Information from the annual report of Hicks Company (a fictional company) to shareholders follows:

Required:

1. Suppose that the increase in the preferred stock account was due to the issuance of new preferred shares at par on January 1, 20X2. What journal entry would the company make on the date to record the new preferred stock?

2. What journal entry would the company make to record preferred dividends for 20X2 and 20X1?

3. Suppose that Hicks had issued 8% debt (at par) rather than any preferred stock. What journal entry would the company make to record interest on the debt for 20X2 and 20X1?

4. Compute the company’s long-term-debt-to-total-equity ratio and its interest coverage ratio for 20X2 and 20X1 as if Hicks had issued 8% debt rather than preferred stock.

5. Lenders generally do not restrict a company’s ability to raise more equity capital. That’s because the dollars raised from selling stock provide a cash cushion that protects the lender’s debt claim. Under what conditions might lenders want to limit a company’s ability to issue preferred stock?

6. How would the preferred stock be shown on the company’s balance sheet if the shares contained a mandatory redemption feature?

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December 31 ($ in millions) 20X2 20X1 Long-term debt $ 6,100 $ 3,100 Preferred stock (5% cumulative) Common stockholders' equity Total stockholders' equity 8,000 18,500 3,500 20,000 $26,500 $23,500 $ 1,000 $ Net income before interest and taxes $ 850 $ 155 Interest expense Long-term debt/total equity 366 0.23 0.13 Times interest earned 2.73 5.48