Principles of Accounting: Chapter Fourteen

Home

Chapter Summary

Chapter 14 provides in-depth coverage of accounting issues that are unique to corporations. The chapter begins with a discussion of the nature of the corporate entity, and its advantages and disadvantages. There are various types of stock, and each type has unique features. The second section of the chapter highlights common and preferred stock, and identifies features that should be fully understood. The presence of multiple classes of stock requires deeper understanding of dividends and capital structure, as described in the chapter.

Companies may buy back shares of their own stock, which are known as treasury shares. The proper accounting for treasury stock involves certain unique principles and practices. Companies would generally not recognize gains and losses on such transactions.

As described in the chapter, the appropriate accounting for stock splits and stock dividends depends on the legal form of the transaction. The accounting methodology is further impacted for stock dividends, based upon whether a transaction is deemed to be a large or small stock dividend. The chapter concludes with an illustrative statement of stockholders' equity, which is more extensive and often substituted for a statement of retained earnings.

Exercises

To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. You will find these exercises very helpful in providing models and guidelines for solving all of the problems at principlesofaccounting.com.

Click here to go to Bookboon.

Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms

Key Terms: Chapter Fourteen

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