Mary Dvorak organized Mullin Enterprises, Inc., in January 2018. 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, 2019, the corporation sold at par value the entire 5,000 authorized shares of 8 percent, $100 par value cumulative preferred stock. On January 2, 2020, the company again 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 2018 and 2019. At the end of 2019, its retained earnings were $170,000. During 2020 and 2021 combined, the company earned a total net income of $890,000. Dividends of 50 cents per share in 2020 and $1.60 per share in 2021 were paid on common stock.

1. Prepare the stockholders equity section of the balance sheet at December 31, 2021. 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). Ensure that your partial balance sheet is labeled correctly and uses the correct format for the stockholders equity section of the balance sheet.

2. Assume that on January 2, 2019, the corporation could have borrowed $500,000 at 10 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.