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chapter 14
Corporate Equity
Accounting
goals discussion
goals achievement
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in the blanks
multiple
choice
problems
check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Define the essence of the corporate form of entity.
Describe the process by which a corporation is formed, and how business operations commence.
Cite and explain the advantages of the corporate form of organization.
Cite and explain the disadvantages of the corporate form of organization.
What influences the issue price for a new class of stock?
What is a prospectus?
Distinguish between common and preferred stocks, carefully detailing the rights and features of each class.
What is meant by the term "callable?"
What is meant by the term "convertible?"
What is the significance of par value?
Define "legal capital."
Be able to prepare complete journal entries to record the issuance of par value stock.
How is stock accounted for that is issued for assets other than cash?
Describe the important dates that pertain to dividends, and differentiate between firms that payout substantial dividends versus minimal dividends.
When are journal entries recorded for dividend transactions?
How are declared but unpaid dividends reported in the financial statements?
Be able to prepare a complete stockholders' equity section for a corporate entity.
Note the thorough nature of the capital stock descriptions on the face of the balance sheet.
Note the distinction between "paid-in capital" and total stockholders' equity.
Be able to perform dividend calculations in cases involving cumulative and noncumulative preferred stock.
What is treasury stock, and where is it positioned on a balance sheet?
Can you prepare journal entries for treasury stock transactions, including reissuances?
Do gains and losses arise on treasury stock transactions, and can retained earnings be increased or decreased as a result of treasury stock transactions?
Differentiate between a stock split and a stock dividend, and the related accounting significance of each.
What is a stock dividend?
Be able to give reasons for issuing stock dividends.
Be able to prepare journal entries for small and large stock dividends, and cite examples of when each is appropriate.
Be able to provide computations demonstrating the impact of stock dividends on equity accounts, and be able to explain the probable impact on market value of a stock dividend.
Be able to prepare a statement of stockholders' equity.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| callable preferred | Preferred stock that can be repurchased by issuer for a preset price |
| common stock | The residual equity interest in a corporation; last in liquidation but usually receiving the full benefits of any corporate growth |
| convertible preferred | Preferred stock that can be exchanged for common stock at some preagreed ratio |
| cumulative preferred | Preferred stock that is entitled to a periodic dividend, and those dividends must be paid (eventually) before any monies can be distributed to common stockholders |
| dividends in arrears | An omitted dividend on cumulative preferred stock that must eventually be paid before any monies can be distributed to common stockholders |
| ex-dividend | The event (date) when a transfer of stock ownership between shareholders will occur without the right for the purchaser to receive any previously declared dividends |
| initial public offering | The first time stock in a corporation is offered to the investing public; registration and other requirements must be met; proceeds may flow to the corporation or private shareholders |
| legal capital | Usually the par value of the stock of a corporation |
| paid-in capital in excess of par | The amount by which a stock's issue price exceeds its par value; also referred to as "additional paid-in capital" |
| preemptive right | A right that may or may not be provided to shareholders enabling them with a first right of refusal to buy any additional shares offered by a corporation |
| preferred stock | A class of stock that generally benefits from a stipulated periodic dividend and priority in liquidation; but, usually lacking in upside participation in corporate growth |
| prospectus | The documentation describing financial and business aspects of an initial public offering |
| statement of stockholders' equity | A financial statement that is often presented in lieu of a statement of retained earnings and other disclosures about equity accounts |
| stock | Transferable units of ownership in a corporation |
| stock dividend | A noncash corporate activity to provide shareholders with additional shares in proportion to existing ownership; makes for more shares outstanding, but does not change total equity |
| stock split | A corporate action to increase the number of shares and reduce the par per share by a stipulated ratio (e.g., 2 for 1) |
| total paid-in capital | The sum of legal capital plus paid-in capital in excess of par |
| treasury stock | Shares of a company's own stock that it has reacquired |