Johnstone Inc. began operations in January 2011 and reported the following results for each of its 3 years of operations.
2011 $260,000 net loss 2012 $40,000 net loss 2013 $700,000 net income
At December 31, 2013, Johnstone Inc. capital accounts were as follows.
6% cumulative preferred stock, par value $100; authorized, issued,
and outstanding 5,000 shares ………………………………………………..$500,000
Common stock, par value $1.00; authorized 1,000,000 shares;
issued and outstanding 750,000 shares ……………………………………...$750,000
Johnstone Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Johnstone began operations. The state law permits dividends only from retained earnings.
(a) Compute the book value of the common stock at December 31, 2013.
(b) Compute the book value of the common stock at December 31, 2013, assuming that the preferred stock has a liquidating value of $106 per share.
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