Assume that the preferred are convertible into common at a rate of eight common shares for each

Question:

Assume that the preferred are convertible into common at a rate of eight common shares for each share of preferred. If 1,000 shares of the preferred are converted into common on April 1, 2020, prepare the entry and describe how this affects the equity section of the balance sheet (immediately after the conversion).

Walking Bear Resources Inc.
Equity Section of the Balance Sheet
March 31, 2020
Contributed capital:
Preferred shares, $17 cumulative, 2,500 shares authorized,
issued, and outstanding ........................................................... $ 600,000
Common shares, unlimited shares authorized,
40,000 shares issued and outstanding ...................................... 960,000
Total contributed capital ........................................................ $1,560,000
Retained earnings ........................................................................ 462,000
Total equity .............................................................................. $2,022,000

Analysis Component: If you are a common shareholder in this company, and the company plans to pay total cash dividends of $720,000, does it make any difference to you whether the conversion takes place before the dividend declaration? Why?

Balance Sheet
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