Preferred Stock

1. Explain the difference between preferred stock and common stock.

2. Discuss the distribution of dividends to preferred stockholders.

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3. Record the issuance of preferred stock.

4. Define “treasury stock” and provide reasons for a corporation to spend its money to acquire treasury stock.

5. Account for the purchase and resale of treasury stock, with both gains and losses occurring.

Question: Some corporations also issue a second type of capital stock referred to as preferred stock. Probably

about 10–15 percent of companies in the United States have preferred stock outstanding but the practice is more

prevalent in some industries. How is preferred stock different from common stock?

Answer: Preferred stock is another version of capital stock where the rights of those owners are set by the

contractual terms of the stock certificate rather than state law. In effect, common stockholders are voluntarily

surrendering one or more of their rights in hopes of enticing additional investors to contribute money to the

corporation. For common stockholders, preferred stock is often another possible method of achieving financial

leverage in the same manner as using money raised from bonds and notes.

The term “preferred stock” comes from the preference that is conveyed to these owners. They are being allowed

to step in front of common stockholders when the specified rights are applied. A wide variety of benefits can be

assigned to the holders of preferred shares, including additional voting rights, assured representation on the board

of directors, and the right to residual assets if the company ever liquidates.

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