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Simon Fraser University
ARCH 131
Steve Gibson

11-6 Common shares carry a basic set of rights. The rights are to share proportionately (based on the number of shares that are held) in: •Profits and losses – This is the shareholder’s share of the success of the corporation. •Management of the Corporation – The shareholders exercise their right to management typically by voting their shares in the election of the Board of Directors and other issues. •Assets upon liquidation – If the corporation decides to go out of business or is forced out of business, the shareholders share in whatever assets are left after creditors are paid. •Subsequent issues of shares – This right ensures that shareholders will not have their percentage ownership diluted by the issuance of new shares. This is only a right if it is written into the articles of incorporation when the corporation is first formed. 11-7 Preferred shares differ from common shares in that they are given a preference with regard to dividends. Preferred shares must be paid dividends first before common shares are entitled to receive dividends. Preferred shares also have different rights from the basic rights of the common shares. Typically, the preferred shares are non-voting or carry a lesser right to vote (for instance, a half a vote per share). If the corporation decides to liquidate, preferred shareholders usually have a claim on assets prior to the claim of common shareholders. There are many other features of preferred shares that are different from common shares. 11-19 A company may make the decision to “go private” as well. This will normally happen when there is a large majority shareholder already present. This shareholder will offer to buy all of the outstanding shares that it does not already own. The shareholder would then have total control over the corporation, its strategy and operations. The company would no longer be required to make any public disclosures thus it would keep all of its information private and not available to its competitors. It would also be able to do any restructuring without the negative publicity which may accompany the restructuring. 11-25 a. 1. Information on the number of common and preferred shares authorized will be reported in the shareholders’ equity section of the statement of financial position. No journal entry is made until actual shares are issued. 2. The following journal entry will be recorded when the common shares are issued: Cash (A) (240,000 x $5) 1,200,000 Common shares (SE) 1,200,000 3. The following journal entry will be recorded when the preferred shares are issued: Cash (A) (15,000 x $14) 210,000 Preferred shares (SE) 210,000 4. The following journal entry will be recorded when the preferred dividend is declared and paid: Preferred dividends declared (SE) 30,000 Cash (A) (15,000 x $2.00) 30,000 5. The following entry will be recorded when the common dividend is declared: Dividends declared (SE) (240,000 x $0.10) 24,000 Dividends payable (L) 24,000 6. Retained earnings will increase by $150,000 and the revenue and expense accounts will be reduced to zero balances. Revenues (SE) 750,000 Expenses (SE) 600,000 Retained earnings (SE) 150,000 7. The following journal entry is recorded when the dividend is paid on the common shares: Dividends payable (L) 24,000 Cash (A) 24,000 8. A 5% stock dividend is declared and distributed on the common shares: Dividends declared (SE) (240,000 x 5% x $5.50) 66,000 Common shares (SE) 66,000 b. Preferred shares (15,000 issued, $ 210,000 100,000 authorized) Common shares (252,000 issued, 1,266,000 1,000,000 authorized) Retained earnings * 30,000 Total shareholders’ equity $1,506,000 * $150,000 – $30,000 – $24,000 – $66,000 = $30,000 c. Common shares for share price appreciation and possibly dividends; preferred shares for dividends and less risk. 11-35 a.) The original group of investors owns 16.7% of (1,000,000 / 6,000,000 common shares) after the IPO. The group could have maintained their control by either issuing debt or preferred shares and thus not diluting ownership of the company while still raising the capital funds necessary for growth.
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