Presentation on theme: "Equity Financing - Learning Objectives"— Presentation transcript:
1 Equity Financing - Learning Objectives 1. Identify the rights associated with ownership of common and preferred stock.2. Record the issuance of stock for cash, on a subscription basis, and in exchange for noncash assets or for services.3. Use both the cost and par value methods to account for stock repurchases.Account for the issuance of stock rights and stock warrants.Explain the difference between the intrinsic value and fair value methods, and use both in accounting for a fixed stock option plan.6. Distinguish between stock conversions that require a reduction in retained earnings and those that do not.7. List the factors that impact the retained earnings balance.
2 Learning Objectives8. Properly record cash dividends, property dividends, small and large stock dividends, and stock splits.9. Explain the background of unrealized gains and losses recorded as direct equity adjustments, and list the major types of equity reserves founds in foreign balance sheets.10. Prepare a statement of changes in stockholders’ equity.
3 Common StockThe owners of common stock of a corporation can be thought of as the true owners of the business.Unless restricted by terms of the articles of incorporation, the common stockholder has certain basic rights.
4 Common StockThe right to vote in the election of directors and in the determination of certain corporate polices such as the management compensation plan or major corporate acquisitions.The right to maintain one’s proportional interest in the corporation through purchase of additional common stock if and when it is issued.
5 Common StockRex Corporation issued 5,000 shares of common stock with a par value of $1 on April 1, 2005, for $30,000 cash.Apr. 1 Cash 30,000Common Stock 5,000Additional Paid-InCapital 25,000at Par Value
6 Preferred Stock The title “preferred” stock is somewhat misleading. Preferred isn’t better; it’s different.
7 The rights of ownership given up by preferred stockholders: Voting: In most cases, preferred stockholders are not allowed to vote for the board of directors.Sharing in success: The cash dividends received by preferred stockholders are usually fixed in amount. If the company does exceptionally well, preferred stockholders do not get to share in the success.
8 The protection enjoyed by preferred stockholders is: Cash dividend preference: Preferred stockholders are entitled to receive their full cash dividend before any cash dividend can be issued to common stockholders.Liquidation preference: If the company goes bankrupt, preferred stockholders are entitled to have their investment repaid in full, before common stockholders receive anything.
9 Preferred StockCumulativeHas the right to receive accumulated dividends before any dividends may be paid to common stockholders.Non-CumulativeHas no right to “passed”dividends.ParticipatingHas claim to a portion ofcommon dividends afterreceiving preferred dividends.
10 Preferred Stock Convertible Callable Redeemable Permits the holder to exchangepreferred stock for common stock.CallablePermits the issuing companyto redeem the preferred stock.RedeemablePermits the holder to redeem thestock—usually with somerestrictions.
11 Preferred StockDividends on cumulative preferred stock that are passed are referred to as dividends in arrears.And… dividends are not a liability until declared by the board of directors.
12 Preferred StockParticipating preferred stock issues provide for additional dividends to be paid to preferred stockholders after dividends of a specified amount are paid to common stockholders.Callable preferred stock is preferred stock that is redeemable at the option of the corporation.Redeemable preferred stock is preferred stock that is redeemable at the option of the stockholder.
13 Capital Stock Issued for Cash Goode Corporation issued 4,000 shares of $1 par common stock on April 1, 2005, for $45,000 cash.Apr. 1 Cash 45,000Common Stock 4,000Paid-In Capital inExcess of Par 41,000
14 Capital Stock Issued for Cash On April 1, 2005, Goode Corporation issued 4,000 shares of no-par common stock without a stated value for $45,000 cash.Apr. 1 Cash 45,000Common Stock 45,000
15 Capital Stock Sold on Subscription On November 1, 2005, a firm received subscriptions for 5,000 shares of $1 par common at $12.50 per share with 50% down, balance due in 60 days.Nov. 1 Common Stock Subscription Receivable 62,500Common Stock Subscribed 5,000Paid-In Capital in Excessof Par 57,500
16 Capital Stock Sold on Subscription On November 1, 2005, a firm received subscriptions for 5,000 shares of $1 par common at $12.50 per share with 50% down, balance due in 60 days.Nov. 1 Cash 31,250Common StockSubscription Receivable 31,250
17 Capital Stock Sold on Subscription On December 9, received balance due on one-half of subscribers and issued stock to fully paid subscribers, 2,500 shares.Dec. 9 Cash 15,625Common Stock Subscription Receivable 15,6259 Common stock Subscribed 2,500Common Stock 2,500
18 Stock Issued for Consideration Other Than Cash AC Company issues 200 shares of $0.50 par value common stock in return for land. The company’s stock is currently selling for $50 per share.Dec. 5 Land 10,000Common Stock Paid-In Capital in Excessof Par 9,900
19 Stock Issued for Consideration Other Than Cash Assume that the land has a readily determinable market price of $12,000, but AC Company’s common stock has no established fair market value.Dec. 5 Land 12,000Common Stock Paid-In Capital in Excessof Par 11,900
20 Companies acquired their own stock to… Stock RepurchasesCompanies acquired their own stock to…Provide shares for incentive compensation and employee savings plans.2. Obtain shares needed to satisfy requests by holders of convertible securities.Reduce the amount of equity relative to the amount of debt.Invest excess cash temporarily.Remove some shares from the open market in order to protect against a hostile takeover.6. Improve per-share earnings by reducing the number of shares outstanding and returning inefficiently used assets to shareholders.7. Display confidence that the stock is currently undervalued by the market.
21 Treasury StockStock issued by a corporation but subsequently reacquired by and held in the name of the corporation and held for possible future reissuance or retirement.Reported as a contra-equity account, not as an asset.Does not create a gain or loss on reacquisition, reissuance, or retirement.May decrease Retained Earnings, but cannot increase it.There are two methods to account for treasury stock transactions: (1) Cost method and (2) Par value method
22 Issued 10,000, $1 par value shares at $15 per share Treasury StockIssued 10,000, $1 par value shares at $15 per shareCost MethodCash 150,000Common Stock. 10,000Paid-In Capital inExcess of Par ,000Par Value MethodCash 150,000Common Stock. 10,000Paid-In Capital inExcess of Par ,000
23 Reacquired 1,000 shares at $40 per share. Treasury StockReacquired 1,000 shares at $40 per share.Cost MethodTreasury Stock 40,000Cash 40,000Par Value MethodTreasury Stock 1,000Paid-In Capital in Excess of Par 14,000Retained Earnings 25,000Cash 40,000The balance
24 Sold 200 shares of treasury stock at $50 per share. Cost MethodCash 10,000Treasury Stock 8,000Paid-In Capital fromTreasury Stock 2,000Par Value MethodCash 10,000Treasury Stock 200Paid-In Capital in Excessof Par 9,800
25 Sold 500 shares of treasury stock at $34 per share. Cost MethodCash 17,000Paid-In Capital from TreasuryStock 2,000Retained Earnings 1,000Treasury Stock 20,000Par Value MethodCash 17,000Treasury Stock 500Paid-In Capital in Excessof Par 16,500
26 Retired remaining 300 shares of treasury stock. Cost MethodCommon Stock 300Paid-In Capital in Excess of Par 4,200Retained Earnings 7,500Treasury Stock 12,000Par Value MethodCommon Stock 300Treasury Stock 300
27 Stock Rights, Warrants, and Options Stock rights—Issued to existing shareholders to permit them to maintain their proportionate ownership interests when new shares are to be issued.Stock warrants—Sold by the corporation for cash, generally in conjunction with the issuance of another security.Stock options—Granted to officers or employees, usually as part of a compensation plan.
28 Stock WarrantsStewart Co. sells 1,000 shares of $50 par preferred stock for $58 per share. Stewart Co. gives the purchaser detachable warrants enabling the holders to subscribe to 1,000 shares of $2 par common stock for $25 per share. Immediately following the issuance of the stock, the warrants are selling for $3, and the fair market value of a preferred share without the warrant attached is $57.
29 Stock Warrants = $3 $57 + $3 Value assigned to warrants Total issue priceMarket value of warrantsx=Market value of security without warrantsMarket value of warrants+$57 + $3Value assigned to warrants=$58,000x$3= $2,900
30 Stock WarrantsThe entry on Stewart’s book to record the sale of the preferred stock with detachable warrants is:Cash 58,000Preferred Stock, $50 par 50,000 Paid-In Capital in Excess ofPar--Preferred Stock 5,100Common Stock Warrants 2,900
31 Stock WarrantsIf the warrants are exercised, the entry to record the issuance of common stock is:Common Stock Warrants 2,900Cash 25,000Common Stock, $2 par 2,000 Paid-In Capital in Excess ofPar—Common Stock 25,900
32 Stock WarrantsIf these warrants were allowed to expired, what entry would be required?Common Stock Warrants 2,900Paid-In Capital fromExpired Warrants 2,900
33 Stock-Based Compensation On January 1, 2003, the board of directors of Neff Company authorize the grant of 10,000 stock options. Each option permits the purchase of one share of Neff common stock at $50 per share. The options vest or becomes exercisable on Jan 1, 2006.
34 Stock-Based Compensation The company estimates a grant date value of $10 for each of the employee stock options. The total fair value of the options granted is $100,000. Compensation cost is allocated over three years from January 1, 2003 (the grant date) to January 1, 2006 (the vesting date).On January 1, 2003, the board of directors of Neff Company authorize the grant of 10,000 stock options. Each option permits the purchase of one share of Neff common stock at $50 per share.
35 Stock-Based Compensation (Fair Value Method)* Dec. 31 Compensation Expense 33,333Paid-In Capital fromStock Options 33,3332003$100,000 ÷ 3Similar entries would be made in 2004 and 2005.* There is also the Intrinsic Value Method, in which case these entries would not be made.
36 * Under the intrinsic value method, the entry would have been: Stock-Based Compensation (Fair Value Method)*On December 31, 2006, all 10,000 of the options are exercised to purchase Neff’s no-par common stock.Dec. 31 Cash 500,000Paid-In Capital from StockOptions 100,000Common Stock (no par) 600,0002006* Under the intrinsic value method, the entry would have been:Dec. 31 Cash 500,000Common Stock (no par) ,0002006
37 * The entry would have been the same under the Intrinsic Value Method. Stock-Based Compensation (Fair Value Method)*If the options had been allowed to expired, the following entry would have been necessary on December 31, 2006:Dec. 31 Paid-In Capital from StockOptions 100,000Paid-In Capital fromExpired Options 100,0002006* The entry would have been the same under the Intrinsic Value Method.
38 Stock Conversions Case 1 On December 31, 2005, 1,000 shares of preferred stock (par $50 and original selling price of $60) are exchanged for 4,000 shares of common stock (par $1)Dec. 31 Preferred Stock, $50 par 50,000Paid-In Capital in Excess ofPar—Preferred 10,000Common Stock 4,000Paid-In Capital in Excessof Par—Common 56,0002005
39 Stock Conversions Case 2 On December 31, 2005, 1,000 shares of preferred stock (par $50 and original selling price of $60) are exchanged for 4,000 shares of common stock (par $20)Dec. 31 Preferred Stock, $50 par 50,000Paid-In Capital in Excess ofPar—Preferred 10,000Retained Earnings 20,000Common Stock 80,0002005
40 Accounting for Dividends Declaration date: The date the corporation’s board of directors formally declares a dividend will be paid.Date of record: The date on which stockholders of record are identified as those who will receive a dividend.Date of payment: The date when the dividend is actually distributed to stockholders.
41 Cash DividendABC Corporation declares a $100,000 dividend; the following journal entries should be made:Declaration DateDividends (or Retained Earnings) 100,000Dividends Payable 100,000Payment DateDividends Payable 100,000Cash 100,000
42 Property DividendIt is a distribution to stockholders that is payable in some asset other than cash.
43 Property DividendBigley Corporation owns 100,000 shares in Tri-State Oil Co, carrying value $2,700,000, current market value $3,000,000, or $30 per share. There are 1,000,000 shares of Bigley stock outstanding. A dividend of 1/10 of a share of Tri-State Oil Co. is declared for each share of Bigley stock outstanding.
44 Declaration of Dividend Property DividendDeclaration of DividendDividend (or Retained Earnings) 3,000,000Property Dividends Payable 2,700,000Gain on Distribution of PropertyDividend 300,000Payment of DividendProperty Dividends Payable 2,700,000Investment in Tri-State Oil Co. 2,700,000
45 Stock Dividends Small Less than 20-25% of the outstanding shares. Debit Retained Earnings for the (post) MARKET value of the shares.LargeGreater than 20-25% of the shares outstanding.Debit Retained Earnings for the PAR value of the shares.
46 Example 1: Stock Dividend Assume the following about Gean, Inc.:Common stock ($2 par, 10,000shares outstanding) $20,000Additional paid-in capital $24,200Retained earnings $12,500Stock dividend declared 1,500 sharesMarket price of stock $10/shareIs this a large or small stock dividend?..Because 1,500 shares represent 15% of the outstanding stock, it is a small stock dividend.
47 Example 1: Stock Dividend Declaration DateRetained Earnings 15,000Stock Dividends Distributable 3,000Paid-In Capital in Excess of Par 12,000Issuance DateStock Dividends Distributable 3,000Common Stock 3,000
48 Example 2: Stock Dividend Assume the following about Gimli’s Corp.:Common Stock ($5 par, 20,000shares outstanding) $100,000Additional Paid-In Capital $100,000Retained Earnings $52,000Stock Dividend Declared 10,000 sharesMarket Price of Stock $20/share50% = large dividendIs this a large or small stock dividend?
50 Unrealized Gains and Losses on Available-For-Sale Securities Available-for-sale securities are those that were not purchased with the immediate intention to resell……but the company also doesn’t necessarily plan to hold these securities forever.
51 The impact of other income-related equity items Kendell had net income of $1,350. Other items that impacted net income are:Unrealized gain (loss) on available-for-sale securities $100(Increase) Decrease in minimumpension liability (60 )Unrealized gain (loss) on derivativeinstruments (20 )Foreign currency translationadjustment, increase (decrease) instockholders’ equity 300
52 Unrealized Gains and Losses on Available-For-Sale Securities Net income $1,350Other comprehensive income:Unrealized gain on available-for-sale securities 60Increase in minimum pension liability (36 )Unrealized loss on derivativeinstruments (12 )Foreign current transactionadjustmentsComprehensive income $1,542
53 Liquidating DividendA liquidating dividend is a distribution representing a return to stockholders of a portion of contributed capital.See page 672 of text.
54 Disclosures Related to the Equity Section Capital stock may be:Authorized but unissued.Subscribed for and held for issuance pending receipt of cash for the full amount of the subscription price.Outstanding in the hands of stockholders.Reacquired and held by the corporation for subsequent reissuance.Canceled by appropriate corporate action.
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