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Equity Financing
Overview
After discussing debt financing in Chapter 12, we now turn to the other kind of financing
available to businessesequity financing. Like debt financing, equity financing, once
you delve below the surface of what you probably covered in your introductory
accounting course, can be quite complex. It isnt as simple as selling shares of stock for
which you debit Cash and credit Common Stock.
One of the complexities involves various kinds of stock. There is not only the common,
voting stock. There are also a wide variety of preferred stock possibilities. Preferred
stock doesnt mean that it is better stock. For instance, as far as voting goes, preferred
shares are usually inferior to common shares. When a company performs really well, or
the prospects for performance are favorable, common shares tend to appreciate in
value (sometimes substantially). Preferred shares, on the other hand, tend to produce
only minor fluctuations in price. Preferred share pricing is tied much more to changes in
interest rates and company credit ratings than to company performance.
This example shows how preferred shares usually act more like debt than equity. The
bonds discussed in the prior chapter also change in value based on changes in interest
rates and company credit ratings. Some preferred shares (mandatorily redeemable
preferred shares) are so similar to debt that they are actually classified as liabilities on
the balance sheet.
Some of the other complexities discussed in this chapter include stock that isnt quite
stock yet like rights, warrants, and options. Options, in particular, are common in U.S.
corporations and, hence, the new accounting treatment for them is important to
understand well.
Finally, financing cuts both ways. The chapter discusses not only the obtaining of cash
and issuing of stock and other equity instruments, but also the repurchase of stock
(treasury stock) and the payment of dividends. The payment of dividends (usually) is
one of several means by which the Retained Earnings account is adjusted.
13-2
Chapter 13
Learning Objectives
Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that
this section of the chapter is second nature to you before you attempt the homework, a
quiz, or exam. This important piece of the chapter serves as your CliffsNotes or cheat
sheet to the basic concepts and principles that must be mastered.
If after reading this section of the chapter you still dont feel comfortable with all of the
Learning Objectives covered, you will need to spend additional time and effort reviewing
those concepts that you are struggling with.
The following Tips, Hints, and Things to Remember are organized according to the
Learning Objectives (LOs) in the chapter and should be gone over after reading each of
the LOs in the textbook.
Chapter 13
13-3
LO2 Record the issuance of stock for cash, on a subscription basis, and
in exchange for noncash assets or for services.
How? When stock is issued for cash, there are usually two accounts that receive a
credit. The first is the Common Stock account, which gets a credit equal to the par value
of the stock issued. For example, if the par value is $1 and 20,000 shares are issued,
then Common Stock will be credited $20,000. The difference between the actual
amount of cash received and the credit to Common Stock receives the remaining credit
to an account called Paid-In Capital in Excess of Par Value or Additional Paid-In
Capital.
If someone (or some business) is going to provide other assets or services in exchange
for stock, the corporation is essentially giving the person (or business) stock instead of
cash. This is frequently the case with new, small corporations that dont have cash.
Another way of looking at it is to pretend the corporation is giving cash for the services
or assets and then the cash is going right back into the corporation for stock. If that was
the case, the corporation would be giving cash to the extent of the fair market value of
the items received. Therefore, these transactions should be booked based on the fair
market value of the assets or services. If the stock trades on an exchange, then the fair
market value of the stock is known and can be used as a firmer number than an
appraisal of assets or estimate of the value of the services.
LO3 Use both the cost and par value methods to account for stock
repurchases.
How? The cost method is the simpler of the two. When shares are repurchased, the
contra-equity account of Treasury Stock is the only account debited under the cost
method. Under the par value method, as the name implies, the Treasury Stock account
is only debited to the extent of the par value of the stock reacquired. Other accounts
(Additional Paid-In Capital and maybe Retained Earnings) make up the difference.
LO4 Account for the issuance of stock rights and stock warrants.
How? There is nothing difficult about accounting for warrants. When cash comes in for
stock that has a warrant attached to it, Cash, of course, receives a debit. The credit is
allocated between the value of the warrant and the stock it is attached to. If the stock
has a par value, then an additional paid-in capital account will also be credited for a total
of three credits (Paid-In Capital in Excess of Par Value, Additional Paid-In Capital, and
Stock Warrant).
13-4
Chapter 13
Chapter 13
13-5
LO8 List the factors that impact the Retained Earnings balance.
How? You have hopefully already mastered the most common changes in the
Retained Earnings balance: income increases the credit balance and dividends reduce
the balance. Outside of those entries there are a couple that can affect it in either
direction: error corrections and some changes in accounting principle. Finally, there are
two that can only decrease the balance: some treasury stock transactions and some
stock conversions (as mentioned in the rare circumstance for LO7).
LO9 Properly record cash dividends, property dividends, small and large
stock dividends, and stock splits.
How? Generally, the recording of a dividend, regardless of the type of dividend, is a
two-step process with similar components. On the date of declaration, Retained
Earnings (or Dividends, which gets closed out to Retained Earnings) receives a debit,
and Dividends Payable receives a credit. Sometimes (in the case of noncash
dividends), another account receives a debit or a credit as well. Then, on the date of
payment, Dividends Payable receives a debit, and the item dividended to shareholders
receives a credit.
13-6
Chapter 13
The following sections, featuring various multiple choice questions, matching exercises,
and problems, along with solutions and approaches to arriving at the solutions, is
intended to develop your problem-solving and critical-thinking abilities. While learning
through trial and error can be effective for improving your quiz and exam scores, and it
can be a more interesting way to study than merely re-reading a chapter, that is only a
secondary objective in presenting this information in this format.
The main goal of the following sections is to get you thinking, How can I best approach
this problem to arrive at the correct solutioneven if I dont know enough at this point to
easily arrive at the proper results? There is not one simple approach that can be
applied to all questions to arrive at the right answer. Think of the following approaches
as possibilities, as tools that you can place in your problem-solving toolkita toolkit that
should be consistently added to. Some of the tools have yet to even be created or
thought of. Through practice, creative thinking, and an ever-expanding knowledge base,
you will be the creator of the additional tools.
Multiple Choice
MC13-1 (LO1) Which of the following shareholder rights is most commonly enhanced in
an issue of preferred stock?
a. the right to vote for the board of directors
b. the right to maintain ones proportional interest in the corporation
c. the right to receive a full cash dividend before dividends are paid to other
classes of stock
d. the right to vote on major corporate issues
MC13-2 (LO2) The par value of common stock represents the
a. liquidation value of the stock.
b. book value of the stock.
c. amount received by the corporation when the stock was originally issued.
d. legal nominal value assigned to the stock.
MC13-3 (LO3) Gains and losses on the purchase and resale of treasury stock may be
reflected only in
a. Paid-In Capital accounts.
b. Paid-In Capital and Retained Earnings accounts.
c. income, Paid-In Capital, and Retained Earnings accounts.
d. income and Paid-In Capital accounts.
Chapter 13
13-7
MC13-4 (LO4) A company issued rights to its existing shareholders to acquire, at $18
per share, 10,000 unissued shares of common stock with a par value of $1 per share.
Common Stock will be credited for
a. $18 per share when the rights are exercised.
b. $18 per share when the rights are issued.
c. $1 per share when the rights are exercised.
d. $1 per share when the rights are issued.
MC13-5 (LO5) On January 1, 2011, Watson Corporation granted stock options to key
employees for the purchase of 60,000 shares of the company's common stock at $25
per share. The options are intended to compensate employees for the next two years.
The options are exercisable within a four-year period beginning January 1, 2013, by
grantees still employed by the company. The fair value of the options based on the
market price of Watson's common stock at the date of grant is $7 per share. Watson
plans to distribute up to 60,000 shares of treasury stock when options are exercised.
The treasury stock was acquired by Watson at a cost of $28 per share and was
recorded under the cost method. How much should Watson charge to Compensation
Expense for the year ended December 31, 2011?
a. $420,000
b. $210,000
c. $180,000
d. $90,000
MC13-6 (LO6) Which of the following items should NOT be reported as a liability on the
balance sheet?
a. written put options
b. mandatorily redeemable preferred shares
c. obligation to issue shares of a certain dollar value
d. obligation to issue a certain number of shares
MC13-7 (LO7) An adjustment to Retained Earnings as a result of a conversion of
preferred stock to common stock most likely would occur when par value of the
a. preferred stock is high relative to fair value of the common stock.
b. common stock is less than the book value of the preferred stock.
c. common stock exceeds the book value of the preferred stock.
d. preferred stock is low relative to fair value of the common stock.
MC13-8 (LO8) Which of the following actions or events does NOT result in an addition
to Retained Earnings?
a. a change from the double-declining-balance method to the straight-line
method of depreciation
b. net income earned for the period
c. the correction of an error in which ending inventory was understated in a
previous year
d. the issuance of a 2-for-1 stock split
13-8
Chapter 13
MC13-9 (LO9) Kearney Company declared a cash dividend on its common stock in
December 2010, payable in January 2011. Retained Earnings would
a. increase on the date of declaration.
b. not be affected on the date of declaration.
c. not be affected on the date of payment.
d. decrease on the date of payment.
MC13-10 (LO10) Slattery Company reported the following for the year ended December
31, 2011 (all items are net of income taxes):
Income from continuing operations
Income (loss) from discontinued operations
Unrealized gain (loss) on available-for-sale securities
(Increase) Decrease in minimum pension liability
Unrealized gain (loss) on derivative instruments
Foreign currency translation adjustment, increase
(decrease) in stockholders' equity
$1,300
(200)
30
(72)
(12)
180
Comprehensive income (loss) for the year ended December 31, 2011 is
a. ($74).
b. $1,226.
c. $1,426.
d. $126.
MC13-11 (LO11) Which of the following is NOT found on a statement of changes in
stockholders equity?
a. Revenue
b. Treasury Stock
c. Retained Earnings
d. Accumulated Gains (Losses) Not Affecting Retained Earnings
Chapter 13
13-9
Matching
Matching 13-1 (LO1) Listed below are the terms and associated definitions from the
chapter for LO1. Match the correct definition letter with each term number.
___ 1. board of
directors
___ 2. par value
___ 3. stated value
___ 4. cumulative
preferred stock
___ 5. dividends in
arrears
___ 6. noncumulative
preferred stock
___ 7. participating
preferred stock
___ 8. convertible
___ 9. callable
___ 10. redeemable
preferred stock
13-10
Chapter 13
Matching 13-2 (LO2, LO3) Listed below are the terms and associated definitions from
the chapter for LO2 and LO3. Match the correct definition letter with each term number.
___ 1. additional paidin capital
___ 2. subscription
___ 3. business
combination
___ 4. purchase
method
___ 5. treasury stock
___ 6. cost method
___ 7. par (or stated)
value method
Matching 13-3 (LO4, LO5) Listed below are the terms and associated definitions from
the chapter for LO4 and LO5. Match the correct definition letter with each term number.
___ 1.
___ 2.
___ 3.
___ 4.
stock rights
stock warrants
stock options
detachable
warrants
___ 5. nondetachable
warrants
___ 6. performancebased stock
option plan
___ 7. stock
appreciation
rights (SARs)
Chapter 13
13-11
Matching 13-4 (LO8, LO9) Listed below are the terms and associated definitions from
the chapter for LO8 and LO9. Match the correct definition letter with each term number.
___ 1. appropriated
retained
earnings
___ 2. cash dividend
___ 3. property
dividend
___ 4. nonreciprocal
transfer to
owners
___ 5. small stock
dividend
___ 6. large stock
dividend
___ 7. stock split
___ 8. liquidating
dividend
Matching 13-5 (LO10, LO11) Listed below are the terms and associated definitions
from the chapter for LO10 and LO11. Match the correct definition letter with each term
number.
___ 1. foreign
currency
translation
adjustment
___ 2. minimum
pension liability
adjustment
___ 3. available-forsale securities
___ 4. derivative
___ 5. equity reserve
___ 6. statement of
changes in
stockholders
equity
13-12
Chapter 13
Problems
Problem 13-1 (LO2)
The following transactions relate to the stockholders' equity transactions of Kati
Corporation for its initial year of existence.
a.
Jan. 7
b.
c.
Jan. 28
Feb. 3
d.
Feb. 24
e.
Sept. 12
f.
Oct. 1
Articles of incorporation are filed with the state. The state authorized
the issuance of 10,000 shares of $50 par value preferred stock and
200,000 shares of $10 par value common stock.
Issued 40,000 shares of common stock for $14 per share.
Issued 80,000 shares of common stock in exchange for land and
buildings that have an appraised value of $250,000 and $1,000,000,
respectively. The stock traded at $15 per share on that date on the
over-the-counter market.
Issued 2,000 shares of common stock to Salisbury and Associates,
Attorneys-at-Law, in payment for legal services rendered in
connection with incorporation. The company charged the amount to
organization costs. The market value of the stock was $16 per share.
Received subscriptions for 10,000 shares of preferred stock at $53
per share. A 40 percent down payment accompanied the
subscriptions. The balance is due on October 1.
Received the final payment for 10,000 shares.
Prepare journal entries to record the foregoing transactions. Identify the entries by letter
(af).
Problem 13-2 (LO3)
On July 1, Renne Corporation reacquired 10,000 shares of its $1 par value common
stock at $34. The stock was originally issued at $18. All 10,000 shares were resold on
November 1 at $45.
Provide the journal entries required to record the reacquisition and the subsequent
resale of the stock using the (1) par-value method and the (2) cost method of
accounting for treasury stock.
Chapter 13
13-13
13-14
Chapter 13
The book value of common stock is the price the shares were sold at initially (less fees).
This amount is usually much more than the par value. Choices b and c are the same
thing. If you knew that you could safely rule out those choices since they both couldnt
be correct, then there is only one correct choice.
MC13-3
Answer: b
Approach and explanation: Whether the cost or par-value method is used for the
recording of treasury stock doesnt matter. Neither will result in income being reported
when treasury stock is resold, reissued, or retired. Therefore, you can safely rule out
choices c and d.
So then the question is, When, if ever, is Retained Earnings affected by the resale of
treasury stock? Under the cost method (the method most widely used), Retained
Earnings receives a debit if treasury stock is sold for less than it was purchased for if
the Paid-In Capital from Treasury Stock account is at, or reduced to, zero. Retained
Earnings can also be debited if shares are retired, under the cost method, after being
purchased back for more than the original issue price.
Under the par-value method, treasury stock that is purchased for more than the original
issue price is always recorded, in part, as a debit to Retained Earnings. This is why the
par-value method is not usually used in practice since companies usually have more
reductions in retained earnings under this method.
MC13-4
Answer: c
Approach and explanation: Rule number one of this chapter is that Common Stock does
not receive credits for amounts beyond the par value. With that in mind, you can rule out
choices a and b.
The next rule is that you should not account for something prematurely. Similar to taking
out a line of credit, until cash is actually drawn down on that line of credit, a credit to a
liability does not take place. Similarly, when rights have been issued, nothing, from an
accounting standpoint, has really taken place yetno cash has come in and no shares
have been issued. There is no entry to make at this point which should, or will, affect the
face of the financial statements.
It is when the rights are exercised, cash is received, and shares are actually issued that
the following entry (assuming all of the rights are exercised at the same time) should be
made:
Cash
Common Stock
Additional Paid-In Capital
180,000
10,000
170,000
Chapter 13
13-15
MC13-5
Answer: b
Approach and explanation: The total compensation expense is calculated on the date of
grant and then expensed evenly over the vesting period. How much a company pays to
acquire treasury stock is irrelevant to the compensation expense calculation. Another
item to note is that it doesnt matter how many of the employees are expected to stay
with the company or how many actually do stay. Compensation expense is still
recognized even if they leave the company in 2012 or, given past turnover rates, it is
expected that some may leave in 2012.
The calculation is as follows:
$7 60,000 = $420,000 of compensation expense
Vesting period (not exercisable period) = 2 years
$420,000/2 = $210,000 of compensation expense in each year (2011 and 2012)
MC13-6
Answer: d
Approach and explanation: The first thing to note is the not in the question. Underline
it, highlight it, or circle itdo something so that you dont miss it. With that in mind, you
should be looking for three choices that are liabilities and one that is not (and likely to be
equity since that is what this chapter is about).
The first three choices are the ones discussed in the chapter that sound like equity, but,
in substance, are actually more like liabilities and, hence, required to be classified as
such. The reason why a certain number of shares is equity, whereas a dollar value of
shares is not, is that if a number of shares is required to be issued, the person to whom
the shares will be issued essentially becomes an owner at that point. They will begin to
share in the risks and rewards that other equity interests will share in.
On the other hand, a person receiving a dollar value of shares will have their number of
shares change between now and the time they are actually issued and, hence, will not
share the risk and reward of other equity owners in the meantime. Once they actually
receive the shares, the liability is turned into equity as they will begin to be an equity
investor at that point.
MC13-7
Answer: c
Approach and explanation: The only time Retained Earnings is adjusted in a conversion
is in the rare situation in which the common stock par value is high. Here are examples
of the other choices:
13-16
Chapter 13
Choices a and b:
Preferred Stock
Common Stock
Additional Paid-In CapitalCommon Stock
1,000,000
1,000
999,000
Or if the par value of the common stock was also high, but not as high as the preferred
stock:
Preferred Stock
Common Stock
Additional Paid-In CapitalCommon Stock
1,000,000
100,000
900,000
Choice d:
Preferred Stock
Additional Paid-In CapitalPreferred Stock
Common Stock
Additional Paid-In CapitalCommon Stock
100,000
50,000
1,000
900,000
Remember that preferred stock usually sells at or very near its par value, unlike
common stock. Therefore, the par value and the fair value of preferred stock are
frequently numbers that are close in value. Common stock, on the other hand, usually
sells for much more than its par value. If the company has been around for a long time
the fair value of shares of common stock can be dozens, or even hundreds, of times
greater than the par value.
MC13-8
Answer: d
Approach and explanation: The first item to note is, of course, the not in the question.
After you have circled, underlined, or highlighted it, realize that three of the choices will
add to Retained Earnings and one will do nothing, or will result in a subtraction, to
Retained Earnings. With that in mind, analyze each choice independently, and write a +,
, or 0 for the effect each action or event will have on Retained Earnings next to each
choice.
A change from an accelerated depreciation method to the straight-line method is a
change in accounting principle that will require prior financial statements to be restated.
Restating those income statements with less depreciation under the newly adopted
method will increase net income in prior years, thereby increasing Retained Earnings.
Put a + next to choice a and move on.
Net income that is earned during the period is probably the easiest of the four choices.
Net income will, of course, increase Retained Earnings. Put a + next to choice b and
move on.
Chapter 13
13-17
For choice c, youll need to recall information from a few chapters back. Remember this
formula?
Beginning inventory
+ Purchases
= Cost of goods available for sale
Ending inventory
= Cost of goods sold
If ending inventory was too low, then that means that cost of goods sold was too high
and income was understated in the previous year. If income was understated and that
understatement is now being corrected, the effect is to increase Retained Earnings now.
Put a + next to choice c and move on. Do not just assume that choice d is correct,
based on your other three + marks, without thinking it through first.
What happens in a 2-for-1 stock split? No journal entry is made. Rather, the number of
shares outstanding doubles and the par value gets cut in half. Therefore, choice d earns
a 0 mark next to it and you can circle it as being the correct answer.
MC13-9
Answer: c
Approach and explanation: On the date of declaration, what has happened? A liability
has been created called Dividends Payable. That account receives a credit for the
amount of the declaration. The missing debit must, therefore, be to Retained Earnings.
So Retained Earnings is affected, but not with an increase. Choices a and b can be
crossed off.
On the date of payment, what has happened? Cash has been paid, so Cash receives a
credit. The liability created on the date of declaration is no longer owed, so Dividends
Payable will receive a debit to bring it to a zero balance. That means Retained Earnings
isnt affected on the date of payment.
MC13-10
Answer: b
Approach and explanation: The solution to this question is as simple as adding up all
the numbers given.
MC13-11
Answer: a
Approach and explanation: The only piece of the income statement that you will find on
the statement of changes in stockholders equity is net income. Therefore, Revenue
(choice a) is the correct answer as it is not found on this statement too.
Even though Treasury Stock (choice b) decreases stockholders equity, any company
that had repurchased its own shares would show Treasury Stock both on this statement
and on the balance sheet (as negative numbers).
13-18
Chapter 13
Chapter 13
13-19
Matching 13-2
1.
b
2.
g
3.
e
4.
d
5.
c
6.
a
7.
f
Matching 13-3
1.
g
2.
d
3.
f
4.
e
5.
b
6.
c
7.
a
Matching 13-4
1.
c
2.
g
3.
b
4.
h
5.
d
6.
a
7.
f
8.
e
Matching 13-5
1.
d
2.
a
3.
f
4.
b
5.
c
6.
e
Problem 13-1
a. No entry is required for the authorization of shares.
b. Cash
Common Stock
Paid-In Capital in Excess of Par
Common Stock
a
b
560,000a
400,000b
160,000
13-20
c. Land
Buildings
Common Stock
Paid-In Capital in Excess of Par
Common Stock
a
Chapter 13
240,000
960,000
800,000a
400,000
Note: The fair market value of the stock is more readily determinable than the value
of the real property because it was traded on the over-the-counter market on the
transaction date. The value of the stock should be assigned to the land and buildings
in proportion to their appraised values:
Cost of Land = $250,000/($250,000 + $1,000,000) $1,200,000 = $240,000
Cost of Building = $1,000,000/($250,000 + $1,000,000) $1,200,000 = $960,000
d. Organization Costs
Common Stock
Paid-In Capital in Excess of Par
Common Stock
a
b
12,000
212,000a
318,000
500,000b
30,000
f. Cash
Subscriptions Receivable
Preferred Stock Subscribed
Preferred Stock
a
20,000b
e. Cash
Subscriptions Receivable
Preferred Stock Prescribed
Paid-In Capital in Excess of Par
Preferred Stock
a
32,000a
318,000a
318,000
500,000
500,000
Chapter 13
13-21
Problem 13-2
Fill in the pieces you know first and the missing pieces will likely come to you easier. For
instance, the cash portion of each entry is the easiest part to figure out. Since it is the
only credit (when it is a credit), or the only debit (when it is a debit), you know you have
to come up with the other side of the entry to equal cash.
Retained Earnings will never increase from dealings in treasury stock.
Finally, the name of the method gives away whether the par value of the treasury stock
needs to be considered or not.
(1)
July
Nov.
1 Treasury Stock
Additional Paid-In Capital
Treasury Stock
Retained Earnings
Cash
1 Cash
Treasury Stock
Additional Paid-In Capital
Treasury Stock
10,000a
170,000b
160,000
340,000c
450,000d
10,000
440,000
10,000 $1 = $10,000
10,000 $17 = $170,000
c
10,000 $34 = $340,000
d
10,000 $45 = $450,000
b
(2)
July
Nov.
1 Treasury Stock
Cash
340,000
1 Cash
Treasury Stock
Additional Paid-In Capital
Treasury Stock
450,000
340,000
340,000
110,000
13-22
Chapter 13
Problem 13-3
1. Preferred dividends per year: 100 shares $3 (0.06 $50) = $300,000
Preferred dividends in 2009:
Paid
$150,000
In Arrears
$150,000
Paid
$75,000
In Arrears
$ 75,000
300,000
$375,000
$375,000
300,000
$675,000
Chapter 13
13-23
Paid
$150,000
In Arrears
$270,000
Paid
$75,000
In Arrears
$195,000
420,000
$615,000
$800,000
615,000
$185,000
Glossary
Note that Appendix C in the rear portion of the textbook contains a comprehensive
glossary for all of the terms used in the textbook. That is the place to turn to if you need
to look up a word but dont know which chapter(s) it appeared in. The glossary below is
identical with one major exception: It contains only those terms used in Chapter 13. This
abbreviated glossary can prove quite useful when reviewing a chapter, when studying
for a quiz for a particular chapter, or when studying for an exam which covers only a few
chapters including this one. Use it in those instances instead of wading through the 19
pages of comprehensive glossary in the textbook trying to pick out just those words that
were used in this chapter.
additional paid-in capital The investment by stockholders in excess of the amounts
assignable to capital stock as par or stated value, as well as invested capital from
other sources, such as sale of treasury stock.
13-24
Chapter 13
Chapter 13
13-25
minimum pension liability adjustment Negative equity item resulting from the
adjustment to pension liability to ensure that at least a minimum pension liability is
reported.
noncontrolling interest The term used by the FASB to replace minority interest and
directs that this item be classified in the consolidated balance sheet as part of equity.
noncumulative preferred stock Preferred stock that has no claim on any prior year
dividends that may have been passed.
nondetachable warrants Stock warrants that cannot be traded separately from the
security with which they were originally issued.
nonreciprocal transfer to owners Transfer of cash or property to shareholders in
which nothing is received by the company in return.
par (or stated) value method Method of accounting for treasury stock purchases in
which the repurchased shares are accounted for as if they were being retired.
par value A nominal value that is assigned to stock by the terms of a corporations
charter.
participating preferred stock Preferred stock that provides for additional dividends to
be paid to preferred stockholders after dividends of a specified amount are paid to
common stockholders.
performance-based stock option plan Option plan in which the terms are
dependent on how well the individual or company performs after the date the options
are granted.
pooling-of-interest method A way to account for a business combination that
assumes a merger of two equals; neither of the merging companies is thought of as
purchasing the other.
property dividend A dividend paid in the form of some asset other than cash.
purchase method A method of accounting for a business combination whereby the
asset and liability values of the purchased company are recorded at their market
values; goodwill is recognized.
redeemable preferred stock Preferred stock that may be redeemed at the option of
the holder, at a fixed price on a specific date, or upon other conditions not solely
within the control of the issuer.
small stock dividend A stock dividend of less than 25% of the shares outstanding.
stated value A nominal value that may be assigned to no-par stock by the board of
directors of a corporation; similar in concept to par value.
statement of changes in stockholders equity A report that summarizes the
reasons for the changes in all equity accounts during a period of time.
stock appreciation rights (SARs) Awards an employee a cash amount equal to the
market value of the issuing firms shares above a specified threshold price.
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Chapter 13