Question

Makoto Corporation has 9,500 shares of $100 par value, 8%, preferred stock and 45,600 shares of $10 par value common stock outstanding at December 31, 2020.

Answer the questions in each of the following independent situations.

(a) If the preferred stock is cumulative and dividends were last paid on the preferred stock on December 31, 2017, what are the dividends in arrears on December 31, 2020, balance sheet?

The amount of dividends in arrears on the December 31, 2020

$

How should these dividends be reported?

The cumulative dividend is not reported as a liability.

(b) If the preferred stock is convertible into 7 shares of $10 par value common stock and 4,300 shares are converted, what entry is required for the conversion assuming the preferred stock was issued at par value?

(c) If the preferred stock was issued at $108 per share, how should the preferred stock be reported in the stockholders’ equity section?

(Should be a Partial Balance sheet)

Answer 1

a) Dividends in arrear for three year from December 2017 to December 2020 :

= (9,500 * $100 * 8%) * 3

= $228,000

Cumulative dividend on preferrence stock is not reported in the balance sheet. They are reported as a footnote to the balance sheet.

b)

Particular	Debit	Credit
Preferred stock	$430,000
Common Stock		$301,000
Paid in capital excess of par		$129,000

Preferred stock that is converted is = 4,000 shares @ $100 = $430,000

Preference share is converted into 7 share of coomon stock of value $10.

Converted share into common stock = 4300 * 7 * $10 = $301,000

The difference is paid in capital

c) When we issue preffered stock cash is increased.

Particular	Debit	Credit
Cash (9,500 * $108)	$1,026,000
Preferred Stock (9,500 * $100)		$950,000
Paid in capital 9,500* ( $108 - $100)		$76,000