Residual Ownership

Common stock is often referred to as a residual ownership because these shareholders are entitled to all that

remains after other claims have been settled including those of preferred stock.

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The issuance of preferred stock is accounted for in the same way as common stock. Par value, though, often

serves as the basis for specified dividend payments. Thus, the par value listed for a preferred share frequently

approximates fair value. To illustrate, assume that a corporation issues ten thousand shares of preferred stock. A

$100 per share par value is printed on each stock certificate. If the annual dividend is listed as 4 percent, $4 per

year ($100 par value × 4 percent) must be paid on preferred stock before any distribution is made on the common


If ten thousand shares of this preferred stock are each issued for $101 in cash ($1,010,000 in total), the company

records the following journal entry.