Problem 11.2A

Stockholders Equity Section

Flag Publications was organized early in 1997 with authorization to issue 5,000 shares of $100 par value preferred stock and 1 million shares of $2 par value common stock. All of the preferred stock was issued at par, and 200,000 shares of common stock were sold for $16 per share. The preferred stock pays a 10% cumulative dividend as is callable at $110.

During the first five years of operations (1997 through 2001) the corporation earned a total of $3,200,000 and paid dividends of $1 per share each year on the common stock. In 2002, however, the corporation reported a net loss of $1,300,000 and paid no dividends.

Instructions

a. Prepare the stockholders equity section of the balance sheet at December 31, 2002. Include a supporting schedule showing your computation of retained earrings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends and net losses decrease retained earnings.)

b. Draft a note to accompany the financial statements disclosing any dividends in arrears at the end of 2002.

c. Do the dividends in arrears appear as a liability of the corporation as of the end of 2002? Explain.