Why is the distinction between paid-in capital and retained earnings important?
Paid in capital reflects investments made by equity holders, while retained earnings reflect the balance of profits in the business.
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.
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.
(Entries for Stock Dividends and Stock Splits) The stockholders’ equity accounts of G.K. Chesterton Company have the following balances on December 31, 2017.
Common stock, $10 par, 300,000 shares issued and outstanding $3,000,000
Paid-in capital in excess of par—common stock 1,200,000
Retained earnings 5,600,000
Shares of G.K. Chesterton Company stock are currently selling on the Midwest Stock Exchange at $37.
Prepare the appropriate journal entries for each of the following cases.
(Preferred Dividends) The outstanding capital stock of Edna Millay Corporation consists of 2,000 shares of $100 par value, 8% preferred, and 5,000 shares of $50 par value common.
Assuming that the company has retained earnings of $90,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions.
McNabb Corp. had $100,000 of 7%, $20 par value preferred stock, and 12,000 shares of $25 par value common stock outstanding throughout 2017.
Dave Matthew Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $100,000.
a) Prepare the journal entry for the issuance when the market price of the common shares is $165 each and the market price of the preferred is $230 each. (Round to the nearest dollar.)
b) Prepare the journal entry for the issuance when only the market price of the common stock is known and it is $170 per share.
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