ACC 311 Chapter 18

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 today?

- the concept of par value and legal capital have been eliminated entirely from the model business corporation act

Brandon components declares a 2-for-1 stock split. What will be the effect of the split, and how shoes it be recorded?

-$1 day will be split into 2 $.50 stocks. -virtual split the par value of the share will not be changed in this type of split but outstanding shares will be increases or doubled

what is reverse stock split?what will be the effect of a reverse stock split on one million $1 par shares? On the accounting records?

-A reverse stock split decreases the number of shares and increases the price without affecting the total market value of shares outstanding; an investor will own fewer shares, but the value of each share is increased. -no journal entry conceptually

corporations offer the advantage of limited liability. Explain what is meant by this statement

-Shareholders liability will be limited to the extent of the value of the shares they are subscribed -they are not liable -can not be sued

distinguish between publicly held and privately (or closely) held corporations

-The stock of publicly held companies corporations is available for purchase by the general public -publicly held and traded: a: on an exchange b: over-the-counter -privately held are owned by only a few individuals and are not apart of the general public

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

-a quoted market price for the share -a selling price established in a recent issue of shares for cash -the amount of cash that would have been paid in a cash purchase of the asset/service -an independent appraisal of the value of the asset received -other available evidence

what is meant by a shareholders preemptive right?

-at the time of issuing additional shares the corporation first offers those shares to the existing shareholders to maintain their ownership right percentage in the corporation.

how do we report components of comprehensive income created during the reporting period?

-by extending in the income statement -in a different statement of comprehensive income separately following the income statement

the owners of a corporation are its shareholders. If a corporation has only one class of shares, they typically are labeled common shares. Indicate the ownership rights held by common shareholders, unless specifically withheld by agreement

-common shareholders bear all losses to the extent of their investment -right to vote -right to share in profits -claim on assets

the balance sheet reports the balance of shareholders equity accounts. What additional information is provided by the statement of shareholders equity?

-includes common stock, preferred stock, additional capital, value of shares capital, surplus, reinvested earnings, retained earnings etc. -Additionally it includes accumulated other comprehensive income (loss)

How does comprehensive income differ from net income? where do companies report in the balance sheet?

-it is a more expanded view, net income is arrived at by taking into consideration all the business related incomes -US GAAP reportsCI in the balance sheet under the head statement of shareholders equity

terminology varies in the way companies differentiate among share types. But many corporations designate shares as common or preferred. What are 2 special rights usually given to preferred shareholders?

-preference in payment of dividends -preference in payment of capital

companies occasionally sell more than one security for a single price. How is the issue price allocated among the separate securities?

-the corporation divides the sum between/among the securities sold. -if the value of the 2 securities is known the total proceeds according to their price -the total selling price is allocated between the 2 securities in proportion to their relative market value

the cost of legal, promotional, and accounting services necessary to effect the sale of shares are referred to as share issue cost. How are these cost recorded? Compare this approach to the way debt issue cost are recorded.

-the expenses on the issue of shares can't be amortized since it is a perpetual capital. Whereas the costs incurred while issue debt capital can be amortized since debt has a maturity period

Identify and briefly describe the two primary sources of shareholders equity?

1:Paid in capital- Company gets funds by selling equity shares to its promoter & public 2:Retained earnings- whenever a company earns a profit, the management retains some or all of the earnings in the business for development activities.

For profit corporations

a corporation whose objective is to make a profit

preference in payment of capital

in the case of liquidation the preference share holders are given preference in the payment of capital back to the preferences shareholders over the equity shareholders

What is comprehensive income?

includes net income as well as other comprehensive income. Includes all changes in equity other than the transaction with owners

most preferred shares are cumulative. Explain what this means.

means that the dividends for non paying years will accumulate and non cumulative preference shares means that dividends for on paying years will be lapsed

not-for-profit organizations

organizations with charitable, educational, community, and other public service goals that buy goods and services to support their functions and to attract and serve their members

preference in payment of dividends

preference will be given to the preference shareholders over the equity shareholders while paying dividends

discuss the conceptual basis for accounting for a share buyback as treasury stock.

share repurchases and not retired are referred to as treasury stock. Corporations may repurchase some of the previous used shares with the intention of issuing those shares again in the future

par value

the face value of the company share, it is used to be the original price of the share which is printed on the face of the share certificate

when a corporation acquires its own shares those shares assume the same status as authorized but unissued shares, as if they never had been issued. Explain how this is reflected in the accounting records if the shares are formally retired.

when formally retired you should reduce the common stock and paid in capital. A company can buy back previously issued shares, it can be to offset the increase in shares issued to employees, or if they feel the price is under valued