Ch 15 Stockholders Equity

Question 1

Preemptive Right

Answer 1

• The right to share proportionately in any new issues of stock of the same class.
• Protects an existing stockholder from involuntary dilution of ownership interest.
• Many corporations have eliminated this right b/c it makes it inconvenient to issue large amounts of stock

Question 2

LO1: Discuss the characteristics of the corporate form of organization

Answer 2

Characteristics:
-influence of state corporate law
-use of the capital stock or share system
-development of a variety of ownership interests
Stock rights, to share proportionately (unless otherwise specified):
-profits/losses
-mgmt - the right to vote for directors
-corp assets upon liquidation
-preemptive rights

Question 3

LO2: Identify the key components of stockholders’ equity

Answer 3

-also called owners’ equity
-classified into 2 categories:
+contributed capital
+earned capital

Question 4

Contributed Capital

Answer 4

• the total amount paid in on capital stock

- incudes: par value of all outstanding capital stock and premiums less any discounts on issuance

Question 5

Earned Capital

Answer 5

• the capital that develops if the business operates profitably
• consists of all the undistributed income that remains invested in the company

Question 6

LO3: Explain the accounting procedures for issuing shares of stock

Answer 6

-Par value stock
+preferred or common stock
+Paid in capital in excess of par (APIC)
+Discount on stock
-No Par stock
+common stock
+common stock & APIC, if stated value is used
-Stock issued in combo w/ other securities
+when issuing stock for services/property other than as, the company should record the services/property at either the fair value of the stock issued or the fair value of the non cash consideration received, whichever is more clearly determinable

Question 7

LO4: Describe the accounting for treasury stock

Answer 7

-cost method
-derives its name b/c a company maintains the Treasury Stock account at the cost of the shares purchased
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