Chapter 11 - Reporting and Interpreting Owners’ Equity
5. Par value is a nominal per share amount established for the common stock and/or
preferred stock in the charter of the corporation, and is printed on the face of each stock certificate. The stock that is sold by a corporation to investors above par value is said to have sold at a premium, while stock that is sold below par is said to have sold at a discount. The laws of practically all states forbid the initial sale of stock by a corporation to investors below par value. No-par value stock does not have an amount per share specified in the charter. As a consequence, it may be issued at any price without involving a discount or a premium. It avoids giving the impression of a value that is not present. 6. The usual characteristics of preferred stock are: (1) dividend preferences, (2)
conversion privileges, (3) asset preferences, and (4) nonvoting specifications. 7. The two basic sources of stockholders’ equity are:
Contributed capital—the amount invested by stockholders by purchase from the corporation of shares of stock. It is comprised of two separate elements: (1) the par or stated amount derived from the sale of capital stock (common or preferred) and (2) the amount received in excess of par or stated value.
Retained earnings—the accumulated amount of all net income since the organization of the corporation, less losses and less the accumulated amount of dividends paid by the corporation since organization.
8. Stockholders’ equity is accounted for in terms of source. This means that several
accounts are maintained for the various sources of stockholders’ equity, such as common stock, preferred stock, contributed capital in excess of par, and retained earnings. 9. Treasury stock is a corporation’s own capital stock that was sold (issued) and
subsequently reacquired by the corporation. Corporations frequently purchase shares of their own capital stock for sound business reasons, such as to obtain shares needed for employees’ bonus plans, to influence the market price of the stock, to increase earnings per share amounts, and to have shares on hand for use in the acquisition of other companies. Treasury stock, while held by the issuing corporation, confers no voting, dividend, or other stockholder rights. 10. Treasury stock is reported on the balance sheet under stockholders’ equity as a
deduction; that is, as contra stockholders’ equity. Any ―gain or loss‖ on treasury stock that has been sold is reported on the financial statements as an addition to contributed capital if a gain; if a loss, it is deducted from any previous contributed capital, or otherwise from retained earnings.