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ASSIGNMENT:Stockholders' Equity Section of the Balance Sheet

***DueFeb 13, 11:59 PM

Purpose of Assignment

The purpose of this assignment is to help you become familiar with examining the stockholders' equity section of the balance sheet.

Assignment Steps

Resources:Financial Accounting: Tools for Business Decision Making

Answerthe following questions in 1,050 words using the LachlinCorporation Balance Sheet (partial) below:

• How many shares of common stock are outstanding?
• Assuming there is a stated value, what is the stated value of the common stock?
• What is the par value of the preferred stock?
• If the annual dividend on preferred stock is $36,000, what is the dividend rate on preferred stock?
• If dividends of $72,000 were in arrears on preferred stock, what would be the balance reported for retained earnings?

Usethe Week 4Excelspreadsheet andsubmitwith your answers.

Name Section Date E11-4 (a) (b) (c) (d) (e) 627 Exercises 11-4 Lachlin Corporation 627 LACHLIN CORPORATION BALANCE SHEET (PARTIAL) STOCKHOLDERS EQUITY PAID-IN CAPITAL PREFERRED STOCK, CUMULATIVE, 10,000 SHARES AUTHORIZED, 6,000 SHARES ISSUED AND OUTSTANDING COMMON STOCK, NO-PAR, 750,000 SHARES AUTHORIZED, 580,000 SHARES ISSSUED $600,000 2,900,000 TOTAL PAID-IN CAPITAL 3,500,000 RETAINED EARNINGS 1,158,000 TOTAL PAID-IN CAPITAL AND RETAINED EARNINGS LESS: TREASURY STOCK (6,000 COMMON SHARES) 4,658,000 32,000 TOTAL STOCKHOLDER'S EQUITY 4,626,000 Running head: STOCKHOLDER'S EQUITY Introduction The liabilities section of balance sheet includes stockholder's equity. It shows the capital that the company has sourced from its stockholder's by issuing different securities in form of preferred stock and common stock. It also shows retained earnings, which is a part of stockholder's wealth and is with company for future expansion and acquisitions. Management also buyback some shares from the stockholders to keep their controlling interest. These stock are also shown as deduction in stockholder's equity. To understand stockholder's equity completely it is important to discuss all of its elements. Preferred Stock These are the stocks that have a high claim on the assets and earnings of the company as compared to common stock. Preferred stock carries a fixed rate of dividend and have the right to be paid before any dividend is paid to common stockholders. The rate of dividend is generally higher than that of common stockholders and it is paid at regular intervals. In event of winding up of the company preferred stockholders also have a right to be paid their money before common stock holders. From an investors perspective preferred stock is comparatively a safer investment. In other words it could be said that the characteristics of preferred stock are between common stock and bonds. Lachlin Corporation has 10,000 authorized shares of preferred stock and out of them the company has issued 6,000. Authorized shares are the number of shares that the company can issue in its lifetime whereas issued shares are the shares that the company has sold to public and has received money against them. The total value of the preferred stock is $600,000. It means that the company has issued preferred stock at a par value of $100 ($600,000 / 6,000) STOCKHOLDER'S EQUITY Common Stock It is the most popular and common form of ownership of public companies. These are the stocks that do not carry any preferential rights. The payment of dividend on these stocks depends on the management's decision and they are paid dividend after preferred stockholders. If the management does not think fit to distribute dividend due to any reason, they have the right not to declare any dividend on common stock. The holders of common stock have right to participate in the management of the company and exercise control over it by electing board of directors as well as by voting on the corporate policies. Lachlin Corporation has 750,000 authorized shares of common stock and it has issued 580,000 shares. The number of outstanding shares is also the same. The total value of common stock of the company is $2,900,000. The stated value of common stock is calculated by dividing total value of common stock by the number of shares issued and outstanding. The stated value of common stock of the company is $5 ($2,900,000 / 580,000). Total Paid-in Capital Total paid-in capital is the money that the company has received from issuing preferred and common stock. Paid-in capital can be different from issued capital as there is a possibility that all the stockholders may not have paid full amount on the stocks they are holding. In case of Lachlin Corporation the total paid-in capital is $3,500,000 which shows that the corporation has received full money on all the stocks it has issued. Retained Earnings The earnings of the company are distributed among stockholders in form of dividend. But the companies do not pay all the earnings to its stockholders and retain a part of it for its future expansion and acquisition plans. There are also some big corporations which do not share STOCKHOLDER'S EQUITY earnings with stockholders and do not declare any dividend. Google, Inc., Amazon.com, etc. are some of the examples. The part of earnings not distributed as dividend to stockholders and kept by the corporations for their future plans is known as retained earnings. Since it is not distributed to stockholders, so it is shown in stockholder's equity as it is the money of stockholders. Lachlin Corporation has retained earnings of $1,158,000 which can be used by it for its future plans. Treasury Stock These are the shares of common stock that are kept by the company in its own treasury. Generally these shares are in form of buyback from the shareholders. These may also be the shares that have never been issued to the public in first place. Treasury stocks have no voting rights and do not get any dividend. They are not considered at the time of calculating common stock. The company has the right to resell or to hold or to cancel these shares. The intention for keeping treasury stock is that the company can use them to source extra cash if needed. The other reason of keeping treasury stock is to have a controlling interest over the company. The buyback of shares is good for the stockholders as it decreases the number of shares outstanding and increases the equity of remaining shareholders in the company. The treasury stock of Lachlin Corporation is $32,000 and it holds 6,000 shares of common stock. Total Stockholder's Equity It shows the total capital that the company's stockholders hold. In other words, it is the total money that the company has received from his shareholders. It includes the value of company's preferred stock, common stock and retained earnings. Retained earnings are added in calculating stockholder's equity as it is the money of stockholder's kept with the company. The value of treasury stock is deducted in calculating total stockholder's equity as these are not hold STOCKHOLDER'S EQUITY by stockholders and are a part of treasury of the company. The total stockholder's equity of the Lachlin Corporation is $4,626,000. If the annual dividend on preferred stock is $36,000, what is the dividend rate on preferred stock? Calculation of rate of dividend on preferred stock: Annual dividend on preferred stock $36,000 Total number of preferred stock: 6,000 Rate of dividend ($36,000/6,000): $6 per share Thus, rate of dividend on preferred stock is calculated by dividing annual dividend by the number of preferred stock. If dividends of $72,000 were in arrears on preferred stock, what would be the balance reported for retained earnings? Calculation of balance to be reported for retained earnings: Total retained earnings Less: Arrears on preferred stock Balance before current year's dividend Less: Current year's dividend Balance to be reported for retained earnings $1,158,000 $72,000 $1,086,000 $36,000 $1,056,000 To calculate the balance to be reported for retained earnings the arrears of dividend as well as the current year's dividend is deducted from the total retained earnings. Name Section Date E11-4 (a) Outstanding Common Stock 580,000 (b) Stated value of common Stock ($2,900,000/580,000) $ 5.00 (c) Par value of preferred stock ($600,000/6,000) $ 100.00 (d) Dividend rate ($36,000/6,000) $ 6.00 (e) Retained earnings Less: Dividend arrears $ $ $ $ $ 1,158,000 72,000 1,086,000 36,000 1,050,000 Less: Current year's dividend Balance reported for retained earnings 627 Exercises 11-4 Lachlin Corporation 627