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Chapter 15: Question 5Q (page 810)

Explain each of the following terms: authorized capital stock, unissued capital stock, issued capital stock, outstanding capital stock, and treasury stock.

Short Answer

Expert verified

Authorized capital stock, unissued capital stock, issued capital stock, outstanding capital stock, and treasury stock are all components of stockholder’s equity.

Step by step solution

01

Meaning of Authorized Capital Stock

Per the company’s constitution, authorized capital refers to the maximum amount of capitala company can issue to its shareholders.

02

Meaning of Unissued Capital Stock

Unissued shares are shares of companies thatdon’tcirculate or don’t seem to be soldby the corporate on the market.

03

Meaning of Issued Capital Stock

The issued capital stock issolelythe value of the sharesthat a company offers to investors.

The number of shares issued is generally the amount of subscribed capital, although none of these amounts may exceed the authorized amount.

04

Meaning of Outstanding Capital Stock

The term “outstanding share capital” refers to the total shares issued under subscription contractsbinding on the subscriber.

To calculate outstanding capital stock, add both preferred and common shareoutstanding and subtract it with the number of treasury shares.

05

Meaning of Treasury Stock

Treasury shares, also called stock orreacquired shares, talk over with previously outstanding shares which the company repurchases.

A company can benefit from Treasury stock by including it as part of employee stock option plans.

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Most popular questions from this chapter

The following is a summary of all relevant transactions of Vicario Corporation since it was organized in 2017. In 2017, 15,000 shares were authorized and 7,000 shares of common stock (\(50 par value) were issued at a price of \)57. In 2018, 1,000 shares were issued as a stock dividend when the stock was selling for \(60. Three hundred shares of common stock were bought in 2019 at a cost of \)64 per share. These 300 shares are still in the company treasury.

In 2018, 10,000 preferred shares were authorized and the company issued 5,000 of them (\(100 par value) at \)113. Some of the preferred stock was reacquired by the company and later reissued for \(4,700 more than it cost the company.

The corporation has earned a total of \)610,000 in net income after income taxes and paid out a total of $312,600 in cash dividends since incorporation.

Instructions

Prepare the stockholders’ equity section of the balance sheet in proper form for Vicario Corporation as of December 31, 2019. Account for treasury stock using the cost method.

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for stockholders’ equity.

Indicate how each of the following accounts should be classified in the Equity section.

  1. Share Capital—Ordinary.
  2. (b) Retained Earnings.
  3. Share Premium—Ordinary.
  4. Treasury Shares.
  5. Share Premium—Treasury
  6. Share Capital—Preference
  7. Accumulated Other Comprehensive Income.

Joe Dumars Company has outstanding 40,000 shares of \(5 par common stock, which had been issued at \)30 per share. Joe Dumars then entered into the following transactions.

  1. Purchased 5,000 treasury shares at \(45 per share.
  2. Resold 2,000 of the treasury shares at \)49 per share.
  3. Resold 500 of the treasury shares at $40 per share.

Instructions

Use the following code to indicate the effect each of the three transactions has on the financial statement categories listed in the table below, assuming Joe Dumars Company uses the cost method (I = Increase; D = Decrease; NE = No effect).

#

Asset

Liabilities

Stockholders’ Equity

Paid-in Capital

Retained

Earnings

Net Income

1

2

3

Hatch Company has two classes of capital stock outstanding: 8%, \(20 par preferred and \)5 par common. At December 31, 2017, the following accounts were included in stockholders’ equity.

Preferred Stock, 150,000 shares \( 3,000,000

Common Stock, 2,000,000 shares 10,000,000

Paid-in Capital in Excess of Par—Preferred Stock 200,000

Paid-in Capital in Excess of Par—Common Stock 27,000,000

Retained Earnings 4,500,000

The following transactions affected stockholders’ equity during 2018.

Jan.1 30,000 shares of preferred stock issued at \)22 per share.

Feb.1 50,000 shares of common stock issued at \(20 per share.

June 1 2-for-1 stock split (par value reduced to \)2.50).

July 1 30,000 shares of common treasury stock purchased at \(10 per

share. Hatch uses the cost method.

Sept.15 10,000 shares of treasury stock reissued at \)11 per share.

Dec.31 The preferred dividend is declared, and a common dividend of 50¢

per share is declared.

Dec. 31 Net income is $2,100,000.

Instructions

Prepare the stockholders’ equity section for Hatch Company at December 31, 2018. Show all supporting computations.
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