The stockholders' meeting for Percival Corporation has been in progress for some time. The chief financial officer for Percival is presently reviewing the company's financial statements and is explaining the items that comprise the stockholders' equity section of the balance sheet for the current year. The stockholders' equity section of Percival Corporation at December 31, 2017, is as follows.

Percival Corporation

Balance Sheet (partial)

December 31, 2017

Paid in Capital

Capital Stock

Preferred stock, authorized 1,000,000 shares

Cumulative, $100 par value, $8 per share, 6000

Shares issued and outstanding $600,000

Common stock, authorized 5,000,000 shares, $1 par

Value, 3,000,000 shares, issued and 2,700,000 outstanding 3,000,000

Total Capital stock 3,600,000

Additional paid in capital

In excess of par- preferred stock $50,000

In excess of par- common stock 25,000,000

Total additional pain in capital 25,050,000

Total paid in capital 28,650,000

Retained Earnings 900,000

Total paid in capital and retained earnings 29,550,000

Less: Treasury Stock (300,000 common shares) 9,300,000

Total Stockholders equity $20,250,000

At the meeting, stockholders have raised a number of questions regarding the stockholders' equity section.

Instructions

With the class divided into groups, answer the following questions as if you were the chief financial officer for Percival Corporation.

(a) What does the cumulative provision related to the preferred stock mean?

Answer:

(b) I thought the common stock was presently selling at $29.75, but the company has the stock stated at $1 per share. How can that be?

Answer:

(c) Why is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholders' equity. Why is treasury stock not reported as an asset if it has a debit balance?