Stockholders’ Equity

15-2 Three primary forms of business organization The Corporate Form of Organization ProprietorshipPartnershipCorporation Special characteristics of the corporate form: 1.Influence of state corporate law. 2.Use of capital stock or share system. 3.Development of a variety of ownership interests.

15-3 Variety of Ownership Interests The Corporate Form of Organization Common stock represent the residual corporate interest.  Bears ultimate risks of loss.  Receives the benefits of success.  Not guaranteed dividends nor assets upon dissolution. Preferred stock is created by contract, when stockholders’ sacrifice certain rights in return for other rights or privileges, usually dividend preference and preference to assets in the event of liquidation.

15-4 Issuance of Stock Accounting problems: 1. Par value stock. 2. No-par stock. 3. Stock issued in noncash transactions. 4. Costs of issuing stock. Corporate Capital Shares authorized – Offer shares for sale – Shares issued: Journal entries given only when shares are issued

15-5 Par Value Stock The par value of a share of stock is the value below which shares of that class cannot be sold. Thus, par value is the nominal value of a security which is determined by the issuing company to be its minimum price. Low par values help companies avoid a contingent liability. Corporations maintain accounts for:  Preferred Stock or Common Stock: credit these accounts when shares are originally issued.  Paid-in Capital in Excess of Par (APIC) Corporate Capital

15-6 No-Par Stock No-par value stock prices are determined by what investors are willing to pay for them in the market. Companies find it beneficial to issue no-par value stock as they have flexibility in setting higher prices for future public offerings. Some states require that no-par stock have a stated value. Reasons for issuance:  Avoids contingent liability.  Avoids confusion over recording par value versus fair market value. Corporate Capital

15-7 Stock Issued in Noncash Transactions The general rule: Companies should record stock issued for services or property other than cash at the  fair value of the stock issued or  fair value of the noncash consideration received, Whichever is more clearly determinable. Corporate Capital

15-8 Costs of Issuing Stock Direct costs incurred to sell stock, such as  underwriting costs,  accounting and legal fees,  printing costs, and  taxes, should be reported as a reduction of the amounts paid in (Paid-in Capital in Excess of Par). Corporate Capital

15-9 Reacquisition of Stock Corporations purchase their outstanding stock (stock currently held by all shareholders) to:  Provide distributions of excess cash to stockholders.  Increase earnings per share and return on equity.  Provide stock for employee stock compensation contracts or to meet potential merger needs.  Thwart takeover attempts or to reduce the number of stockholders.  Make a market in the stock. Corporate Capital

15-10 Purchase of Treasury Stock Two acceptable methods:  Cost method (more widely used): Debit the treasury stock account for the cost of the shares acquired and reduce the total paid-in capital and retained earnings on the balance sheet.  Par or Stated value method: Record all transactions in treasury shares at par value and reduce it from only capital stock on the balance sheet. Treasury stock reduces stockholders’ equity. Corporate Capital

15-11 Sale of Treasury Stock Companies usually reissue treasury stock. When selling treasury stocks, the accounting for the sale depends on the selling price.  Above Cost: record the difference between selling price and cost as a credit to paid-in capital from treasury stock.  Below Cost: record the difference between cost and selling price as a debit to paid-in capital from treasury stock. Both increase total assets (cash) and change stockholders’ equity. Corporate Capital

15-12  Cumulative: failure to pay dividend in one year must be compensated in the next year.  Participating: share in any profit distributions beyond the prescribed rate.  Convertible: can exchange preferred stock for common stock.  Callable: corporations have the right (but not the obligation) to repurchase the stock at a specific price after a certain date.  Redeemable: corporations have a mandatory redemption period or a redemption feature, making it more like a debt than equity. Preferred Stock Features of Preferred Stock The accounting for preferred stock at issuance is similar to that for common stock.

Cash dividends. 2. Property dividends. All dividends, except for stock dividends, reduce the total stockholders’ equity in the corporation. 3. Liquidating dividends. 4. Stock dividends. Types of Dividends Dividend Policy

15-14 Cash Dividends   Board of directors vote on the declaration of cash dividends.   A declared cash dividend is a liability, usually a current liability.  Companies do not declare or pay cash dividends on treasury stock. Three dates: a.Date of declaration b.Date of record c.Date of payment Dividend Policy Approve dividends to be paid Prepare list of current stockholders Dividend is paid in cash

15-15 Property Dividends   Dividends payable in assets other than cash.   Restate at fair value the property it will distribute, recognizing any gain or loss at the date of declaration.   Upon distribution of dividend, credit the account containing the distributed asset at the restated fair value. Dividend Policy

15-16 Liquidating Dividends Dividends based on paid-in capital and not retained earnings. Any dividend not based on earnings reduces corporate paid-in capital. This term implies that such dividends are a return of the stockholder’s investment rather than of profits. In other words, it can be considered as a return of capital. Dividend Policy

15-17 Stock Dividends   A dividend payment made in the form of additional shares, rather than a cash payout.   Companies may decide to distribute stock to shareholders of record if company's availability of liquid cash is in short supply.   Issuance by a company of its own stock to stockholders is done on a pro rata basis.   When stock dividend is less than 20–25 percent of the common shares outstanding at the declaration date, company transfers fair market value of the stock issued from retained earnings – often referred to as small (ordinary) stock dividends. Dividend Policy