Chapter 15: Stockholders' Equity

Total stockholders' equity represents a. a claim to specific assets contributed by the owners b. the maximum amount that can be borrowed by a company c. a claim against a portion of the total assets of a company d. only the amount of earnings that have been retained in the business

c. a claim against a portion of the total assets of a company

The general rule to be applied when stock is issued for services or property other than cash is that the property or services be recorded at: a. the fair market value of the stock issued b. the fair market value of the noncash consideration received c. either the fair market value of the stock issued or the fair market value of the noncash consideration received, whichever is more clearly determinable d. a value that clearly reflects the intentions of the parties entering into the transaction and provides a relevant basis for recording

c. either the fair market value of the stock issued or the fair market value of the noncash consideration received, whichever is more clearly determinable

The residual interest in a corporation belongs to the a. management b. creditors c. common stockholders d. preferred stockholders

common stockholders

What do low par values help companies to avoid?

contingent liability

Stockholders' equity is generally classified into two major categories a. contributed capital and appropriated capital b. appropriated capital and retained earnings c. retained earnings and unappropriated capital d. earned capital and contributed capital

d. earned capital and contributed capital

Companies should record stock issued for services or property other than cash at the...

either (1) fair value of the stock issued or (2) the fair value of the noncash consideration received

What is common stock?

it is the residual corporate interest -bears ultimate risks of loss -receives the benefits of success -not guaranteed dividends nor assets upon dissolution

Berry Corporation has 50,000 shares of $10 par common stock authorized. The following transactions took place during 2014, the first year of the corporations existence: Sold 10,000 shares of common stock for $13.50 per share Issued 10,000 shares of common stock in exchange for a patent valued at $150,000 At the end of the Berry's first year, total paid-in capital amounted to:

$285,000

What are some direct costs incurred when selling stock?

-underwriting costs -accounting and legal fees -printing costs -taxes, should be reported as a reduction of the amounts paid in Paid-in Capital in Excess of Par

What are the three characteristics of the corporate form?

1. Influence of state corporate law 2. Use of capital stock or share system 3. Development of a variety of ownership interests

What are the three primary forms of business organization?

1. Propietorship 2. Partnership 3. Corporation

What are five reasons why corporations purchase their outstanding stock?

1. Provide tax-efficient distributions of excess cash to stockholders 2. Increase earnings per share and return on equity 3. Provide stock for employee stock compensation contracts or to meet potential merger needs 4. thwart takeover attempts or to reduce the number of stockholders 5. make a market in the stock

What are two reasons for issuing no-par stock?

1. avoids contingent liability 2. avoids confusion over recording par value versus fair market value

What are 3 different types of dividends?

1. cash dividends 2. property dividends 3. liquidating dividends

. What are two acceptable methods for purchasing treasury stock?

1. cost method (more widely used) 2. par (stated) value method

What are the three dates involved when declaring dividends?

1. date of declaration 2. date of record 3. date of payment

Why do few companies pay dividends in amounts equal to their legally available retained earnings?

1. maintain agreements with creditors 2. meet state incorporation requirements 3. to finance growth or expansion 4. to smooth out dividend payments 5. to build up a cushion against possible losses

What are 8 features often associated with preferred stock?

1. preference as to dividends 2. preference as to assets in the event of liquidation 3. convertible into common stock 4. callable at the option of the corporation 5. nonvoting 6. cumulative 7. participating 8. redeemable

What are the two methods for allocating proceeds?

1. proportional method 2. incremental method

What four rights do shares of a company have?

1. to share proportionately in profits and losses 2. to share proportionately in management (the right to vote for directors) 3. to share proportionately in assets upon liquidation 4. to share proportionately in any new issues of stock of the same class- called the preemptive right

Norton Company issues 4,000 shares of its $5 par value common stock having a fair value of $25 per share and 6,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $210,000. What amount of the proceeds should be allocated to the preferred stock?

114,545

Manning Company issues 10,000 shares of its $5 par value common stock having a fair value of $25 per share and 15,000 shares of its$15 par value preferred stock having a fair value of $20 per share for a lump sum of $530,000. How much of the proceeds would be allocated to the common stock?

240,909

Bishop Co. issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Bishop records the issuance as follows:

Cash 120,000 Preferred Stock 100,000 Paid-in Capital in Excess of Par- Preferred 20,000

Some states require that no-par stock have a stated value. If a company issued 1,000 of the shares with a $5 stated value at $15 per share for cash, what entry is made?

Cash 15,000 Common Stock 5,000 Paid-in Capital in excess of stated value 10,000

Video Electronics Corporation is organized with authorized common stock of 10,000 shares without par value. If Video Electronics issues 500 shares for cash at $10 per share, what entry is made?

Cash 5,000 Common Stock 5,000

Pacific Company had issued 100,000 shares of $1 par value common stock at a price of $10 per share. In addition, it has retained earnings of $300,000. On January 20, Pacific acquires 10,000 of its shares at $11 per share. Pacific records the re acquisition as follows:

Treasury Stock 110,000 Cash 110,000

True or False: All dividends except for stock dividends, reduce the total stockholders' equity in the corporation

True

What is preferred stock?

a special class of stock created by contract, when stockholders' sacrifice certain rights in return for other rights or privileges, usually dividend preference

When a corporation sells stock to investors, the transaction will increase Contributed Capital Earned Capital a. yes no b. yes yes c. no yes d. no no

a. yes no

What must a corporation submit to the state in which the incorporation is desired?

articles of incorporation

The pre-emptive right of a common stockholder is the right to a. share proportionately in corporate assets upon liquidation b. share proportionately in any new issues of stock of the same class c. receive cash dividends before they are distributed to preferred stockholders d. exclude preferred stockholders from voting rights

b. share proportionately in any new issues of stock of the same class