Explain.

L$04$ PROBLEM $11\mathrm{.}3$B

Stockholders' Equity in a Balance Sheet

$106$

Joy Sun organized Ray Beam, Inc., in January $2008.$ The corporation immediately issued at $$15$ per share one$-$half of its $260,000$ authorized shares of $$1$ par value common stock. On January $2,2009,$ the corporation sold at par value the entire $10,000$ authorized shares of $10$ percent, $$100$ par value cumulative preferred stock. On January $2,2010,$ the company again needed money and issued $5,000$ shares of an authorized $8,000$ shares of no$-$par cumulative preferred stock for a total of $$320,000.$ The no$-$par shares have a stated dividend of $$6$ per share.

The company declared no dividends in $2008$ and $2009.$ At the end of $2009,$ its retained earnings were $$530,000.$ During $2010$ and $2011$ combined, the company earned a total of $$1,400,000.$ Dividends of $90$ cents per share in $2010$ and $$2$ per share in $2011$ were paid on the common stock.

Instructions

a$.$ Prepare the stockholders' equity section of the balance sheet at December $31,2011.$ Include a supporting schedule showing your computation of retained earnings at the balance sheet date. $($Hint: Income increases retained earnings, whereas dividends and net losses decrease retained earnings.$)$

b$.$ Assume that on January $2,2009,$ 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.