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Cumulative provision related to the preferred stock mean

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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 comprise the stockholders' equity section of the balance sheet for the current year. The stockholders' equity section of Harris Corporation at December 31, 2008, is shown on page 590.

Harris Corporation
Balance Sheet (partial)
December 31, 2008
Paid in capital
Capital stock
Preferred stock, authorized 1,000,000 shares cumulative, $100 par value, $8 per share, 6,000 shares issued and outstanding $ 600,000
Common stock, authorized 5,000,000 shares, $1 par value, 3,000,000 shares issued, and 2,700,000 outstanding 3,000,000
Total capital stock 3,600,000
Additional paid-in capital
In excess of par value?preferred stock $ 50,000
In excess of par value?common stock 25,000,000
Total additional paid-in capital 25,050,000
Total paid-in capital 28,650,000
Retained earnings 900,000
Total paid-in capital and retained earnings 29,550,000
Less: Common treasury stock (300,000 shares) 9,300,000
Total stockholders' equity $20,250,000

At the meeting, stockholders have raised a number of questions regarding the stockholders' equity section.

Instructions
With the class divided into groups, answer the following questions as if you were the chief financial officer for Harris Corporation.

(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 stated at $1 per share. How can that be?"

(c) "Why is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholders' equity. Why is treasury stock not reported as an asset if it has a debit balance?"

(d) "Why is it necessary to show additional paid-in capital? Why not just show common stock at the total amount paid in?"

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Solution Summary

The cumulative provisions related to the preferred stock mean is examined.

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ANSWERS

Question A
The cumulative provision related to the preferred stock means that whenever the Board of Directors of Harris Corporation does not declare dividends for either preferred or common shares or both, the company is obligated to pay the preferred stockholders the amount of dividends that were not declared. Say, the company did not declare dividends for the past two years and have declared that dividends be paid this year, then the amount of ...

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