Question 2

A) A firm has 1,000 shares of 12 percent cumulative preferred stock with a $200 par value and a $210 liquidation value. The firm also has 1,000 shares of common stock outstanding with a $10 par value. There is $200,000 of retained earnings and $12,000 of treasury stock. The firm has 5,000 authorized common shares and 500 treasury shares. There are two years of dividends in arrears.

Instructions

1. Calculate book value per share
2. Briefly explain in your own words how book value per share can be used by analysts to evaluate a firms stock market performance.

B) A firm has 2,000 shares of 9 percent, $100 par convertible preferred stock in issue. Each share of preferred stock is convertible into four shares of the firms $2.50 par value common stock. The preferred stock was issued for $150 per share. Assume all shares of preferred stock were converted into common shares.

Instructions

Prepare the necessary journal entries to record the conversion of the preferred stock.