This document provides an overview of stockholders' equity, including paid-in capital and different types of stock issued by corporations. It discusses the formation of corporations and advantages/disadvantages of incorporation. It also covers key aspects of common stock, preferred stock, treasury stock, and stock splits. The slides define important terms, provide examples of accounting entries, and illustrate how different transactions affect stockholders' equity.

1. Slide
11-1
Chapter
11 STOCKHOLDERS’
EQUITY:
PAID-IN CAPITAL
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

2. Slide
11-2
Corporations
An entity
created by law.
Privately, or
Existence is Closely, Held
Ownership
separate from
can be
owners.
Has rights and
privileges.
Publicly Held
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

3. Slide
11-3
Advantages of Incorporation
Limited personal
liability for
stockholders.
Transferability of
ownership.
Professional
management.
Continuity of
existence.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

4. Slide
11-4
Disadvantages of Incorporation
Heavy taxation.
Greater regulation.
Cost of formation.
Separation of
ownership and
management.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

5. Slide
11-5
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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

6. Slide
11-6
Formation of a Corporation
 Each corporation is The costs associated with
formed according to incorporation are usually
the laws of the state expensed immediately, but
amortized over 5 years for
where it is located.
tax purposes.
 The application for
corporate status is
called the Articles of
Incorporation.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

7. Slide
11-7
Rights of Stockholders
 Voting (in person
or by proxy).
 Proportionate
Rights distribution of
dividends.
 Proportionate
Stockholders distribution of
assets in a
liquidation.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

8. Slide
11-8
Rights of Stockholders
C orporate O rganization C hart
Stockholder Stockholders
Ultimate
ledgers are often S to ckho ld ers usually meet
control
maintained by a once a year.
stock transfer
agent or stock B o a rd o f D irecto rs
registrar.
P resid ent
S ecreta ry T rea surer C o ntro ller O ther V ice
P resid ents
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

9. Slide
11-9
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
11-10
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
11-11
Functions of the Board of Directors
Corporate O rganization Chart
Stockholders
Overall
Selected by a
responsibility
vote of the Board of Directors for managing
stockholders
the company.
President
Secretary Treasurer Controller Other Vice
Presidents
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

12. Slide
11-12
Functions of the Corporate Officers
C orporate O rganization C hart
Contractual and legal
representation
S to c k ho ld e rs
Custodian of Chief
funds Accountant
B o a rd o f D ire c to rs
P re sid e nt
S e c re ta ry T re a sure r C o ntro ller O ther V ice
P resid ents
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

13. Slide
11-13
Paid-In Capital of a Corporation
S to c k h o ld e rs' e q u ity is
in c re a se d in tw o w a y s.
C o n trib u tio n s b y R e te n tio n o f p ro fits
in ve sto rs in e x c h a n g e e a rn e d b y th e
fo r c a p ita l sto c k . c o rp o ra tio n .
Pa id -in C a p ita l R e ta in e d E a rn in g s
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

14. Slide
11-14
Authorization and Issuance of
Capital Stock
Authorized
Shares
The maximum
number of
shares of capital
stock that can be
sold to the
public.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

15. Slide
11-15
Authorization and Issuance of
Capital Stock
Authorized
Shares
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
Usually stock that stock that
shares are have been never have
sold sold. been sold.
through an
underwriter.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

16. Slide
11-16
Authorization and Issuance of
Capital Stock
Authorized Outstanding shares are
issued shares that are
Shares owned by
stockholders.
Outstanding
Unissued
Issued Shares
Shares
Shares
Treasury shares are
Treasury issued shares that
Shares have been reacquired
by the corporation.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

17. Slide
11-17
Stockholders’ Equity
Par value is an
arbitrary
amount
assigned to
each share of
stock when it is
authorized.
Market price is
the amount that
each share of
stock will sell
for in the
market.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

18. Slide
11-18
Stockholders’ Equity
Common stock can be issued in three forms:
Par Value No-Par Stated Value
Common Common Common
Stock Stock Stock
Let’s examine All proceeds Treated like par
this form of credited to value common
stock. Common Stock stock
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

19. Slide
11-19
Issuance of Par Value Stock
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.
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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

20. Slide
11-20
Issuance of Par Value Stock
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.
Date Description Debit Credit
1-Sep Cash 250,000
Common Stock 20,000
Contributed Capital in
Excess of Par 230,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

21. Slide
11-21
Issuance of Par Value Stock
Stockholders' Equity with Common Stock
Stockholders' Equity
Contributed capital:
Common Stock - $2 par value; 50,000 shares
authorized; 10,000 shares issued and
outstanding $ 20,000
Contributed Capital in Excess of Par 230,000
Retained earnings 65,000
Total stockholders' equity $ 315,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

22. Slide
11-22
Preferred Stock
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.
Other Features Include:
Cumulative Usually Normally has
dividend callable by no voting
rights. the company. rights.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

23. Slide
11-23
Cumulative Preferred Stock
Cumulative Vs. Noncumulative
Dividends in Undeclared
arrears must be dividends from
paid before current and prior
dividends may be years do not have
paid on common to be paid in future
stock. years.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

24. Slide
11-24
Stock Preferred as to Dividends
Example: Consider the following partial Statement of
Stockholders’ Equity.
Common stock, $50 par value; 4,000 shares
authorized, issued and outstanding $ 200,000
Preferred stock, 9%, $100 par value; 1,000
shares authorized, issued and outstanding 100,000
Total contributed capital $ 300,000
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
11-25
Stock Preferred as to Dividends
Preferred Common
If Preferred Stock is Noncumulative:
Example: Consider the following partial Statement of
Year 2002 $5,000 dividends declared $ 5,000 $ -
Stockholders’ Equity.
Year 2003
Step 1: Current preferred dividend
Common stock, $50 par value; 4,000 shares $ 9,000
authorized, issued and outstanding
Step 2: Remainder to common shareholders $ 200,000
$ 33,000
Preferred stock, 9%, $100 par value; 1,000
If Preferred Stock is Cumulative: outstanding
shares authorized, issued and 100,000
Total contributed capital
Year 2002 $5,000 dividends declared $ 5,000 300,000 -
$ $
Year 2003
During 2000, the directors declare cash dividends of
Step 1: Dividends in arrears $ 4,000
Step 2: Currentyear 2001, the directors declare cash
$5,000. In preferred dividend 9,000
Step 3: Remainder to common shareholders
dividends of $42,000. $ 29,000
Totals $ 13,000 $ 29,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

26. Slide
11-26
Convertible Preferred Stock
I just converted 100 shares Gee, I can’t
of preferred stock into do that with
1,000 shares of common MY preferred
stock and ended up with a stock!
higher dividend yield!
Some preferred
stock is convertible
into shares of
common stock.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

27. Slide
11-27
Preferred Stock
Stockholders' Equity with Common and Preferred Stock
Stockholders' Equity
Contributed capital:
Preferred Stock - $100 par value; 1,000 shares
authorized; 50 shares issued and
outstanding $ 5,000
Common Stock - $10 par value; 50,000 shares
authorized; 30,000 shares issued and
outstanding 300,000
Contributed Capital in Excess of Par 1,000
Retained earnings 65,000
Total stockholders' equity $ 371,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

28. Slide
11-28
Stock Issued for Assets Other Than
Cash
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.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

29. Slide
11-29
I love this
stuff!
Can we do
some more?
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

30. Slide
11-30
Market Value
Common stock is
Accounting by
carried at original issue
the issuer.
price.
Investments in
Accounting by marketable securities
the investor. are carried at market
value.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

31. Slide
11-31
Market Price of Preferred Stock
Factors affecting market price The return based on
of preferred stock: the market value is
l Dividend rate called the “dividend
l Risk yield.”
l Level of interest rates
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

32. Slide
11-32
Market Price of Common Stock
Factors affecting Changes in market value
market price of have no impact on the
common stock: books of the issuer.
l Investors’
expectations of
future profitability.
l Risk that this level
of profitability will
not be achieved.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

33. Slide
11-33
Stock Splits
 Companies use stock
splits to reduce market
price.
Ice Cream Parlor
 Outstanding shares
increase, but par value
is decreased Banana Splits
On Sale Now
proportionately.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

34. Slide
11-34
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.
Before After
Split Split
Common Stock Shares 5,000 10,000 Increase
Par Value per Share $ 1.00 $ 0.50 Decrease
Total Par Value $ 5,000 $ 5,000 No
Change
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

35. Slide
11-35
Treasury Stock
Treasury
No voting shares are
Contra issued
or shares that
equity have been
dividend
account reacquired
rights by the
corporation.
When stock is reacquired, the corporation
records the treasury stock at cost.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

36. Slide
11-36
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.
D a te D e sc ri p ti o n De b it C re d i t
1-M ay T r e asu r y S to ck 165,000
C ash 165,000
3 0 0 0 sh a re s × $ 5 5 = $ 1 6 5 , 0 0 0
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

37. Slide
11-37
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
Date
D a te Description
D e sc ri p ti o n Debit
De b it Credit
C re d i t
3-Dec Cash 75,000
Treasury Stock 55,000
Contributed Capital in
Excess of Par 20,000
1,000 shares × $55 cost = $55,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

38. Slide
11-38
Stockholders’ Equity - Presentation
Stockholders' Equity
Contributed capital:
Preferred Stock - $100 par value; 1,000 shares
authorized; 50 shares issued & outstanding $ 5,000
Common Stock - $10 par value; 50,000 shares
authorized; 30,000 shares issued and
outstanding 300,000
Contributed Capital in Excess of Par 21,000
Retained earnings 65,000
Subtotal $ 391,000
Less: Treasury stock 110,000
Total Stockholders' equity $ 281,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

39. Slide
11-39
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