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CH11CNTB.CAPITAL+09F (1) - Chapter 11 1 ACCT 207 CHAPTER 11...

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Chapter 11 - 1 ACCT 207 - CHAPTER 11 Contributed Capital I. Two types of stock: In this chapter -- the corporation issues stock to obtain large amounts of funding (capital, cash). In Appendix E, the corporation is an investor buying stock in other companies. A. Preferred Stock (various features) B. Common Stock (no “special ” features). Most stocks on stock market. C. Terms: 1. Par value = stated value = no par = legal capital. Arbitrary amount printed on the stock certificate -- typically the minimum initial selling price -- does not reflect current market value. 2. Market Price =MP = Issue Price = FMV = fair market value = cash received. D. Prior to this chapter - when the owners invested in the business we had one account called: Common Stock for the issuance price. Now, we separate the issue price between 2 accounts. dr: Cash (issue price) cr: Common stock (PAR) cr: Additional Paid in capital in excess of par (APIC) (difference of MP-par)
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Chapter 11 - 2 Preferred stock uses similar JE. There is no difference between par & stated value (if we use "no par" it means to record common stock at market and there is no APIC account). Usually owners invest cash in business. However, they may invest other assets, such as equipment or services. E. The corporation may pay dividends to shareholders. The corporation is not obligated to repay the investors for their investment funds. If investors want their investment returned, they will sell it on the open stock market to other investors. The most an investor can lose is their original investment (e.g., limited liability of shareholders). F. Contrast stocks to bond: a. the corporation that issues the bond must repay both principal and interest. b. bond holders do not vote whereas common stockholders vote and control the board of directors. G. a. Degree of risk To Corporation To Investor Bonds Pref. St. Com. St. b. What causes the degree of risk? c. Note: the higher the risk the higher the rate of return required by investors. H.Categories of stock A. Authorized stock (must receive permission to issue these shares from the Secretary of State where the business is
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Chapter 11 - 3 incorporated) B. Issued stock – sold to all investors C.Outstanding Stock – has been issued and is in the hands of stockholders outside the corporation itself D.Treasury Stock – stock that has been previously issued and outstanding but now held by the corporation itself E. Corporations may resell (reissue) its Treasury Stock and then it becomes issued and outstanding again. II. Review: a. Glossary (see class matching problem) b. Differences of sole proprietorship, partnership & corporation -- Ch. 1 handout or p. 570-574 c. Rights of common stockholders. Common: voting, preemptive, residual assets (p. 574--575) d. Rights of preferred stock: Non-voting, fixed dividends, liquidation preference to assets before common. (p.582-3) e. How stock prices reported—see p. 579 III. Dividends are a distribution to stockholders as a return on their investment. They are NOT an expense of the corporation (and thus, are non-tax deductible to the issuing corporation) but a distribution of equity (from retained earnings).
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