Retirement of bonds payable involves paying the face value of the bonds. Bonds can be retired at the maturity date or before. When a bond is matured, the carrying value always equals the face value. Companies sometimes retire their bonds prior to maturity. The main reason is to relieve the pressure of paying interest payments. Some bonds are callable bonds, which means the company may call, or pay off, the bonds at a specified price. At the end of each period, all current and long-term liabilities are reported on the balance sheet. When a company issues bonds, a discount or premium will be included in the section with the bonds payable. The relationship between total liabilities and total equity is called the debt to equity ratio. The debt to equity ratio shows the proportion of total liabilities to total equity. This ratio measures financial leverage. A ratio greater than 1 indicates the company is financing more assets with debt than with equity. CH13 Stockholders’ Equity A corporation is a business organized under state law that is a separate legal entity. Corporations dominate business activity in the United States. Most well-known companies are corporations. Characteristics of Corporations Unique characteristics of corporations: Separate legal entity, Number of owners, No personal liability of the owner(s), Lack of mutual agency, Indefinite life, Taxation, Capital accumulation . The maximum number of shares of stock a corporation may issue is called authorized stock . Issued stock has been issued by the corporation. Stock held by the stockholders is called outstanding stock . Stockholders are issued stock certificates . Capital stock represents a stockholder’s ownership. A stockholder has 4 basic rights : 1. Vote : Each share of basic ownership in the corporation carriers one vote. 2. Dividends: Stockholders receive a proportionate part of any dividend declared and paid. 3. Liquidation: Stockholders receive their proportionate share of any assets remaining after liquidation. 4. Preemptive right: Stockholders have a right to maintain their proportional ownership. Capital stock: Corporations issue different classes of stock: Common stock and Preferred stock. Stock may carry a par value or may be no-par stock. Stated value stock is no-par stock that has been assigned an amount similar to par value. Stockholders’ Equity: A corporation’s equity is called stockholders’ equity. The two basic sources of stockholders’ equity are: Paid-in capital and Retained earnings. Companies raise capital by issuing stock. A company can sell its stock directly to stockholders, or it can use the services of an underwriter. Stocks of public companies are bought and sold on a stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ Stock Market.
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