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STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL

STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL. Chapter 11. Privately, or Closely, Held. Ownership can be . Publicly Held. Corporations. An entity created by law. Existence is separate from owners. Has rights and privileges. Advantages of Incorporation.

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STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL

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  1. STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Chapter11

  2. Privately, or Closely, Held Ownership can be Publicly Held Corporations An entity created by law. Existence is separate from owners. Has rights and privileges.

  3. Advantages of Incorporation Limited personal liability for stockholders. Transferability of ownership. Professional management. Continuity of existence.

  4. Disadvantages of Incorporation Heavy taxation. Greater regulation. Cost of formation. Separation of ownership and management.

  5. Publicly Owned Corporations Face Different Rules Corporations are requiredby law to: • Prepare financial statements in accordance with GAAP. • Have their financial statements audited by an independent CPA. • Comply with federal securities laws. • Submit financial information for SEC review.

  6. Formation of a Corporation • Each corporation is formed according to the laws of the state where it is located. • The application for corporate status is called the Articles of Incorporation. Costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes.

  7. Voting (in person or by proxy). • Proportionate distribution ofdividends. Rights • Proportionate distribution of assets in a liquidation. Rights of Stockholders Stockholders

  8. Functions of the Corporate Officers Contractual and legal representation Chief Accountant Custodian of funds

  9. Paid-In Capital of a Corporation

  10. Authorization and Issuance of 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

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

  12. 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.

  13. Issuance of Par Value Stock Record: The cash received. The number of shares issued × the par value per share in the Common Stockaccount. The remainder is assigned to Contributed Capital in Excess of Par. Prepare the journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 per share which occurred on September 1, 2003.

  14. Issuance of Par Value Stock The journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 per share on September 1, 2003, should include a credit to common stock for the par value of the shares issued.

  15. Issuance of Par Value Stock

  16. 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 Stock Other Features Include: Cumulative dividend rights. Usually callable by the company. Normally has no voting rights.

  17. 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.

  18. Stock Preferred as to Dividends Example: Consider the following partial Statement of Stockholders’ Equity. During 2002, the directors declare cash dividends of $5,000. In year 2003, the directors declare cash dividends of $42,000.

  19. Stock Preferred as to Dividends Example: Consider the following partial Statement of Stockholders’ Equity. During 2002, the directors declare cash dividends of $5,000. In year 2003, the directors declare cash dividends of $42,000.

  20. Stock Issued for Assets Other Than Cash Companies sometimes issue stock in exchange for non-cash assets. Since no cash is received, record the transaction at the market value of the goods or services received.

  21. Ice Cream Parlor Banana Splits On Sale Now Stock Splits • Companies use stock splits to reduce market price. • Outstanding shares increase, but par value is decreased proportionately.

  22. Increase Decrease No Change Stock Splits - Example Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.

  23. 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.

  24. Treasury Stock - Example On May 1, 2003, East Corp. reacquired 3,000 shares of its common stock at $55 per share. Prepare the journal entry for May 1.

  25. 1,000 shares × $75 = $75,000 1,000 shares × $55 cost = $55,000 Treasury Stock - Example On December 3, 2003, East Corp. reissued 1,000 shares of the stock at $75 per share. Prepare the journal entry for December 3.

  26. Stockholders’ Equity - Presentation

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