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ACC327_CH15_Notes - Chapter 15 Stockholders Equity 1 The...

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Chapter 15 Stockholders' Equity 1. The two broad categories of owners' equity are a. Paid-in (contributed) capital - equity arising from contributions by the owners. b. Earned capital - equity arising from past earnings retained in the company; this is comprised primarily of one account, retained earnings. 2. Capital stock - is a general term referring to stock, both common stock and preferred stock. a. Par value of capital stock - is an arbitrary amount assigned to the stock by the corporation's organizers when the stock is first authorized by the state. Par value establishes the stock's minimum legal capital. 1. Minimum legal capital (MLC) - is the minimum amount a stockholder must invest in the corporation or be liable to its creditors for the difference. b. Some stock is "no par stock," of which there are two types 1. No par stock with a stated value A. The stated value establishes minimum legal capital. 2. True no par stock A. The stock has no par value or stated value. B. The stock's issuance price establishes minimum legal capital. 3. How do common stock and preferred stock differ? - they differ primarily in the following ways: a. Preferred stock generally carries no voting rights while common stock does.
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b. Preferred stockholders have asset preference over common stockholders in the event of liquidation. c. Preferred stockholders have preference with respect dividends. 4. Features of preferred stock - P/S has many more features than C/S; some of these features are a. Cumulative vs. noncumulative - cumulative P/S implies dividends in arrears must be paid prior to the issuance of any C/S dividends. b. Participating feature - P/S may be allowed to participate (i.e., share) in dividends above its state percentage in the current year. c. Callable P/S - is P/S that can be retired at a specified price by the corporation. d. Redeemable P/S - is P/S that has a mandatory redemption date and price (i.e., it must be retired). Thus, it has characteristics of both debt and equity. ASC 480-10 states that redeemable P/S must be reported as debt and dividend payments are interest expense. e. Convertible P/S - is P/S that is convertible into a given number of shares of C/S at the discretion of the P/S holder. 5. Recording the issuance of stock - several situations may occur when recording the original issuance of stock; some of these situations are a. Straightforward issuance of stock - can be demonstrated in the following example: Jan. 1 - XYZ Co. issues 5,000 shares of $10 par value C/S at par.
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ACC327_CH15_Notes - Chapter 15 Stockholders Equity 1 The...

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