Answer for Chapter11 Organization, Capital Stock and Dividend

KEY POINTS

1.Describe the nature of the corporate form of organization.

Corporations have a separate legal existence, transferable units of stock, and limited stockholders' liability. Corporations may be either public or private corporations, and they are subject to federal income taxes.

The documents included in forming a corporation include an application of

incorporation, articles of incorporation, and bylaws. Costs often incurred in organizing a corporation include legal fees, taxes, state incorporation fees, and promotional costs.

Such costs are debited to an expense account entitled Organizational Expenses.

2.List the major sources of paid-in capital, including the various classes of stock.

The main source of paid-in capital is from issuing stock. The two primary classes of stock are common stock and preferred stock. Preferred stock is normally

nonparticipating and may be cumulative or noncumulative. In addition to the issuance of stock, paid-in capital may arise from treasury stock transactions.

3.State the effect of stock splits on corporate financial statements.

When a corporation reduces the par or stated value of its common stock and issues a proportionate number of additional shares, a stock split has occurred. There are no changes in the balances of any corporation accounts, and no entry is required for a stock split.

4.Describe and illustrate the reporting of stockholders' equity.

Significant changes in the sources of stockholders' equity-paid-in capital and retained earnings-may be reported in separate statements or notes that support the balance

sheet presentation. Changes in retained earnings may be reported by preparing a

separate retained earnings statement, a combined income and retained earnings

statement, or a statement of stockholders' equity. Restrictions to retained earnings must be disclosed, usually in the notes to the financial statements. Material errors in a prior period's net income, called prior-period adjustments, are reported in the retained earnings statement.

PROBLEM

Use the following accounts and related balances to prepare the classified balance sheet of Fiesta, Inc., at September 30, 2007. Use the account format of the balance sheet. And compute the book value per share of Fiesta’s common stock. No preferred dividends are in arrears, and Fiesta has not declared the current-year dividend.

Solution

Compute the book value share of Fiesta’s common stock. No preferred dividends are in arrears, and Fiesta has not declared the current-year dividend.

Preferred equity:

Carrying value﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍$50,000 Cumulative dividend for the current year(2,000 shares ×$2.50)﹍5,000 Preferred equity﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍$55,000 Common:

Total stockholder's equity﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍$225,000 Less preferred equity﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍55,000 Common equity﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍﹍$170,000 Book value share of common($170,000/20,000 shares)﹍﹍﹍﹍$8.50