Famba6e Sm Mod08 041414

Topics: Stock market, Corporate finance, Stock Pages: 49 (10929 words) Published: June 21, 2015
Module 8

Reporting and Analyzing
Owner Financing

DISCUSSION QUESTIONS

Q8-1.Par value stock is stock that has a face value printed (identified) on the stock certificate. Historically, par value was the minimum selling price for one share.

From an accounting and analysis standpoint, there are no implications. The par value of the common stock is the amount added to the common stock account when the company sells stock. The remainder of the sale price is added to the additional paid-in-capital account. Stockholders’ equity increases by the total amount regardless of whether one or two accounts (line items) are used.

Q8-2.Typically, preferred stock has the following features: 1) Preferential claim to dividends and to assets in liquidation, 2) Cumulative dividend rights, and 3) No voting rights.

Q8-3.Preferred stock is similar to debt when
1.Dividends are cumulative.
2.Dividends are nonparticipating.
3.Preferred stockholders have preference to assets in liquidation.

Preferred stock is similar to common stock when
1.Dividends are not cumulative.
2.Dividends are fully participating.
3.It is convertible into common stock.
4.Preferred stockholders do not have a preference to assets in liquidation.

Q8-4.Dividends in arrears on preferred stock are the cumulative preferred dividends that have not been paid to date. The dividends in arrears and a current dividend must be paid to preferred stockholders before common stockholders can receive any dividends. In the example, the company must pay preferred stockholders $90,000 in dividends ($500,000  0.06  3 years = $90,000) before paying any dividends to common stockholders. Q8-5.A corporation's authorized stock is the maximum number of shares of stock it may issue. When the corporation is formed, its charter specifies the authorized amounts and classes of stock. A corporation can later amend its charter to change the amount of authorized capital, but such actions must be approved by the company’s shareholders. Shares that have been sold and issued to stockholders are the company's issued stock.

Shares that have been sold and issued can be subsequently reacquired by the corporation—these shares are called treasury stock. When treasury stock is held, the issued shares exceed the outstanding shares.

Q8-6.Contributed capital represents the total investment “contributed” by shareholders when they purchase stock. It is considered contributed because the company is under no legal obligation to repay the shareholders. Earned capital represents the cumulative net income that the company has earned, less the portion of that income that has been paid out to shareholders in the form of dividends.

When profit is earned, the company can either pay out a portion of that profit as a dividend or reinvest the earnings in order to grow the company. In fact, many companies title the Retained Earnings account Reinvested Earnings or Undistributed Earnings. Earned capital, thus, represents an implicit investment by the shareholders in the form of forgone dividends.

Q8-7. Contributed capital is divided into two accounts: the common or preferred stock account at par and additional paid-in capital. The common stock or preferred stock accounts at par increase by the par value of each share issued. But, if companies sell shares for more than par, it is the market price of the stock that determines the company’s proceeds. The difference between the share’s market price and its par value is added to the additional paid-in capital account. The breakdown of contributed capital between the common or preferred stock accounts and additional paid-in capital is not informative – it does not yield any implications regarding the financial condition of the company.

Q8-8.A stock split refers to the issuance of additional shares to the current stockholders in proportion to their ownership interests. This is normally accompanied by a proportionate reduction in...
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