1. Stockholders’ equity
ACCTG 5120
David Plumlee

2. Business Forms What are the most numerous forms of business?
Sole proprietorship and Partnership
Which have the highest dollar value of assets?
Corporations Closely-held (private) Openly-held, publicly traded (listed, over-the-counter).
What hybrid business forms are available?
PCs, LLCs and LLPs, etc. 5 5 5 5 5

3. Common Stock What advantages does a corporation offer?
Limited liability
Unlimited life
What are common stockholders’ legal rights?
Share in profits
Voting
Preemptive
Proportionate share

4. Preferred Stock What is preferred stock?
Preferred means preference in dividends and liquidation
What are some of the features often found on preferred stock?
Cumulative (dividend passed are paid before common)
Participating
Callable (usually redeemed at a premium)
Convertible

5. Authorized, Issued and Outstanding
What is “authorized capital stock?”
The number of shares that can be issued legally as defined in the corporate charter
What is “issued capital stock?”
The number of shares that have been issued and have not been subsequently retired
What is “Outstanding capital stock?”
The number of shares currently trading
authorized > issued > outstanding

6. Par, Stated or Assigned Value
What does par value mean?
The minimum amount that must be contributed under the law to consider the shares fully paid;
generally not related to market value
What does “no par” value mean?
true no par stock has no legal minimum
stated or assigned value basically takes the place of par value

7. Stock Issue What is the basic JE for Common Stk. issued for cash?
Cash XXXX
Common stock XX
Paid in capital in excess XXX

8. Journal Entry to Record Stock Issue
What about stock issued for non-cash consideration?
other asset (or expense) xx
capital stock yy
contributed in excess of par* zz
*or assigned value
xx = most clearly determinable fair value
yy = # shares x par value (or assigned value)
zz= whatever is left over!

9. Lump Sales of Stock Proportional method
fair value available for each class
allocate based on ratio of each fair value to total fair value
Incremental method
fair value not available for at least one class
assign fair value to classes with known fair value first; remainder to those with unknown fair value

10. How are stock subscriptions recorded?
Where does this account show up on the balance sheet?
stock subscriptions receivable xx
capital stock subscribed yy
contributed capital in excess of par* zz
*or assigned value
A contra-stock holders equity account offset against common stock subscribed.

11. Default on Subscriptions
What if the subscriber defaults?
Return all payments made
Issue shares equivalent to # paid in full
All payments made forfeited
Resale under a lien
reimbursed to extent net receipts > original subscription price
not to exceed payments made

12. Treasury Stock What is treasury stock?
Issued stock that a company has ‘bought’ from the market.
Is it an asset of the company?
NO, it reduces both assets and stockholder’s equity--a reduction in capitalization
It provides no future expected economic benefit

13. Accounting for Treas. Stk.
What “rights” does Treasury Stock have?
Same as unissued stock---has no right to VOTE, SHARE in EARNINGS, PREEMPTIVE, or SHARE IN ASSETS
What methods are available for accounting?
Company can choose to either RETIRE stock or hold it as TREASURY stock. Cost method is more common.

14. Cost Method
Repurchase and subsequent sale viewed as one continuous transaction (“one transaction approach”)
What is the general form of the journal entry:
treasury stock xx
cash xx

15. Cost Method (cont.)
Treasury stock account viewed as a “suspense account”
Reported as a deduction from total shareholders’ equity
Can either reissue (sell) or retire the stock

16. Treas. Stk. Example
100 shares of treasury stock purchased for $1400, then
Sold 50 shares for $800
Sold 50 shares for $500
treasury stock $1400 cash

17. Cost Method - Resale When resale price > acquisition cost
Remove acquisition cost from treasury stock account
difference between cost and sale price is credited to “contributed capital from TS transactions”
Cash $800
Treasury stock 700
APIC – Treasury Stock

18. Cost Method - Resale When resale price < acquisition cost Cash $500
Remove acquisition cost from treasury stock account
Then
debit “contributed capital from TS transactions” (same class) if available
remaining amount --debit retained earnings
Cash $500
APIC – T/Stock RE
Treasury stock 700

19. Cost Method - Retirement
Remove acquisition cost from treasury stock
Then remove stock…
reduce capital stock for par
reduce PIC for amount paid in when stock was issued
If you need a debit to balance
APIC from TS transactions (same class)
retained earnings
If you need a credit difference to be allocated
contributed capital from TS transactions

20. Retirement Example
You have 100 shares of $1 par value treasury stock which was purchased for $1400
Retire 50 shares with original issue price of $600
Retire 50 shares with original issue price of $1000

21. Example Entries Com/stk. $ 50 APIC in excess 550 RE 100
Treasury Stock $700
Com/stk. $ 50
APIC in excess
APIC-t/s retirement $ Treasury Stock

22. Presentation of Treasury Stock
Cost method: T/S is subtracted at the bottom of the shareowner equity section at cost. It is included in the “regular” shares above as well. 34 34 34 34 34 34

23. Preferred Stock
Exchange of rights for other rights: Hybrid of debt and ownership characteristics.
Dividends paid are a % of par or $ per share.
Preferred shareholders’ claim on earnings generally precedes common shareholders’
Dividends
Cumulative (arrearages) vs. noncumulative stock
Participating
Fully
Partially
Non 35 35 35 35 35 35

24. Debt or Equity? Debt related Equity Stated return Non-voting
Preference at liquidation
Non-participating
Equity
Return not mandatory
Dividends, not interest expense
Participating

25. Cash Dividend Example
2,000 shares of P/S, $50 par, 8% cumulative, non-participating;
80,000 shares of C/S, $30 par.
Dividends declared:
Year 1, $0;
Year 2, $6,000;
Year 3, $18,000;
Year 4, $75,000. 36 36 36 36 36 36 36 36

26. Cash Dividends How much is the preferred dividend?
P/S dividend = 2,000 shares x $50 par x .08 = $8,000
To P/S Arrearage To C/S
Year 1
Year 2
Year 3
Year 4
$ $8,000 $0
$6, $10, $0
$18, $ $0
$8, $0 $67,000 36 36 36 36 36 36 36 36

27. Cash Dividends
Note: No formal liability arises when a dividend is not declared.
Memo only. Arrearages are paid before any current dividends are paid.
Entries at the date of declaration:
RE $6,000
P/S Div. Payable $6,000 37 37 37 37 37 37 37

28. Convertible Preferred Stock
Convertible P/S. To convert use book value method
P/S, par XX
Paid in Capital, P/S (if any) XX
Discount P/S (if any) XX
C/S, par XX
Paid in Capital, C/S (to balance) XX 39 39 39 39 39 39