Question

(Preferred Stock Entries and Dividends) Otis Thorpe Corporation has 10,000 shares of \(100 par value, 8%, preferred stock and 50,000 shares of \)10 par value common stock outstanding at December 31, 2017.

Instructions

Answer the questions in each of the following independent situations.

1. If the preferred stock is cumulative and dividends were last paid on the preferred stock on December 31, 2014, what are the dividends in arrears that should be reported on the December 31, 2017, balance sheet? How should these dividends be reported?
2. If the preferred stock is convertible into seven shares of \(10 par value common stock and 4,000 shares are converted, what entry is required for the conversion assuming the preferred stock was issued at par value?
3. If the preferred stock was issued at \)107 per share, how should the preferred stock be reported in the stockholders’ equity section?

Short answer

Total Paid-in Capital from Treasury stock is $1,000.

Step-by-step solution

Meaning of Preferred Stock

Preferred stock is the only stock that gives shareholders different rights than common stock. A shareholder holding preferred stock gets dividends regularly and is paid first in the case of insolvency or amalgamation.

Recording Journal Entries

S.no.	Particular	Debit $	Credit $
May 2	Cash	192,000
	Common Stock		60,000
	Paid-in Capital in Excess of Par Common stock		132,000
	To record the issue of share.
May 10	Cash	600,000
	Preferred Stock		300,000
	Paid-in Capital in Excess of Par Preferred Stock		300,000
	To record the issue of shares.
May 15	Treasury Stock	15,000
	Cash		15,000
	To record the issue of shares.
May 31	Cash	8,500
	Treasury Stock		7,500
	Paid-in Capital from Treasury Stock		1,000
	To record the transfer of treasury stock.