Slide

11-1

Chapter

11

STOCKHOLDERS
EQUITY:
PAID-IN CAPITAL

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Slide
11-2

Corporations
Corporations
An
Anentity
entity
created
createdby
bylaw.
law.
Existence
Existenceis
is
separate
separatefrom
from
owners.
owners.
Has
Hasrights
rightsand
and
privileges.
privileges.
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Ownership
can be

Privately, or
Closely, Held

Publicly Held

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Slide
11-3

Advantages
Advantages of
of Incorporation
Incorporation
Limited
Limitedpersonal
personal
liability
liabilityfor
for
stockholders.
stockholders.
Transferability
Transferability of
of
ownership.
ownership.
Professional
Professional
management.
management.
Continuity
Continuityof
of
existence.
existence.
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Slide
11-4

Disadvantages
Disadvantages of
of Incorporation
Incorporation
Heavy
Heavytaxation.
taxation.
Greater
Greaterregulation.
regulation.
Cost
Cost of
of formation.
formation.
Separation
Separation of
of
ownership
ownership and
and
management.
management.
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Slide
11-5

Publicly
Publicly Owned
Owned Corporations
Corporations Face
Face
Different
Different Rules
Rules

By
By LAW,
LAW, publicly
publicly owned
owned
corporations
corporations must:
must:

Prepare
Prepare financial
financial statements
statements
in
in accordance
accordance with
with GAAP.
GAAP.

Have
Have their
their financial
financial statement
statement
audited
audited by
by an
an independent
independent
CPA.
CPA.

Comply
Comply with
with federal
federal securities
securities
laws.
laws.

Submit
Submit financial
financial information
information
for
for SEC
SEC review.
review.
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Slide
11-6

Formation
Formation of
of aa Corporation
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
Thecosts
costsassociated
associatedwith
with
incorporation
incorporationare
areusually
usually
expensed
expensedimmediately,
immediately,but
but
amortized
amortized over
over 55years
yearsfor
for
tax
taxpurposes.
purposes.

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Slide
11-7

Rights
Rights of
of Stockholders
Stockholders
Voting (in person
or by proxy).
Right
s
Stockholders

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Proportionate
distribution of
dividends.
Proportionate
distribution of
assets in a
liquidation.

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Slide
11-8

Rights
Rights of
of Stockholders
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
controlby
maintained
maintained
byaa
stock
stocktransfer
transfer
agent
agentor
or stock
stock
registrar.
registrar.

S t o c k h o ld e r s

Stockholders
Stockholders
usually
usuallymeet
meet
once
onceaayear.
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
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P r e s id e n t s

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Slide
11-9

Rights
Rights of
of Stockholders
Stockholders
Each unit of
ownership is
called a share of
stock.
A stock
certificate serves
as proof that a
stockholder has
purchased
shares.

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Slide
11-10

Rights
Rights of
of Stockholders
Stockholders
When the stock
is sold, the
stockholder
signs a transfer
endorsement on
the back of the
stock certificate.

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Slide
11-11

Functions
Functions of
of the
the Board
Board of
of Directors
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
Selectedby
byaa
vote
voteof
ofthe
the
stockholders
stockholders

B o a r d o f D ir e c t o r s

Overall
Overall
responsibility
responsibility
for
formanaging
managing
the
thecompany.
company.

P r e s id e n t
S e c re ta ry
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Slide
11-12

Functions
Functions of
of the
the Corporate
Corporate Officers
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
Contractualand
andlegal
legal
representation
representation
Custodian
Custodianof
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
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Slide
11-13

Paid-In
Paid-In Capital
Capital of
of aa Corporation
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

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Slide
11-14

Authorization
Authorization and
and Issuance
Issuance of
of
Capital
Capital Stock
Stock

Authorized
Authorized
Shares
Shares

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The maximum
number of
shares of capital
stock that can be
sold to the
public.

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Slide
11-15

Authorization
Authorization and
and Issuance
Issuance of
of
Capital
Capital Stock
Stock

Authorized
Authorized
Shares
Shares

Usually
Usually
shares
sharesare
are
sold
sold
through
throughan
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.

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Slide
11-16

Authorization
Authorization and
and Issuance
Issuance of
of
Capital
Capital Stock
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.

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Slide
11-17

Stockholders
StockholdersEquity
Equity
Par value is an
arbitrary
amount
assigned to
each share of
stock when it is
authorized.
Market
Market price
price is
is
the
theamount
amountthat
that
each
eachshare
shareof
of
stock
stockwill
willsell
sell
for
forin
inthe
the
market.
market.
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Slide
11-18

Stockholders
StockholdersEquity
Equity
Common
Common stock
stock can
can be
be issued
issued in
in three
three forms:
forms:
Par
ParValue
Value
Common
Common
Stock
Stock

No-Par
No-Par
Common
Common
Stock
Stock

Stated
StatedValue
Value
Common
Common
Stock
Stock

Lets
Letsexamine
examine
this
thisform
form of
of
stock.
stock.

All
Allproceeds
proceeds
credited
creditedto
to
Common
CommonStock
Stock

Treated
Treated like
like par
par
value
value common
common
stock
stock

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Slide
11-19

Issuance
Issuance of
of Par
Par Value
Value Stock
Stock
Record:
Record:
The
Thecash
cashreceived.
received.
The
Thenumber
numberof
ofshares
sharesissued
issued the
thepar
par value
value
per
per share
sharein
inthe
the Common
CommonStock
Stock account.
account.
The
Theremainder
remainderis
isassigned
assigned to
to Contributed
Contributed
Capital
Capitalin
in Excess
Excess of
ofPar.
Par.

Prepare
Prepare the
the journal
journal entry
entry to
to record
record an
an issuance
issuance
of
of 10,000
10,000 shares
shares of
of $2
$2 par
par value
value stock
stock for
for $25
$25
per
per share
share which
which occurred
occurred on
on September
September 1,
1, 2003.
2003.
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Slide
11-20

Issuance
Issuance of
of Par
Par Value
Value Stock
Stock
The
The journal
journal entry
entry to
to record
record an
an issuance
issuance of
of 10,000
10,000
shares
shares of
of $2
$2 par
par value
value stock
stock for
for $25
$25 per
per share
share on
on
September
September 1,
1, 2003,
2003, should
should include
include aa credit
credit to
to
common
common stock
stock for
for the
the par
par value
value of
of the
the shares
shares
issued.
issued.

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Slide
11-21

Issuance
Issuance of
of Par
Par Value
Value Stock
Stock

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Slide
11-22

Preferred
Preferred Stock
Stock
AAseparate
separateclass
classof
ofstock,
stock,typically
typicallyhaving
havingpriority
priorityover
over
common
commonshares
sharesin
in......

Dividend
Dividenddistributions
distributions(rate
(rateisisusually
usuallystated).
stated).

Distribution
Distributionof
ofassets
assetsin
incase
caseof
ofliquidation.
liquidation.

Other Features Include:

Cumulative
Cumulative
dividend
dividend
rights.
rights.
McGraw-Hill/Irwin

Usually
Usually
callable
callable by
by
the
the company.
company.

Normally
Normally has
has
no
no voting
voting
rights.
rights.

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Slide
11-23

Cumulative
Cumulative Preferred
Preferred Stock
Stock
Cumulative
Dividends
Dividends in
in
arrears
arrears must
must be
be
paid
paid before
before
dividends
dividends may
may be
be
paid
paid on
on common
common
stock.
stock.

McGraw-Hill/Irwin

Vs.

Noncumulative
Undeclared
Undeclared
dividends
dividends from
from
current
current and
and prior
prior
years
years do
do not
not have
have
to
to be
be paid
paid in
in future
future
years.
years.

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Slide
11-24

Stock
Stock Preferred
Preferred as
as to
to Dividends
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.
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Slide
11-25

Stock
Stock Preferred
Preferred as
as to
to Dividends
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.
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Slide
11-26

Convertible
Convertible Preferred
Preferred Stock
Stock
IIjust
justconverted
converted100
100shares
shares
of
ofpreferred
preferredstock
stockinto
into1,000
1,000
shares
sharesof
ofcommon
commonstock
stockand
and
ended
endedup
upwith
withaahigher
higher
dividend
dividendyield!
yield!

Gee,
Gee,II cant
cant
do
do that
that with
with
MY
MY preferred
preferred
stock!
stock!

Some preferred
stock is convertible
into shares of
common stock.
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Slide
11-27

Preferred
Preferred Stock
Stock

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Slide
11-28

Stock
Stock Issued
Issued for
for Assets
Assets Other
Other Than
Than
Cash
Cash
Companies
Companiessometimes
sometimesissue
issue
stock
stockin
inexchange
exchange for
fornonnoncash
cashassets.
assets.

Since
Sinceno
nocash
cashis
isreceived,
received,
record
recordthe
thetransaction
transactionat
atthe
the
market
marketvalue
value of
of the
thegoods
goodsor
or
services
servicesreceived.
received.
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Slide
11-29

I love this
stuff!
Can we do
some more?
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Slide
11-30

Market
Market Value
Value
Accounting
Accounting by
by
the
the issuer.
issuer.

Common
Common stock
stock is
is
carried
carried at
at original
original issue
issue
price.
price.

Accounting
Accounting by
by
the
the investor.
investor.

Investments
Investments in
in
marketable
marketable securities
securities
are
are carried
carried at
at market
market
value.
value.

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Slide
11-31

Market
Market Price
Price of
of Preferred
Preferred Stock
Stock
Factors
Factorsaffecting
affectingmarket
marketprice
price
of
of preferred
preferredstock:
stock:
Dividend
Dividendrate
rate
Risk
Risk
Level
Levelof
ofinterest
interestrates
rates

McGraw-Hill/Irwin

The
Thereturn
returnbased
basedon
on
the
themarket
market value
valueis
is
called
calledthe
thedividend
dividend
yield.
yield.

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Slide
11-32

Market
Market Price
Price of
of Common
Common Stock
Stock
Factors
Factors affecting
affecting
market
market price
price of
of
common
common stock:
stock:

Investors
Investors
expectations
expectations of
of
future
future profitability.
profitability.

Risk
Risk that
that this
this level
level
of
of profitability
profitability will
will
not
not be
be achieved.
achieved.
McGraw-Hill/Irwin

Changes
Changesin
inmarket
market value
value
have
haveno
noimpact
impacton
onthe
the
books
booksof
ofthe
theissuer.
issuer.

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Slide
11-33

Stock
Stock Splits
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

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Slide
11-34

Stock
Stock Splits
Splits -- Example
Example
Assume that a corporation had 5,000 shares
of $1 par value common stock outstanding
before a 2for1 stock split.

Increase
Decrease
No
Change
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Slide
11-35

Treasury
Treasury Stock
Stock
No voting
or
dividend
rights

Contra
equity
account

Treasury
Treasury
shares
shares are
are
issued
issued
shares
sharesthat
that
have
havebeen
been
reacquired
reacquired
by
bythe
the
corporation.
corporation.

When
When stock
stock is
is reacquired,
reacquired, the
the corporation
corporation
records
records the
the treasury
treasury stock
stock at
at cost.
cost.
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Slide
11-36

Treasury
Treasury Stock
Stock -- Example
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.

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Slide
11-37

Treasury
Treasury Stock
Stock -- Example
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
1,000shares
shares$75
$75== $75,000
$75,000

1,000
1,000shares
shares $55
$55 cost
cost == $55,000
$55,000
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Slide
11-38

Stockholders
StockholdersEquity
Equity -- Presentation
Presentation

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Slide
11-39

End
End of
of Chapter
Chapter 11
11
This isnt what I
meant when I asked
for stock for my
birthday!

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