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Study Smarter.....Study The Answers!

Owner's Equity

1) Key Things To Know 5) Medium Practice Test
2) Self Test 6) Hard Practice Test
3) Practice as You Learn 7) On Your Test
4) Easy Practice Test 8) Quick Study Sheet

 

 

Key Things to Know

 Corporation:  A separate legal entity that owns assets and incurs liabilities. 
                      
                        The business applies for a charter from the state it will incorporate in.
                        “Articles of Incorporation” are issued that specify the general rules
                       for conducting the business of the corporation.
                       
                        The corporation acquires capital through issuing shares to stockholders
                          who then become owners of the company.
 
 
Common Stock - Shares of Ownership 
 
                        Authorized – the maximum number of shares the corporation can sell
 
                        Issued – the cumulative total number of shares the corporation has sold
 
                        Outstanding – shares currently held by investors outside the corporation
                                                   This is equal to issued shares  less  treasury shares
 
 
            Par Value:  a value per share that is assigned in the corporate charter
 
                                    1) It is the legal capital that must be retained in the business
                                    2) Company’s set par value very low - $0.01 per share
                                    3) It has no relationship to fair market value
                                    4) Some states allow for a par value of 0 – “no-par value stock”
 
Common
Stockholders:   Do not participate in the day to day operations of the business
                           Elect the BOD and vote on important issues of the Company
                           BOD – makes major decisions, hires the management of the Company
 
Common Stockholder rights:

1) attend all stockholder meetings; vote in board members
2) share in dividends declared by the board
3) share in the proceeds of any liquidation
4) can sell their investment in shares at any time
5) have liability limited to their investment in the corporation
 
 
 
 
Preferred stock may also be issued to raise capital.  Preferred stockholders
  give capital in return for income and are not seeking voting ownership.   
  Preferred stock typically has a stated fixed dividend rate. 
 
            Preferred Stockholders get:

1)    preference for receiving dividends (before common)

2)    No voting rights
 
    Preferred Dividends are computed as:  Number of shares x  Par Value x Stated %
 
 
Dividends paid to preferred shareholders must be declared by the board of directors
   before they are paid
 

Cumulative:  If not declared this year, the board may declare this year’s dividend

   at some point in the future

 

Non-cumulative:  If not declared this year, the board may not declare in the future                      

Dividends in Arrears:   Cumulative dividends not paid to preferred shareholders                                           - must be paid before common shareholders are paid

                                          

 
When a company issues stock to raise capital:
 
            CASH                                                 $ = FMV per share x # shares
                   Common Stock   (par)              $ = Par Value per share x # shares
                   Paid in Capital - CS                  The difference in par value and FMV
 
 
                        ** The total value received by the company is CS + Paid in Capital (PIC)
 
                        ** When one investor sell stock to another investor, there is no
                            impact on the corporation and no entry is recorded.
 
 
      For preferred shares issued, use the same journal entry and replace CS with PS
 
 
 
Treasury Stock:   The company buys back its own stock from investors to
                                    1)  reissue the shares to employees as compensation
                                    2)  reduce the number of shares outstanding to increase
                                       earnings per share
                                    3)  show other investors they have confidence in the value
                                        of the company 
                                   
            The “treasury stock” account is a contra owner’s equity.  It is subtracted from
               owner’s equity.  A company cannot create an asset by investing in itself.  
 
            When treasury stock is sold back to investors there is no gain or loss.
              The gain or loss is reported as an addition or subtraction of paid in capital
 
 
                        Purchase Treasury Stock:   record at what was paid – the original cost
 
                                    Treasury Stock        $XXX 
                                                Cash                          $XXX      
 
                        Sell treasury stock back to investors:
 
 
                                    Cash                                   (FMV – amount received)
                                                Treasury Stock         (at original cost per share x # shares)
                                                PIC – TS                     **
 
 
                                    ** Record the difference in FMV and original cost to balance the J/E
                                        When a debit is needed to balance you may debit PIC – TS for
                                    up to the amount you have in the account and then the rest must
                                    be a debit to R.E.                                                              
                                                              
 
Dividends:  Distribution’s to shareholders, can be cash or additional shares of stock
 
            Declaration date:  The date the board of directors officially declares the dividend              Record Date:        The date the corporation prepares the list of owners that will
                                           be paid the dividend – if you own on this date you get paid              
            Payment Date:      The date the payment is made to shareholders on record        
 
 
                        Declaration Date:                 Retained Earnings              $XXX
                                                                                    Dividend Payable                $XXX
 
                        Record Date:                         No J/E
 
                        Payment Date-                     Dividends Payable              $XXX
                          for a cash dividend:                       Cash                                      $XXX
 
 
 
Stock Dividend:  The corporation issues to current shareholders additional
                                shares – issued as a percentage of what is already held
 
                        Example:  20% stock dividend when there are 1,000,000 shares issued
                                            means that 200,000 additional shares will be issued
 
 
                        Declaration Date:                 Retained Earnings              $XXX
                                                                                    Dividend Payable                $XXX
 
                        Record Date:                         No J/E
 
                        Payment Date-                     Dividends Payable              $XXX
                          for a stock dividend:                      Common stock                     $XXX
                                                                                    PIC – CS                          $XXX
                                                                       
                                                                             common stock is at par
                                                                              PIC – CS is the difference, a plug                 
           
 
                        The question is – what amount is recorded to retained earnings?
                           Is the company giving stock for fair market value or for par value
 
                                    Large    > 20-25%     Debit R.E. for Par value of stock x # shares
                                    Small    < 20-25 %    Debit R.E. for Fair MV of stock x # shares
 
 
            The result of a stock dividend is no change to total owner’s equity.  The amounts
               in the owner’s equity accounts are moved from one account to another
 
 
Stock Split   
 
            Does not change owner’s equity.   Nothing is issued or received by the company.
 
            The par value is divided and the number of shares increases by the
              ratio determined by the board of directors.
 
 
                        Example:   2:1 split           par value is now half the amount
                                                                     issued shares are now doubled
 

                                               

 


 

 

 

 
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