Maria Martinez organized Manhattan Transport Company in January 2004. The corporation immediately issued at \(\$ 8\) per share one-half of its 200,000 authorized shares of \(\$ 2\) par value common stock. On January 2, 2005, the corporation sold at par value the entire 5,000 authorized shares of 8 percent, \(\$ 100\) par value cumulative preferred stock. On January 2,2006 , the company again needed money and issued 5,000 shares of an authorized 10,000 shares of no-par cumulative preferred stock for a total of \(\$ 512,000\). The no-par shares have a stated dividend of \(\$ 9\) per share.

The company declared no dividends in 2004 and 2005. At the end of 2005, its retained earnings were \(\$ 170,000\). During 2006 and 2007 combined, the company earned a total of \(\$ 890,000\). Dividends of 50 cents per share in 2006 and \(\$ 1.60\) 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 decrease retained earnings.)

b. Assume that on January 2,2005 , the corporation could have borrowed \(\$ 500,000\) at 8 percent interest on a long-term basis instead of issuing the 5,000 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.