accounting chapter 11

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

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STOCKHOLDERS’ EQUITY:PAID-IN CAPITAL

Chapter11/12text book


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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

Corporations / Joint stock company limited by shares

Corporations / Joint stock company limited by shares


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Publicly Owned Corporations Face Different Rules

Publicly Owned Corporations Face Different Rules

By LAW, publicly owned corporations must:Prepare financial statements in accordance with

GAAP/IFRS.

Have their financial statement audited by an independent CA.

Comply with SECP and submit financial information for review.

By LAW, publicly owned corporations must:Prepare financial statements in accordance with

GAAP/IFRS.

Have their financial statement audited by an independent CA.

Comply with SECP and submit financial information for review.


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Stockholders

Rights

Voting (in person or by proxy).

Proportionate distribution of

dividends.

Proportionate distribution of

assets in a liquidation (last

recourse).

Rights of Stockholders/Shareholders

Rights of Stockholders/Shareholders


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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

StockholdersStockholders 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.

Overall responsibility for managing the company. Selected by votes of stockholders

Overall responsibility for managing the company. Selected by votes 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 Shareholders/Stockholders

Rights of Shareholders/Stockholders


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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



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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




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Legal capital is the amount of capital, required by the state of incorporation, that must remain invested in the business.

Par Value

Nominal Amount

Legal Capital

Characteristics of Capital StockCharacteristics of Capital Stock

11-10


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Exhibits of share capitalExhibits of share capital


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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, 2014.

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, 2014.

Record:

The cash received.

The number of shares issued × the par value per share in the Common Stock/Share Capital account.

The remainder is assigned to Paid-in 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/Share Capital account.

The remainder is assigned to Paid-in 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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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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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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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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The ShareholdersThe Shareholders

DividendsIncrease in market

price per share

Shareholders benefit in two wayswhen a company generates

earnings.

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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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Declared by board of directors.

Declared by board of directors.

Not legally required.

Not legally required.

Creates liability at declaration.

Creates liability at declaration.

Requires sufficient Retained Earnings

and Cash.

Requires sufficient Retained Earnings

and Cash.

Accounting for Cash DividendsAccounting for Cash Dividends


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Date of Declaration Board of directors declares the dividend. Record a liability.

Date of Declaration Board of directors declares the dividend. Record a liability.

Dividend DatesDividend Dates


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Date of Payment Record the payment of the dividend to

stockholders.

Date of Payment Record the payment of the dividend to

stockholders.

Dividend DatesDividend Dates


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All stockholders retain same percentage ownership.

All stockholders retain same percentage ownership.

No change in total stockholders’ equity.

No change in total stockholders’ equity.

No change in par values.

No change in par values.

Distribution of additional shares of stock to stockholders.

Distribution of additional shares of stock to stockholders.

Accounting for Stock Dividends / Bonus issue

Accounting for Stock Dividends / Bonus issue


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Date Description Debit ($) Credit ($)

31 Dec 14 Retained earning 1,050,000

Ordinary Share Capital or Common stock

1,050,000

(Bonus issue or stock dividend of 210,000 shares of common stock )

Suppose Company A has 2,100,000 ordinary shares outstanding with a par value of $5, and on 31 December 2014, it declares a 10% stock dividend.


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Self-test questionSelf-test questionAt the beginning of 2012, Knight Ltd. showed the following amounts in the stockholders’ equity section of its balance sheet: Stockholders’ equity: Capital stock, $1 par value, 1,000,000 shares authorized, 420,000 issued .................................. $ 420,000 Additional paid-in capital: capital stock............................. 7,560,000 Total paid-in capital ......................................................... 7,980,000 Retained earnings ............................................................... 2,000,000 Total stockholders’ equity ............................................... $5,980,000 The transactions relating to stockholders’ equity during the year are as follows: Jan. 5 Declared a dividend of $1 per share to stockholders of record on January 31, payable on

February 25. Feb. 25 Paid the cash dividend declared on January 5. June 15 Distributed a 5% stock dividend to stockholders of record. The market price of the stock at

June 15 was $19 per share. Dec. 31 The Income Summary account, showing net income for the year of $2,100,000, was closed

into the Retained Earnings account. Required

Prepare in general journal form the entries to record the above transactions. Show total Stockholders’ equity as at 31 December 2012


Slide 11-30 Self-test questionSelf-test question

SAM Corporation.Ltd was established early in 2014. The corporation was authorized to issue 8% cumulative preferred stock with a par value of $10, and 500,000 shares of $1 par value common stock. The following transactions occurred during the year: Jan. 4 Issued for cash 40,000 shares of common stock at $8 per share. Jan. 15 Issued 3,000 shares of preferred stock for cash of $300,000. Aug. 12 Acquired land as a building site in exchange for 20,000 shares of common stock.

In view of the appraised value of the land and the progress of the company, the directors agreed that the common stock was to be valued for purposes of this transaction at $10 per share.

Nov. 25 The first annual divided of $8 per share was declared on the preferred stock to be paid December 11as well as declared a cash dividend of $0.10 on the outstanding common stock.

Dec. 11 Paid the cash dividend declared on November 25. Dec. 31 After the revenue and expenses were closed into the Income Summary account,

that amount indicated a net income of $217,500. Instructions

a. Prepare journal entries in general journal form to record the above transactions. Include entries at December 31 to close the Income Summary account.

b. Prepare the stockholders’ equity section of SAM Corporation Ltd. balance sheet at December 31, 2014.


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Any questions?

End of the topicEnd of the topic

accounting chapter 11

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