SM_CH10 - CHAPTER 10 10-1 The preemptive privilege gives...

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CHAPTER 10 10-1 The preemptive privilege gives present shareholders the opportunity to purchase additional shares directly from the corporation before new shares can be sold to the general public. In this way, the shareholders are able to maintain their percentage ownership. 10-2 Unlike individual proprietors or partners, stockholders' personal assets cannot be claimed by creditors to satisfy the debts of an incorporated entity. 10-3 No. Before a share of common stock can be outstanding, it must be duly authorized and issued. 10-4 No. Treasury stock is issued stock that has been repurchased by the issuer and is no longer outstanding. 10-5 Dividends are never liabilities unless declared. Here liabilities is used in the strict accounting sense. Cumulative dividends are conditional obligations as the statement implies. 10-6 No. Liquidating value is the dollar measurement of the preference to receive assets in the event of corporate liquidation . 10-7 Convertible securities are bonds and stocks that can be transformed into common shares at the option of the holder. 244
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10-8 Preferred stock and debt both have fixed payment rates. A payment on preferred stock is called a dividend while the payment on debt is called interest. While interest is a legal obligation on the periodic payment date, dividends on preferred and common stock are not an obligation of the company until declared by the board of directors. A final, very important issue, is that interest is an expense and reduces net income while preferred and common dividends do not reduce net income. 10-9 Bonds are riskier for the corporation because interest and principal payments are legal responsibilities. Preferred stock is riskier for the investor because the corporation has no legal obligation to pay dividends and most preferred stocks have an infinite life. 10-10 When a company grants a stock option to an executive, it is giving something of value for services rendered. When the company grants other items of value to employees, they record an expense. Many accountants think the same should happen for stock options. The FASB required expensing as of mid- 2005. 10-11 Stock options reward the employees only if the stock appreciates in value. Stock options create incentives for employees to work hard in the best interests of the shareholders. There can also be tax advantages to options. 10-12 Cash dividends are real in the sense that they require the disbursement of assets, whereas stock dividends do not. 10-13 No. It is impossible to increase every shareholders' fractional portion of the company. A stock dividend does not affect stockholders' fractional ownership. 245
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10-14 The use of high-percentage stock dividends (20% or more) is merely another way of obtaining a stock split. Sometimes such transactions are called a "stock split effected in the form of a stock dividend." While the economic values are the same for large stock dividends and splits, different stockholders’ equity accounts may be involved in the accounting. 10-15
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This note was uploaded on 04/13/2008 for the course ACCT 151 taught by Professor Largay during the Spring '07 term at Lehigh University .

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SM_CH10 - CHAPTER 10 10-1 The preemptive privilege gives...

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