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Unformatted text preview: 16-116CONTRIBUTED CAPITAL CHAPTER OBJECTIVESAfter careful study of this chapter, students will be able to: 1. Explain the corporate form of organization. 2. Know the rights and terms that apply to capital stock. 3. Account for the issuance of capital stock. 4. Describe a compensatory stock option plan. 5. Recognize compensation expense for a compensatory share option plan. 6. Account for a fixed compensatory share option plan. 7. Account for a variable compensatory share option plan. 8.Account for share appreciation rights. 9.Describe the characteristics of preferred stock. 10. Know the components of contributed capital. 11. Understand the accounting for treasury stock. 16-2SYNOPSISCorporate Form of Organization1. FASB Statement of Concepts No. 6includes the definition of equity as one of the elements of financial statements. Equityin a company is the ownership interest in the company and may be calculated as the difference between assets and liabilities. Equity in a company is first created by owners' investments in the company. Subsequently, the value of the equity is changed by net income (loss), additional investments by owners, and distributions to owners. 2. A corporationis a legal entity, separate and distinct from its individual owners, created under the laws of a particular state. As a result, the corporation has an unlimited life, owners have limited legal liability, and ownership interests (stocks) are easily transferable. The purpose of the corporation and the rights and powers granted by the state to the corporation to engage in certain legal activities and business transactions related to those activities are stipulated in a written contract called the articles of incorporationor corporate charter. Corporations may be classified as private or public, open or closed, domestic or foreign. Corporate Capital Structure 3. The individual owners are called stockholderswhose ownership in the corporation is evidenced by a stock certificate. Each stockholder has various stockholder's rightswhich include (a) the right to share in profits when a dividend is declared, (b) the right to elect directors and to establish corporate policies, (c) the preemptive rightto maintain a proportionate interest in the ownership of the corporation by purchasing a proportionate share of additional capital stock, if more stock is issued, and (d) the right to share in the distribution of the assets of the corporation if it is liquidated. Common stockhas all these rights; preferred stockdoes not, but has certain other privileges. 4. Authorized capital stockis the number of shares of capital stock which may be issued as stated in the corporate charter. Issued capital stockis the number of shares actually issued as of a specific date. Outstanding capital stockis the number of shares issued to stockholders which are still being held by them. Treasury stockis the number of shares of capital stock which were issued to stockholders and were later reacquired by the corporation but not retired. corporation but not retired....
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- Spring '11