Question

Lynbrook, Inc. was formed on January 2, 2015 with the authorization to issue 300,000 shares of $10 par value common stock and 20,000 shares of $100 par value cumulative preferred stock. During 2015, all the preferred stock was issued at par, and 170,000 shares of common stock were sold for $25 per share. The preferred stock is entitled to a dividend equal to 8 percent of its par value before any dividends are paid on the common stock.

During its first five years of business (2015 through 2019), the company earned income totaling $4,200,000 and paid dividends of 40 cents per share each year on the common stock outstanding as of December 31.

On January 2, 2017, the company purchased 20,000 shares of its own common stock in the open market for $300,000. On January 2, 2019, it reissued 15,000 shares of this treasury stock for $270,000. The remaining 5,000 were still held in treasury at December 31, 2019.

Instructions

a. Prepare the stockholders' equity section of the balance sheet for Lynbrook, Inc. at December 31, 2019. Include supporting schedules showing (1) your computation of any paid-in capital on treasury stock and (2) retained earnings at the balance sheet date. (use the Review Problem at end of Chapter 10, page 550-552, as a guide for your solution)

b. At December 31, 2019, shares of the company's common stock were trading at $30. Explain what would have happened to the market price per share had the company split its stock 3-for-1 at this date. Also explain what would have happened to the par value of the common stock and to the number of common shares outstanding.

Answer 1