Southern Exposure Ltd. begins operations on January 2, 2010. During the year, the following transactions affect shareholders' equity:
1. Southern Exposure authorizes the issuance of 1 million common shares and 100,000 preferred shares, which pay a dividend of $2 per share.
2. A total of 240,000 common shares are issued for $5 a share.
3. A total of 15,000 preferred shares are issued for $14 per share,
4. The full annual dividend on the preferred shares is declared and paid.
5. A dividend of $0.10 per share is declared on the common shares but is not yet paid.
6. The company has earnings of $150,000 for the year. (Assume revenues of $750,000 and total expenses of $600,000.)
7. The dividends on the common shares are paid.
8. A 5% stock dividend is declared on the common shares and distributed. On the date of declaration, the shares' market price was $5.50.
Required:
a. Prepare journal entries to record the above transactions, including the closing entries for the net earnings.
b. Prepare the shareholders' equity section of the statement of financial position as at December 31, 2010.
c. Why would an investor choose to purchase the common shares rather than the preferred shares? Or vice versa?