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chapter11entirechapter
Chapter11
ReportingandInterpretingOwners’Equity
ANSWERSTOQUESTIONS
1.Acorporationisaseparatelegalentity（authorizedbylawtooperateasanindividual）.Itis ownedbyanumberofpersonsand/orentitieswhoseownershipisevidencedbysharesof capitalstock.Itsprimaryadvantagesare:
（a）transferabilityofownership,（b）limitedliabilitytotheowners,and（c）theabilitytoaccumulatelargeamountsofresources.
2.Thecharterofacorporationisalegaldocumentfromthestatethatauthorizesitscreationasaseparatelegalentity.Thecharterspecifiesthenameoftheentity,itspurpose,andthekindsandnumberofsharesofcapitalstockitcanissue.
3.（a）Authorizedcapitalstock—themaximumnumberofsharesofstockthatcanbesoldandissuedasspecifiedinthecharterofthecorporation.
（b）Issuedcapitalstock—thetotalnumberofsharesofcapitalstockthathavebeenissuedbythecorporationataparticulardate.
（c）Outstandingcapitalstock—thenumberofsharescurrentlyownedbythestockholders.
4.Commonstock—theusualornormalstockofthecorporation.Itisthevotingstockandgenerallyranksafterthepreferredstockfordividendsandassetsdistributedupondissolution.Oftenitiscalledtheresidualequity.Commonstockmaybeeitherparvalueorno-parvalue.
Preferredstock—whenoneormoreadditionalclassesofstockareissued,theadditionalclassesarecalledpreferredstock.Preferredstockhasmodificationsthatmakeitdifferentfromcommonstock.Generally,preferredstockhasbothfavorableandunfavorablefeaturesincomparisonwithcommonstock.Preferredstockusuallyisparvaluestockandusuallyspecifiesadividendratesuchas“6%preferredstock.”
5.Parvalueisanominalpershareamountestablishedforthecommonstockand/orpreferredstockinthecharterofthecorporation,andisprintedonthefaceofeachstockcertificate.Thestockthatissoldbyacorporationtoinvestorsaboveparvalueissaidtohavesoldatapremium,whilestockthatissoldbelowparissaidtohavesoldatadiscount.Thelawsofpracticallyallstatesforbidtheinitialsaleofstockbyacorporationtoinvestorsbelowparvalue.No-parvaluestockdoesnothaveanamountpersharespecifiedinthecharter.Asaconsequence,itmaybeissuedatanypricewithoutinvolvingadiscountorapremium.Itavoidsgivingtheimpressionofavaluethatisnotpresent.
6.Theusualcharacteristicsofpreferredstockare:
（1）dividendpreferences,
（2）conversionprivileges,（3）assetpreferences,and（4）nonvotingspecifications.
7.Thetwobasicsourcesofstockholders’equityare:
Contributedcapital—theamountinvestedbystockholdersbypurchasefromthecorporationofsharesofstock.Itiscomprisedoftwoseparateelements:
（1）theparorstatedamountderivedfromthesaleofcapitalstock（commonorpreferred）and
（2）theamountreceivedinexcessofparorstatedvalue.
Retainedearnings—theaccumulatedamountofallnetincomesincetheorganizationofthecorporation,lesslossesandlesstheaccumulatedamountofdividendspaidbythecorporationsinceorganization.
8.Stockholders’equityisaccountedforintermsofsource.Thismeansthatseveralaccountsaremaintainedforthevarioussourcesofstockholders’equity,suchascommonstock,preferredstock,contributedcapitalinexcessofpar,andretainedearnings.
9.Treasurystockisacorporation’sowncapitalstockthatwassold（issued）andsubsequentlyreacquiredbythecorporation.Corporationsfrequentlypurchasesharesoftheirowncapitalstockforsoundbusinessreasons,suchastoobtainsharesneededforemployees’bonusplans,toinfluencethemarketpriceofthestock,toincreaseearningspershareamounts,andtohavesharesonhandforuseintheacquisitionofothercompanies.Treasurystock,whileheldbytheissuingcorporation,confersnovoting,dividend,orotherstockholderrights.
10.Treasurystockisreportedonthebalancesheetunderstockholders’equityasadeduction;thatis,ascontrastockholders’equity.Any“gainorloss”ontreasurystockthathasbeensoldisreportedonthefinancialstatementsasanadditiontocontributedcapitalifagain;ifaloss,itisdeductedfromanypreviouscontributedcapital,orotherwisefromretainedearnings.
11.Thetwobasicrequirementstosupportacashdividendare:
（1）cashonhandortheabilitytoobtaincashsufficienttopaythedividendand
（2）asufficientbalanceinretainedearnings,becausethedividendrepresentsareturnofearningstothestockholders.Acashdividendreducesboththeassetsofacorporationandstockholders’equitybytheamountofthedividend.
12.Cumulativepreferredstockhasadividendpreferencesuchthat,shouldthedividendsonthepreferredstockforanyyear,orseriesofyears,notbepaid,dividendscannotbepaidtothecommonstockholdersuntilallsuchdividendsinarrearsarepaidtothepreferredstockholders.Noncumulativepreferredstockdoesnothavethispreference;therefore,dividendsnotpaidinpastperiodswillneverbepaidtothepreferredstockholders.
13.Astockdividendinvolvestheissuancetothestockholdersofadividendinthecorporation’sownstock（ratherthancash）.Astockdividendissignificantlydifferentfromacashdividendinthatthecorporationdoesnotdisburseanyassets,whileinthecaseofacashdividend,cashisdecreasedbytheamountofthedividend.Acashdividendalsoreducestotalstockholders’equitybytheamountofthedividend.Incontrast,astockdividenddoesnotchangetotalstockholders’equity.
14.Theprimarypurposesforissuingastockdividendare:
（1）tomaintaindividendconsistency;thatis,topaydividendseachyeareitherincashorincapitalstock,
（2）tocapitalizeretainedearnings;thatis,astockdividendrequiresatransferfromtheRetainedEarningsaccounttothepermanentcontributedcapitalaccountsfortheamountofthedividend.Althoughthistransferdoesnotchangestockholders’equityintotal,itdoescauseashiftfromretainedearningstocontributedcapital.
15.Whenadividendisdeclaredandpaid,thethreeimportantdatesare:
Declarationdate—thedateonwhichtheboardofdirectorsvotesthedividend.Inthecaseofacashdividend,onthisdateadividendliabilitycomesintoexistenceandmustberecordedasadebittoRetainedEarningsandasacredittoDividendsPayable.
Dateofrecord—thisdateusuallyisaboutonemonthafterthedateofdeclaration.Itisthedateonwhichthecorporationextractsfromitsstockholders’recordsthelistofindividualsowningshares.Thedividendispaidonlytothosenameslistedontherecorddate.Noentryintheaccountsismadeonthisdate.
Dateofpayment—thedateonwhichthecashisdisbursedtopaythedividend.Itfollowsthedateofrecordasspecifiedinthedividendannouncement.TheentrytorecordthecashdisbursementforthedividendisadebittoDividendsPayableandacredittoCash.
16.Totalretainedearningsistheaccumulatedamountofallnetincomeofthecorporationlessalllossesandlesstheaccumulatedamountofalldividendsdeclaredtodate.Theprimarycomponentsofretainedearningsare:
beginningbalance,plusnetincome,lessnetlosses,minusdividendsdeclared,equalstheendingbalance.
ANSWERSTOMULTIPLECHOICE
1.c）
2.d）
3.b）
4.a）
5.c）
6.b）
7.c）
8.c）
9.d）
10.a）
Authors’RecommendedSolutionTime
（Timeinminutes）
Miniexercises
Exercises
Problems
Alternate
Problems
Casesand
Projects
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*Duetothenatureofthisproject,itisverydifficulttoestimatetheamountoftimestudentswillneedtocompletetheassignment.Aswithanyopen-endedproject,itispossibleforstudentstodevotealargeamountoftimetotheseassignments.Whilestudentsoftenbenefitfromtheextraeffort,wefindthatsomebecomefrustratedbytheperceiveddifficultyofthetask.Youcanreducestudentfrustrationandanxietybymakingyourexpectationsclear.Forexample,whenourgoalistosharpenresearchskills,wedevoteclasstimetodiscussingresearchstrategies.Whenwewantthestudentstofocusonarealaccountingissue,weoffersuggestionsaboutpossiblecompaniesorindustries.
MINI-EXERCISES
M11–1.
Stockholdersmay:
a）Voteinthestockholders’meeting（orbyproxy）onmajorissuesconcerningmanagementofthecorporation.
b）Participateproportionatelywithotherstockholdersinthedistributionofthecorporation’sprofits.
c）Shareproportionatelywithotherstockholdersinthedistributionofcorporateassetsuponliquidation.
Beingabletovoteisthemostimportantoftherightsbecausethisensuresthattheownershaveaninputatthestockholders’meetingandsomecontrolofthemanagementofthecorporation,thusenablingthemtoprotecttheirrightsasstockholders.
M11–2.
Unissuedshares=90,000（268,000–178,000）
M11–3.
Cash（170,000$21）（+A）
3,570,000
CommonStock（170,000$1）（+SE）
170,000
CapitalinExcessofParValue（+SE）
3,400,000
Thejournalentry
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