Stockholders’ Equity Presentations for Chapter 12 by Glenn Owen

Key Points The three forms of financing and their relative importance to major U.S. Corporations. Distinctions between debt and equity. Economic consequences associated with the methods used to account for stockholders’ equity. Rights associated with preferred and common stock and the methods used to account for stock issuances. Distinctions among the market value, book value, and par (stated) value of a share of common stock. Treasury stock. Cash dividends and dividend strategies followed by corporations. Stock dividends and stock splits.

Liabilities as a Percentage of Total Assets

Contributed Capital as a Percentage of Total Assets

Retained Earnings as a Percentage of Total Assets

Debt vs. Equity DebtEquity Formal legal contractNo legal contract Fixed maturity dateNo fixed maturity date Fixed periodic paymentsDiscretionary dividends Security in case of defaultResidual asset interest No voice in managementVote - board of directors Interest expenseDividends reduce RE

Distinctions Between Debt and Equity Interested PartyDebtEquity Investors / Creditors Lower investment riskHigher investment risk Management Fixed cash receiptsVariable cash receipts Contractual future cash payments Dividends are discretionary Effects on credit rating Effects of dilution/ takeover Interest is tax deductible Dividends are not tax deductible Accountants/ Auditors Liabilities section of the balance sheet Stockholders’ equity of the balance sheet Income statement effects from debt No income statement effects from equity

Accounting for Stockholders’ Equity Preferred stock Common stock Treasury stock Stock options Dividends

Preferred Stock Authorized, issued, and outstanding preferred shares Preferred dividend payments Cumulative preferred stock Participating preferred stock Debt or equity?

Common Stock Market value Book value Par value Accounting for issuances

Treasury Stock Why companies purchase treasury stock Purchasing treasury stock Reissuing treasury stock for more than acquisition cost Reissuing treasury stock for less than acquisition cost The magnitude of the treasury stock account

Stock Options Stock options as a means of compensation Methods used to account for stock options Are stock options compensation expense?

Dividends Dividend strategy Accounting for cash dividends Stock splits Stock dividends Retained earnings appropriations

Review Problem The company issued 1,000 shares of $1 par value stock for $70 per share. Cash (+A)70,000 Common Stock (+SE)1,000 Additional Paid-In Capital (+SE)69,000 Issued common stock. Cash (+A)70,000 Common Stock (+SE)1,000 Additional Paid-In Capital (+SE)69,000 Issued common stock.

The company issued 500 shares of no par value, $5, cumulative preferred stock for $50 per share. Cash (+A)25,000 Preferred Stock (+SE)25,000 Issued preferred stock. Cash (+A)25,000 Preferred Stock (+SE)25,000 Issued preferred stock. Review Problem

Net income during the year = $2,000 Dividends = $0 No entry Review Problem

Pike Place Corporation Balance Sheet December 31, 2001 Stockholders’ Equity Preferred stock (500 sh., no par value)$25,000 Common stock (1,000 $1 par value)1,000 Additional paid-in capital (C/S)69,000 Retained earnings2,000 Total stockholders’ equity$97,000 Review Problem Note: Dividends in arrears on cumulative preferred stock = $2,500 (500 sh. x $5/sh.)

The company purchased 200 treasury (common) shares for $60 per share. Treasury Stock (-SE)12,000 Cash (-A)12,000 Acquired treasury stock. Treasury Stock (-SE)12,000 Cash (-A)12,000 Acquired treasury stock. Review Problem

Net income for the year = $20,000. Dividends = $6,600: $5,000 for preferred shareholders [$2,500 dividends in arrears and $2,500 (500 sh. x $5/sh.)], and $1,600 for the common stockholders (800 outstanding sh. x $2/sh.). The dividends were declared and paid. Preferred Dividends (-SE)5,000 Common Dividends (-SE)1,600 Dividends Payable (+L)6,600 Declared dividends. Dividends Payable (-L)6,600 Cash (-A)6,600 Paid dividends. Preferred Dividends (-SE)5,000 Common Dividends (-SE)1,600 Dividends Payable (+L)6,600 Declared dividends. Dividends Payable (-L)6,600 Cash (-A)6,600 Paid dividends. Review Problem

Pike Place Corporation Balance Sheet December 31, 2002 Stockholders’ Equity Preferred stock (500 sh, no par value)$25,000 Common stock (1,000 $1 par value)1,000 Additional paid-in capital (C/S)69,000 Retained earnings15,400 Less: Treasury stock (200 sh. x $60/sh.)(12,000) Total stockholders’ equity$98,400 * $2,000 + $20,000 - $6,600 * Review Problem

The company reissued 100 treasury shares for $65 each. Cash (+A)6,500 Treasury Stock (+SE)6,000 Additional Paid-In Capital, T/S (+SE)500 Reissued treasury stock. Cash (+A)6,500 Treasury Stock (+SE)6,000 Additional Paid-In Capital, T/S (+SE)500 Reissued treasury stock. Review Problem

The company reissued 50 treasury shares for $40 each. Cash (+A)2,000 Additional Paid-In Capital, T/S (-SE)500 Retained Earnings (-SE)500 Treasury Stock (+SE)3,000 Reissued treasury stock. Cash (+A)2,000 Additional Paid-In Capital, T/S (-SE)500 Retained Earnings (-SE)500 Treasury Stock (+SE)3,000 Reissued treasury stock. Review Problem

The company declared a 10 percent stock dividend. There were 950 common shares outstanding at the time of the dividend, each with a fair value of $5. Stock Dividend (-SE)475 Common Stock (+SE)95 Additional Paid-In Capital (+SE)380 Declared stock dividend. Stock Dividend (-SE)475 Common Stock (+SE)95 Additional Paid-In Capital (+SE)380 Declared stock dividend. Review Problem

Net income for the year = $35,000 Dividends = $4,690: $2,500 to preferred shareholders and $2,190 to common shareholders (1,095 sh. outstanding x $2/sh.). The dividends were declared but unpaid at year-end. Preferred Dividends (-SE)2,500 Common Dividends (-SE)2,190 Dividends Payable(+L)4,690 Declared dividends. Preferred Dividends (-SE)2,500 Common Dividends (-SE)2,190 Dividends Payable(+L)4,690 Declared dividends. Review Problem

Pike Place Corporation Balance Sheet December 31, 2003 Stockholders’ Equity Preferred stock (500 sh. no par value)$ 25,000 Common stock (1,095 $1 par value)1,095 Review Problem * * $1,000 + $95

Pike Place Corporation Balance Sheet December 31, 2003 Stockholders’ Equity Preferred stock (500 sh. no par value)$ 25,000 Common stock (1,095 $1 par value)1,095 Additional paid-in capital69,380 Review Problem * * $69,000 + $500 - $500 + $380

Pike Place Corporation Balance Sheet December 31, 2003 Stockholders’ Equity Preferred stock (500 sh. no par value)$ 25,000 Common stock (1,095 $1 par value)1,095 Additional paid-in capital69,380 Retained earnings: Restricted$30,000 Unrestricted14,73544,735 Review Problem * $15,400 - $500 - $475 + $35,000 - $4,690

Pike Place Corporation Balance Sheet December 31, 2003 Stockholders’ Equity Preferred stock (500 sh. no par value)$ 25,000 Common stock (1,095 $1 par value)1,095 Additional paid-in capital69,380 Retained earnings: Restricted$30,000 Unrestricted14,73544,735 Less: Treasury stock (3,000) Total stockholders’ equity$137,210 * 50 sh. x $60/sh. or $12,000 - $6,000 - $3,000 * Review Problem