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Unformatted text preview: Chapter 15 ANSWERS TO QUESTIONS 1. The basic rights of each stockholder (unless otherwise restricted) are to share proportionately: (1) in profits, (2) in management (the right to vote for directors), (3) in corporate assets upon liquidation, and (4) in any new issues of stock of the same class (preemptive right). 2. The preemptive right protects existing share holders from dilution of the ownership share in the event the corporation issues new shares. 3. Preferred stock commonly has preference to dividends in the form of a fixed dividend rate and a preference over common stock to remaining corporate assets in the event of liquidation. Preferred stock usually does not give the holder the right to share in the management of the company. Common stock is the residual security possessing the greater risk of loss and the greater potential for gain; it is guaranteed neither dividends nor assets upon dissolution but it generally controls the management. 4. The distinction between paid-in capital and retained earnings is important for both legal and economic points of view. Legally, dividends can be declared out of retained earnings in all states, but in many states dividends cannot be declared out of paid-in capital. Economically, management, stockholders, and others look to earnings for the continued existence and growth of the corporation. 5. Authorized capital stockthe total number of shares authorized by the state of incorporation for issuance. Unissued capital stockthe total number of shares authorized but not issued. Issued capital stockthe total number of shares issued (distributed to stockholders). Outstanding capital stockthe total number of shares issued and still in the hands of stockholders (issued less treasury stock). Treasury stockshares of stock issued and repurchased by the issuing corporation but not retired. 6. Par value is an arbitrary, fixed per share amount assigned to a stock by the incorporators. It is recognized by the state of incorporation as the amount that must be paid in for each share if the stock is to be fully paid when issued. If not fully paid, a contingent liability for the discount results. 7. The issuance for cash of no-par value common stock at a price in excess of the stated value of the common stock is accounted for as follows: 1. Cash is debited for the proceeds from the issuance of the common stock. 2. Common Stock is credited for the stated value of the common stock. 3. Additional Paid-in Capital is credited for the excess of the proceeds from the issuance of the common stock over its stated value. 8. The proportional method is used to allocate the lump sum received on sales of two or more classes of securities when the fair market value or other sound basis for determining relative value is available for each class of security. In instances where the fair market value of all classes of securities is not determinable in a lump sum sale, the incremental method must be used. The value of the securities lump sum sale, the incremental method must be used....
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This note was uploaded on 04/24/2008 for the course ACC 319 taught by Professor Lewis during the Spring '08 term at Creighton.
- Spring '08