Kieso, Weygandt, Warfield, Young, Wiecek Intermediate Accounting, Eighth Canadian Edition 15-5 10.Profits of a corporation distributed to shareholders are referred to as dividends. In general, dividends can only be paid if the company's capital will be maintained intact. Also, dividends must be formally approved by the board of directors and be in full agreement with share capital contracts. 11.When special classes of shares are created with certain preferential rights, they are usually called preferred shares. A common type of preference is a prior claim on earnings and priority claim on assets upon dissolution. Preferred shares can be cumulative, convertible, callable/redeemable, retractable, and/or participating. Preferred shares are often issued instead of debt to keep the company’s debt-to-equity ratio within a certain range. However, if the characteristics of the preferred shares are such that the instrument resembles debt more than equity, reclassification as debt may be required.
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