Question

Owners’ equity in a corporation is defined as stockholders’ equity, share­holders’ equity, or corporate capital. The following categories normally appear as part of stockholders’ equity.

a. Capital stock.
b. Additional paid-in capital.
c. Retained earnings.
d. Stock Dividend
e. Treasury Stock
Please define each term and provide an example of each. How would you prepare a journal entry if any of these amounts were increased from a transaction?

Answer 1

Capital stock represents the initial investment made by shareholders in exchange for ownership in a corporation. Additional paid-in capital reflects the premium paid by investors for the ownership interest. Retained earnings represent accumulated profits. Stock dividends are distributions of additional shares. Treasury stock represents repurchased shares.

Step-by-step explanation:

Capital stock:

Capital stock represents the initial investment made by shareholders in exchange for ownership in a corporation. It is recorded at the par value of the shares issued. For example, if a corporation issues 1,000 shares of $1 par value stock, the capital stock will be recorded as $1,000.

Additional paid-in capital:

Additional paid-in capital represents the amount of money paid by shareholders for the shares of stock that exceeds the par value of the stock. It reflects the premium paid by investors for the ownership interest. For example, if investors paid $10 per share for stock with a $1 par value, and a total of 1,000 shares were issued, the additional paid-in capital will be $9,000.

Retained earnings:

Retained earnings represent the accumulated profits that have not been distributed as dividends to shareholders. It reflects the company's reinvested earnings over time. For example, if a corporation has earned $10,000 in net income over the years and has paid out $2,000 in dividends, the retained earnings will be $8,000.

Stock dividend:

A stock dividend is a distribution of additional shares of stock to existing shareholders. It is usually expressed as a percentage of the existing shares held. For example, if a corporation declares a 5% stock dividend and a shareholder owns 100 shares, they will receive an additional 5 shares as a dividend.

Treasury stock:

Treasury stock represents shares of a corporation's own stock that it has repurchased. It is recorded as a contra equity account and reduces the shareholders' equity. For example, if a corporation repurchases 500 shares of its own stock and the par value of each share is $1, the treasury stock will be recorded as $500.