(Preemptive Rights and Dilution of Ownership) Wallace Computer Company is a small, closely-held corporation. Eighty percent of the stock is held by Derek Wallace, president. Of the remainder, 10% is held by members of his family and 10% by Kathy Baker, a former officer who is now retired. The balance sheet of the company at June 30, 2017, was substantially as shown below.
Current assets $22,000
Equipment (net) 450,000
Liabilities and Stockholders’ Equity
Current liabilities $50,000
Common stock 250,000
Retained earnings 172,000
Additional authorized common stock of $300,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued common stock with a par value of $100,000 to himself at par for cash. At the next stockholders’ meeting, Baker objected and claimed that her interests had been injured.
Wallace Computer Company should investigate the idea of dilution of ownership interests and take any required remedial steps to compensate current shareholders for this dilution impact.
Preemptive Rights are the rights given to existing shareholders to purchase newly issued shares before the share is offered to others. This right helps to protect the dilution of existing shareholders’ shares.
Here, one of the important preemptive rights was ignored, to share proportionately in any new stock of the same class.
Derek Wallace purchased a $100,000 par value stock. The initial cost of his ownership was $200,000. As a result, he raised his shareholding by 50%. This imbalance can be remedied by issuing Ms. Baker at par shares equal to 50% of her current holdings or by purchasing shares equal to 50% of their holdings, allowing all shareholders to retain the same proportionate stake as before the issue of extra shares.
As there is no information given with respect to the fair value of stock, an estimate should be taken for a fair value that could be developed based on market transactions that involve comparable assets.
Alternatively, discounted projected cash flow might be utilized to estimate fair value. In this closely held corporation, and in the lack of credible fair value data, the book value may be utilized to calculate the cash settlement amount.
Showing calculation to support the opinion
Book value of Ms. Baker’s capital stock, June 30 2017 before
Issuance of additional shares,
Less: Book value after issuance of additional shares to Derek Wallace
Loss in book value and amount of cash settlement
(Computation of Retained Earnings) The following information has been taken from the ledger accounts of Isaac Stern Corporation.
Total income since incorporation $317,000
Cash dividends paid 60,000
Total value of stock dividends distributed 30,000
Gains on treasury stock transactions 18,000
Unamortized discount on bonds payable 32,000
Determine the current balance of retained earnings.
(Preferred Stock Dividends) Cajun Company has outstanding 2,500 shares of $100 par, 6% preferred stock and 15,000 shares of $10 par value common. The following schedule shows the amount of dividends paid out over the last 4 years.
Allocate the dividends to each type of stock under assumptions (a) and (b). Express your answers in per share amounts using the format shown below
Preferred, cumulative, and fully participating
(Stock Dividends) Kulikowski Inc., a client, is considering the authorization of a 10% common stock dividend to common stockholders. The financial vice president of Kulikowski wishes to discuss the accounting implications of such an authorization with you before the next meeting of the board of directors.
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