1. Stockholder’s Equity

2. Why are we studying Stockholders’ Equity
Owners Investments
Residual Equity
Required Reconciliation Statement

3. 2. Components of Shareholders Equity
Capital Stock
Preferred Stock
Additional Paid in Capital
Treasury Stock
Other changes in Assets Accounts
Investments
Pensions
Foreign Currency

4. Preferred Stock 1. preferred as to dividends
2. preference as to assets upon liquidation
3. convertible into common stock
4. callable at option of corporation
5. non-voting

5. Preferred Stock Cumulative preferred Participating preferred
Dividends in arrears
Participating preferred
Convertible preferred
Participation limited
Callable preferred
Call premium

6. Convertible Preferred
Assume 500s of $100 par sold at $120s 1
Cash 500 x $120
60,000
Preferred Stock x 100
50,000
Paid in Capital Preferred stock
10,000
Assume each preferred=4 shares of CS
Common Stock 4 x 500 x $20
40,000
Paid in Capital PS conversion
20,000
Book value Method

7. Preferred Stock Conversion
Assume each preferred=7 shares of CS
Preferred Stock x 100
50,000
Paid in Capital Preferred stock
10,000
Retained Earnings ( 70,000-60,000)
Common Stock 7 x 500 x $20
70,000
Book value Method

8. Preferred Stock With Warrants APB 14
PS$ = FMV-PS/ (FMV-PS+FMV-warrants) x proceeds
W$ = FMV-Warrants/ (FMV-PS+FMV-warrants) x proceeds
PS = 115,192 = 119,000/(119,000+6,000)x121,000
Warrants = 5,808 = 6,000/(119,000+6,000)x121,000

9. Preferred Stock with warrants
Cash 1000 x$121
121,000
Preferred Stock , x 100
100,000
Paid in capital preferred
115, ,000
15,192
Common Stock warrants
5,808
Assume all warrants are exercised
Cash 1000 x 40
40,000
Common Stock 1000 x 10
10,000
Paid in capital
35.808

10. 4. Treasury Stock Why? Non taxable to shareholders
Increase Earnings per Share
Increase return on Equity
To provide shares for compensation agreements
To thwart take over attempts
To make a market for the stock

11. Treasury Stock Treasury stock is not an asset
Treasury stock is issued but not outstanding
Accounting for Purchase
Cost method
Par value method (seldom used)

12. Purchase and sale of treasury Stock1
Cash
72,000
Common Stock 6000 x $10
60,000
Paid in Capital
12,000 2
Treasury Stock 1,000s x $13
13,000 3
Cash 600 x $15
9,000
Treasury Stock 600 x 13
7,800
Paid in capital – Treasury Stock
1,200

13. Purchase and sale of treasury Stock4
Cash 200 x $8
1600
Paid in Capital –Treasury Stock
1000
Treasury Stock 200 x $13
2600
Analysis of PIC Treasury stock:
Debit
Credit 1
1200 2
Balance is now 200 credit

14. Purchase and sale of treasury Stock5
Cash 100 x $10
1,000
Paid in capital Treasury stock
200
Retained Earnings
100
Treasury Stock 100 x $13
1,300

15. Retirement of Treasury Stock
Common Stock 100s x $10
1,000
Paid in Capital Common Stock
($12,000/6,000s) X 100 shares
200
Retained Earnings
100
Treasury Stock x $13
1,300
$12,000 is remaining par value
6,000s remaining shares

16. Green Mail Black Mail?
When Common stock is re-acquired at a price substantially greater than the market value
Thwart takeover attempt
Seller may agree to
Restrict purchases
Abandon acquisition

17. Green Mail 6 Treasury Stock 2000 x $13 26,000
Paid In capital Treasury Stock (NO)
Litigation expense settlement 2000 x $13
Cash 2,000 x 26
52,000