302Chapter 11 notes

302Chapter 11 notes - CHAPTER 11 E Equity Financing E...

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C HAPTER 11 E Equity Financing E L EARNING O BJECTIVES 1. Identify the rights associated with ownership of common and preferred stock. C Common stockholders vote in the election of board of directors members. C Preferred stockholders usually cannot vote in director elections. C Preferred stock dividends must be paid in full before any common stock dividends can be paid. C Preferred stock can be cumulative, participating, convertible, callable, redeemable, or some combination of these. C Par values of common stock are usually very low (less than $1); par values of preferred stocks often approximate the issuance price. 2. Record the issuance of stock for cash, on a subscription basis, and in exchange for noncash assets or for services. C When stock is sold for cash, the proceeds are usually divided between par, or stated, value and additional paid-in capital. C When stock is sold on a subscription basis, any unpaid subscription amount is reported as a subtraction from stockholders’ equity. C When stock is issued in exchange for noncash assets or for services, the transaction is recorded using the fair market value of the assets or services or the fair market value of the stock, whichever is more objectively determinable. 3. Use both the cost and par value methods to account for stock repurchases. C When capital stock is acquired and retired, the capital stock account is reduced, and retained earnings can be reduced for all or part of the excess over par value paid to reacquire the stock. C Additional paid-in capital created at the issuance of the stock can also be reduced or eliminated when the stock is reacquired. C Treasury stock is stock reacquired but not immediately retired. C When the cost method is used, the treasury shares are accounted for in a manner similar to a stock retirement. C When the cost method is used, the entire cost to reacquire the treasury shares is shown in a contra-equity account until the shares are reissued or retired. 1
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4. Account for the issuance of stock rights and stock warrants. C Stock rights are issued to existing shareholders to allow them to purchase sufficient shares to maintain their proportionate interest when new shares are issued. C Stock warrants are issued in conjunction with other securities to make those other securities more attractive to investors. 5. Explain the difference between the intrinsic value and the fair value methods, and use both in accounting for a fixed stock option plan. C With the intrinsic value method, total compensation expense for the option service period is equal to the number of options multiplied by the difference between the market price of the stock and the option exercise price as of the grant date. (Usually this results in no compensation expense.) C With the fair value method, total compensation expense is the number of options multiplied by the fair value of each option as of the grant date. This expense is allocated over the service period. C
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302Chapter 11 notes - CHAPTER 11 E Equity Financing E...

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