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Authorization and Issuance of Capital Stock

Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold. Authorization and Issuance of Capital Stock. Authorized Shares. Usually shares are sold through an underwriter.

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Authorization and Issuance of Capital Stock

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  1. Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold. Authorization and Issuanceof Capital Stock Authorized Shares Usually shares are sold through an underwriter.

  2. Authorization and Issuanceof Capital Stock Authorized Shares Outstanding shares are issued shares that are owned by stockholders. Outstanding Shares Unissued Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Treasury Shares

  3. Stockholders’ Equity Par value is an arbitrary amount assigned to each share of stock when it is authorized. Market priceis the amount that each share of stock will sell for in the market.

  4. All proceeds credited to Common Stock Treated like par value common stock Stockholders’ Equity Common stock can be issued in three forms: Par Value Common Stock No-Par Common Stock Stated Value Common Stock Let’s examine this form of stock.

  5. Issuance of Par Value Stock Record: The cash received. The number of shares issued × the par value per share in theCommon Stockaccount. The remainder is assigned toContributed Capital in Excess of Par. Matrix, Inc. issues 10,000 shares of its $2 par value stock for $25 per share on September 1, 2007.

  6. 10,000× $2 = $20,000 Issuance of Par Value Stock Matrix, Inc. issues 10,000 shares of its $2 par value stock for $25 per share on September 1, 2007.

  7. Issuance of Par Value Stock

  8. A separate class of stock, typically having priority over common shares in . . . Dividend distributions (rate is usually stated). Distribution of assets in case of liquidation. Preferred vs. Common StockPreferred Stock Other Features Include: Cumulative dividend rights. Usually callable by the company. Normally has no voting rights.

  9. Cumulative Vs. Noncumulative Cumulative Preferred Stock Dividends in arrears must be paid before dividends may be paid on common stock. Undeclared dividends from current and prior years do not have to be paid in future years.

  10. Stock Preferred as to Dividends Example: Consider the following partial Statement of Stockholders’ Equity. During 2007, the directors declare cash dividends of $5,000 (note $9,000 s/b paid to P.S.). In 2008, the directors declare cash dividends of $42,000.

  11. Stock Preferred as to Dividends

  12. Market Value Common stock is carried at original issue price. Accounting by the issuer. Investments in marketable securities are carried at market value. Accounting by the investor.

  13. Factors affecting market price of preferred stock: Dividend rate Risk Level of interest rates Market Price of Preferred Stock The return based on the market value is called the “dividend yield.”

  14. Market Price of Common Stock • Factors affecting market price of common stock: • Investors’ expectations of future profitability. • Risk that this level of profitability will not be achieved. Changes in market value have no impact on the books of the issuer.

  15. Preferred stock at par value only and preferred dividends in arrears are deducted from total stockholders’ equity. Total Stockholders’ Equity Number of Common Shares Outstanding = Book Value per Shareof Common Stock Book Value Market Value

  16. Stock Splits • Companies use stock splits to reduce market price. • Outstanding shares increase, but par value is decreased proportionately. • No journal entry

  17. Increase Decrease No Change Stock Split Assume a corporation has 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.

  18. No voting or dividend rights Contra equity account Treasury Stock Treasury shares are issued shares that have been reacquired by the corporation. When stock is reacquired, the corporation records the treasury stock at cost.

  19. Treasury Stock - Example On May 1, 2007, East, Inc. reacquires 3,000 shares of its common stock at $55 per share. Prepare the journal entry for May 1.

  20. 1,000 shares × $75 = $75,000 1,000 shares × $55 cost = $55,000 Treasury Stock - Example On December 3, 2007, East Corp. reissued 1,000 shares of the stock at $75 per share. (What if reissued at $50 per share?) Prepare the journal entry for December 3.

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