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1 Stockholders’ equity ACCTG 5120 David Plumlee. page2 Business Forms Sole proprietorship and Partnership Corporations Closely-held (private) Openly-held,

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Presentation on theme: "1 Stockholders’ equity ACCTG 5120 David Plumlee. page2 Business Forms Sole proprietorship and Partnership Corporations Closely-held (private) Openly-held,"— Presentation transcript:

1 1 Stockholders’ equity ACCTG 5120 David Plumlee

2 page2 Business Forms Sole proprietorship and Partnership Corporations Closely-held (private) Openly-held, publicly traded (listed, over-the-counter). What are the most numerous forms of business? Which have the highest dollar value of assets? What What hybrid business forms are available? PCs, LLCs and LLPs, etc.

3 page3 Common Stock What are common stockholders’ legal rights? Limited liability Unlimited life Share in profits Voting Preemptive Proportionate share What advantages does a corporation offer?

4 page4 Preferred Stock Preferred means preference in dividends and liquidation Cumulative (dividend passed are paid before common) Participating Callable (usually redeemed at a premium) Convertible What is preferred stock? What are some of the features often found on preferred stock?

5 page5 Authorized, Issued and Outstanding authorized > issued > 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

6 page6 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 true no par stock has no legal minimum stated or assigned value basically takes the place of par value What does “no par” value mean?

7 page7 Stock Issue What is the basic JE for Common Stk. issued for cash? CashXXXX Common stock XX Paid in capital in excess XXX

8 page8 Journal Entry to Record Stock Issue 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! What about stock issued for non-cash consideration?

9 page9 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 page10 How are stock subscriptions recorded? stock subscriptions receivablexx capital stock subscribedyy contributed capital in excess of par*zz * or assigned value Where does this account show up on the balance sheet? A contra-stock holders equity account offset against common stock subscribed.

11 page11 Default on Subscriptions 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 What if the subscriber ? What if the subscriber defaults?

12 page12 Treasury Stock What is treasury stock? Issued stock that a company has ‘bought’ from the market. NO, it reduces both assets and stockholder’s equity--a reduction in capitalization It provides no future expected economic benefit Is it an asset of the company?

13 page13 Accounting for Treas. Stk. Same as unissued stock---has no right to VOTE, SHARE in EARNINGS, PREEMPTIVE, or SHARE IN ASSETS What “rights” does Treasury Stock have? 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 page14 Cost Method Repurchase and subsequent sale viewed as one continuous transaction (“one transaction approach”) treasury stockxx cash xx What is the general form of the journal entry:

15 page15 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 page16 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 1400

17 page17 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 stock700 APIC – Treasury Stock 100

18 page18 Cost Method - Resale When resale price < acquisition cost 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 100 RE 100 Treasury stock700

19 page19 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 page20 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 page21 Example Entries Com/stk.$ 50 APIC in excess 550 RE 100 Treasury Stock $700 Com/stk.$ 50 APIC in excess 950 APIC-t/s retirement $ 300 Treasury Stock 700

22 page22 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. Presentation of Treasury Stock

23 page23 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 Preferred Stock

24 page24 Debt or Equity? Debt related Stated return Non-voting Preference at liquidation Non-participating Equity Return not mandatory Dividends, not interest expense Participating

25 page25 36 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.

26 page26 36 Cash Dividends To P/SArrearage To C/S Year 1 Year 2 Year 3 Year 4 How much is the preferred dividend? P/S dividend = 2,000 shares x $50 par x.08 = $8,000 $0 $8,000 $0 $6,000 $10,000 $0 $18,000 $0 $0 $8,000 $0 $67,000

27 page27 37 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: Entries at the date of declaration: Cash Dividends RE$6,000 P/S Div. Payable $6,000

28 page28 Convertible P/S. To convert use book value method Convertible Preferred Stock P/S, parXX Paid in Capital, P/S (if any)XX Discount P/S (if any)XX C/S, parXX Paid in Capital, C/S (to balance)XX


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