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Unformatted text preview: Chapter 18 - Shareholders’ Equity The two primary sources of shareholders’ equity are amounts invested by shareholders in the corporation and amounts earned by the corporation on behalf of its shareholders. Invested capital is reported as paid-in capital and earned capital is reported as retained earnings . The three primary ways a company can be organized are (1) a sole proprietorship , (2) a partnership , or (3) a corporation. Transactions are accounted for the same regardless of the form of business organization with the exception of the method of accounting for capital – the ownership interest in the company. Several capital accounts (as discussed in this chapter) are used to record changes in ownership interests for a corporation, rather than recording all changes in ownership interests in a single capital account for each owner, as we do for sole proprietorships and partnerships. In the eyes of the law, a corporation is a separate legal entity – separate and distinct from its owners. The owners are not personally liable for debts of the corporation. So, shareholders generally may not lose more than the amounts they invest when they purchase shares. This is perhaps the single most important advantage of corporate organization over a proprietorship or a partnership. “Not-for-profit” corporations, such as churches, hospitals, universities, and charities, are not organized for profit and do not sell stock. Some not-for-profit corporations, such as the Federal Deposit Insurance Corporation (FDIC), are government owned. Corporations that are organized for profit may be publicly held or privately (or closely) held. The stock of publicly held corporations is available for purchase by the general public. Shares might be traded on organized national stock exchanges available “over-the-counter” from securities dealers. Privately held companies' shares are held by only a few individuals and are not available to the general public. Corporations are formed in accordance with the corporation laws of individual states. The Model Business Corporation Act serves as the guide to states in the development of their corporation statutes, presently as the model for the majority of states. The ownership rights held by common shareholders, unless specifically withheld by agreement with the shareholders, are: a. The right to vote on policy issues. b. The right to share in profits when dividends are declared (in proportion to the percentage of shares owned by the shareholder). 18-1 Chapter 18 Shareholders’ Equity (Spiceland, 6 th ed) QUESTIONS FOR REVIEW OF KEY TOPICS Question 18-1 Question 18-2 Question 18-3 Question 18-4 Question 18-5 Question 18-6 Answers to Questions (continued) Question 18-7 Chapter 18 - Shareholders’ Equity c. The right to share in the distribution of any assets remaining at liquidation after other claims are satisfied....
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- Spring '11
- Shareholders Equity, .........