Problem Solving Survival Guide for Intermediate Accounting, 15th Edition, Instructor's Manual: Volume II: Chapters 15-24

CHAPTER 15

STOCKHOLDERS' EQUITY

OVERVIEW

A major source of assets of an entity is owners' equity. Owners' equity of a corporation is called stockholders' equity or shareholders' equity because the owners of the business hold shares of stock as evidence of their ownership claims. Stockholders' equity typically has two major classifications for reporting purposes: contributed capital (paid-in capital) and retained earnings. Contributed capital includes the subclassifications of capital stock and additional paid-in capital.

This chapter discusses the issuance of stock and the reacquisition of shares. When shares are reacquired and held in the treasury, two alternative generally accepted accounting methods are available for use: the cost method and the par value method. The cost method is the more popular method.

The term earnings refers to net income for a period. The term retained earnings refers to accumulated earnings. That is, retained earnings is the total of all amounts reported as net income since the inception of the corporation less the sum of any amounts reported as net losses and dividends declared since the inception of the corporation. Thus, distributions of corporate profits to stockholders reduce retained earnings. A corporation may distribute cash, noncash assets, or additional shares of the corporation's own stock to its owners in the form of dividends. A distribution of assets may represent a distribution of income or a return of invested capital. A distribution ...