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    Owner's Equity - Paid-In and Earned Capital

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    a. Why is it important to keep paid-in capital separate from earned capital?
    b. As an investor, is paid-in or earned capital more important? Why?
    c. As an investor, are basic or diluted earnings per share more important? Why?

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    a. Why is it important to keep paid-in capital separate from earned capital?

    The owner's equity is subdivided into two categories, which represent the two ways that owners can make contributions to the corporation:

    * Contributed capital, which includes the contributions to the corporation in return for common stock
    * Earned surplus (also called retained earnings), which is comprised of the corporation's cumulative earnings, less distributions of those earnings (i.e., dividends)

    Thus Paid in capital is capital received from investors in exchange for stock. This is recorded as an entry on the balance sheet.

    Investopedia Says: This term is sometimes also referred to as contributed capital or share capital. Paid in Capital is capital that is brought in by investors in return for stock. It is not capital that is generated as a result of the operation of the company. Also referred to as ...

    Solution Summary

    Over 500 words explain why one must keep paid-in and earned capital separate, as well as their importance to investors.