Intermediate Accounting 6e Spiceland Chap018answer.docx
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Intermediate Accounting 6e Spiceland Chap018answer.docx
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IntermediateAccounting6eSpicelandChap018answer
Chapter18Shareholders’Equity
QuestionsforReviewofKeyTopics
Question18-1
Thetwoprimarysourcesofshareholders’equityareamountsinvestedbyshareholdersinthecorporationandamountsearnedbythecorporationonbehalfofitsshareholders.Investedcapitalisreportedaspaid-incapitalandearnedcapitalisreportedasretainedearnings.
Question18-2
Thethreeprimarywaysacompanycanbeorganizedare
(1)asoleproprietorship,
(2)apartnership,or(3)acorporation.Transactionsareaccountedforthesameregardlessoftheformofbusinessorganizationwiththeexceptionofthemethodofaccountingforcapital–theownershipinterestinthecompany.Severalcapitalaccounts(asdiscussedinthischapter)areusedtorecordchangesinownershipinterestsforacorporation,ratherthanrecordingallchangesinownershipinterestsinasinglecapitalaccountforeachowner,aswedoforsoleproprietorshipsandpartnerships.
Question18-3
Intheeyesofthelaw,acorporationisaseparatelegalentity–separateanddistinctfromitsowners.Theownersarenotpersonallyliablefordebtsofthecorporation.So,shareholdersgenerallymaynotlosemorethantheamountstheyinvestwhentheypurchaseshares.Thisisperhapsthesinglemostimportantadvantageofcorporateorganizationoveraproprietorshiporapartnership.
Question18-4
“Not-for-profit”corporations,suchaschurches,hospitals,universities,andcharities,arenotorganizedforprofitanddonotsellstock.Somenot-for-profitcorporations,suchastheFederalDepositInsuranceCorporation(FDIC),aregovernmentowned.
Question18-5
Corporationsthatareorganizedforprofitmaybepubliclyheldorprivately(orclosely)held.Thestockofpubliclyheldcorporationsisavailableforpurchasebythegeneralpublic.Sharesmightbetradedonorganizednationalstockexchangesavailable“over-the-counter”fromsecuritiesdealers.Privatelyheldcompanies'sharesareheldbyonlyafewindividualsandarenotavailabletothegeneralpublic.
Question18-6
Corporationsareformedinaccordancewiththecorporationlawsofindividualstates.TheModelBusinessCorporationActservesastheguidetostatesinthedevelopmentoftheircorporationstatutes,presentlyasthemodelforthemajorityofstates.
AnswerstoQuestions(continued)
Question18-7
Theownershiprightsheldbycommonshareholders,unlessspecificallywithheldbyagreementwiththeshareholders,are:
a.Therighttovoteonpolicyissues.
b.Therighttoshareinprofitswhendividendsaredeclared(inproportiontothepercentageofsharesownedbytheshareholder).
c.Therighttoshareinthedistributionofanyassetsremainingatliquidationafterotherclaimsaresatisfied.
Question18-8
The“preemptiveright”istherighttomaintainone’spercentageshareofownershipwhennewsharesareissued.Whengranted,eachshareholderisofferedtheopportunitytobuythesamepercentageofanynewsharesissuedasthepercentageofshareshe/sheownsatthetime.Forreasonsofpracticality,thepreemptiverightusuallyisexcluded.
Question18-9
Thetypicalrightsofpreferredsharesusuallyincludeoneorbothofthefollowing:
a.Apreferencetoapredesignatedamountofdividends,i.e.,astateddollaramountpershareor%ofparvaluepershare.Thismeansthatwhentheboardofdirectorsofacorporationdeclaresdividends,preferredshareholderswillreceivethespecifieddividendpriortoanydividendsbeingpaidtocommonshareholders.
b.Apreferenceovercommonshareholdersinthedistributionofassetsintheeventthecorporationisdissolved.
Question18-10
Ifpreferredsharesarenoncumulative,dividendsnotdeclaredinanygivenyearneedneverbepaid.However,ifcumulative,whenthespecifieddividendisnotpaidinagivenyear,theunpaiddividendsaccumulateandmustbemadeupinalaterdividendyearbeforeanydividendsarepaidoncommonshares.Theseunpaiddividendsarecalled“dividendsinarrears.”
Question18-11
Parvaluewasdefinedbyearlycorporationlawsastheamountofnetassetsnotavailablefordistributiontoshareholders(asdividendsorotherwise).However,nowtheconceptsof“parvalue”and“legalcapital”havebeeneliminatedentirelyfromtheModelBusinessCorporationAct.Mostsharescontinuetobeararbitrarilydesignatedparvalues,typicallynominalamounts.Althoughmanystatesalreadyhaveadoptedtheseprovisions,mostestablishedcorporationsissuedsharespriortochangesinthestatestatutes.So,mostcompaniesstillhaveparvaluesharesoutstandingandcontinuetoissuepreviouslyauthorizedparvalueshares.
AnswerstoQuestions(continued)
Question18-12
Comprehensiveincomeisabroaderviewofthechangeinshareholders’equitythantraditionalnetincome.Itisthetotalnonownerchangeinequityforareportingperiod.Itencompassesallchangesinequityexceptthosecausedbytransactionswithowners.Transactionsbetweenthecorporationanditsowners(shareholders)primarilyincludedividendsandthesaleorpurchaseofsharesofthecompany’sstock.Mostnonownerchanges(e.g.,revenuesandexpenses)arereportedintheincomestatement.So,thechangesotherthantheonesthatarepartofnetincomearethosereportedas“othercomprehensiveincome.”
Twoattributesofothercomprehensiveincomearereported:
(1)componentsofcomprehensiveincomecreatedduringthereportingperiodand
(2)thecomprehensiveincomeaccumulatedoverthecurrentandpriorperiods.
Thecomponentsofcomprehensiveincomecreatedduringthereportingperiod-canbereportedeither(a)asanadditionalsectionoftheincomestatement,(b)aspartofthestatementofshareholders’equity,or(c)inadisclosurenote.Regardlessofthechoiceacompanymakes,thepresentationwillreportnetincome,othercomponentsofcomprehensiveincome,andtotalcomprehensiveincome.Thesecondattribute-thecomprehensiveincomeaccumulatedoverthecurrentandpriorperiods–isreportedasaseparatecomponentofshareholders’equity.Thisamountrepresentsthecumulativesumofthechangesineachcomponentcreatedduringeachreportingperiodthroughoutallprioryears.
Question18-13
AspartofajointprojectwiththeFASB,theInternationalAccountingStandardsBoard(IASB)in2007issuedarevisedversionofIASNo.1,“PresentationofFinancialStatements,”thatrevisedthestandardtobringinternationalreportingofcomprehensiveincomelargelyinlinewithU.S.standards.Itprovidestheoptionofpresentingrevenueandexpenseitemsandcomponentsofothercomprehensiveincomeeitherin(a)asinglestatementofcomprehensiveincomeor(b)twostatements:
anincomestatementandastatementofcomprehensiveincome,traditionallyreferredtoastheStatementofRecognizedIncomeandExpense,or“SoRIE.”U.S.GAAPalsoallowsreportingothercomprehensiveincomeinthestatementofshareholders’equity,whichisthewaymostU.S.companiesreportit.
Question18-14
Thestatementofshareholders’equityreportsthetransactionsthatcausechangesinitsshareholders’equityaccountbalances.Itshowsthebeginningandendingbalancesinprimaryshareholders’equityaccountsandanychangesthatoccurduringtheyearsreported.Typicalreasonsforchangesarethesaleofadditionalsharesofstock,theacquisitionoftreasurystock,netincome,andthedeclarationofdividends.
Question18-15
Themeasurementobjectiveisthatthetransactionshouldberecordedatfairvalue.Thismightbethefairvalueofthesharesorofthenoncashassetsorservicesreceived,whicheverevidenceoffairvalueseemsmoreclearlyevident.Thisisconsistentwiththegeneralpracticeofrecordinganynoncashtransactionatmarketvalue.
AnswerstoQuestions(continued)
Question18-16
Thecashreceivedusuallyisthesumoftheseparatemarketvaluesoftheseparatesecurities.However,whenthetotalsellingpriceisnotequaltothesumoftheseparatemarketprices,thetotalsellingpriceisallocatedinproportiontotheirrelativemarketvalues.
Question18-17
Shareissuecostsreducethenetcashproceedsfromsellingthesharesandthuspaid-incapital–excessofpar.Ontheotherhand,debtissuecostsarerecordedinaseparate“debtissuecosts”accountandamortizedtoexpenseoverthelifeofthedebt.Thedifferenceoftenisjustifiedbythepresumptionthatshareissuecostsanddebtissuecostsarefundamentallydifferentbecauseadebtissuehasafixedmaturity,butthatsellingsharesrepresentsaperpetualequityinterest.ConceptStatement6disagrees,statingthatdebtissuecostsshouldbetreatedthesamewayasshareissuecosts.But,ConceptStatementsdonotconstituteGAAP,andthecurrentlyprescribedpracticeistorecorddebtissuecostsasassetsandexpensetheassetoverthematurityofthedebt.
Question18-18
Thesameaccountsthatpreviouslywereincreasedwhenthesharesweresoldaredecreasedwhenthesharesareretired.Specifically,common(orpreferred)stockandpaid-incapital–excessofpararereducedbythesameamountstheywereincreasedbywhentheshareswereoriginallysold.
Ifthecashpaidtorepurchasethesharesdiffersfromtheamountoriginallypaidin,accountingforthedifferencedependsonwhetherthecashpaidtorepurchasethesharesislessthanormorethanthepricepreviouslyreceivedwhenthesharesweresold.Whenlesscashisdistributedtoshareholderstoretiresharesthanoriginallypaidin,someoftheoriginalinvestmentremainsandislabeledpaid-incapital–sharerepurchase.Whenmorecashisdistributedtoshareholderstoretiresharesthanoriginallywaspaidinforthoseshares,theadditionalamountisviewedasadividendonthe
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