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  • 1. Slide 1-1 Chapter 11 STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 2. Slide 1-2 Corporations Corporations An entity An entity created by law. created by law. Existence is Existence is separate from separate from owners. owners. Has rights and Has rights and privileges. privileges. McGraw-Hill/Irwin Ownership can be Privately, or Closely, Held Publicly Held © The McGraw-Hill Companies, Inc., 2002
  • 3. Slide 1-3 Advantages of Incorporation Advantages of Incorporation Limited personal Limited personal liability for liability for stockholders. stockholders. Transferability of Transferability of ownership. ownership. Professional Professional management. management. Continuity of Continuity of existence. existence. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 4. Slide 1-4 Disadvantages of Incorporation Disadvantages of Incorporation Heavy taxation. Heavy taxation. Greater regulation. Greater regulation. Cost of formation. Cost of formation. Separation of Separation of ownership and ownership and management. management. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 5. Slide 1-5 Publicly Owned Corporations Face Publicly Owned Corporations Face Different Rules Different Rules By LAW, publicly owned By LAW, publicly owned corporations must: corporations must:  Prepare financial statements  Prepare financial statements in accordance with GAAP. in accordance with GAAP.  Have their financial statement  Have their financial statement audited by an independent audited by an independent CPA. CPA.  Comply with federal securities  Comply with federal securities laws. laws.  Submit financial information  Submit financial information for SEC review. for SEC review. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 6. Slide 1-6 Formation of a Corporation Formation 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. McGraw-Hill/Irwin The costs associated with The costs associated with incorporation are usually incorporation are usually expensed immediately, but expensed immediately, but amortized over 5 years for amortized over 5 years for tax purposes. tax purposes. © The McGraw-Hill Companies, Inc., 2002
  • 7. Slide 1-7 Rights of Stockholders Rights of Stockholders Voting (in person or by proxy). Right s Stockholders McGraw-Hill/Irwin Proportionate distribution of dividends. Proportionate distribution of assets in a liquidation. © The McGraw-Hill Companies, Inc., 2002
  • 8. Slide 1-8 Rights of Stockholders Rights of Stockholders C o r p o r a t e O r g a n iz a t io n C h a r t Stockholder Stockholder Ultimate Ultimate ledgers are often ledgers are often control control maintained by a maintained by a stock transfer stock transfer agent or stock agent or stock registrar. registrar. S t o c k h o ld e r s Stockholders Stockholders usually meet usually meet once a year. once a year. B o a r d o f D ir e c t o r s P r e s id e n t S e c re ta ry McGraw-Hill/Irwin T re a s u re 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 © The McGraw-Hill Companies, Inc., 2002
  • 9. Slide 1-9 Rights of Stockholders Rights of Stockholders Each unit of ownership is called a share of stock. A stock certificate serves as proof that a stockholder has purchased shares. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 10. Slide 1-10 Rights of Stockholders Rights of Stockholders When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 11. Slide 1-11 Functions of the Board of Directors Functions of the Board of Directors C o r p o r a t e O r g a n iz a t io n C h a r t S t o c k h o ld e r s Selected by a Selected by a vote of the vote of the stockholders stockholders B o a r d o f D ir e c t o r s Overall Overall responsibility responsibility for managing for managing the company. the company. P r e s id e n t S e c re ta ry McGraw-Hill/Irwin T re a s u re 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 © The McGraw-Hill Companies, Inc., 2002
  • 12. Slide 1-12 Functions of the Corporate Officers Functions of the Corporate Officers C o r p o r a t e O r g a n iz a t io n C h a r t Contractual and legal Contractual and legal representation representation Custodian of Custodian of funds funds S t o c k h o ld e r s B o a r d o f D ir e c t o r s Chief Chief Accountant Accountant P r e s id e n t S e c re ta ry McGraw-Hill/Irwin T re a s u re 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 © The McGraw-Hill Companies, Inc., 2002
  • 13. Slide 1-13 Paid-In Capital of a Corporation Paid-In Capital of a Corporation S to c k h o ld e r s ' e q u ity is in c r e a s e d in tw o w a y s . C o n tr ib u tio n s b y in v e s to r s in e x c h a n g e fo r c a p ita l s to c k . R e te n tio n o f p r o fits e a rn e d b y th e c o r p o r a tio n . P a id -in C a p ita l R e ta in e d E a r n in g s McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 14. Slide 1-14 Authorization and Issuance of Authorization and Issuance of Capital Stock Capital Stock Authorized Authorized Shares Shares McGraw-Hill/Irwin The maximum number of shares of capital stock that can be sold to the public. © The McGraw-Hill Companies, Inc., 2002
  • 15. Slide 1-15 Authorization and Issuance of Authorization and Issuance of Capital Stock Capital Stock Authorized Authorized Shares Shares Usually Usually shares are shares are sold sold through an through an underwriter. underwriter. McGraw-Hill/Irwin Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold. © The McGraw-Hill Companies, Inc., 2002
  • 16. Slide 1-16 Authorization and Issuance of Authorization and Issuance of Capital Stock Capital Stock Outstanding shares are issued shares that are owned by stockholders. Authorized Authorized Shares Shares Issued Issued Shares Shares Outstanding Shares Treasury Shares McGraw-Hill/Irwin Unissued Shares Treasury shares are issued shares that have been reacquired by the corporation. © The McGraw-Hill Companies, Inc., 2002
  • 17. Slide 1-17 Stockholders’ Equity Stockholders’ Equity Par value is an arbitrary amount assigned to each share of stock when it is authorized. Market price is Market price is the amount that the amount that each share of each share of stock will sell stock will sell for in the for in the market. market. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 18. Slide 1-18 Stockholders’ Equity Stockholders’ Equity Common stock can be issued in three forms: Common stock can be issued in three forms: Par Value Par Value Common Common Stock Stock No-Par No-Par Common Common Stock Stock Stated Value Stated Value Common Common Stock Stock Let’s examine Let’s examine this form of this form of stock. stock. All proceeds All proceeds credited to credited to Common Stock Common Stock Treated like Treated like par value par value common stock common stock McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 19. Slide 1-19 Issuance of Par Value Stock Issuance of Par Value Stock Record: Record: The cash received. The cash received. The number of shares issued × the par value The number of shares issued × the par value per share in the Common Stock account. per share in the Common Stock account. The remainder is assigned to Contributed The remainder is assigned to Contributed Capital in Excess of Par. Capital in Excess of Par. Prepare the journal entry to record an issuance Prepare the journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 of 10,000 shares of $2 par value stock for $25 per share which occurred on September 1, 2003. per share which occurred on September 1, 2003. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 20. Slide 1-20 Issuance of Par Value Stock Issuance of Par Value Stock The journal entry to record an issuance of 10,000 The journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 per share on shares of $2 par value stock for $25 per share on September 1, 2003, should include a credit to September 1, 2003, should include a credit to common stock for the par value of the shares common stock for the par value of the shares issued. issued. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 21. Slide 1-21 Issuance of Par Value Stock Issuance of Par Value Stock McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 22. Slide 1-22 Preferred Stock Preferred Stock A separate class of stock, typically having priority over A separate class of stock, typically having priority over common shares in ...... common shares in  Dividend distributions (rate is usually stated).  Dividend distributions (rate is usually stated).  Distribution of assets in case of liquidation.  Distribution of assets in case of liquidation. Other Features Include: Cumulative Cumulative dividend dividend rights. rights. McGraw-Hill/Irwin Usually Usually callable by callable by the company. the company. Normally has Normally has no voting no voting rights. rights. © The McGraw-Hill Companies, Inc., 2002
  • 23. Slide 1-23 Cumulative Preferred Stock Cumulative Preferred Stock Cumulative Dividends in Dividends in arrears must be arrears must be paid before paid before dividends may be dividends may be paid on common paid on common stock. stock. McGraw-Hill/Irwin Vs. Noncumulative Undeclared Undeclared dividends from dividends from current and prior current and prior years do not have years do not have to be paid in future to be paid in future years. years. © The McGraw-Hill Companies, Inc., 2002
  • 24. Slide 1-24 Stock Preferred as to Dividends Stock Preferred as to Dividends 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. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 25. Slide 1-25 Stock Preferred as to Dividends Stock Preferred as to Dividends 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. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 26. Slide 1-26 Convertible Preferred Stock Convertible Preferred Stock IIjust converted 100 just converted 100 shares of preferred stock shares of preferred stock into 1,000 shares of into 1,000 shares of common stock and ended common stock and ended up with a higher dividend up with a higher dividend yield! yield! Gee, II can’t Gee, can’t do that with do that with MY preferred MY preferred stock! stock! Some preferred stock is convertible into shares of common stock. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 27. Slide 1-27 Preferred Stock Preferred Stock McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 28. Slide 1-28 Stock Issued for Assets Other Than Stock Issued for Assets Other Than Cash Cash Companies sometimes issue Companies sometimes issue stock in exchange for nonstock in exchange for noncash assets. cash assets. Since no cash is received, Since no cash is received, record the transaction at the record the transaction at the market value of the goods or market value of the goods or services received. services received. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 29. Slide 1-29 I love this stuff! Can we do some more? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 30. Slide 1-30 Market Value Market Value Accounting by Accounting by the issuer. the issuer. Common stock is Common stock is carried at original issue carried at original issue price. price. Accounting by Accounting by the investor. the investor. Investments in Investments in marketable securities marketable securities are carried at market are carried at market value. value. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 31. Slide 1-31 Market Price of Preferred Stock Market Price of Preferred Stock Factors affecting market price Factors affecting market price of preferred stock: of preferred stock: Dividend rate Dividend rate Risk Risk Level of interest rates Level of interest rates McGraw-Hill/Irwin The return based on The return based on the market value is the market value is called the “dividend called the “dividend yield.” yield.” © The McGraw-Hill Companies, Inc., 2002
  • 32. Slide 1-32 Market Price of Common Stock Market Price of Common Stock Factors affecting Factors affecting market price of market price of common stock: common stock: Investors’ Investors’ expectations of expectations of future profitability. future profitability. Risk that this level Risk that this level of profitability will of profitability will not be achieved. not be achieved. McGraw-Hill/Irwin Changes in market value Changes in market value have no impact on the have no impact on the books of the issuer. books of the issuer. © The McGraw-Hill Companies, Inc., 2002
  • 33. Slide 1-33 Stock Splits Stock Splits  Companies use stock splits to reduce market price.  Outstanding shares increase, but par value is decreased proportionately. McGraw-Hill/Irwin Ice Cream Parlor Banana Splits On Sale Now © The McGraw-Hill Companies, Inc., 2002
  • 34. Slide 1-34 Stock Splits -- Example Stock Splits Example 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 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 35. Slide 1-35 Treasury Stock Treasury Stock No voting or dividend rights Contra equity account Treasury Treasury shares are shares are issued issued shares that shares that have been have been reacquired reacquired by the by the corporation. corporation. When stock is reacquired, the corporation When stock is reacquired, the corporation records the treasury stock at cost. records the treasury stock at cost. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 36. Slide 1-36 Treasury Stock -- Example Treasury Stock Example 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. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 37. Slide 1-37 Treasury Stock -- Example Treasury Stock Example 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 = $75,000 1,000 shares × $75 = $75,000 1,000 shares × $55 cost = $55,000 1,000 shares × $55 cost = $55,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 38. Slide 1-38 Stockholders’ Equity -- Presentation Stockholders’ Equity Presentation McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  • 39. Slide 1-39 End of Chapter 11 End of Chapter 11 This isn’t what I meant when I asked for stock for my birthday! McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002