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  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-1 STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Chapter 11
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-2 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-3 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-4 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-5 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. Have their financial statement audited by an independent CPA. Comply with federal securities laws. Submit financial information for SEC review. 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 McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-6 The costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes. The costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes. Formation of a CorporationFormation 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 McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-7 Stockholders Right s Voting (in person or by proxy). Proportionate distribution of dividends. Proportionate distribution of assets in a liquidation. Rights of StockholdersRights of Stockholders
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-8 C o r p o r a te O r g a n iz a tio n C h a r t S e c r e t a r y T r e a s u r e r C o n t r o lle r O t h e r V ic e P r e s id e n t s P r e s id e n t B o a r d o f D ir e c t o r s S t o c k h o ld e r sUltimate 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-9 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-10 When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate. Rights of StockholdersRights of Stockholders
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-11 C o r p o r a te O r g a n iz a tio n C h a r t S e c r e t a r y T r e a s u r e r C o n t r o lle r O t h e r V ic e P r e s id e n t s P r e s id e n t B o a r d o f D ir e c t o r s S t o c k h o ld e r s Overall 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-12 C o r p o r a te O r g a n iz a tio n C h a r t S e c r e t a r y T r e a s u r e r C o n t r o lle r O t h e r V ic e P r e s id e n t s P r e s id e n t B o a r d o f D ir e c t o r s S t o c k h o ld e r s 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-13 P a i d - in C a p it a l C o n t r ib u t i o n s b y i n v e s t o r s i n e x c h a n g e f o r c a p it a l s t o c k . R e t a in e d E a r n in g s R e t e n t i o n o f p r o f it s e a r n e d b y t h e c o r p o r a t io n . S t o c k h o ld e r s ' e q u it y is in c r e a s e d in t w o w a y s . Paid-In Capital of a CorporationPaid-In Capital of a Corporation
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-14 The maximum number of shares of capital stock that can be sold to the public. Authorized Shares Authorized Shares Authorization and Issuance of Capital Stock Authorization and Issuance of Capital Stock
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-15 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. Authorized Shares Authorized Shares Authorization and Issuance of Capital Stock Authorization and Issuance of Capital Stock
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-16 Unissued Shares Treasury Shares Outstanding Shares Treasury shares are issued shares that have been reacquired by the corporation. Issued Shares Issued Shares Outstanding shares are issued shares that are owned by stockholders. Authorized Shares Authorized Shares Authorization and Issuance of Capital Stock Authorization and Issuance of Capital Stock
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-17 Par value is anPar value is an arbitraryarbitrary amountamount assigned toassigned to each share ofeach share of stock when it isstock 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-18 Common stock can be issued in three forms:Common stock can be issued in three forms: No-Par Common Stock No-Par Common Stock Par Value Common Stock Par Value Common Stock Stated Value Common Stock Stated 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 Treated like par value common stock Treated like par value common stock Stockholders’ EquityStockholders’ Equity
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-19 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. 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 StockIssuance of Par Value Stock
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-20 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-21 Issuance of Par Value StockIssuance of Par Value Stock
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-22 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-23 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-24 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-25 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-26 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-27 Preferred StockPreferred Stock
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-28 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-29 I love this stuff! Can we do some more?
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-30 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-31 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-32 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-33 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.
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-34 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-35 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-36 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-37 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
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-38 Stockholders’ Equity - PresentationStockholders’ Equity - Presentation
  • © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 1-39 This isn’t what I meant when I asked for stock for my birthday! End of Chapter 11End of Chapter 11