The stockholders’ equity section of Pillar Corporation’s comparative balance sheet at the end of 2013 and 2014 is presented below. It is part of the financial data just reviewed at a stockholders’ meeting. 2,500,000 Paid-in Capital in Excess of Par............... Retained Earnings (see Note)................. Note: Availability of retained earnings for cash dividends is restricted by $2,000,000 due to a planned plant expansion. The following items were also disclosed at the stockholders’ meeting: net income for 2014 was $1,220,000; a 10% stock dividend was issued December 14, 2014; when the stock dividend was declared, the market value was $28 per share; the market value per share at December 31, 2014, was $26; management plans to borrow $500,000 to help finance a new plant addition, which is expected to cost a total of $2,300,000; and the customary $1.54 per share cash dividend had been revised to $1.40 when declared and issued the last week of December 2014. As part of its investor relations program, during the stockholders’ meeting management asked stockholders to write any questions they might have concerning the firm’s operations or finances. As assistant controller, you are given the stockholders’ questions. If you have $2,000,000 put aside in retained earnings for the new plant addition, which will cost $2,300,000, why are you borrowing $500,000 instead of just the $300,000 needed?December 31, 2014December 31, 2013Common Stock, $10 Par Value, 600,000 sharesauthorized; issued atDecember 31, 2014, 275,000 shares;2013, 250,000 shares .....................$2,750,000 2,500,000 Paid-in Capital in Excess of Par...............4,575,0004,125,000 Retained Earnings (see Note).................2,960,0002,825,000Total Stockholders’ Equity ...................$10,285,000$9,450,000 Solution Although there is a sufficient amount available in retained earning , it may be a reason that there is no cash availability in hand. This may be one of the reason that why they are borrowing..

1. The stockholders’ equity section of Pillar Corporation’s comparative balance sheet at the end of
2013 and 2014 is presented below. It is part of the financial data just reviewed at a stockholders’
meeting.
2,500,000
Paid-in Capital in Excess of Par...............
Retained Earnings (see Note).................
Note: Availability of retained earnings for cash dividends is restricted by $2,000,000 due to a
planned plant expansion.
The following items were also disclosed at the stockholders’ meeting: net income for 2014 was
$1,220,000; a 10% stock dividend was issued December 14, 2014; when the stock dividend was
declared, the market value was $28 per share; the market value per share at December 31, 2014,
was $26; management plans to borrow $500,000 to help finance a new plant addition, which is
expected to cost a total of $2,300,000; and the customary $1.54 per share cash dividend had been
revised to $1.40 when declared and issued the last week of December 2014. As part of its
investor relations program, during the stockholders’ meeting management asked stockholders to
write any questions they might have concerning the firm’s operations or finances. As assistant
controller, you are given the stockholders’ questions.
If you have $2,000,000 put aside in retained earnings for the new plant addition, which will cost
$2,300,000, why are you borrowing $500,000 instead of just the $300,000 needed?December 31,
2014December 31, 2013Common Stock, $10 Par Value, 600,000 sharesauthorized; issued
atDecember 31, 2014, 275,000 shares;2013, 250,000 shares .....................$2,750,000
2,500,000
Paid-in Capital in Excess of Par...............4,575,0004,125,000
Retained Earnings (see Note).................2,960,0002,825,000Total Stockholders’ Equity
...................$10,285,000$9,450,000
Solution
Although there is a sufficient amount available in retained earning , it may be a reason that there
is no cash availability in hand. This may be one of the reason that why they are borrowing.