Question

At December 31, 2017, Coburn Corp. has assets of \(10,000,000, liabilities of \)6,000,000, common stock of \(2,000,000 (representing 2,000,000 shares of \)1 par common stock), and retained earnings of \(2,000,000. Net sales for the year 2017 were \)18,000,000, and net income was \(800,000. As auditors of this company, you are making a review of subsequent events on February 13, 2018, and you find the following.

6) On February 1, 2018, the board of directors adopted a resolution accepting the offer of an investment banker to guarantee the marketing of \)1,200,000 of preferred stock.

Instructions

State in each case how the 2017 financial statements would be affected, if at all.

Short answer

A new stock issue should be disclosed.

Step-by-step solution

Meaning of Preferred Stocks

Preferred stock is a type of stock that has particular advantages or qualities that common stock does not have. The characteristics that separate preferred stock from ordinary stock may be more limiting and negative than preferences.

Explaining the effect in the financial statements

In the footnote of the balance sheet, describe the functions of the new stock issue.

New issues, whether stocks or bonds, are a way for a firm to raise funds. An initial public offering (IPO) is a type of stock offering that allows investors to purchase the stock of a private company for the first time.