18-1 capital stock chapter 18. 18-2 stock stock a unit of ownership in a corporation is called a...

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CAPITAL STOCK

CHAPTER 18CHAPTER 18

18-2

StockStock

A unit of ownership in a corporation is called a share of stock.

Stock certificate

Stockowners

Investment

Corporation

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StockStock

Shareholders’ meeting Board of directorsElect

Appoint

Corporate officers and managers

They are responsible for the operations of

the business.

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StockStock

Corporation

Issue

Common Stock Preferred Stock

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Common StockCommon Stock

If only one stock is issued by the corporation, it is called common stock.

The common stockholders have the right to vote on certain general management matters.

They have access to the financial report about corporation performance.

A portion of dividends is issued by the company to its common stockholders.

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Common StockCommon Stock

Common Stock

The common stock means that all other creditors and priority claims are settled ahead of those of the common stockholders.

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Preferred StockPreferred Stock

Preferred stock may be issued so that the company can obtain money from investors who have different investment goals.

At maturity date, the company will purchase back the preferred stocks.

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Differences Common stock

Preferred stock

The right to vote on important issues

Have No

Declare dividend After preferred stock

The first to be paid

Liquidation After preferred stock

After the creditor

Callable feature Cannot be recalled Can be made callable

The Difference between Common The Difference between Common Stock and Preferred StockStock and Preferred Stock

The company can force the preferred shareholders to cash out of their position in exchange for a “call price” that is often set at a

certain percentage of par value.

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Issuance of Par Value StockIssuance of Par Value Stock

Stocks are required to have a designated par value.

Par value “Legal capital” of the company represent

When par value stock is issued, the appropriate capital stock account is credited for the par value regardless of whether the proceeds are more or less than the par value.

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Issuance of Par Value StockIssuance of Par Value Stock

Suppose that Anderson Corporation issues 100,000 shares of $10 par value stock for $10 per share.

The entry

Cash $1,000,000

Common Stock $1,000,000

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If Anderson issues 100,000 shares of $1 par value stock for $10 per share, the entry to record the issuance of the stock at the price in excess of par value would be as follows:

Issuance of Par Value StockIssuance of Par Value Stock

The entry

Cash $1,000,000

Common Stock $100,000

Paid-in Capital in Excess of Par 900,000

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Issuance of No-Par StockIssuance of No-Par Stock

Stock may be issued without a par value.

However, to protect the corporation’s assets for the creditors, all or part of the proceeds from the issuance of no-par stock are required to be

designated as legal capital not subject to withdrawal, except in liquidation.

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Issuance of No-Par StockIssuance of No-Par Stock

Board of directors

Set a stated value

on

No-par stock

It represents the legal capital.

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Issuance of No-Par StockIssuance of No-Par Stock

Suppose that Anderson issued 100,000 shares of no-par common stock at $12 on January 1, 20X0.

The entry

Jan. 1, 20X0 Cash $1,200,000

Common Stock $1,200,000

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Issuance of No-Par StockIssuance of No-Par Stock

If the stock does not have a par value, all proceeds of the issue are credited to Common Stock and are part of the company’s legal capital.

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Issuance of No-Par StockIssuance of No-Par Stock

Assume that Anderson’s board of directors set a $10 stated value on its no-par stock. They issued 100,000 shares of no-par common stock with a $10 par value for $12 per share.

Jan. 1, 20X0 Cash $1,200,000

Common Stock $1,000,000

Paid-in Capital in Excess of Par 200,000

The entry

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Assets

DividendsDividends

Usually cash, in proportion to the number

of shares of stock held

Stockholder Corporation

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DividendsDividends

Corporation

Sufficient cashA positive balance

in retained earnings

Stockholder

If a company has a negative retained

earnings account would not pay a dividend unless it is part of a

corporate liquidation action.

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DividendsDividends

The dividend will be paid to the stockholders of record on the date of payment.

The date of record

It is the date on which ownership of the

stock of a company, and the right to

receive a dividend is determined.

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DividendsDividends

CorporationShares of stock

Shares of stock

The right to the cash dividend remains with first person and

does not transfer with the shares to the second person.

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DividendsDividends

Assume that the board of directors has decided that sufficient cash is available to pay a $50,000 cash dividend to the common stockholders.

Assume that the dividend is declared by the board of directors for stockholders on November 21, 20X0. It is recorded on December 10, 20X0 to be paid on December 31, 20X0.

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DividendsDividends

The entry

Date of declaration

November 21 Dividends $50,000

Dividends Payable $50,000

Date of record

No entries

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Date of payment

December 31 Dividends Payable $50,000

Cash $50,000

The entry

DividendsDividends

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