Page 501 - Accounting Principles (A Business Perspective)

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The preferred stock is 6 per cent, cumulative. It is preferred as to dividends and as to assets in liquidation to the
extent of the liquidation value of USD 100 per share, plus any cumulative dividends on the preferred stock.
Dividends for four years (including the current year) are unpaid. You would calculate the book values of each class

of stock as follows:
Total stockholders' equity Total Per Share
$3,100,000
Book value of preferred stock (5,000 $ 500,000
shares) 120,000 620,000 $124.00*
Liquidation value (5,000 shares X $100) $2,480,000 12.40T
Dividends (4 years at $30,000)
Book value of common stock (200,000 shares)
* $620,000 ÷ 5,000 shares.
T $2,480,000 ÷ 200,000 shares.
Notice that Celoron did not assign the paid-in capital in excess of par value—preferred to the preferred stock in
determining the book values. Celoron assigned only the liquidation value and cumulative dividends on the

preferred stock to the preferred stock.
Assume now that the features attached to the preferred stock are the same except that the preferred
stockholders have the right to receive USD 103 per share in liquidation. The book values of each class of stock
would be:
Total stockholders' equity Total Per Share
$3,100,000
Book value of preferred stock (5,000 shares)
Liquidation value (5,000 shares X $103) $ 515,000
Dividends (4 years at $30,000) 120,000 635,000 $ 127.00
Book value of common stock (200,000 shares) $2,465,000 12.33
Book value rarely equals market value of a stock because many of the assets have changed in value due to
inflation. Thus, the market prices of the shares of many corporations traded regularly are different from their book
values.

An accounting perspective:

Business insight

The Wall Street Journal publishes the New York Stock Exchange (NYSE) Composite Transactions
each Monday through Friday except when the exchange is closed. For each stock listed on the
NYSE, it lists the following data. We use data for the Kellogg Company, which produces ready-to-
eat cereals and other food products, as recently reported in The Wall Street Journal as an example:
52 Weeks

The first column reflects the stock price percentage change for the calendar year to date, adjusted

for stock splits and dividends over 10 per cent. The next two columns show the high and low price

Accounting Principles: A Business Perspective 502 A Global Text