Reference no: EM132556054

Question - Maria Martinez organized Manhattan Transport Company in January 2006. The corporation immediately issued at $8 per share one-half of its 200,000 authorized shares of $2 par value common stock. On January 2, 2007, the corporation sold at par value the entire 5,000 authorized shares of 8 percent, $100 par value cumulative preferred stock. On January 2, 2008, the company again needed money and issued 5,000 shares of an authorized 10,000 shares of no-par cumulative preferred stock for a total of $512,000. The no-par shares have a stated dividend of $9 per share.

The company declared no dividends in 2006 and 2007. At the end of 2007, its retained earnings were $170,000. During 2008 and 2009 combined, the company earned a total of $890,000. Dividends of 50 cents per share in 2008 and $1.60 per share in 2009 were paid on the common stock.

INSTRUCTIONS -

a) Prepare the stockholders equity section of the balance sheet at December 31, 2009. Include a supporting schedule showing your computation of retained earnings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends decrease retained earnings.)

b) Assume that on January 2, 2007, the corporation could have borrowed $500,000 at 8 percent interest on a long - term basis instead of issuing the 5,000 shares of $100 par value cumulative preferred stock. Identify two reasons a corporation may choose to issue cumulative preferred stock rather than finance operations with long term debt.