 | Term | Definition |
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Equity |
the residual interest in the assets of an entity that remains after deducting its liabilities. This represents the ownership interest. It does no represent a claim to specific assets, but a claim against a portion of total assets |
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Corporation |
an artificial person created by the law and having a distinct existence seperate and apart from the persons who are responsible for its creation and operation |
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Seperate Legal Entity |
can do anything a person can legally do; e.g. acquire assets, be sued |
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Limited Liability |
the amount the stockholder has invested in the corporation is the extent of the possible loss; personal assets are protected |
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Transferability of Ownership |
shares are bought and sold among stockholders without interrupting operations |
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Unlimited Life |
the corporation continues in existence and is not dependent on the lives of its owners |
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Capital Raising Capability |
can raise large amounts of capital because of the attractiveness to investors of limited liability and the liquidity available because of the ease of transfer of ownership |
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Taxation |
earnings of a corporation are subject to federal income tax whether the earnings are distributed to stockholders or not. |
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Governmental Regulation |
more governmental regulation for corporations than for sole proprietorships or partnerships |
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Authorized stock |
maximum # of shares a company may legally have as authorized by the state |
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Issued stock |
authorized share of stock in a corporation that have been sold to investors |
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Outstanding stock |
the shares of a corporation’s stock that have been issued and are in the hands of the public |
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Treasury Stock |
stock re-acquired by a corporation to be retired or resold to the public |
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Par Value Stock |
the face value of a stock, assigned by a corporation at the time the stock is issued |
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No par stock |
no specification of a par value indicated in the company’s articles of incorporation. |
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Stated Value Stock |
a value that instead of being par value, is assigned to a corporation’s stock for accounting purposes |
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Legal Capital |
the value at which a company’s shares are recorded on its books (required cushion of capital needed before can declare dividends). |
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Proportional Method for a Combined Sale |
the proceeds are allocated based on their individual relative market value. This method is used when the market values of all the securities in the package are known and is the preferred method. |
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Incremental Method for a Combined Sale |
the market value of the securities is used as a basis for those classes of securities for which the market value is known and the remainder of the lump sum is allocated to the security whose market value is not known. |
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Watered Stock |
the overstatement of stockholders’ equity through intentional overvaluation by the board of directors of the property or services received. This may be eliminated by writing down the assets to their actual market value. |
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Secret Reserves |
results from undervaluing the property or services received in exchange for the company’s stock |
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Retained Earnings |
summarizes the stockholder’s share of assets resulting primarily from earnings not distributed as dividends |
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Dividends |
distributions of earnings to stockholders. It is the board of director’s responsibility to determine if dividends should be declared. |
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Date of Declaration |
a declared cash dividend is a liability (current). Companies do not declare treasury stock. J/E is required. |
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Date of Record |
No J/E. Date used to determine who will get the dividend and how many people or what amount on that date. |
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Date of Payment |
the corporation debits Property Dividends Payable and credits the account containing the distributed assets (restated at FV) |
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Property Dividends |
in the form of some asset other than cash. The dividend is recorded at the MV of the asset given up. The dividend is viewed as a simultaneous sale of the asset at market value and distribution of the proceeds. Therefore, on the date of declaration, the asset should be revalued to MV and any gain or loss recorded. |
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Liquidating Dividends |
declared when the company is terminating or reducing operations. The dividend reduces Contributed Capital rather than Retained Earnings. |
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Stock dividends |
occur when the company issues additional shares of its own stock. Each stockholder receives additional shares at a percentage of the number of shares owned before the dividend. Total Stockholders’ Equity does not change, but is rearranged, with Contributed Capital increasing and Retained Earnings decreasing. The amount at which the dividend is recorded depends on whether the dividend is small or large. |
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Small Stock Dividend |
less than 20-25% of common stock outstanding. This is viewed in the same way as a property dividend, that is, simultaneous sale of the stock at market value and payment of the dividend with the proceeds. Therefore, the dividend is to be recorded at MV. |
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Large Stock Dividend |
greater than 20-25% of common stock outstanding. This is viewed as a stock split rather than a dividend, so it is recorded at par. |
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Stock Split |
occurs when a proportionate number of additional shares are issued based on the number of shares currently issued while simultaneously, the corresponding par value is reduced proportionately. The MV of the stock will fall in proportion to the split. The primary purpose of this is to decrease the market price of the company’s stock in order to make it more marketable. Usually recorded with a memo entry. |
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Appropriation of Retained Earnings |
setting aside of cash for a specific purpose such as a building or retiring bonds. |
