1 stockholders’ equity: chapter 11. 2 existence is separate from owners. an entity created by law....
TRANSCRIPT
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Existence is separate from
owners.
Existence is separate from
owners.
An entity created by law.
An entity created by law.
Has rights and privileges.
Has rights and privileges.
Privately, or Closely, Held
Publicly Held
Ownership can be
CorporationsCorporations
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Limited personal liability for
stockholders.
Limited personal liability for
stockholders.
Transferability of ownership.
Transferability of ownership.
Professional management.
Professional management.
Continuity of existence.
Continuity of existence.
Advantages of IncorporationAdvantages of Incorporation
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Heavy taxation.Heavy taxation.
Greater regulation.Greater regulation.
Cost of formation.Cost of formation.
Separation of ownership and management.
Separation of ownership and management.
Disadvantages of IncorporationDisadvantages of Incorporation
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Stockholders
Rights
Voting (in person or by proxy).
Proportionate distribution of
dividends.
Proportionate distribution of
assets in a liquidation.
Rights of StockholdersRights of Stockholders
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C orpora te O rgan iza tion C hart
Secreta ry T rea surer C ontro ller O ther V icePresidents
President
B oa rd of D irectors
StockholdersUltimate control
Ultimate control
Stockholders usually meet once a year.
Stockholders usually meet once a year.
Stockholder ledgers are often maintained by a stock transfer agent or stock
registrar.
Stockholder ledgers are often maintained by a stock transfer agent or stock
registrar.
Rights of StockholdersRights of Stockholders
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Each unit of ownership is
called a share of stock.
A stock certificate serves
as proof that a stockholder has
purchased shares.
Rights of StockholdersRights of Stockholders
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When the stock is sold, the stockholder
signs a transfer endorsement on the back of the
stock certificate.
Rights of StockholdersRights of Stockholders
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C orpora te O rgan iza tion C hart
Secreta ry T rea surer C ontro ller O ther V icePresidents
President
B oa rd of D irectors
StockholdersOverall
responsibility for managing the company.
Overall responsibility for managing the company.
Selected by a vote of the
stockholders
Selected by a vote of the
stockholders
Functions of the Board of DirectorsFunctions of the Board of Directors
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C orpora te O rgan iza tion C hart
Secreta ry T rea surer C ontro ller O ther V icePresidents
President
B oa rd of D irectors
Stockholders
Chief Accountant
Chief Accountant
Contractual and legal representation
Contractual and legal representation
Custodian of funds
Custodian of funds
Functions of the Corporate OfficersFunctions of the Corporate Officers
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Paid-in Capita l
Contributions byinvestors in exchange
for capital stock.
Retained Earnings
Retention of profitsearned by thecorporation.
Stockholders' equity isincreased in tw o w ays.
Paid-In Capital of a CorporationPaid-In Capital of a Corporation
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The maximum number of
shares of capital stock that can be
sold to the public.
AuthorizedShares
AuthorizedShares
Authorization and Issuance of Capital Stock
Authorization and Issuance of Capital Stock
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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.
Usually shares are
sold through an
underwriter.
AuthorizedShares
AuthorizedShares
Authorization and Issuance of Capital Stock
Authorization and Issuance of Capital Stock
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UnissuedShares
TreasuryShares
OutstandingShares
Treasury shares are issued shares that
have been reacquired by the corporation.
IssuedShares
IssuedShares
Outstanding shares are issued shares that are
owned by stockholders.
AuthorizedShares
AuthorizedShares
Authorization and Issuance of Capital Stock
Authorization and Issuance of Capital Stock
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Par value is an Par value is an arbitrary arbitrary amount amount
assigned to assigned to each share of each share of
stock when it is stock when it is authorized.authorized.
Market price is the amount that each share of stock will sell
for in the market.
Market price is the amount that each share of stock will sell
for in the market.
Stockholders’ EquityStockholders’ Equity
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Common stock can be issued in two forms:Common stock can be issued in two forms:
No-Par Common
Stock
No-Par Common
Stock
Par Value Common
Stock
Par Value Common
Stock
Let’s examine this form of
stock.
Let’s examine this form of
stock.
All proceeds credited to
Common Stock
All proceeds credited to
Common Stock
Stockholders’ EquityStockholders’ Equity
Existin
g Com
pany’
s Act
New C
ompan
y’s A
ct
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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.
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.
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/Share Premium
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/Share Premium
Issuance of Par Value StockIssuance of Par Value Stock
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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.
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.
Issuance of Par Value StockIssuance of Par Value Stock
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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.
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.
Cumulative dividend rights.
Cumulative dividend rights.
Normally has no voting
rights.
Normally has no voting
rights.
Usually callable by
the company.
Usually callable by
the company.
Other Features Include:
Preferred StockPreferred Stock
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Vs. NoncumulativeCumulative
Dividends in arrears must be
paid before dividends may be paid on common
stock.
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.
Undeclared dividends from
current and prior years do not have to be paid in future
years.
Cumulative Preferred StockCumulative Preferred Stock
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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.
Stock Preferred as to DividendsStock Preferred as to Dividends
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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.
Stock Preferred as to DividendsStock Preferred as to Dividends
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I just converted 100 shares of preferred stock
into 1,000 shares of common stock and ended up with a higher dividend
yield!
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 MYMY preferred
stock!
Gee, I can’t do that with MYMY preferred
stock!
Some preferred stock is convertible
into shares of common stock.
Convertible Preferred StockConvertible Preferred Stock
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Companies sometimes issue stock in exchange for non-
cash assets.
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.
Since no cash is received, record the transaction at the market value of the goods or
services received.
Stock Issued for Assets Other Than Cash
Stock Issued for Assets Other Than Cash
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Accounting by the issuer.
Accounting by the issuer.
Accounting by the investor.
Accounting by the investor.
Common stock is carried at original issue
price.
Common stock is carried at original issue
price.
Investments in marketable securities are carried at market
value.
Investments in marketable securities are carried at market
value.
Market ValueMarket Value
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Factors affecting market price of preferred stock:
Dividend rate Risk Level of interest rates
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.”
The return based on the market value is called the “dividend
yield.”
Market Price of Preferred StockMarket Price of Preferred Stock
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Factors affecting market price of common stock:
Investors’ expectations of future profitability.
Risk that this level of profitability will not be achieved.
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.
Changes in market value have no impact on the
books of the issuer.
Market Price of Common StockMarket Price of Common Stock
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Ice Cream Parlor
Banana Splits On Sale Now
Stock SplitsStock Splits
Companies use stock splits to reduce market price.
Outstanding shares increase, but par value is decreased proportionately.
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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
Stock Splits - ExampleStock Splits - Example
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Stock DividendsStock Dividends
A company may be short of cash and be unable to pay a cash dividend. A stock dividend is a distribution by a corporation of its own stock to its shareholders.
Stock dividends Affect only stockholders equity accounts i.e. RE & Common
Stock Have no effect on total stockholders equity.
Stock dividends to be distributed to stockholders are proportionate to the number of shares they already own. Example. Suppose you own 300 shares of common stock. The company distributes a 10% stock dividend. You would now receive 30 additional shares and would now have 330 shares but you would be in the same position as before in terms of percentage ownership.
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Recording Stock DividendsRecording Stock Dividends
Stock dividends are issued - To continue dividends but conserve on cash for
investment purposes - To reduce the market price of its stock so as to
make it more attractive to investors.
Dr Retained Earnings (MV of shares)Cr Common Stock (Par value)Cr Paid-in Capital in Excess of Par
Note that a stock dividend merely rearranges the Stockholders equity section of the BS.
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No voting or
dividend rights
Contra equity
account
When stock is reacquired, the corporation records the treasury stock at cost.
When stock is reacquired, the corporation records the treasury stock at cost.
Treasury shares are
issued shares that have been reacquired
by the corporation.
Treasury shares are
issued shares that have been reacquired
by the corporation.
Treasury StockTreasury Stock
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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.
Treasury Stock - ExampleTreasury Stock - Example
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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 = $75,0001,000 shares × $75 = $75,000
1,000 shares × $55 cost = $55,0001,000 shares × $55 cost = $55,000
Treasury Stock - ExampleTreasury Stock - Example
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Statement of Changes in Equity – Presentation as per IAS1
Statement of Changes in Equity – Presentation as per IAS1
•Assume that the Stockholder’s Equity information on slide 38 was as at December 31. 2003 and that for 2004 the following occurred:
•Net income after tax was $30,000
•Issued 10,000 shares of common stock with a par value of $10 for $15
•Paid cash dividends of $5,000 for preference stock and $2000 for common stock.
•Issued stock dividend of 1,000 shares of common stock with a par value of $10. The FMV was also $10
Required: Prepare a statement of changes in equity for the year ended December 31, 2004 (Solution presented in class)