Intermediate Financial Accounting Shareholders' Equity -Contributed Capital

Objectives of this Chapter I. Basic Characteristics of a corporation II. Accounting for issuance of common stock and preferred stock: Stock subscription Package sale of stock Characteristics of preferred stock Convertible P.S, callable P.S, redeemable P.S, P.S. with stock warrants. Stockholders' Equity(1)-Contributed Capital

Objectives of this Chapter (contd.) III. Accounting for Treasury stock: Cost method Par value method Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital I. Corporation A form of business entity. It is established as a legal entity separated from its owners. It has all rights as a person has (i.e., can sue or be sued, can own property, sign contract) except for voting and holding public office. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Types of Corporations 1. Private corporations. 2. Public corporations. 3. Domestic corporations. 4. Foreign corporations. Stockholders' Equity(1)-Contributed Capital

Types of Corporations 1. Private Corporations Private corporations: privately owned including a. nonstock companies: companies do not issue stock and do not operate for profit (i.e., universities, hospitals churches). b. stock companies: companies issue shares of stock to stockholders and operate for profits. Stockholders' Equity(1)-Contributed Capital

Types of Corporations 1. Private Corporations (contd.) Stock companies include: (1)Publicly-traded corporations: stock is available to public on a stock exchange. (2)Privately-held corporations: do not allow sale of stock to the general public and stock is held by a few stockholders. Stockholders' Equity(1)-Contributed Capital

Types of Corporations 2. Public Corporations Public corporations: owned by governmental units such as Federal Deposit Insurance Corporation, Pension Benefit Guaranty Corporation. Stockholders' Equity(1)-Contributed Capital

Types of Corporations 3. Domestic Corporations Domestic corporations: as viewed by an individual state, are those companies incorporated in that state. If viewed by the federal government, a domestic corporation is one that is incorporated in the U.S. Stockholders' Equity(1)-Contributed Capital

Types of Corporations 4. Foreign Corporations Foreign corporations: as viewed by an individual state are those operating in the state but incorporated in another state. If viewed by federal government, a foreign corporation is one incorporated in another country. Stockholders' Equity(1)-Contributed Capital

Procedures of Forming a Corporation 1. Apply for a charter by submitting articles of incorporation to the appropriate state officials. 2. If the application is approved, the state will issue a charter. Stockholders' Equity(1)-Contributed Capital

Procedures of Forming a Corporation (contd.) 3. A stockholders' meeting would be held at which the initial issuance of capital stock is made to the incorporators. 4. A board of directors is elected, a set of rules regulating the operation is established, and the board appoints the executive officers. Stockholders' Equity(1)-Contributed Capital

Procedures of Forming a Corporation (contd.) 4. Ready for operations. 5. Issuance of stock to public to raise more capital (IPO) Note: Regardless of the number of states in which a corporation operates, it is incorporated in one state. Stockholders' Equity(1)-Contributed Capital

Organization of a Corporation a. Stockholders (owners). b. Board of Directors (elected by stockholders) Decide major operation principles. Arrange major loans, authorize contract, determine the salaries of executives. Appoint officers. Stockholders' Equity(1)-Contributed Capital

Organization of a Corporation (contd.) c. Management: Appointed by the board of directors. Responsible for day-to-day operations and the preparations of the financial statements. Stockholders' Equity(1)-Contributed Capital

Advantages of a Corporation 1. Separated legal entity from its owners: it can buy, sell and own properties. 2. Limited liability for stockholders. 3. Continuous existence. 4. Ease of transfer of ownership. Stockholders' Equity(1)-Contributed Capital

Advantages of a Corporation (cont.) 5. Ease of capital generation. 6. Centralized authority and responsibility-- to the President, not to numerous owners. 7. Professional management. Stockholders' Equity(1)-Contributed Capital

Disadvantages of a Corporation 1. Government regulations. 2. Corporation taxes (double taxation). 3. Separation of ownership and management: principal & agent conflicts. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity Section of a Corporation Balance Sheet State. Microsfot Corporation Balance Sheets (6/30) in millions 1999 2000 Stockholders' equity: Convertible preferred stock- shares authorized 12,000; shares issued and outstanding 13 and 0 980 0 Common stock and paid-in capital -shares authorized 12,000; shares issued and outstanding 5,109 and 5,283 13,844 23,195 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity Section (cont.) Microsfot Corporation Balance Sheets (6/30) (contd.) in millions 1999 2000 Stockholders' equity(contd.) : Retained earnings, including other comprehensive income of $1,787 and $1,527 13,614 18,713 Total stockholders' equity 28,438 41,368 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity Statements Microsfot Corporation Stockholders' Equity Statements (year ended 6/30) in millions 1999 2000 Convertible preferred stock Balance, beginning of year 980 980 Conversion of pref.to com. - (980) Balance, end of year 980 0 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity Statements (contd.) Microsfot Corporation Stockholders' Equity Statements (year ended 6/30) in millions 1999 2000 Com. stock and paid-in capital Balance, beginning of year 8,025 13,844 Common stock issued 2,338 3,554 Common stock repurchased (64) (210) Structured repurch. price differ. (328) - Proceeds from sale of put warrants 766 472 Stock option income tax benefits 3,107 5,535 Balance, end of year 13,844 23,195 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity Statements(contd.) Microsfot Corporation Stockholders' Equity Statements (year ended 6/30) in millions 1999 2000 Retained earnings Balance, beginning of years 7,622 13,614 Net income 7,785 9,421 Other comprehensive income: Net unrealized invest. gains/losses 1,052 (283) Translation adjustment 69 23 Comprehensive income 8,906 9,161 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity Statements(contd.) Microsfot Corporation Stockholders' Equity Statements (year ended 6/30) in millions 1999 2000 Retained earnings (contd.) Comprehensive income 8,906 9,161 Preferred stock dividends (28) (13) Immaterial pooling of interests - 97 Common stock repurchased (2,631) (4,686) Balance, end of year 13,614 18,173 Total stockholders' equity $28,438 $41,368 Stockholders' Equity(1)-Contributed Capital

Terminologies Related to Stockholders' Equity (contd.) 1. Common Stock: a class of stock with rights such as: (a)To share proportionately in profits and losses; (b)To share proportionately in management; Note: more than one class of shares can be authorized by the articles of incorporation and each class would have specific rights (i.e., voting, dividends, etc.) specified in the articles. Stockholders' Equity(1)-Contributed Capital

Terminologies Related to Stockholders' Equity (contd.) 1. Common Stock: a class of stock with some rights (contd.): (c) To share proportionately in corporate assets in liquidation; (d) To share proportionately in any new issuance of stock of the same class (the preemptive right). Stockholders' Equity(1)-Contributed Capital

Terminologies Related to Stockholders' Equity (contd.) 2. Preferred Stock: a class of stock with rights such as: (a) Dividends (with a higher priority than that of common stock); (b) Sharing assets in liquidation (with a higher priority than that of common stock). Stockholders' Equity(1)-Contributed Capital

Terminologies Related to Stockholders' Equity (contd.) 3. Par Value Stock: Capital stock with a nominal dollar amount printed on the stock certificate. In the past, some states designate the par value of issued stock as the legal capital. Note: The concept of par value and legal capital has been entirely eliminated by Model Business Corporation Act. Stockholders' Equity(1)-Contributed Capital

Terminologies Related to Stockholders' Equity (contd.) 4. No-Par Stock: capital stock without a Par Value. Many states allow the board of directors to establish a stated value, in general, is the legal capital. Note: due to the elimination of par value and legal capital concept by Model Business Corporation Act, many companies issue no-par shares these days. Stockholders' Equity(1)-Contributed Capital

Terminologies Related to Stockholders' Equity (contd.) 5. Stated Value: a nominal value assigned to no-par stock by board of directors. 6. Additional Paid-in Capital (or Paid-in Capital in Excess of Par Value or Premium on Capital Stock): The excess of the issuance price over the par value or the stated value. Stockholders' Equity(1)-Contributed Capital

Terminologies Related to Stockholders' Equity 7. Contributed Capital: the portion of stockholders' equity contributed by investors through the issuance of stock including common stock par value, preferred stock par value and the paid-in capital in excess of the par/stated value of both stocks. 8. Legal Capital (eliminated by Model Business Corporation Act): the amount of contributed capital not available for dividends (usually equal to the par or stated value of outstanding stock). Stockholders' Equity(1)-Contributed Capital

Terminologies Related to Stockholders' Equity This concept of par value and legal capital has been eliminated entirely by Model Business Corporation Act which is adopted by many states. Thus, many companies issue no-par value shares now days. However, there are companies which issued par value stock prior to the changes in the state law and continued to issue previously authorized par value shares. Stockholders' Equity(1)-Contributed Capital

Terminologies Related to Stockholders' Equity (contd.) 9. Outstanding Stock: issued stock held by investors (not being repurchased back). 10. Treasury Stock: issued stock repurchased by the corporation and held by the corporation, not retired. 11. Authorized Capital: the number of shares of stock that the corporation can issue as stated in its corporate Charter. Stockholders' Equity(1)-Contributed Capital

Issuance for Cash II. Accounting for the Issuance of Stock Stock issued for cash Example 1: (Common Stock with Par) Issued 1,000 shares of $10 par common stock for $50 per share. Journal Entry Cash 50,000 Common Stock 10,000 Paid-in Capital in Excess of Par--Common Stock 40,000 Stockholders' Equity(1)-Contributed Capital

Issuance for Cash Example 2: (Preferred Stock with Par) Issued 1,000 shares of $10 par preferred stock for $30 per share. Journal Entry Cash 30,000 Preferred Stock 10,000 Paid-in Capital in Excess of par -- Preferred Stock 20,000 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Issuance for Cash Example 3 (Common Stock with Stated Value Set by the Board of Directors) Issued 1,000 shares of no-par common stock with a stated value $1 per share. Shares are issued at $5 per share. Journal Entry Cash 5,000 Common Stock 1,000 Paid-in Capital in Excess of Stated Value 4,000 Stockholders' Equity(1)-Contributed Capital

Issuance for Cash Example 4 (No-par Common Stock without Stated Value) Issued 1,000 shares of no-par and no stated value common stock for $5 per share. Journal Entry Cash 5,000 Common Stock 5,000 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Stock Issuance Costs Costs relate directly to the initial issuance of capital stock (i.e., legal fees, accountants' fees,printing costs, promotion costs, postage, expense of filing with the SEC, etc.) are recorded as reduction of the paid-in capital. Costs relate to subsequent issuance of stock are expensed. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Stock Subscriptions Investors agree to buy stock on an "installment" ( or credit) basis. The corporation and the prospective stockholders enter into a legal binding subscription contract when such an agreement has been made. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example Emery enters into a subscription contract with several subscribers that calls for the purchase of 1,000 shares of $6 par common stock at a price of $13 per shares. The contract requires a $3 down payment per share, with the remaining $10 per share collectible at the end of one month. The stock will be issued to subscribers upon full payment. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example (contd.) Journal Entry to record the subscription: Cash 3,000 Subscription Receivable: C.S. 10,000 C.S. Subscribed (issuable) 6,000 Additional Paid-in Capital on C.S. 7,000 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example (contd.) J. E. record the subscription if stock has been issued at time of subscription: Cash 3,000 Note Receivable: C.S. 10,000 Common Stock 6,000 Additional Paid-in Capital on C.S. 7,000 Stockholders' Equity(1)-Contributed Capital

Reporting of the Subscription Receivable Account: (a contra account) Subscription Receivable: reported as a contra - stockholders' equity account due to the uncertainty involved in the collection (supported by the SEC). Common stock subscribed and the additional paid-in capital accounts are reported in the contributed capital section of stockholders' equity. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Subsequent Recording Assume that $10 per share final payment was received from subscribers for 950 shares: Journal Entry 1. Cash 9,500 Subscription Receivable:C.S 9500 2. C.S Subscribed 5,700 C.S. $6 Par ($6950) 5,700 Stockholders' Equity(1)-Contributed Capital

Subsequent Recording (contd.) Assume the rest of 50 remaining shares subscribed default on the contract, the following entry will be recorded: C.S. Subscribed ($650) 300 Additional paid-in capital on C.S ($750) 350 Subscription Receivable 500 Additional Paid-in Capital from Subscription Default ($350) 150 Stockholders' Equity(1)-Contributed Capital

Combined Sales of Stock (Lump-Sum sales) When different classes of securities are issued in a combined sale, the proceeds are allocated based on the individual relative market values of the separate securities. If the market value of one class of security is not known, the security with the known market values is assigned a portion of the proceeds equals to its market value. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example A corporation issues 100 "package" of securities for $82.8 per package. Each package consists of two shares of $10 par common stock and one share of $50 par preferred stock. If the separate market values are $16 per share for the common stock and $60 per share for the preferred stock, the following entry will be recorded: Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example (contd.) Cash 8280 1. C.S., 10 par 2,000 Additional paid-in capital on C.S. 880 2. Preferred Stock, 50 par 5,000 Additional Paid-in capital on P.S 400 Aggregate M.V of both securities: $162100 + $601100 = 9,200 Allocation: 1. $8,280  [(162100)/9,200] = 2,880 2. $8,280  [(601100)/9,200] = 5,400 2,880 + 5,400 = 8,280 Stockholders' Equity(1)-Contributed Capital

Stock Issued for Noncash Proposition Principle: Stock issued for service or property should be recorded either at the fair value of the stock or the fair value of the property, whichever is more clearly determinable (reliable). In most cases, if stock is traded frequently, the fair value of stock is used. Otherwise, use the market value of the property. Stockholders' Equity(1)-Contributed Capital

Example- Stock Issued for Noncash Proposition Issued 10,000 shares of $5 par C.S. for building. The market value of the stock is $15 per share and the stock is traded frequently. Journal Entry: Building 150,000 C.S. 50,000 Additional paid-in 100,000 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Stock Splits Reasons (1) To increase the marketability of stock by decreasing the market value and par value per share. (2) To increase the numbers of shares outstanding. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example: 2 for 1 split Shares Par Market Outstanding value Price Before Split 1,000 $50 $120 After Split a b c Stockholders' Equity(1)-Contributed Capital

Accounting for Stock Splits No entry. A memo is required. a. 2,000 b.$25 c.$60(likely) Proportionate Stock Split: the memo indicates the increase in shares outstanding and the reduction of par value. Disproportionate stock split: the reduction in par value is not proportionate to the increase in the number of shares. A journal entry is required for a disproportionate stock split. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example A corporation issued 60,000 shares of C.S of $10 par value. The corporate declared a 2 for 1 split with a reduction of par value to $4 per share. Journal Entry: Common Stock, $10 par 600,000 Common Stock, $4 par 480,000 Additional Paid-in Capital from Stock Split 120,000 Stockholders' Equity(1)-Contributed Capital

Stock Rights to Current Stockholders When warrants are issued, no entry is required. A memo listing the number of additional shares that maybe acquired through the exercise of the stock rights is made. If the right expires, another memo is made. Stockholders' Equity(1)-Contributed Capital

Preferred Stock Characteristics Preference as to dividends: holders have a preference to dividends. The annual dividends are expressed as percentage of the par value. If no-par preferred stock is issued, the dividend is expressed as a dollar amount per share. Stockholders' Equity(1)-Contributed Capital

Convertible Preferred Stock Convertible preferred stock allows stockholders, at their option, to convert the shares of preferred stock into another security of the corporation under specified conditions. Both the preferred features and the potential for common stock equity are valuable to investors in convertible preferred stock. Stockholders' Equity(1)-Contributed Capital

Convertible Preferred Stock Therefore, conceptually, the proceeds received upon issuance should be separated into preferred and common stock equity. However, APB Opinion No. 14 requires that when convertible preferred stock is issued, no value is assigned to the the conversion feature. Any difference between the par and market values is recorded as the paid-in capital. Stockholders' Equity(1)-Contributed Capital

Accounting for the Conversion of Preferred to Common Stock Book value method is used. Example: A corporation issued 500 shares of $100 par convertible preferred stock at $120 per share. Each preferred share was converted into 4 shares of $20 par common stock. The following entry will be recorded for this conversion: Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example (contd.) Preferred Stock 50,000 Additional Paid-in Capital on P.S 10,000 Common Stock 40,000 Additional Paid-in capital on Common Stock 20,000 Stockholders' Equity(1)-Contributed Capital

Preferred Stock with Stock Warrants (Rights) Warrants: rights that allow the holder to purchase additional shares of common stock at a specified price over some future period. Warrants can be attached to preferred stock to increase the marketability of the stock. Stockholders' Equity(1)-Contributed Capital

Preferred Stock with Stock Warrants (contd.) Since warrants are detachable and are traded separately from the preferred stock, APB opinion No. 14 requires that the proceeds from the issuance of preferred stock with attached warrants be allocated to preferred stockholders' equity and to common stockholders' equity, based on the relative market values of the two securities at the time of issuance. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example A Landy Corporation issues 1,000 shares of $100 par value preferred stock at $121 per share. A warrant is attached to each share of preferred stock to allow the holder to purchase one share of $10 par common stock at $40 per share. Immediately after the issuance, the preferred stock begins selling ex rights on the market for $119 per share. The warrants begin selling for $6 per share. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example A (contd.) Journal Entry: Cash 121,000 1. Preferred Stock 100,000 1. Additional Paid-in Capital on P.S 15,192 2. Common Stock Warrants 5,808 Aggregate M.V of two securities = ($1191,000) + ($61,000) = $125,000 1. P.S = [$121,000  (119,000 / 125,000)] = $115,192 2. C.S warrants = [121,000  (6,000 / 120,000)] = $5,808 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example B Assuming 900 warrants are exercised, the following entry is recorded for the issuance of 900 shares of common stock: Cash (40 * 900) 36,000 Common Stock warrant 5,227 Common Stock, $10 Par 9,000 Additional paid-in capital on C.S 32,227 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example C Assuming 100 warrants expired, the following entry will be recorded: Common Stock Warrant 581 Additional Paid-in capital from Expired Warrants 581 Stockholders' Equity(1)-Contributed Capital

Callable Preferred Stock Callable Preferred Stock: preferred stock may be retrieved (recalled) under specified conditions by the corporation. The call price is usually several points (dollars) higher than the issuance price. Also, the specified conditions and call price are specified in the stock contract. Payments of dividends in arrears before the execution of call option is in general required in the stock contract. Stockholders' Equity(1)-Contributed Capital

Callable Preferred Stock (contd.) When callable preferred stock is issued, no value is assigned to the call feature. Upon recall, the difference between the call price and the original issuance price is NOT treated as a gain or loss, but treated as a reduction of retained earnings (when call price > issuance price) or as an increase of additional paid-in (when call price < issuance price). Stockholders' Equity(1)-Contributed Capital

Callable Preferred Stock (contd.) This treatment is to avoid a company from manipulating its earnings by recognizing a gain (or a loss) in transaction involving its own equity securities. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Example Koden Corporation has outstanding 1,000 shares of $100 par callable preferred stock that was issued at $110 per share and no dividends are in arrears. If the call price is $112, the following entry is made to record the recall of these shares: Preferred Stock 100,000 Additional Paid-in on P.S. 10,000 Retained Earnings 2,000 Cash 112,000 Stockholders' Equity(1)-Contributed Capital

Redeemable Preferred Stock Redeemable at the option of the holders for a specified price or mandatory at a specified future maturity date for a specified price. Thus, redeemable preferred stock has some of the characteristics of a liability. Stockholders' Equity(1)-Contributed Capital

Redeemable Preferred Stock (cont.) SEC requires this stock to be reported as a separate component of the balance sheet (i .e., before the stockholders’ equity) and requires the disclosure of the redemption features, shares issued and redeemed. FASB does not require a separate reporting but requires a similar disclosure. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Treasury Stock Treasury stock: issued stock that has been purchased back (reacquired) by the issuing corporation. Treasury stock carries no voting or preemptive rights, no right to dividends, and no right at liquidation. However, it does participate in stock split. Stockholders' Equity(1)-Contributed Capital

Reasons of Acquiring Treasury Stock 1. To use for stock option plans, bonus and employee purchase plans; 2. To use in the conversion of convertible preferred stock or bonds; 3. To use excess cash and help maintain the market price of its stock; to increase EPS; Stockholders' Equity(1)-Contributed Capital

Reasons of Acquiring Treasury Stock (contd.) 4. To use in the acquisition of other companies; 5. To use for stock dividend; 6. To reduce the number of shares held by outside shareholders and thereby reduce the likelihood of being acquired by another company. Stockholders' Equity(1)-Contributed Capital

Accounting Methods for Treasury Stock A. Cost method B. Par value method (rarely used) Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital A. Cost Method T.S. is recorded at cost paid for transactions: 1. Issuance of 6,000 shares of $10 par common stock for $12 per share Cash 72,000 C.S., $10 par 60,000 Additional Paid-in Capital on C.S. 12,000 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital A. Cost Method (contd.) 2. Reacquisition of 1,000 shares of C.S. at $13 per share: Treasury Stock 13,000 Cash 13,000 3. Reissuance of 600 shares of T.S. at $15 per share Cash 9,000 T.S. 7,800 Additional Paid-in Capital from T.S. 1,200 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital A. Cost Method (contd.) 4. Reissuance of another 200 shares of T.S. at $8 per share: Cash 1,600 Additional Paid-in Capital from T.S. 1,000 Treasury Stock 2,600 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital A. Cost Method (contd.) 5. Reissuance of another 100 shares of T.S. at $6 per share Cash 600 Additional Paid-in Capital from T.S. 200 Retained Earnings 500 Treasury Stock 1,300 Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital A. Cost Method (contd.) 6. Retirement of the last 100 shares of T.S. Common Stock, $10 par 1,000 *Additional Paid-in on Common Stock 200 Retained Earnings 100 Treasury Stock 1,300 * [12,000  (100/6,000)] = $200 Original additional Paid-in Capital on common stock for 6,000 shares. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Retirement of Stock Repurchased stock can be retired immediately. Example: 100 shares of stock were repurchase at $14 per share and retired immediately: Common Stock, $10 par 1,000 Additional Paid-in on Common Stock 200 Retained Earningsa 200 Cash 1,400 a. If there is a credit balance in the paid-in capital-repurchase of stock account, this paid-in capital account needs to be debited first before debiting R/E. Stockholders' Equity(1)-Contributed Capital

B. Par Value Method (Rarely Used) 1. Issuance of 6,000 shares of $10 par common stock for $12 per share Cash 72,000 C.S., $10 par 60,000 Additional Paid-in Capital on C.S 12,000 Stockholders' Equity(1)-Contributed Capital

B. Par Value Method (contd.) 2. Reacquisition of 1,000 shares of common stock at $13 per shares: Treasury Stock (1000 shares, par $10) 10,000 Additional Paid-in Capital on C.S * 2,000 Retained Earnings 1,000 Cash 13,000 * ($12,000/6,000) 1,000 = 2,000 Stockholders' Equity(1)-Contributed Capital

B. Par Value Method (contd.) 3. Reissuance of 600 shares of treasury stock at $15 per share: Cash 9,000 Treasury Stock 1, $10 par 6,000 Additional Paid-in Capital on C.S. 3,000 1. $10  600 Stockholders' Equity(1)-Contributed Capital

B. Par Value Method (contd.) 4. Reissuance of 200 shares of Treasury stock at $8 per share: Cash 1,600 Additional Paid-in Capital on C. S. 400 Treasury Stock, $10 par 2,000 Stockholders' Equity(1)-Contributed Capital

B. Par Value Method (contd.) 5. Reissuance of 100 shares of Treasury stock at $6 per share Cash 600 Additional Paid-in Capital on C.S* 400 Treasury Stock, $10 par 1,000 * If this account does not have sufficient amount to cover the sale below the par, debit retained earnings account. Stockholders' Equity(1)-Contributed Capital

B. Par Value Method (contd.) 6. Retirement of the last 100 shares Common Stock, $10 par 1,000 Treasury Stock, $10 par 1,000 Stockholders' Equity(1)-Contributed Capital

Balance Sheet Presentation of Treasury Stock Before the last 100 shares of treasury stock were retired, the stockholders' equity section is prepared after transactions 1-5 as follows: (The Retained earnings has a credit balance of $40,000 prior to record any treasury stock transaction.) Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Cost Method Contributed Capital: Common stock, $10 par (20,000 shares authorized, 6,000 shares issued, of which 100 are being held as Treasury Stock) $ 60,000 Additional paid-in capital on C.S. 12,000 Total Contributed Capital 72,000 Retained Earnings (see Note) 39,500 Total Contributed Capital and Retained Earnings 111,500 Less: Treasury Stock (100 shares at cost) (1,300) Total Stockholders' Equity $110,200 Note: Retained Earnings are restricted regarding dividends in the amount of $1,300, the cost of treasury stock. Stockholders' Equity(1)-Contributed Capital

Stockholders' Equity(1)-Contributed Capital Par Value Method Contributed Capital: Common stock, $10 par (20,000 shares authorized, 6,000 shares issued) 60,000 Less: Treasury stock (100 shares at par) (1,000) Common stock outstanding 59,000 Additional Paid-in Capital on Common Stock 12,200 Total Contributed Capital 71,200 Retained Earnings 39,000 Total Stockholders' Equity 110,200 Stockholders' Equity(1)-Contributed Capital

Related Ledger Accounts Cost Method Par Value Method Retained Earnings Retained Earnings 500 40,000 1,000 40,000 Paid-In Capital On C.S. Paid-In Capital on C.S. 12,000 2,000 12,000 400 3,000 400 12,200 Stockholders' Equity(1)-Contributed Capital

Ledger Accounts for R/E and Paid-in Cost Method Par Value Method Paid-In Capital from T.S. 1,000 1,200 200 0 Treasury Stock Treasury Stock 13,000 7,800 10,000 6,000 2,600 2,000 1,300 1,000 1,300 1,000 Stockholders' Equity(1)-Contributed Capital

Donated Treasury Stock : Cost Method 100 shares of common stock, $10 par were donated by stockholder. At reacquisition: no entry, just prepare a memo. At reissuance: 100 shares of donated T.S. reissued for $12 per share. Cash 1,200 Donated Capital 1,200 Stockholders' Equity(1)-Contributed Capital

Donated Treasury Stock : Par Value Method At reacquisition: Treasury Stock,$10 par 1,000 Donated Capital from Treasury Stock 1,000 At reissuance: 100 shares at $12 per share Cash 1,200 Treasury Stock, $10 par 1,000 Treasury Stock 200 Stockholders' Equity(1)-Contributed Capital

Overview of Treasury Stock Cost method is widely used due to its simplicity but par value method is theoretically preferable. Treasury stock is not an asset; it is treated as a reduction of stockholders' equity. Treasury stock does not have voting rights, no preemptive right; does not participate in dividends; does not participate in assets at liquidation, but participate in stock split. Stockholders' Equity(1)-Contributed Capital

Overview of Treasury Stock(contd.) Treasury stock transactions do not result in gains or losses. Treasury stock transactions may reduce retained earnings but may never increase retained earnings. Retained earnings may be restricted regarding dividends in the amount of the treasury stock on hand. Stockholders' Equity(1)-Contributed Capital

Overview of Treasury Stock (T.S.) (contd.) Total amount of stockholders' equity is the same under cost or par value method However, the subtotals of component elements (R/E, treasury stock, and additional paid-in capital) are likely to be different when using different method. Stockholders' Equity(1)-Contributed Capital