Class today pWhat is a corporation? lwhy corporate form? pOwnership in a corporation lCommon Stock l Sale/Issuance l Buyback (Treasury) lPreferred Stock pQuiz chapters 13 & 14

55 Business Forms oMost numerous lSole proprietorship lPartnership pHighest dollar value assets lCorporations (dominant form) l Closely-held (private). l Openly-held, publicly traded (listed, over-the- counter). pHybrid forms available lPCs, LLCs and LLPs, etc.

Stockholders’ equity pContributed capital = stock lTypes lAccounting for issuance lBalance sheet presentation lTreasury stock pRetained earnings - next chapter

Contributed Capital pbasic concepts pstock issue plump sum sales of stock pstock subscriptions

Stock pStockholders’ rights lShare in profits lVoting lPreemptive lProportionate share pLimited liability pUnlimited life pCommon vs. preferred

Authorized, Issued and Outstanding pauthorized capital stock lnumber of shares that can be issued legally as defined in the corporate charter pissued capital stock lnumber of shares that have been issued and have not been subsequently retired poutstanding capital stock lnumber of shares currently trading authorized > issued > outstanding

Par, Stated or Assigned Value ppar value lminimum amount that must be contributed under the law to consider the shares fully paid lgenerally not related to market value pnopar ltrue nopar stock lstated or assigned value l basically takes the place of par value

Stock Issue pCash CashXXXX Common stockXX Paid in capital in excess XXX pNoncash consideration lrecord at FMV of asset received or stock issued whichever most clearly determinable lvalue assigned by the Board

Journal Entry to Record Stock Issue cash (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!

Lump Sales of Stock pproportional method lfair value available for each class lallocate based on ratio of each fair value to total fair value pincremental method lfair value not available for at least one class lassign fair value to classes with know fair value first; remainder to those with unknown fair value

Stock Subscriptions 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?

Default on Subscriptions pReturn all payments made pIssue shares equivalent to # paid in full pAll payments made forfeited pResale under a lien lreimbursed to extent net receipts > original subscription price lnot to exceed payments made

Treasury Stock pWhat is.. pWhy? lMeet merger or compensation needs lIncrease EPS lMake a ‘market’… pHow to account for lCost method lPar/stated value method pCarries a debit balance. lContra owner equity. lNOT an asset!

Cost Method pRepurchase and subsequent sale viewed as one continuous transaction (“one transaction approach”) pjournal entry: treasury stockxx cashxx

Cost Method (cont.) pTreasury stock account viewed as a “suspense account” pReported as a deduction from total shareholders’ equity pCan either reissue (sell) or retire the stock

Example pHave 100 shares of treasury stock which was purchased for $1400 pSold 50 shares for $800 pSold 50 shares for $500

Cost Method - Resale pWhen resale price > acquisition cost lRemove acquisition cost from treasury stock account ldifference between cost and sale price is credited to “contributed capital from TS transactions”

Cost Method - Resale pWhen resale price < acquisition cost lRemove acquisition cost from treasury stock account lThen l debit “contributed capital from TS transactions” (same class) if available l remaining amount --debit retained earnings

Cost Method - Retirement pRemove acquisition cost from treasury stock pThen lreduce capital stock for par lreduce PIC for amount paid in when stock was issued pIf:debit difference to be allocated lcontributed capital from TS transactions (same class) lretained earnings pIf:credit difference to be allocated lcontributed capital from TS transactions

Example pHave 100 shares of $1 par value treasury stock which was purchased for $1400 pRetire 50 shares with original issue price of $600 pRetire 50 shares with original issue price of $1000

Example Entries

34 B/S presentation of T/S 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

35 pExchange of rights for other rights: Hybrid of debt and ownership characteristics. pDividends paid are a % of par or $ per share. pPreferred shareholders’ claim on earnings generally precedes common shareholders’ pDividends lCumulative (arrearages) vs. noncumulative stock lParticipating l Fully l Partially l Non Preferred stock

36 pExample: 2,000 shares of P/S, $50 par, 8% cumulative, non-participating; 80,000 shares of C/S, $30 par. pDividends declared: Year 1, $0; Year 2, $6,000; Year 3, $18,000; Year 4, $75,000. P/S dividend = 2,000 shares x $50 par x.08 = $8,000 To P/SArrearageTo C/S Year 1 Year 2 Year 3 Year 4 Cash Dividends

37 Note: No formal liability arises when a dividend is not declared. lMemo only. Arrearages are paid before any current dividends are paid. lEntries at the date of declaration: Cash Dividends Year 2

38 Cash Dividends Year 3 Year 4

39 Convertible P/S. To convert use book value method Convertible Preferred Stock

Debt or Equity? pDebt related lStated return lNon-voting lPreference at liquidation lNon-participating pEquity lReturn not mandatory lDividends, not interest expense lParticipating