Bài giảng Financial & Managerial Accounting - Chapter 11: Stockholders’ equity: paid-In capital

STOCKHOLDERS’ EQUITY:PAID-IN CAPITALChapter11Existence is separate from owners.An entity created by law.Has rights and privileges.Privately, or Closely, HeldPublicly HeldOwnership can be CorporationsLimited personal liability for stockholders.Transferability of ownership.Professional management.Continuity of existence.Advantages of IncorporationHeavy taxation.Greater regulation.Cost of formation.Separation of ownership and management.Disadvantages of IncorporationPublicly 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.The costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes.Formation of a CorporationEach 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.StockholdersRights Voting (in person or by proxy). Proportionate distribution of dividends. Proportionate distribution of assets in a liquidation.Rights of StockholdersUltimate controlStockholders usually meet once a year.Stockholder ledgers are often maintained by a stock transfer agent or stock registrar.Rights of StockholdersEach unit of ownership is called a share of stock.A stock certificate serves as proof that a stockholder has purchased shares.Rights of StockholdersWhen the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.Rights of StockholdersOverall responsibility for managing the company.Selected by a vote of the stockholdersFunctions of the Board of DirectorsChief AccountantContractual and legal representationCustodian of fundsFunctions of the Corporate OfficersPaid-In Capital of a CorporationThe maximum number of shares of capital stock that can be sold to the public. AuthorizedSharesAuthorization and Issuance of Capital StockIssued 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.AuthorizedSharesAuthorization and Issuance of Capital StockUnissuedSharesTreasurySharesOutstandingSharesTreasury shares are issued shares that have been reacquired by the corporation.IssuedSharesOutstanding shares are issued shares that are owned by stockholders.AuthorizedSharesAuthorization and Issuance of Capital StockPar 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.Stockholders’ EquityCommon stock can be issued in three forms:No-Par Common StockPar Value Common StockStated Value Common StockLet’s examine this form of stock.All proceeds credited to Common StockTreated like par value common stockStockholders’ EquityPrepare 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. 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.Issuance of Par Value StockThe 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. Issuance of Par Value StockIssuance of Par Value StockA separate class of stock, typically having priority over common shares in . . .Dividend distributions (rate is usually stated).Distribution of assets in case of liquidation.Cumulative dividend rights.Normally has no voting rights.Usually callable by the company.Other Features Include:Preferred StockVs.NoncumulativeCumulativeDividends 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.Cumulative Preferred StockExample: 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.Stock Preferred as to DividendsExample: 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.Stock Preferred as to DividendsI 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.Convertible Preferred StockPreferred StockCompanies 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.Stock Issued for Assets Other Than CashI love this stuff!Can we do some more?Accounting by the issuer.Accounting by the investor.Common stock is carried at original issue price. Investments in marketable securities are carried at market value. Market Value Factors affecting market price of preferred stock:Dividend rateRiskLevel of interest ratesThe return based on the market value is called the “dividend yield.”Market Price of Preferred 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.Market Price of Common StockIce Cream ParlorBanana Splits On Sale NowStock SplitsCompanies use stock splits to reduce market price.Outstanding shares increase, but par value is decreased proportionately.Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.IncreaseDecreaseNo ChangeStock Splits - ExampleNo voting or dividend rightsContra equity accountWhen stock is reacquired, the corporation records the treasury stock at cost.Treasury shares are issued shares that have been reacquired by the corporation.Treasury StockOn May 1, 2003, East Corp. reacquired 3,000 shares of its common stock at $55 per share.Prepare the journal entry for May 1.Treasury Stock - ExampleOn 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 = $75,0001,000 shares × $55 cost = $55,000Treasury Stock - ExampleStockholders’ Equity - PresentationThis isn’t what I meant when I asked for stock for my birthday!End of Chapter 11