3. Callable

If a corporation has 10% preferred stock outstanding and market rates decline to 8%, it makes sense that the corporation would like to eliminate the 10% preferred stock and replace it with 8% preferred stock. On the other hand, the holders of the 10% preferred stock bought it with the assumption of getting the 10% indefinitely. Anticipating such a situation, the preferred stock will usually have a stipulation that the corporation can "call in" (retire) the preferred stock at a certain price. This price is referred to as the call price and it might be 110% of the par amount (par plus one year's dividend).

4. Convertible

Occasionally, a corporation's preferred stock states that it can be exchanged for a stated number of shares of the corporation's common stock. If that is the case, the preferred stock is said to beconvertible preferred. For example, a corporation might issue shares of 8% convertible preferred stock which can be converted at any time into three shares of common stock. The preferred stockholder receives the usual preferences, but in addition has the potential to share in the success of the corporation. If the common stock is selling for $20 per share at the time the preferred shares are issued, the preferred stock is more valuable because of its dividend. However, if the company's success increases the value of the common stock to $40 per share, the convertibility feature is more valuable since the preferred stock is now worth $120 per share. (The preferred stock can be exchanged for 3 shares of common stock worth $40 each). The preferred stockholder could sell the preferred stock at the market price of $120 per share, or, could have the corporation issue three shares of common stock in exchange for each share of preferred stock.

5. Combination of Features

The strength of the corporation, coupled with the status of key financial markets, all influence the features that are offered with a given preferred stock. If a corporation is not attractive to potential investors, the preferred stock might need both the cumulative and the fully participating features in order to sell. On the other hand, a successful blue chip corporation might easily sell its preferred stock as noncumulative and nonparticipating. If a corporation wants to conserve its cash, it may offer a convertibility feature in order to have a lower dividend rate.

25) Entries to the Retained Earnings Account

Net Income or Loss

The closing entries of a corporation include closing the income summary account to the Retained Earnings account. If the corporation was profitable in the accounting period, the Retained Earnings account will be credited; if the corporation suffered a net loss, Retained Earnings will be debited.

Dividends

When dividends are declared by a corporation's board of directors, a journal entry is made on the declaration date to debit Retained Earnings and credit the current liability Dividends Payable. As stated earlier, it is the declaration of cash dividends that reduces Retained Earnings.

Appropriations or Restrictions of Retained Earnings

A board of directors can vote to appropriate, or restrict, some of the corporation's retained earnings. An appropriation (or restriction) will result in two retained earnings accounts instead of one:

(1) Retained Earnings (or Unappropriated Retained Earnings) and

(2) Appropriated Retained Earnings.

The subdividing of retained earnings is a way of disclosing the appropriation on the face of the balance sheet. (An appropriation might occur when a corporation is expanding its factory and its cash must be preserved.) By displaying the appropriated retained earnings account on the balance sheet, the corporation is communicating a certain situation and is potentially limiting itself from declaring dividends by having reduced the balance in its regular (the unappropriated) retained earnings. (Legally, dividends can be declared only if there is a credit balance in Retained Earnings.)

To record an appropriation of retained earnings, the account Retained Earnings is debited (causing this account to decrease), and Appropriated Retained Earnings is credited (causing this account to increase).

An alternative to having Appropriated Retained Earnings appearing on the balance sheet is to disclose the specific situation in the notes to the financial statements. The board of directors can simply not declare dividends or dividend increases.