Joy Sun organized Ray Beam, Inc., in January 2004. The corporation immediately issued at \(\$ 15\) per share one-half of its 260,000 authorized shares of \(\$ 1\) par value common stock. On January 2, 2005 , the corporation sold at par value the entire 10,000 authorized shares of 10 percent, \(\$ 100\) par value cumulative preferred stock. On January 2, 2006, the company again needed money and issued 5,000 shares of an authorized 8,000 shares of no-par cumulative preferred stock for a total of \(\$ 320,000\). The no-par shares have a stated dividend of \(\$ 6\) per share.

The company declared no dividends in 2004 and 2005. At the end of 2005, its retained earnings were \(\$ 530,000\). During 2006 and 2007 combined, the company earned a total of \(\$ 1,400,000\). Dividends of 90 cents per share in 2006 and \(\$ 2\) per share in 2007 were paid on the common stock.

Instructions

a. Prepare the stockholders' equity section of the balance sheet at December 31, 2007. Include a supporting schedule showing your computation of retained earnings at the balance sheet date. (Income increases retained earnings, whereas dividends and net losses decrease retained earnings.)

b. Assume that on January 2,2005 , the corporation could have borrowed \(\$ 1,000,000\) at 10 percent interest on a long-term basis instead of issuing the 10,000 shares of the \(\$ 100\) 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.