Page 517 - Accounting Principles (A Business Perspective)

12. Stockholders' equity: Classes of capital stock

Alternate problem G Mendell, Inc., is a corporation in which all of the outstanding preferred and common
stock is held by the four Lehman brothers. The brothers have an agreement stating that the remaining brothers will,
upon the death of a brother, purchase from the estate his holdings of stock in the company at book value.

The stockholders' equity section of the balance sheet for the company on 2009 December 31, the date of the
death of James Lehman, shows:
Stockholders' equity:
Paid-in capital:
Preferred stock—6%; $320 par value; $320 liquidation value, $1,280,000
4,000 shares authorized, issued, and outstanding
Paid-in capital in excess of par—preferred 64,000
Common stock—without par value, $16 stated value,
60,000 shares authorized, issued and outstanding 960,000
Paid-in capital in excess of par value—common 960,000
Total paid-in capital $3,264,000
Retained earnings 128,000
Total stockholders' equity $3,392,000
No dividends have been paid for the last year on the preferred stock, which is cumulative. At the time of his
death, James Lehman held 2,000 shares of preferred stock and 10,000 shares of common stock of the company.
a. Compute the book value of the preferred stock.
b. Compute the book value of the common stock.
c. Compute the amount the remaining brothers must pay to the estate of James Lehman for the preferred and

common stock that he held at the time of his death.
Beyond the numbers—Critical thinking
Business decision case A Rudd Company and Clay Company have extremely stable net income amounts of
USD 4,800,000 and USD 3,200,000, respectively. Both companies distribute all their net income as dividends each
year. Rudd Company has 100,000 shares of USD 80 par value, 6 per cent preferred stock, and 500,000 shares of
USD 8 par value common stock outstanding. Clay Company has 50,000 shares of USD 40 par value, 8 per cent

preferred stock, and 400,000 shares of USD 8 par value common stock outstanding. Both preferred stocks are
cumulative.
a. Compute the annual dividend per share of preferred stock and per share of common stock for each company.
b. Based solely on the preceding information, which common stock would you predict to have the higher market
price per share? Why?
c. Which company's stock would you buy? Why?
Business decision case B Jesse Waltrip recently inherited USD 480,000 cash that he wishes to invest in the

common stock of either the West Corporation or the East Corporation. Both corporations have manufactured the
same types of products for five years. The stockholders' equity sections of the two corporations' latest balance
sheets follow:

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