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Chapter 11. STOCKHOLDERS’ EQUITY: Paid-In Capital. Corporations. An entity created by law. Privately, or Closely, Held. Existence is separate from owners. Ownership can be. Has rights and privileges. Publicly Held. Learning Objective.
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Chapter11 STOCKHOLDERS’ EQUITY:Paid-In Capital
Corporations An entity created by law. Privately, or Closely, Held Existence is separate from owners. Ownership can be Has rights and privileges. Publicly Held
Learning Objective To discuss the advantages and disadvantages of organizing a business as a corporation. LO1
Advantages of Incorporation Limited personal liability for stockholders Transferability of ownership Professional management Continuity of existence
Disadvantages of Incorporation Heavy taxation Greater regulation Cost of formation Separation of ownership and management
Learning Objective To distinguish between publicly owned and closely held corporations. LO2
Publicly Owned Corporations Face Different Rules By LAW, publicly owned corporations must: • Prepare financial statements in accordance with GAAP. • Have their financial statement audited by an independent CPA. • Comply with federal securities laws. • Submit financial information for SEC review.
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. The costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes.
Learning Objective To explain the rights of stockholders and the roles of corporate directors and officers. LO3
Voting (in person or by proxy). Proportionate distribution of dividends. Rights Proportionate distribution of assets in a liquidation. Rights of Stockholders Stockholders
Rights of Stockholders Stockholders usually meet once a year. Ultimate control
Rights of Stockholders Stockholder ledgers are often maintained by a stock transfer agent or stock registrar. Stockholders usually meet once a year. Ultimate control
Rights of Stockholders Each unit of ownership is called a share of stock. Stock certificates serve as proof that a stockholder has purchased shares.
Rights of Stockholders When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.
Functions of the Board of Directors Overall responsibility for managing the company. Selected by a vote of the stockholders
Functions of the Corporate Officers Contractual and legal representation Chief Accountant Custodian of funds
Learning Objective To account for paid-in capital and prepare the equity section of a corporate balance sheet. LO4
Authorization and Issuanceof Capital Stock Authorized Shares The maximum number of shares of capital stock that can be sold to the public.
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.
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
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.
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.
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.
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.
Learning Objective To contrast the features of common stock with those of preferred stock. LO5
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.
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.
Stock Preferred as to Dividends Example: Consider the following partial Statement of Stockholders’ Equity. During 2007, the directors declare cash dividends of $5,000. In 2008, the directors declare cash dividends of $42,000.
Gee, I can’t do that with MY preferred stock! Other Features of Preferred Stock I just converted 100 shares of preferred stock into 1,000 shares of common stock and ended up with a higher dividend yield! Some preferred stock is convertible into shares of common stock.
Learning Objective To discuss the factors affecting the market price of preferred stock and common stock. LO6
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.
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.”
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.
Learning Objective To explain the significance of par value, book value, and market value of capital stock. LO7
Preferred stock and preferreddividends in arrears are deductedfrom total stockholders’ equity. Total Stockholders’ Equity Number of Common Shares Outstanding = Book Value per Shareof Common Stock Book Value Market Value
Learning Objective To explain the purpose and effects of a stock split. LO8
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.
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.
Learning Objective To account for treasury stock transactions. LO9
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.
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.
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. Prepare the journal entry for December 3.
