Stocks and bonds

1. Stocks and bonds

2. Common stock

3. If a corporation issues only one kind of stock it is common stock • It does not give the stockholder any special preferences other than the right to vote • It only pays dividends after preferred stockholders are paid • The value printed on the share is called par value

4. Preferred stock

5. Preferred stockholders generally receive dividends from the corporation • They usually do not have voting rights and cannot influence when and how much is paid in dividends • Dividends are often stated as a percentage of par value or as an amount per share

6. Stock subscriptions

7. Corporations frequently contract with investors to sell capital stock with payment to be received at a later date • When cash has not changed hands, the journal transaction is to debit Subscriptions Receivable and credit Stock Subscribed

8. Declaring dividends

9. Corporate earnings distributed to stockholders are called dividends • Action by a board of directors to distribute corporate earnings to stockholders is called declaring a dividend • The board determines when and what amount of the retained earnings will be distributed

10. Preferred stock dividends are often calculated based on a percentage of par value (ie. 1000 shares of 8%, $100 par-value stock = $8000) • Any dividends left over after preferred stockholders are paid go to common stockholders • When dividends are declared, the Dividends account is debited and Dividends Payable is credited. • When dividends are paid, Dividends Payable is debited and cash is credited

11. Treasury stock

12. Stock that is reacquired by a corporation is called Treasury stock (it could be used to give employees bonus payments, to use as stock dividends, or to regain control of the company) • When a corporation buys treasury stock, it reduces the number of shares of capital stock outstanding and the shares owned by the company are no longer considered capital stock

13. Treasury stock is a contra account to capital stock and has a normal debit balance (we don’t touch the capital stock account when purchasing treasury stock) • The corporation records treasury stock at the price paid regardless of the par or stated value (par value is NOT taken into consideration when journalizing the purchase of Treasury Stock)

14. If the corporation gives (or sells) the stock to a stockholder, the shares cease to be treasury stock and they become outstanding capital stock • To journalize the sale of Treasury Stock, debit Cash and credit Treasury Stock

15. If Treasury stock is sold at a higher or lower price than it was purchased, the “Paid-in-Capital from Sale of Treasury Stock” account will be debited or credited depending on whether the company made or lost money – there is no Discount account for Treasury stock

16. Corporate bonds

17. Bond: A printed, long term promise to pay a specified amount on a specified date and to pay interest at stated intervals • All bonds representing the total amount of the loan are called a bond issue • Corporations usually sell an entire bond issue to a securities dealer who sells individual bonds to the public

18. Bond Sinking Fund: An amount set aside to pay a bond issue when due • Example: ABC Corporation issued a five-year, 12% $1,000 par value bond issue for $250,000 • ABC spreads the $250,000 amount over 5 years and sets aside the money owed by increasing the bond • sinking fund by $50,000 each year