Accounting

Why are paid-in-capital and retained earnings displayed separately in the stockholder's equity section of the balance sheet?

The stockholder is an investor who gets part ownership in a corporation for their investment. The corporation can pay dividends to the stockholders or keep the net income for the business which is the retained earnings. Paid-in-capital and retained earnings are displayed separately in the stockholder’s equity of the balance sheet because corporations are subject to State law regulations which often require that these are shown separately.

Why would investors buy common stock when preferred stock is available?

Preferred stock is generally less risky and the stock holders are paid before the common stockholders if the company is in trouble and has to liquidate its assets. However, Investors would buy common stock because the common stockholders get to elect the board of directors and have the right to vote on some company decisions.

If you owned 5,000 shares of common stock in Microsoft Corporation and someone offered to buy the stock for its book value, would you accept the offer? Provide rationale for your decision

I would not sell my common stock first because it is a technology company that can make changes with years to come to keep up with new technologies and continue to grow. As a common stockholder I may be able to vote on some of the decisions that will influence the future of the company.

Secondly, according to data form ychart.com, the book value of Microsoft has been steadily increasing in the last 5yrs. If this rise continues, then the value of the stock will be high and it also means that Microsoft as a company is in good shape so I would definitely not sell my stock.

Reference

Ycharts.com (2013). Microsoft Corporation Book Value per share. Retrieved from: http://ycharts.com/companies/MSFT/book_value_per_share