The stockholders’ meeting for Harris Corporation has been in progress for some time. The chief financial officer for Harris is presently reviewing the company’s financial statements and is explaining the items that comprises the stockholders’ equity section of the balance sheet for the current year. The stockholders’ equity section of Harris Corporation at December 31, 2008.
A What does the cumulative provision related to the preferred stock mean?
B I thought the common stock was presently selling at $29.75, but the company has the stock state at $1 per share. How can that be?
C Why is the company buying back its common stock? Futhermore, the treasury stock has a debit balance because it is substracted from stockholders’ equity. Why is treasury stock not report as an asset if it has a debit balance?
D Why is necessary to show additional paid-in capital? Why not just show common stock at the total amount paid in?
Answers & Comments
Verified answer
a. What does the cumulative provision related to the preferred stock mean?
The cumulative effect of the declaration and payment of a cash dividend is to decrease both stockholders’ equity and total assets. Preferred stock that is said to be cumulative entails that if a company does not pay any dividend it must make up for it. Preferred stock holders must be paid any of the unpaid prior year dividends before common stockholders receive dividends. (Weygandt, Kimmel, & Kieso, 2010)
b. I thought that common stock was presently selling at $29.50 but the company has the stock stated at $1 per share. How can that be?
Par relationship has no relationship with market value. When the Harris Corporation issues stock for less than par value it debits the account paid-in capital in excess of par value. Prices for common stock vary depending on market pressures. Common stock also appreciates in value, permitting people to sell their stock at a higher price than they paid.
c. Why is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholder’s equity. Why is treasury stock not reported as an asset if it has a debit balance?
The company is buying back its common stock because it will help increase the company’s share price. Buying back our shares adds to the demand for your company's shares. Harris Company has more cash than needed. Cash doesn't earn much because of low interest rates. So it is better to let your money make money for you.
Treasury stock is not reported as an asset if it has a debit balance because when the company disposes the shares, it credits the treasury stock for the cost of the shares purchased. This means that there is outstanding stock. Treasury stock reduces stockholders claims on corporate assets.
d. Why is it necessary to show additional paid-in capital? Why not just show common stock at the total amount paid?
It is necessary to show additional paid-in capital because it includes the excess of amounts paid over par or stated value and paid-in capital from treasury stock. (Weygandt, Kimmel, & Kieso, 2010) Common stock cannot be shown just at the total amount paid because it includes the par amount. State laws entail that a corporation is to record and report independently the par amount of issued shares from the amount received that was greater than the par amount.