Early in $2012,$ Searfoss, Inc., was organized with authorization to issue $2,000$ shares of $$100$ par

value preferred stock and $300,000$ shares of $$1$ par value common stock. Five hundred shares of

the preferred stock were issued at par, and $80,000$ shares of common stock were sold at $$15$ per

share. The preferred stock pays a $10$ percent cumulative dividend.

During the first four years of operations $(2012$ through $2015),$ the corporation earned a total of

$$1,950,000$ and paid dividends of $40$ cents per share in each year on its outstanding common stock.

Instructions

a$.$ Prepare the stockholders$$ equity section of the balance sheet at December $31,2015.$ Include

a supporting schedule showing your computation of the amount of retained earnings

reported. Assume the call price of preferred stock is $$110$ per share as of December $31,2015.$

$($Hint: Income increases retained earnings, whereas dividends decrease retained earnings.$)$

b$.$ Are there any dividends in arrears on the company$$s preferred stock at December $31,2015?$

Explain your answer.

c$.$ Assume that interest rates increase steadily from $2012$ through $2015.$ Would you expect the

market price of the company$$s preferred stock to be higher or lower than its call price of $$110$

at December $21,2015?($The call price is the amount the company must pay to repurchase the

shares from the stockholders.$)$