Waller Publications was organized early in 2006 with authorization to issue 20,000 shares of $100 par value preferred stock and 1 million shares of $1 par value common stock. All of the preferred stock was issued at par, and 300,000 shares of common stock were sold for $20 per share. The preferred stock pays a 10 percent cumulative dividend.

During the first five years of operations (2006 through 2010) the corporation earned a total of $4,460,000 and paid dividends of $1 per share each year on the common stock. In 2011, however, the corporation reported a net loss of $1,750,000 and paid no dividends.

Instructions

a. Prepare the stockholders’ equity section of the balance sheet at December 31, 2011. Include a supporting schedule showing your computation of retained earnings at the balance sheet date.

b. Draft a note to accompany the financial statements disclosing any dividends in arrears at the end of 2011.

c. Do the dividends in arrears appear as a liability of the corporation as of the end of 2011? Explain.