Eastwood Inc. had the following shares authorized in its articles of incorporation and issued on December 31,

2015:

• 100,000 preferred shares, no par, $4 semi-annual dividend, non-voting, redeemable at $103, none issued

• Unlimited number of common shares authorized, 500,000 shares issued for $4.4 million

On December 31, 2015, the company had the following balances in other equity accounts:

Retained Earnings...........$5,120,000

Accumulated Other Comprehensive Income... $ 345,000

During 2016, the following events occurred:

1. On January 2, Eastwood decided to raise more capital and issued 30,000 preferred shares for $100 per share.

2. The company declared and paid the dividend on the preferred shares for the first half of the year.

3. The company declared and distributed a 5% common stock dividend when the market price of the common shares was $46 per share.

4. In November, the share price of the common shares had risen to $100 per share, so the board of directors voted to split the shares five-for-one.

5. Late in December, the company declared and paid the dividend on the preferred shares for the second half of the year and declared a cash dividend on the common shares of $0.50 per share payable in early January

2016. In past years, the dividend had generally been about $2.00 per share.

6. The company earned a net income of $720,000 for 2015 and reported other comprehensive income of $85,000.

Required:

a. Use a spreadsheet or table format like the one in the first practice problem to track all of the changes in the shareholders’ equity accounts in 2016. Use the table to prepare the statement of changes in shareholders’ equity for 2016.

b. Prepare the shareholders’ equity section of the statement of financial position as at the end of 2016.

c. What reasons might the company have for issuing preferred shares instead of common shares at the start of the year?

d. If you owned 50,000 common shares on January 1, 2016, and did not buy or sell any shares during the year, how has your ability to influence the management of the company changed over the year? Did you need to consider the existence of preferred shares on January 1, 2016? Explain briefly.

e. What effect did each dividend (stock dividend and cash dividend) have on the financial statements?

f. What reason might the company have for declaring a stock dividend?
g. What reason might the company have for splitting the shares?

h. If you were a common shareholder, would you be happy or unhappy with the stock dividend and stock split? Explain briefly.

i. What do you think about the reduction in the cash dividend from $2.00 to $0.50? Explain.

j. Why would an investor purchase common shares rather than preferred shares? Or vice versa?