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.
HARRIS CORPORATION
Balance Sheet (partial)
December 31, 2011
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Paid in capital
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Capital stock
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Preferred stock, authorized 1,000,000 shares
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cumulative, $100 par value, $8 per share, 6,000
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shares issued and outstanding
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$ 600,000
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Common stock, authorized 5,000,000 shares, $1 par
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value, 3,000,000 shares issued, and 2,700,000
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outstanding
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3,000,000
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Total capital stock
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3,600,000
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Additional paid-in capital
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In excess of par value-preferred stock
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$ 50,000
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In excess of par value-common stock
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25,000,000
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Total additional paid-in capital
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25,050,000
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Total paid-in capital
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28,650,000
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Retained earnings
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900,000
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Total paid-in capital and retained earnings
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29,550,000
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Less: Common treasury stock (300,000 shares)
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9,300,000
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Total stockholders' equity
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$20,250,000
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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?"