Exam 1 Review

What effect does a stock dividend have on the stockholders' equity? Retained earnings? Contributed capital?

A stock dividend effects stockholders' equity by transferring to equity. It has an effect on retained earnings by transferring to RE. It effects contributed capital by transferring to paid-in capital.

What is a stock dividend? At what value would a small stock dividend be recorded?

A stock dividend is a proportional distribution of shares of the company's stock to its stockholders. A small stock dividend is recorded at the market price of the stock.

What is a preferred stock? What are the preferences of preferred stock over common stock?

Preferred stock is sold to raise money. It is preferred over common stock for investment goals.

What kind of normal balance does retained earnings have? Can a corporation have a contra-balance in retained earnings?

RE normal balance is credit. A corporation can have a contra-balance which is a deficit.

How do you calculate retained earnings? What does a restriction on Retained Earnings mean?

RE=NI-Net losses, D, CC A restriction on RE does not change the total RE or stockholders equity of the company

What are retained earnings, and do they relate to the assets of a corporation?

Retained earnings are the part of the stockholders equity that represents claims to assets arising from the earnings of the business.

What are the advantages of a corporation? Disadvantages?

The advantages of a corporation are that it is a separate legal entity, have an ease of raising capital, and have an ease of transfer of ownership. The disadvantages are double taxation and heavy government regulation.

What is the legal capital of a corporation, and what is its purpose? What is the par value? Stated value? No par stock? Market value?

The legal capital of a corporation is contributed (paid-in) capital. Its purpose is to represent the investment made by the stockholders of the corporation. The par value is capital stock that has been assigned a value per share in the corporate charter. The stated value is the entire amount the stock sold for proceeds that goes to stock account. No par stock is capital stock that has not been assigned a value in the charter. Market value is the price of the stock sold at the stock market value.

What is a corporation? How does it differ from a sole proprietorship and partnership?

A corporation is a body of persons granted a charter legally recognizing them as a separate entity having its own rights, privileges and liabilities distinct from those of its members. It differs from a sole proprietorship and partnership because they own the largest amount of resources, are a legal entity, and employ a large amount of individuals rather than one or two people.

Why does a corporation obtain treasury stock?

A corporation obtains treasury stock to have stock available to distribute to officers and employees under bonus and stock compensation plans, to maintain a favorable market for its stock and to increase its EPS, among other reasons.

What are the authorized shares? Outstanding shares? Issued shares? Treasury stock? Be able to obtain or calculate each of these.

Authorized shares are the maximum number of shares a corporation is allowed to issue without changing its charter. Outstanding shares are the shares of stock issued and still in circulation. Issued shares are the shares sold or otherwise transferred to stockholders. Treasury stock are the shares of stock a corporation repurchases from the stockholders.

How do you calculate contributed capital and total stockholders' equity.

Contributed capital is calculated with preferred stock, common stock and paid-in capital. Total stockholders equity is calculated by retained earnings.

What is included in the stockholders; equity section of a balance sheet.

Contributed paid-in capital is included in the stockholders' equity section of a balance sheet.

What is convertible preferred stock? Callable preferred stock?

Convertible preferred stock is when the stockholder can exchange the preferred stock for common stock at the specified ration. Callable preferred stock is the corporation's right to purchase the stock from the stockholders at the call price.

What are the organizational costs of a corporation?

The organizational cost of a corporation includes state incorporation fees, attorney fees, cost of printing stock certificates and account fees.

How is the value of stock determined when stock is issued for non cash assets?

The value of stock when stock is issued for non cash assets is determined by either the market value of the stock if it is unknown or is a reliable amount or the fair market value of the asset or service.

What is treasury stock? What is its classification. What is its normal balance? What effect does it have on stockholders' equity? Assets? Liabilities?

Treasury stock is the capital stock that has been issued and is reacquired but eh corporation so it is no longer outstanding. Its classification is either common or preferred stock. Its normal balance is a contra equity account, therefore it has a normal debit balance. It reduces stockholders' equity. Its effect on assets is a decrease. It doesn't effect liabilities.