Question

(Computation of Book Value per Share) Morgan Sondgeroth Inc. began operations in January 2015 and reported the following results for each of its 3 years of operations.

2015 \(260,000net loss 2016 \)40,000 net loss 2017 \(800,000 net income

At December 31, 2017, Morgan Sondgeroth Inc. capital accounts were as follows.

8% cumulative preferred stock, par value \)100;

authorized, issued, and outstanding 5,000 shares \(500,000

Common stock, par value \)1.00; authorized 1,000,000 shares;

issued and outstanding 750,000 shares \(750,000

Morgan Sondgeroth Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Sondgeroth began operations. The state law permits dividends only from retained earnings.

Instructions

1. Compute the book value of the common stock on December 31, 2017.
2. Compute the book value of the common stock on December 31, 2017, assuming that the preferred stock has a liquidating value of \)106 per share.

Short answer

a) The book value of the common stock on December 31, 2017, is $380,000.

b) The book value of the common stock on December 31, 2017, assuming that the preferred stock has a liquidating value of $106 per share is $350,000.

Step-by-step solution

Meaning of Common Stock

The common stock represents the ownership of a corporation and trades on stock exchanges. There are two major stock exchanges in the United States: the New York Stock Exchange and the NASDAQ. As a result, stocks are both liquid and easy to price. As a result, they are great indicators of the assets' underlying worth.

Computation of book value of the common stock on December 31, 2017

	Common	Preferred
Stockholders’ Equity Preferred stock Common stock	$ 750,000	$ 550,000
Retained Earnings
Dividends in arrears (3 years at 8%)		120,000
Remainder to common	380,000
	$1,130,000	$ 620,000
Shares outstanding	750,000
Book value per share$\left(\$1,130,000÷750,000\right)$	$1.51
*Balance in retained earnings $\left(\$800,000-\$40,000-\$260,000\right)$		$500,000
Less: Dividends to preferred		120,000
Available to common		$380,000

Computation of the book value of the common stock on December 31, 2017, assuming that the preferred stock has a liquidating value of $106 per share.

	Common	Preferred
Stockholders’ Equity Preferred stock Liquidating premium		$500,000 30,000
Common stock	$ 750,000
Retained Earnings
Dividend in arrears (3years at 8%)		$120,000
Remainder to common	350,000
	$1,100,000	$650,000
Shares outstanding	750,000
Book value per share$\left(\$1,100,000÷750,000\right)$	$1.47

Calculating the total amount of common stock

Balance in retained earnings $\left(\$800,000-\$40,000-\$260,000\right)$	$500,000
Less: Liquidating premium to preferred Dividends to preferred	30,000 120,000
Available to Common	$350,000