Accounting Chapter 15.1.txt
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What are the two broad categories of owners' equity?
Paid in (contributed) capital, Earned capital
What is paid in capital? Give examples
Equity arising from contributions by the owners. Ex. Common stock, preferred stock, additional paid in capital
What is earned capital? Give example
Equity arising from past earnings retained in the company; primarily retained earnings
What is par value of capital stock?
an arbitrary amount assigned to the stock by the corporation's organizers when the stock is first authorized by the state.
___ ____ establishes the stock's minimum legal capital.
What is minimum legal capital?
the minimum amout a stockholder must invest in the corporation or be liable to its creditors for the difference
What are the 2 types of "no par stock"? What do they imply?
- 1. No par stock with a stated value. The stated value establishes minimum legal capital.
- 2. True no par stock. a. the stock has no par value or stated value. b. the stock's issuance price establishes minimum legal capital.
How do common stock and preferred stock differ?
- a. preferred stock generally carries no voting rights while common stock does.
- b. Preferred stockholders have asset preference over common stockholders in the event of liquidation.
- c. Preferred stockholders have preference with respect to dividends (they will get them before common stock if they get them).
Preferred stock is cumulative. What does it mean?
It implies that dividends in arrears must be paid prior to the issuance of any common stock dividends.
Preferred stock can be participating. What does that mean?
Preferred stock may be allowed to participate (share) in dividends above its stated percentage in the current year (but not below).
Preferred stock can be callable. What does it mean?
This is preferred stock that can be retired at a specified price by the corporation.
Preferred stock may be redeemable. What does that mean?
This is preferred stock that has a mandatory redemption date and price (it must be retired). Thus, it has characteristics of both debt and equity.
According to FAS how should redeemable Preferred Stock be reported?
It should be reported as debt, dividend payments are interest expense
Preferred stock can be convertible. What does that mean?
This is preferred stock that is convertible into a given number of shares of common stock at the discretion of the PS holder.
What are the two methods of recording different classes of stock for a lump sum price? Which is preferred?
Proportional Method and Incremental Method. Proportional method is preferred.
What is the proportional method?
If market values exist for the various classes of stock issued, allocate the lump sum based on their relative market values.
What is the Incremental Method?
If market value exists for one class but not the other, allocate the market value to the one that is known and any remaining portion of the lump sum is allocated to the other class.
What should the basis be when stock is issued in an exchange instead of cash?
The transaction should be based upon the market value of the consideration received or the market value of the stock issued, whichever is more clearly determinable.
When do stock subscription occur?
when prospective stockholders agree to purchase the stock at a specified price by a specified date.
What are the two new accounts that are created when a subscription contract is entered into?
Stock subscriptions receivable and stock subscribed
What is stock subscriptions receivable?
represents the amount to be received in the future. It may be classified as a current asset or as a contra equity account; The SEC requires this latter classification.
How must publically traded companies report stock subscriptions receivable?
As a contra stock holder equity
How can nonpublically traded companies report stock subsciptions receivable?
as a current asset or contra stockholders equity
What is stock subscribed?
it's a stockholders' equity account representing the par value of the stock to be issued in the future. It will be removed when the stock is issued.
What happens when the final payment is received for stock subscriptions?
- a. Any remaining stock subscription receivable is removed
- b. stock subscribed is removed
- c. the stock is issued
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