(Learning Objective 1, 3, 4: Explaining the features of a corporation’s stock) The board of directors of Free stroke Swim Centers, Inc., is meeting to address the concerns of stockholders. Stockholders have submitted the following questions for discussion at the board meeting. Answer each question.
1. Why did Free stroke organize as a corporation if a corporation must pay an additional layer of income tax?
2. How is preferred stock similar to common stock? How is preferred stock similar to debt?
3. Free stroke purchased treasury stock for $50,000 and a year later sold it for $65,000.
Explain to the stockholders whether the $15,000 excess is profit to be reported on the company’s income statement. Explain your answer.
4. Would Free stroke investors prefer to receive cash dividends or stock dividends? Explain your reasoning.