Maria Martinez organized Manhattan Transport Company in January 2015. 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, 2016, the corporation sold at par value the entire 5,000 authorized shares

of 8 percent, $100 par value cumulative preferred stock. On January 2, 2017, the company again

Problem Set A 513

needed capital 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 2015 and 2016. At the end of 2016, its retained earnings

were $170,000. During 2017 and 2018 combined, the company earned a total of $890,000. Dividends

of 50 cents per share in 2017 and $1.60 per share in 2018 were paid on the common stock.

Instructions

a. Prepare the stockholders equity section of the balance sheet at December 31, 2018. Include a

supporting schedule showing your computation of retained earnings at the balance sheet date.

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

b. Assume that on January 2, 2016, 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