Corporate Organization and Stockholders' Equity

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Questions and Answers

What distinguishes a public corporation from a private corporation?

Public corporations have fewer shareholders and restrict share sales.

Public corporations may have thousands of shareholders, while private corporations have a limited number. (correct)

Private corporations can be owned by anyone in the public.

Private corporations are traded on stock exchanges.

What is par value in the context of shares issued by a corporation?

The actual market value of the shares once issued.

The maximum selling price of the shares to public investors.

The total value of all outstanding shares in the market at any given time.

An arbitrary amount assigned to each share of stock defined in the corporation's charter. (correct)

What does 'legal capital' refer to in a corporation?

The amount invested by founders before any shares are issued.

The excess paid-in capital that shareholders can withdraw.

The total cash remaining after all liabilities have been paid.

The total number of shares issued multiplied by the par value of those shares. (correct)

Which characteristic is NOT associated with corporations?

Unlimited liability of shareholders. Signup and view all the answers

In the equity section of a corporate balance sheet, what does 'Paid in Capital in Excess of Par Value' represent?

The extra amount investors paid above the par value of the shares. Signup and view all the answers

What is the significance of the par value of stock when it is issued?

It is the amount credited to the appropriate capital account regardless of selling price. Signup and view all the answers

What is the total stockholders’ equity indicated in the example provided?

$260,000 Signup and view all the answers

When Bradley Corporation issued 10,000 shares of $10 par value common stock for $10 each, what was the journal entry debiting cash?

DR Cash $100,000 Signup and view all the answers

What is credited when stock is issued for a price greater than par?

Paid-in Capital in Excess of Par Value Signup and view all the answers

What should be recorded when issuing a no-par stock with a stated value at a price above that value?

Stated value recorded in Common Stock plus excess in Paid-in Capital Signup and view all the answers

In what scenario is an account called Discount on Capital Stock debited?

When stock is issued at less than par value Signup and view all the answers

What is the treatment of all proceeds when no-par stock is issued without a stated value?

Recorded entirely in the Common Stock account Signup and view all the answers

What is the typical recording basis for shares issued for services or non-cash assets?

Recorded at the fair market value of the stock Signup and view all the answers

When treasury stock is acquired, how is it recorded in the financials?

At cost of acquisition Signup and view all the answers

What might prompt a company to reacquire its own shares?

To maintain a favorable market perception Signup and view all the answers

How is the increase in Earnings Per Share (EPS) calculated?

Net Income / Number of Outstanding Shares Signup and view all the answers

What is the effect on stockholders' equity when treasury stock is purchased?

Reduces stockholders' equity Signup and view all the answers

Which of the following is true about organization costs?

They are recorded as expenses in the year incurred Signup and view all the answers

What should be recorded to reflect the issuance of stock for land when the share has a higher market value than par?

Land at market value and excess in Paid-in Capital Signup and view all the answers

What is the most common legal capital of a corporation when issuing no-par stock?

The fair market value at the time of issue Signup and view all the answers

What is the total amount of stockholders’ equity after accounting for treasury stock?

$1,030,000 Signup and view all the answers

When treasury shares are sold for an amount greater than their cost, what should be credited?

Paid-in Capital, Treasury Stock Signup and view all the answers

What happens when treasury shares are sold below their cost if Paid-in Capital, Treasury Stock has insufficient balance?

The difference is absorbed by Retained Earnings Signup and view all the answers

What is the effect on Retained Earnings if the acquisition price of treasury stock is higher than the original contributed capital during retirement?

It is debited Signup and view all the answers

If Caprock Corporation sold shares of its treasury stock for $60 per share and their cost was $50, which journal entry correctly reflects this transaction?

DR Cash $60,000; CR Treasury Stock $50,000; CR Paid-in Capital, Treasury Stock $10,000 Signup and view all the answers

In the retirement of treasury stock, if the shares were originally issued for $6 and later retired at a cost of $50, which accounts would be debited?

Common Stock and Paid-in Capital in Excess of Par Signup and view all the answers

Which entry should be recorded when selling treasury stock for the same price as the cost?

DR Cash $50,000; CR Treasury Stock $50,000 Signup and view all the answers

What is the total contributed capital before deducting treasury stock?

$1,080,000 Signup and view all the answers

In the case of selling 600 treasury shares for $42 while their cost is $50, how should the journal entry reflect the loss?

DR Cash $25,200; DR Paid-in Capital, Treasury Stock $4,000; DR Retained Earnings $800 Signup and view all the answers

Study Notes

Corporate Form of Organization

Corporations are legal entities separate from owners, aiming for profit or non-profit.
Public vs. private corporations are distinguished by ownership—publicly-held means thousands of shareholders, while private corporations have few shareholders.
Key characteristics include separate legal existence, limited shareholder liability, transferable ownership, capital acquisition, continuous life, management, and government regulations.

Par Value and Legal Capital

Par value is an arbitrary amount assigned to each share, shown on the charter.
Legal capital is calculated by multiplying the number of issued shares by their par value.
It's the minimum reported contributed capital, protected for corporate creditors.

Components of Stockholders' Equity

Stockholders' equity includes contributed capital (e.g., preferred stock, common stock, paid-in capital in excess of par) and retained earnings.
The equity section of a balance sheet has these two sections.
Example: Preferred Stock (50parvalue,1000shares)=50 par value, 1000 shares) = 50parvalue,1000shares)=50,000

Stock Issuance

Par Value Stock: Issued at par, above par, or below par.
Par Value Example (at par): Issuing shares at the stated par value credits the common stock account.
Par Value Example (above par): If shares are issued for more than their par value, the excess is credited to "Paid-in Capital in Excess of Par Value".
Par Value Example (below par): If shares are issued for less than par, a "Discount on Capital Stock" account is debited, generally illegal in many regions.
No Par Value Stock: No assigned par value.
Stated Value Example (with stated value): If no-par stock has a stated value, shares are recorded at that value, excess proceeds go to the capital account.
Stated Value Example (without stated value): If no-par stock has no stated value, all proceeds go to the capital stock account, and this amount is the company's legal capital.

Issuing Shares for Non-Cash Assets/Services

Shares can be issued for assets (like land) or services (like legal work).
Transactions are valued at fair market value (FMV). If FMV of stock isn't clear, FMV of the received asset/service is used.
Organization costs (underwriters' fees, legal fees) are expensed in the year incurred.

Reacquired Shares/Treasury Stock

Outstanding shares are issued and still tradable.
Reacquired shares (treasury stock) are bought back by the company.
Reasons for buybacks include maintaining a high market price, increasing earnings per share (EPS), preventing hostile takeovers, or needing additional shares for plans.

Purchase of Treasury Stock

Treasury stock is recorded at cost (not par value).
This reduces both assets and stockholders' equity.
Cost is deducted from total contributed capital and retained earnings in the balance sheet.

Sale of Treasury Stock

Treasury stock can be sold at cost, above cost, or below cost.
At cost: Cash and treasury stock accounts are balanced.
Above cost: Excess goes to "Paid-in Capital, Treasury Stock".
Below cost: Deficit is either covered by "Paid-in Capital, Treasury Stock" or "Retained Earnings".

Retirement of Treasury Stock

Retiring shares removes them from contributed capital (common stock, excess paid-in).
If purchase price is less than contributed capital, difference goes to "Paid-in Capital, Retirement of Stock".
If purchase price is more, the difference is debited from "Retained Earnings".

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Description

This quiz covers the fundamentals of corporate forms of organization, including the differences between public and private corporations. It also explores concepts such as par value, legal capital, and the components of stockholders' equity. Test your knowledge about these essential elements of corporate finance.