Fall 2010_Section Problem Set 10 (Chap 11)

Fall 2010_Section Problem Set 10 (Chap 11) - AEM 2210...

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AEM 2210 Section Problem Set 10 Covering Material from Chapter 11 Name: Section: Material Review Accounting for Owner’s Equity (Chapter 11) o Ownership rights of common stockholders can include: Voting rights (for board of directors and other important actions) Right to dividends (not all companies pay dividends) Pre-emptive right – option to keep the same percentage of ownership (by buying the appropriate number of shares) when new shares are issued Right of residual claim – share in assets upon liquidation of a company (claims of almost all other parties are repaid first with common stockholders obtaining the leftover value) o Stock issuances Common stock is increased by the number of shares issued multiplied by the par value Additional increase (difference between market value and par value of stock) is included as Additional Paid in Capital Example: A company receives cash for 10,000 shares of common stock. The stock has a current market value of $10 per share and a par value of $2 per share, Journal entry: Cash $100,000 Common Stock $20,000 Additional Paid in Capital $80,000 o Equity accounts normally have credit balances except for bankrupt firms with negative retained earnings and treasury stock accounts o Common stock account balance is always equal to par value multiplied by number of shares issued (not necessarily outstanding)
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o Treasury stock – stock that has been repurchased by the company Has a debit balance because it is a contra-equity account Always recorded at the par value paid to repurchase it Does not receive dividends of any kind When sold, the difference between the book value and the proceeds of the sale is recorded in Additional Paid in Capita (same as new stock issuance) When repurchased, treasury stock reduces the number of shares outstanding, not the number of shares issued
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Fall 2010_Section Problem Set 10 (Chap 11) - AEM 2210...

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