Wiley GAAP 2008

Concepts, Rules, and Examples

Legal Capital and Capital Stock

Legal capital typically refers to that portion of the stockholders' investment in a corporation that is permanent in nature and represents assets that will continue to be available for the satisfaction of creditor's claims. Traditionally, legal capital was comprised of the aggregate par or stated value of common and preferred shares issued. In recent years, however, many states have eliminated the requirement that corporate shares have a designated par or stated value. States which have adopted provisions of the Model Business Corporation Act have eliminated the distinction between par value and the amount contributed in excess of par.

The specific requirements regarding the preservation of legal capital are a function of the business corporation laws in the state in which a particular entity is incorporated. Accordingly, any action by the corporation that could affect the amount of legal capital (e.g., the payment of dividends in excess of retained earnings) must be considered in the context of the relevant laws of the state where the company is chartered.

Ownership interest in a corporation is made up of common, and optionally, preferred shares. The common shares represent the residual risk‐taking ownership of the corporation after the satisfaction of all claims of creditors and senior classes of equity.

Preferred stock. Preferred shareholders are owners who have certain rights superior to those of common shareholders. ...