Accounting chapter 19

Shares may be:

1.Convertible into a specified number of another class of shares. 2.Redeemable at the option of a.Shareholders. b.The corporation

CI?

Comprehensive income includes net income as well as other gains and losses that change shareholders' equity but are not included in traditional net income.

Paid in capital?

Consists primarily of amounts invested by shareholders when they purchase shares of stock from the corporation

What business entity is better suited for raising capital?

Corporation

Retained earnings is reported variously as?

Retained income

Model Business Corporation Act

This act is designed to serve as a guide to states in the development of their corporation statutes. It presently serves as the model for the majority of states.

property dividend

Whennon cash assets is distrubted, often called dividend in kind or a nonreciprocal transfer to owners.

Privately held companies?

do not need to register those shares with the Securities and Exchange Commission and are spared the voluminous, annual reporting requirements of the SEC. Of course, new sources of equity financing are limited when shares are privately held, as is the market for selling existing shares. Page 1087Frequently, companies begin as smaller, privately held corporations

limited liability partnership?

is similar to a limited liability company, except it doesn't offer all the liability protection available in the limited liability company structure. Partners are liable for their own actions but not entirely liable for the actions of other partners

Distinction between Debt and Equity for Preferred Stock

most non-mandatorily redeemable preferred stock (preference shares) also is reported as debt as well as some preference shares that aren't redeemable Under

limited liability company?

offers several advantages. Owners are not liable for the debts of the business, except to the extent of their investment

Distinction between Debt and Equity for Preferred Stock under GAAP

preferred stock normally is reported as equity, but is reported as debt with the dividends reported in the income statement as interest expense if it is "mandatorily redeemable" preferred stock

Distinguish between publicly held and privately (or closely) held corporations.

publicly held corporations is available for purchase by the general public. Shares might be traded on organized national stock exchanges or available "over-the-counter" from securities dealers. Privately held companies' shares are held by only a few individuals and are not available to the general public.

OCI?

reported in the statement of comprehensive income.

preemptive right?

right sometimes given to common shareholders is the right to maintain one's percentage share of ownership when new shares are issued

Articles of incorporation

sometimes called the corporate charter) describe (a) the nature of the firm's business activities, (b) the shares to be issued, and (c) the composition of the initial board of directors

Identify the three common forms of business organization and the primary difference between the way they are accounted for

(1) a sole proprietorship, (2) a partnership, or (3) a corporation

What are specific things that comprehensive income includes.

1.Net holding gains (losses) on investments. 2.Gains (losses) from and amendments to postretirement benefit plans. 3.Deferred gains (losses) on derivatives. 4.Gains (losses) from foreign currency translation

The four classifications within shareholders' equity are?

Are paid-in capital, retained earnings, accumulated other comprehensive income, and treasury stock

Transaction we examine can be viewed simply?

As an increase or decrease in shareholders' equity, per se, without regard to specific shareholders' equity accounts

Preferred shares may be thought of in what 4 ways?

Cumulative and noncumulative, particapating and nonparticipating.

What is treasury stock normal balance?

Debit (contra equity account)

Shareholders' equity

Equity is a residual amount—what's left over after creditor claims have been subtracted from assets

Participating preferred share?

Feature allows preferred shareholders to receive additional dividends beyond the stated amount

Distinguishing Classes of Shares

If more than one class of shares is authorized by the articles of incorporation, the specific rights of each (for instance, the right to vote, residual interest in assets, and dividend rights) must be stated

Corporations offer the advantage of limited liability. Explain what is meant by that statement

In the eyes of the law, a corporation is a separate legal entity—separate and distinct from its owners. The owners are not personally liable for debts of the corporation. So, shareholders generally may not lose more than the amounts they invest when they purchase shares. This is perhaps the single most important advantage of corporate organization over a proprietorship or a partnership

Stock dividend

Is the distribution of additional sgares of stock to current shareholders of the corporation.

Treasury stock?

It indicates that some of the shares previously sold were bought back by the corporation from shareholders

Do we report a gain or loss on treaury stock?

No

Distinguish between not-for-profit and for-profit corporations.

Not-for-profit" corporations such as churches, hospitals, universities, and charities, are not organized for profit and do not sell stock. Some not-for-profit corporations, such as the Federal Deposit Insurance Corporation (FDIC), are government owned.

Reverse stock split

Occurs when a company decreases rather than increases its outstanding shares.

What are the disadvantages of a corporation?

Paperwork,impose expensive reporting requirements,double taxation.

The par value of shares historically indicated the real value of shares and all shares were issued at that price. The concept has changed with time. Describe the meaning of par value as it has evolved to today.

Par value was defined by early corporation laws as the amount of net assets not available for distribution to shareholders (as dividends or otherwise). However, now the concepts of "par value" and "legal capital" have been eliminated entirely from the Model Business Corporation Act. Most shares continue to bear arbitrarily designated par values, typically nominal amounts.

Limited liability?

Shareholders' liability is limited to the amounts they invest in the company when they purchase shares (unless the shareholder also is an officer of the corporation

Brandon Components declares a 2-for-1 stock split. What will be the effects of the split, and how should it be recorded?

The effect and maybe the motivation for the 2-for-1 stock split is to reduce the per share market price (by half). This will likely increase the stock's marketability by making it attractive to a larger number of potential investors. The appropriate accounting treatment of a stock split is to make no journal entry, which avoids the reclassification of "earned" capital as "invested" capital

At times, companies issue their shares for consideration other than cash. What is the measurement objective in those cases?

The measurement objective is that the transaction should be recorded at fair value. This might be the fair value of the shares or of the noncash assets or services received, whichever evidence of fair value seems more clearly evident. This is consistent with the general practice of recording any noncash transaction at market value.

Identify and briefly describe the two primary sources of shareholders' equity.

The two primary sources of shareholders' equity are amounts invested by shareholders in the corporation and amounts earned by the corporation on behalf of its shareholders. Invested capital is reported as paid-in capital and earned capital is reported as retained earnings

S corporation?

corporations have characteristics of both regular corporations and partnerships. Owners have the limited liability protection of a corporation, but income and expenses are passed through to the owners as in a partnership, avoiding double taxation.

cumulative

which means that if the specified dividend is not paid in a given year, the unpaid dividends (called dividends in arrears) accumulate and must be made up in a later dividend year