Gemini Company has the following accounts in the Stockholders' Equity category of the balance sheet: Common Stock, $10 no par, 10,000 shares authorized, 9,000 issued, 8,000 outstanding Preferred Stock, $100 par, 8%, cumulative, participating, 1,000
shares authorized, issued, and outstanding Required: 1 . Explain how the issuance of stock affects the financial statements when the stock has no par value. 2 . Why would preferred stockholders want to have a cumulative feature in preferred stock? 3 . When a participating feature is present in preferred stock, how does it affect the amount of dividends that preferred stockholders can expect to receive?
1 . When no par stock is issued, the entire amount of the issuance is in the stock account. There is no distinction between the stock amount and the additional paid-in capital amount.
2 . The cumulative feature gives the stockholders some assurance that a dividend will eventually be received. If the dividends on preferred stock are cumulative, then the dividends that are not paid are considered to be in arrears. Before a dividend on common stock can be declared in a subsequent period, the dividends in arrears as well as the current year's dividend must be paid to the preferred stockholders.
3 . If a participating feature is present in preferred stock, then it allows the preferred stockholders to receive a dividend in excess of the regular rate when the firm has been particularly profitable and declares an abnormally large dividend.
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