The stockholders' meeting for Percival Corporation has been in progress for some time. The chief financial officer for Percival is presently reviewing the company's financial statements and is explaining the items that comprise the stockholders' equity section of the balance sheet for the current year. The stockholders' equity section of Percival Corporation at December 31, 2017, is as follows.
Percival Corporation
Balance Sheet (partial)
December 31, 2017
Paid in Capital
Capital Stock
Preferred stock, authorized 1,000,000 shares
Cumulative, $100 par value, $8 per share, 6000
Shares issued and outstanding $600,000
Common stock, authorized 5,000,000 shares, $1 par
Value, 3,000,000 shares, issued and 2,700,000 outstanding 3,000,000
Total Capital stock 3,600,000
Additional paid in capital
In excess of par- preferred stock $50,000
In excess of par- common stock 25,000,000
Total additional pain in capital 25,050,000
Total paid in capital 28,650,000
Retained Earnings 900,000
Total paid in capital and retained earnings 29,550,000
Less: Treasury Stock (300,000 common shares) 9,300,000
Total Stockholderâs equity $20,250,000
At the meeting, stockholders have raised a number of questions regarding the stockholders' equity section.
Instructions
With the class divided into groups, answer the following questions as if you were the chief financial officer for Percival Corporation.
(a) âWhat does the cumulative provision related to the preferred stock mean?â
Answer:
(b) âI thought the common stock was presently selling at $29.75, but the company has the stock stated at $1 per share. How can that be?â
Answer:
(c) âWhy is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholders' equity. Why is treasury stock not reported as an asset if it has a debit balance?â
The stockholders' meeting for Percival Corporation has been in progress for some time. The chief financial officer for Percival is presently reviewing the company's financial statements and is explaining the items that comprise the stockholders' equity section of the balance sheet for the current year. The stockholders' equity section of Percival Corporation at December 31, 2017, is as follows.
Percival Corporation
Balance Sheet (partial)
December 31, 2017
Paid in Capital
Capital Stock
Preferred stock, authorized 1,000,000 shares
Cumulative, $100 par value, $8 per share, 6000
Shares issued and outstanding $600,000
Common stock, authorized 5,000,000 shares, $1 par
Value, 3,000,000 shares, issued and 2,700,000 outstanding 3,000,000
Total Capital stock 3,600,000
Additional paid in capital
In excess of par- preferred stock $50,000
In excess of par- common stock 25,000,000
Total additional pain in capital 25,050,000
Total paid in capital 28,650,000
Retained Earnings 900,000
Total paid in capital and retained earnings 29,550,000
Less: Treasury Stock (300,000 common shares) 9,300,000
Total Stockholderâs equity $20,250,000
At the meeting, stockholders have raised a number of questions regarding the stockholders' equity section.
Instructions
With the class divided into groups, answer the following questions as if you were the chief financial officer for Percival Corporation.
(a) âWhat does the cumulative provision related to the preferred stock mean?â
Answer:
(b) âI thought the common stock was presently selling at $29.75, but the company has the stock stated at $1 per share. How can that be?â
Answer:
(c) âWhy is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholders' equity. Why is treasury stock not reported as an asset if it has a debit balance?â
Related questions
ACT5725
The stockholders' equity of Verrecchia Company at December 31, 2016, follows:
| Common stock, $5 par value, 500,000 shares authorized; 350,000 shares issued and outstanding | $1,750,000 |
| Paid-in capital in excess of par value | 800,000 |
| Retained earnings | 634,000 |
During 2017, the following transactions occurred:
Jan. 5 Issued 10,000 shares of common stock for $13 cash per share.
Jan. 18 Repurchased 4,000 shares of common stock at $16 cash per share.
Mar. 12 Sold one-fourth of the treasury shares acquired January 18 for $19 cash per share.
July 17 Sold 500 shares of treasury stock for $14 cash per share.
Oct. 1 Issued 5,000 shares of 8%, $25 par value preferred stock for $36 cash per share. This is the first issuance of preferred shares from the 50,000 authorized preferred shares.
(a) Use the financial statement effects template to indicate the effects of each transaction.
Use negative signs with answers, when appropriate.
| Balance Sheet | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Transaction | Cash Asset | + | Noncash Assets | = | Liabilities | + | Contributed Capital | + | Earned Capital | |
| Jan. 5 | Answer | Answer | Answer | Answer | Answer | |||||
| Jan. 18 | Answer | Answer | Answer | Answer | Answer | |||||
| Mar. 12 | Answer | Answer | Answer | Answer | Answer | |||||
| July. 17 | Answer | Answer | Answer | Answer | Answer | |||||
| Oct. 1 | Answer | Answer | Answer | Answer | Answer | |||||
| Income Statement | |||||
|---|---|---|---|---|---|
| Revenue | - | Expenses | = | Net Income | |
| Answer | Answer | Answer | |||
| Answer | Answer | Answer | |||
| Answer | Answer | Answer | |||
| Answer | Answer | Answer | |||
| Answer | Answer | Answer | |||
(b) Prepare the December 31, 2017, stockholders' equity section of the balance sheet assuming that the company reports net income of $76,900 for the year.
Use a negative sign with your answer for treasury stock.
| Stockholders' Equity | ||
|---|---|---|
| Paid-in capital | ||
| 8% Preferred stock, $25 par value, 50,000 shares authorized, 5,000 shares issued and outstanding | $Answer | |
| Common stock, $5 par value, 500,000 shares authorized; 360,000 shares issued | Answer | $Answer |
| Additional Paid-in capital | ||
| Paid-in capital in excess of par value-preferred stock | Answer | |
| Paid-in capital in excess of par value-common stock | Answer | |
| Paid-in capital from treasury stock | Answer | Answer |
| Total paid-in capital | Answer | |
| Retained earnings | Answer | |
| Answer | ||
| Less: Treasury stock (2,500 shares) at cost (use a negative sign with answer) | Answer | |
| Total Stockholders' Equity | $Answer | |
act5725
The stockholders' equity of Verrecchia Company at December 31, 2016, follows:
| Common stock, $5 par value, 500,000 shares authorized; 350,000 shares issued and outstanding | $1,750,000 |
| Paid-in capital in excess of par value | 800,000 |
| Retained earnings | 634,000 |
During 2017, the following transactions occurred:
Jan. 5 Issued 10,000 shares of common stock for $13 cash per share.
Jan. 18 Repurchased 4,000 shares of common stock at $16 cash per share.
Mar. 12 Sold one-fourth of the treasury shares acquired January 18 for $19 cash per share.
July 17 Sold 500 shares of treasury stock for $14 cash per share.
Oct. 1 Issued 5,000 shares of 8%, $25 par value preferred stock for $36 cash per share. This is the first issuance of preferred shares from the 50,000 authorized preferred shares.
(a) Use the financial statement effects template to indicate the effects of each transaction.
Use negative signs with answers, when appropriate.
| Balance Sheet | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Transaction | Cash Asset | + | Noncash Assets | = | Liabilities | + | Contributed Capital | + | Earned Capital | |
| Jan. 5 | Answer | Answer | Answer | Answer | Answer | |||||
| Jan. 18 | Answer | Answer | Answer | Answer | Answer | |||||
| Mar. 12 | Answer | Answer | Answer | Answer | Answer | |||||
| July. 17 | Answer | Answer | Answer | Answer | Answer | |||||
| Oct. 1 | Answer | Answer | Answer | Answer | Answer | |||||
| Income Statement | |||||
|---|---|---|---|---|---|
| Revenue | - | Expenses | = | Net Income | |
| Answer | Answer | Answer | |||
| Answer | Answer | Answer | |||
| Answer | Answer | Answer | |||
| Answer | Answer | Answer | |||
| Answer | Answer | Answer | |||
(b) Prepare the December 31, 2017, stockholders' equity section of the balance sheet assuming that the company reports net income of $76,900 for the year.
Use a negative sign with your answer for treasury stock.
| Stockholders' Equity | ||
|---|---|---|
| Paid-in capital | ||
| 8% Preferred stock, $25 par value, 50,000 shares authorized, 5,000 shares issued and outstanding | $Answer | |
| Common stock, $5 par value, 500,000 shares authorized; 360,000 shares issued | Answer | $Answer |
| Additional Paid-in capital | ||
| Paid-in capital in excess of par value-preferred stock | Answer | |
| Paid-in capital in excess of par value-common stock | Answer | |
| Paid-in capital from treasury stock | Answer | Answer |
| Total paid-in capital | Answer | |
| Retained earnings | Answer | |
| Answer | ||
| Less: Treasury stock (2,500 shares) at cost (use a negative sign with answer) | Answer | |
| Total Stockholders' Equity | $Answer | |
