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Stockholder’s Equity.  Why are we studying Stockholders’ Equity Owners Investments Residual Equity Required Reconciliation Statement.

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Presentation on theme: "Stockholder’s Equity.  Why are we studying Stockholders’ Equity Owners Investments Residual Equity Required Reconciliation Statement."— Presentation transcript:

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 Dividends in arrears  Participating preferred  Convertible preferred Participation limited  Callable preferred Call premium

6 Convertible Preferred Assume 500s of $100 par sold at $120s 1Cash 500 x $12060,000 Preferred Stock 500 x 10050,000 Paid in Capital Preferred stock10,000 Assume each preferred=4 shares of CS Preferred Stock 500 x 10050,000 Paid in Capital Preferred stock10,000 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 500 x 10050,000 Paid in Capital Preferred stock10,000 Retained Earnings ( 70, ,000) 10,000 Common Stock 7 x 500 x $2070,000 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$121121,000 Preferred Stock, 1000 x ,000 Paid in capital preferred 115, ,00015,192 Common Stock warrants 5,808 Assume all warrants are exercised Cash 1000 x 4040,000 Common Stock warrants5,808 Common Stock 1000 x 1010,000 Paid in capital35.808

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 Stock 1Cash72,000 Common Stock 6000 x $1060,000 Paid in Capital12,000 2Treasury Stock 1,000s x $1313,000 Cash13,000 3Cash 600 x $159,000 Treasury Stock 600 x 137,800 Paid in capital – Treasury Stock1,200

13 Purchase and sale of treasury Stock 4Cash 200 x $81600 Paid in Capital –Treasury Stock 1000 Treasury Stock 200 x $ Analysis of PIC Treasury stock:DebitCredit Balance is now 200 credit

14 Purchase and sale of treasury Stock 5Cash 100 x $101,000 Paid in capital Treasury stock 200 Retained Earnings 100 Treasury Stock 100 x $131,300

15 Retirement of Treasury Stock Common Stock 100s x $101,000 Paid in Capital Common Stock ($12,000/6,000s) X 100 shares 200 Retained Earnings 100 Treasury Stock 100 x $131,300 $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 6Treasury Stock 2000 x $1326,000 Paid In capital Treasury Stock (NO) 0 Litigation expense settlement 2000 x $13 26,000 Cash 2,000 x 2652,000

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