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Chapter 15: Question 4Q (page 810)

Why is the distinction between paid-in capital and retained earnings important?

Short Answer

Expert verified

Paid in capital reflects investments made by equity holders, while retained earnings reflect the balance of profits in the business.

Step by step solution

01

Definition of Retained Earnings

An organization's retained earnings are the profits left over after they have deducted their direct expenses, indirect expenses, income taxes, and dividends to shareholders.

02

Distinction between Paid-In Capital and Retained Earnings

The legal right to declare dividends out of retained earnings is available in all states, but out of paid-in capital is not allowed in many states. A corporation's continued existence and growth are determined by its earnings, which are viewed by management, shareholders, and others. In comparison, paid-in capital shows the value of the investment made by the investor in the company. Retained earnings are determined to measure the profit remains for the year; on the other hand, paid-up capital is used to measure a company's capital valuation.

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Most popular questions from this chapter

Washington Company has the following stockholders’ equity accounts at December 31, 2017.

Common Stock (\(100 par value, authorized 8,000 shares) \)480,000

Retained Earnings 294,000

Instructions

a. Prepare entries in journal form to record the following transactions, which took place during 2018.

1. 280 shares of outstanding stock were purchased at \(97 per share. (These are to be accounted for using the cost method.)

2. A \)20 per share cash dividend was declared.

3. The dividend declared in (2) above was paid.

4. The treasury shares purchased in (1) above were resold at \(102 per share.

5. 500 shares of outstanding stock were purchased at \)105 per share.

6. 350 of the shares purchased in (5) above were resold at \(96 per share.

b.Prepare the stockholders’ equity section of Washington Company’s balance sheet after giving effect to these transactions, assuming that the net income for 2018 was \)94,000. State law requires restriction of retained earnings for the amount of treasury stock.

Faith Evans Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a \(500 par, 12% subordinated debenture and 10 shares of \)5 par common stock. The units were sold to outside investors for cash at \(880 per unit. Prior to this sale, the 2-week ask price of common stock was \)40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.

Instructions

  1. Prepare the journal entry to record Evans’ transaction, under the following conditions.
  2. Employing the incremental method.
  3. Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.
  4. Briefly explain which method is, in your opinion, the better method.

Hinges Corporation issued 500 shares of \(100 par value preferred stock for \)61,500. Prepare Hinges journal entry.

Why is a preemptive right important?

Twenty-five thousand shares reacquired by Elixir Corporation for \(53 per share were exchanged for undeveloped land that has an appraised value of \)1,700,000. At the time of the exchange, the common stock was trading at $62 per share on an organized exchange.

Instructions

a) Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock was originally recorded using the cost method.

b) Briefly identify the possible alternatives (including those that are totally unacceptable) for quantifying the cost of the land and briefly support your choice.
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