Determining Equity Balances Gabriel Company is just completing its second year of operations, expecting to report net income of $430,000. This amount is double its earnings in its first year of operations, and near the end of the second year, the company declared its first cash common dividend of $1 per share. The company started by authorizing 500,000 shares of $5-stated value common stock and issuing 100,000 of those shares for $16 per share. Since then, no additional common shares have been sold; however, a 10 percent stock dividend was declared and distributed at the end of its first year when the stock price was $19 per share. At the beginning of the second year, Gabriel repurchased 3,000 shares of its common stock for $20 per share, but a short time later resold 1,000 of those shares for $25 per share. The company also issued at par all shares authorized of its 10 percent, $10-par pre- ferred stock at the beginning of the second year. All normal dividends were paid on the preferred stock for the second year, an amount totaling $200,000.

a. Prepare the stockholders’ equity section of Gabriel’s balance sheet at the end of the company’s second year of operations.

b. For the second year, compute the times-preferred-dividends-earned ratio. What does this measure indicate about the safety of the company’s preferred dividend? What about implications for future common dividends?