Chap13 - CHAPTER 13 QUESTIONS 1. The basic rights of common...

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CHAPTER 13 QUESTIONS 1. The basic rights of common stockholders, unless otherwise restricted in the articles of incorporation or bylaws, are as follows: (a) The right to vote in the election of direc- tors and in the determination of certain corporate policies. (b) The right to maintain one’s proportional interest in the corporation through pur- chase of additional stock issued by the company. (In recent years, some states have eliminated this preemptive right.) 2. Historically, par value was equal to the market value of the shares at issuance. Par value was also sometimes viewed by the courts as the minimum contribution by in- vestors. These days, par values for com- mon stocks are usually set at very low val- ues (less than $1), so the importance of par value has decreased substantially. 3. Preferred stock is stock that carries certain preferences over common stock, such as prior claims to dividends and liquidation preferences. Often, preferred stock has no voting rights or only limited voting rights, and dividends are usually limited to a stated percentage or amount. The special rights of a particular issue of preferred stock are set forth in the articles of incorpo- ration and in the preferred stock certificates issued by the corporation. 4. Under the November 2007 Preliminary Views document issued by the FASB, all preferred stock would be classified as a li- ability in the balance sheet. 5. When stock is issued for noncash assets or for services, the fair market value of the stock or the fair market value of the prop- erty or services, whichever is more objec- tively determinable, is used to record the transaction. 6. A company may repurchase its own stock for any of the following reasons: To provide shares for incentive com- pensation plans To obtain shares for convertible securi- ties holders To reduce the amount of equity out- standing To invest excess cash temporarily To protect against a hostile takeover To improve per-share earnings To display confidence that the stock is currently undervalued 7. a. The cost method of accounting for treasury stock records the treasury stock at cost, pending final disposition of the stock; the par value method treats the acquisition of treasury stock as effective or “constructive” retirement of outstanding stock. b. Total stockholders’ equity will be the same regardless of whether the cost method or the par value method is used to account for treasury stock. The respective amounts of retained earn- ings and paid-in capital may differ, however. 8. The difference between the purchase price and the selling price of treasury stock is properly excluded from the income state- ment because treasury stock transactions cannot be considered to give rise to a gain or a loss. Gain or loss arises from the utili- zation of assets or resources by the corpo- ration in operating and investing activities. Because the recognition of treasury stock
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Chap13 - CHAPTER 13 QUESTIONS 1. The basic rights of common...

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