1. STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL
Chapter 11
STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL 2

2. Corporations An entity created by law. Privately, or Closely, Held
Existence is separate from owners.
Ownership can be
Has rights and privileges.
Publicly Held

3. Advantages of Incorporation
Limited personal liability for stockholders.
Transferability of ownership.
Professional management.
Continuity of existence.

4. Disadvantages of Incorporation
Heavy taxation.
Greater regulation.
Cost of formation.
Separation of ownership and management.

5. Publicly Owned Corporations Face Different Rules
By LAW, publicly owned corporations must:
Prepare financial statements in accordance with GAAP.
Have their financial statement audited by an independent CPA.
Comply with federal securities laws.
Submit financial information for SEC review.

6. Formation of a Corporation
Each corporation is formed according to the laws of the state where it is located.
The application for corporate status is called the Articles of Incorporation.
The costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes.

7. Rights of Stockholders
Voting (in person or by proxy).
Proportionate distribution of dividends.
Proportionate distribution of assets in a liquidation.
Rights
Stockholders

8. Rights of Stockholders
Stockholder ledgers are often maintained by a stock transfer agent or stock registrar.
Stockholders usually meet once a year.
Ultimate control

9. Rights of Stockholders
Each unit of ownership is called a share of stock.
A stock certificate serves as proof that a stockholder has purchased shares.

10. Rights of Stockholders
When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.

11. Functions of the Board of Directors
Overall responsibility for managing the company.
Selected by a vote of the stockholders

12. Functions of the Corporate Officers
Contractual and legal representation
Chief Accountant
Custodian of funds

13. Paid-In Capital of a Corporation

14. Authorization and Issuance of Capital Stock
Authorized
Shares
The maximum number of shares of capital stock that can be sold to the public.

15. Authorization and Issuance of Capital Stock
Authorized
Shares
Issued shares are authorized shares of stock that have been sold.
Unissued shares are authorized shares of stock that never have been sold.
Usually shares are sold through an underwriter.

16. Authorization and Issuance of Capital Stock
Authorized
Shares
Outstanding shares are issued shares that are owned by stockholders.
Outstanding
Shares
Unissued
Shares
Issued
Shares
Treasury shares are issued shares that have been reacquired by the corporation.
Treasury
Shares

17. Stockholders’ Equity
Par value is an arbitrary amount assigned to each share of stock when it is authorized.
Market price is the amount that each share of stock will sell for in the market.

18. Stockholders’ Equity Common stock can be issued in three forms:
Par Value Common Stock
No-Par Common Stock
Stated Value Common Stock
Let’s examine this form of stock.
All proceeds credited to Common Stock
Treated like par value common stock

19. Issuance of Par Value Stock
Record:
The cash received.
The number of shares issued × the par value per share in the Common Stock account.
The remainder is assigned to Contributed Capital in Excess of Par.
Prepare the journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 per share which occurred on September 1, 2003.

20. Issuance of Par Value Stock
The journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 per share on September 1, 2003, should include a credit to common stock for the par value of the shares issued.

21. Issuance of Par Value Stock

22. Preferred Stock Other Features Include: Cumulative dividend rights.
A separate class of stock, typically having priority over common shares in . . .
Dividend distributions (rate is usually stated).
Distribution of assets in case of liquidation.
Other Features Include:
Cumulative dividend rights.
Usually callable by the company.
Normally has no voting rights.

23. Cumulative Preferred Stock
Vs.
Noncumulative
Cumulative
Dividends in arrears must be paid before dividends may be paid on common stock.
Undeclared dividends from current and prior years do not have to be paid in future years.

24. Stock Preferred as to Dividends
Example: Consider the following partial Statement of Stockholders’ Equity.
During 2002, the directors declare cash dividends of $5,000. In year 2003, the directors declare cash dividends of $42,000.

25. Stock Preferred as to Dividends
Example: Consider the following partial Statement of Stockholders’ Equity.
During 2000, the directors declare cash dividends of $5,000. In year 2001, the directors declare cash dividends of $42,000.

26. Convertible Preferred Stock
I just converted 100 shares of preferred stock into 1,000 shares of common stock and ended up with a higher dividend yield!
Gee, I can’t do that with MY preferred stock!
Some preferred stock is convertible into shares of common stock.

27. Preferred Stock

28. Stock Issued for Assets Other Than Cash
Companies sometimes issue stock in exchange for non-cash assets.
Since no cash is received, record the transaction at the market value of the goods or services received.

29. I love this stuff!
Can we do some more?

30. Market Value Common stock is carried at original issue price.
Accounting by the issuer.
Investments in marketable securities are carried at market value.
Accounting by the investor.

31. Market Price of Preferred Stock
Factors affecting market price of preferred stock:
Dividend rate
Risk
Level of interest rates
The return based on the market value is called the “dividend yield.”

32. Market Price of Common Stock
Factors affecting market price of common stock:
Investors’ expectations of future profitability.
Risk that this level of profitability will not be achieved.
Changes in market value have no impact on the books of the issuer.

33. Banana Splits On Sale Now
Stock Splits
Companies use stock splits to reduce market price.
Outstanding shares increase, but par value is decreased proportionately.
Ice Cream Parlor
Banana Splits On Sale Now

34. Stock Splits - Example
Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.
Increase
Decrease
No Change

35. No voting or dividend rights
Treasury Stock
Treasury shares are issued shares that have been reacquired by the corporation.
No voting or dividend rights
Contra equity account
When stock is reacquired, the corporation records the treasury stock at cost.

36. Treasury Stock - Example
On May 1, 2003, East Corp. reacquired 3,000 shares of its common stock at $55 per share.
Prepare the journal entry for May 1.

37. Treasury Stock - Example
On December 3, 2003, East Corp. reissued 1,000 shares of the stock at $75 per share.
Prepare the journal entry for December 3.
1,000 shares × $75 = $75,000
1,000 shares × $55 cost = $55,000

38. Stockholders’ Equity - Presentation

39. This isn’t what I meant when I asked for stock for my birthday!
End of Chapter 11
This isn’t what I meant when I asked for stock for my birthday!