Chapter 18 Shareholders’ Equity

Questions for Review of Key Topics

Question 18-1 The two primary sources of shareholders’ equity are amounts invested by shareholders in the corporation and amounts earned by the corporation on behalf of its shareholders. Invested capital is reported as paid-in capital and earned capital is reported as retained earnings.

Question 18-2 The three primary ways a company can be organized are (1) a sole proprietorship, (2) a partnership, or (3) a corporation. Transactions are accounted for the same regardless of the form of business organization with the exception of the method of accounting for capital – the ownership interest in the company. Several capital accounts (as discussed …ver más…

Question 18-6 Corporations are formed in accordance with the corporation laws of individual states. The Model Business Corporation Act serves as the guide to states in the development of their corporation statutes, presently as the model for the majority of states.

Answers to Questions (continued)

Question 18-7 The ownership rights held by common shareholders, unless specifically withheld by agreement with the shareholders, are: a. The right to vote on policy issues. b. The right to share in profits when dividends are declared (in proportion to the percentage of shares owned by the shareholder). c. The right to share in the distribution of any assets remaining at liquidation after other claims are satisfied.

Question 18-8 The “preemptive right” is the right to maintain one’s percentage share of ownership when new shares are issued. When granted, each shareholder is offered the opportunity to buy the same percentage of any new shares issued as the percentage of shares he/she owns at the time. For reasons of practicality, the preemptive right usually is excluded.

Question 18-9 The typical rights of preferred shares usually include one or both of the following: a. A preference to a predesignated amount of dividends, i.e., a stated dollar amount per share or % of par value per share. This means that when the board of directors of a corporation declares dividends, preferred shareholders will receive the specified