12-1 s tockholders’ e quity: c lasses o f c apital s tock chapter 12
TRANSCRIPT
12-1
STOCKHOLDERS’ EQUITY:
CLASSES OF CAPITAL STOCK
CHAPTER 12CHAPTER 12
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The CorporationThe Corporation
A business entity recognized by law with existence separate and distinct from its
owners.
Acorporation
can . . .
Acorporation
can . . .
Enter intocontracts
Enter intocontracts
Buy, sell, orhold property
Buy, sell, orhold property
Borrowmoney
Borrowmoney
Hire and fireemployees
Hire and fireemployees
Sue and besued
Sue and besued
433
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Advantages of the Advantages of the Corporate Form of Business* Corporate Form of Business*
Easy capitalgeneration
Easy capitalgeneration
Continuousexistence
Continuousexistence
Limited liability
Limited liability
Easy transferof ownership
Easy transferof ownership
Separation ofowners and entity
Separation ofowners and entity
Professionalmanagement
Professionalmanagement
* Relative to a Partnership* Relative to a Partnership434
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Disadvantages of the Disadvantages of the Corporate Form of Business* Corporate Form of Business*
Governmentalregulation
Governmentalregulation
Doubletaxation
Doubletaxation
Limited ability toraise creditor
capital
Limited ability toraise creditor
capital
Entrenched,inefficient
management
Entrenched,inefficient
management
* Relative to a Partnership* Relative to a Partnership434
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Incorporators
Persons who form corporation
Articles of incorporation
Application for corporate charter
Corporate Charter
Contract between state and incorporators granting legal existence to corporation
CorporationsCorporationsGeneral TerminologyGeneral Terminology
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CorporationsCorporationsGeneral TerminologyGeneral Terminology
Corporate bylaws Rules adopted by board of directors to
govern conduct of corporate affairs
Organization costs Intangible assets subject to amortization
e.g., Legal and accounting costs
Domestic vs. Foreign Corporation Depends on state in which chartered
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Directing the CorporationDirecting the CorporationStockholder Rights
To dispose of their shares
Preemptive right Preemptive right to buy new shares in proportion to shares already owned
To share in dividends when declared
To share in assets in event of liquidation
To participate in management by voting at stockholders’ meetings
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Directing the CorporationDirecting the Corporation
Elected bywhom?
Elected bywhom?
Formulatescorporate policies
Formulatescorporate policies
Hires corporateofficers
Hires corporateofficers
Boardof
Directors Composition of board?
Composition of board?
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Directing the CorporationDirecting the Corporation
Includes president,vice presidents,secretary, and
treasurer
Includes president,vice presidents,secretary, and
treasurer
Responsible forroutine corporate
operations
Responsible forroutine corporate
operations
Carry out thepolicies set by theboard of directors
Carry out thepolicies set by theboard of directors
Corporate Officers
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Directing the CorporationDirecting the CorporationCorporate Organization Chart
Secretary Treasurer Vice PresidentProduction
Vice PresidentSales
President (CEO)
Board of Directors
Stockholders
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Capital StockCapital Stock
A share of stock is a transferable unit of ownership.
Stock ownership records may be kept by external parties called stock-transfer
agents and stock registrars.
100 Shares
VidTel, Inc.Common Stock
Stock CertificateStock Certificate
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Capital StockCapital Stock
The two classes of capital stock are common and preferred.
100 Shares
VidTel, Inc.Common Stock
Capital Stock may have Par value No par value No par value with a stated value
Stock CertificateStock Certificate
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Capital StockCapital Stock
Par value is an arbitrary amount assigned to each share of stock
Par value is an arbitrary amount assigned to each share of stock
Par is not an indication of market value!!! Par is not an indication of market value!!!
100 Shares
$5 par value
VidTel, Inc.Common Stock
Stock CertificateStock Certificate
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Capital StockCapital Stock
100 Shares
No-par value
VidTel, Inc.Common Stock
No-par stock has no par or stated value.(This is permitted in most states.)
No-par stock has no par or stated value.(This is permitted in most states.)
Why would no-par stock be used?Why would no-par stock be used?
Stock CertificateStock Certificate
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Capital StockCapital Stock
100 Shares
No-par,$5 stated value
VidTel, Inc.Common Stock
No-par, stated value stockNo-par, stated value stock
Stock without par value, but to whicha stated value has been assigned
by the board of directors.
Stock without par value, but to whicha stated value has been assigned
by the board of directors.
Stock CertificateStock Certificate
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Capital StockCapital Stock
Market Value
Price at which a seller is willing to sell for and a buyer is willing to buy for in the
marketplace.
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Capital StockCapital Stock
Liquidation Value
Amount each share of stock would receive if assets are sold, liabilities are paid, and
remainder is distributed to shareholders.
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Capital StockCapital Stock
Three Important Numbers
No. of shares authorized
No. of shares issued
No. of shares outstanding
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Capital StockCapital StockAuthorized
Shares
The maximum number of shares the
corporation may issue as designated in its
charter is the authorized number of
shares.
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Capital StockCapital Stock
Issued shares are authorized shares of stock that have been
sold.
Unissued shares are authorized shares of stock that have never been sold.
AuthorizedShares
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Capital StockCapital Stock
UnissuedShares
TreasuryShares
OutstandingSharesIssued
Shares
Outstanding shares are shares that were sold and issued and
are still held by stockholders.
AuthorizedShares
Treasury shares are issued shares that have been reacquired by the
corporation.
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QuestionQuestion Ace Company’s corporate charter authorizes 1,000,000 shares of common stock. Ace issued
600,000 shares and later reacquired 100,000 shares. How many shares are outstanding and
how many are unissued respectively?
a. 600,000 & 300,000
b. 500,000 & 500,000
c. 500,000 & 400,000
d. 400,000 & 500,000
Ace Company’s corporate charter authorizes 1,000,000 shares of common stock. Ace issued
600,000 shares and later reacquired 100,000 shares. How many shares are outstanding and
how many are unissued respectively?
a. 600,000 & 300,000
b. 500,000 & 500,000
c. 500,000 & 400,000
d. 400,000 & 500,000
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Ace Company’s corporate charter authorizes 1,000,000 shares of common stock. Ace issued
600,000 shares and later reacquired 100,000 shares. How many shares are outstanding and
how many are unissued respectively?
a. 600,000 & 300,000
b. 500,000 & 500,000
c. 500,000 & 400,000
d. 400,000 & 500,000
Ace Company’s corporate charter authorizes 1,000,000 shares of common stock. Ace issued
600,000 shares and later reacquired 100,000 shares. How many shares are outstanding and
how many are unissued respectively?
a. 600,000 & 300,000
b. 500,000 & 500,000
c. 500,000 & 400,000
d. 400,000 & 500,000
QuestionQuestion
Issued 600,000 Reacquired 100,000
Outstanding 500,000
Authorized 1,000,000Issued 600,000
Unissued 400,000
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Classes of Capital StockClasses of Capital Stock
Common Stock
Residual Equity - all other claims against corporation’s assets, including those of creditors, rank above the claims of common stockholders.
1. Is not automatically entitled to dividends
2. Does not have asset preference in liquidation
Claims
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Classes of Capital StockClasses of Capital Stock
Preferred Stock
Preferences include 1. Dividends
2. Priority in case of liquidation
A dividend rate is usually expressed either as a percent of par value or as a dollar amount per share
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Classes of Capital StockClasses of Capital Stock
Companies issue preferred stock to avoid
Using bonds with fixed interest charges
Issuing so many additional shares of common stock
Diluting the common stockholders’ control of the corporation
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Attributes of Preferred StockAttributes of Preferred Stock
Voting or Nonvoting Preferred stock normally does not vote.
Cumulative or Noncumulative Right to dividends accumulates if not paid. Unpaid dividends (called what?) mustmust be
paid before dividends may be paid to common shareholders.
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Convertible or Nonconvertible May be exchanged for shares of common
stock - a “sweetener” Callable or Noncallable
Corporation may require shareholders to surrender shares of stock for a specified amount of cash
Attributes of Preferred StockAttributes of Preferred Stock
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Types of Preferred StockTypes of Preferred Stock
Preference as to dividends:
NoncumulativeUnpaid currentdividends neednot be paid infuture years.
CumulativeUnpaid dividends
must be paidbefore any
distribution tocommon
stockholders.
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Balance Sheet PresentationBalance Sheet Presentation
On the Balance Sheet, stockholders’ equity is divided into two parts.
Paid-in CapitalInvestment by owners in
exchange for shares of stock
Paid-in CapitalInvestment by owners in
exchange for shares of stock
Retained EarningsEarnings that have beenretained and reinvested
in the business
Retained EarningsEarnings that have beenretained and reinvested
in the business
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Paid-in Capital
Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding 1,000,000$
Common Stock - $10 par, 300,000
shares authorized, 40,000 issued and outstanding 400,000
Total Paid-in Capital 1,400,000$ Retained Earnings 300,000
Total Stockholders' Equity 1,700,000$
Stockholders’ Equity:
(Similar) 444
Balance Sheet PresentationBalance Sheet Presentation
TwoParts
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Stock Issued for CashStock Issued for Cash
Let’s take a closer look at the journalentries when stock is sold for cash.
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Stock Issued for CashStock Issued for CashGuidelines for Journal EntryGuidelines for Journal Entry
Debit cash for number of shares times price per share.
Credit common (or preferred) stock
If Par Value Stocknumber of shares × par value per share
If Stated Value Stocknumber of shares × stated value per share
If No-Par Stockamount of cash received
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Stock Issued for CashStock Issued for CashGuidelines for Journal EntryGuidelines for Journal Entry
If cash received differs from par or stated value Credit Paid-in Capital in Excess of Paid-in Capital in Excess of ParPar
Value Value for difference between cash received and total par value.
Credit Paid-in Capital in Excess of Paid-in Capital in Excess of StatedStated Value Value for difference between cash received and total stated value.
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Stock Issued for CashStock Issued for CashPar Value ExamplePar Value Example
On September 1st, 10,000 shares of $20 par value common stock were sold for cash of $25 per share.
GENERAL JOURNAL Page: 1
Date Description PR Debit Credit
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Stock Issued for CashStock Issued for CashPar Value ExamplePar Value Example
On September 1st, 10,000 shares of $20 par value common stock were sold for cash of $25 per share.
GENERAL JOURNAL Page: 1
Date Description PR Debit Credit9/1 Cash 250,000
Common Stock 200,000 Paid-in Capital in Excess of Par Value 50,000
To record issuance of stock for cash
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GENERAL JOURNAL Page: 1
Date Description PR Debit Credit9/1 Cash 250,000
Common Stock 200,000 Paid-in Capital in Excess of Par Value 50,000
To record issuance of stock for cash
Stock Issued for CashStock Issued for CashPar Value ExamplePar Value Example
On September 1st, 10,000 shares of $20 par value common stock were sold for cash of $25 per share.
SharesDollars per
share TotalCash 10,000 × 25$ = 250,000$ Common stock 10,000 × 20(Par) = 200,000 Paid-in capital 10,000 × 5 = 50,000
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Stock Issued for CashStock Issued for CashStated Value ExampleStated Value Example
On September 1st, 10,000 shares of no-par, $20 stated valuestated value common stock were sold for cash of
$25 per share.
GENERAL JOURNAL Page: 1
Date Description PR Debit Credit
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Stock Issued for CashStock Issued for CashStated Value ExampleStated Value Example
On September 1st, 10,000 shares of no-par, $20 stated valuestated value common stock were sold for cash of
$25 per share.
GENERAL JOURNAL Page: 1
Date Description PR Debit Credit9/1 Cash 250,000
Common Stock 200,000 Paid-in Capital in Excess of Stated Value 50,000
To record issuance of stock for cash
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GENERAL JOURNAL Page: 1
Date Description PR Debit Credit9/1 Cash 250,000
Common Stock 200,000 Paid-in Capital in Excess of Stated Value 50,000
To record issuance of stock for cash
On September 1st, 10,000 shares of no-par, $20 stated valuestated value common stock were sold for cash of
$25 per share.
Stock Issued for CashStock Issued for CashStated Value ExampleStated Value Example
Stated value is treated just likepar value for accounting purposes.
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Stock Issued for CashStock Issued for CashNo-Par ExampleNo-Par Example
GENERAL JOURNAL Page: 1
Date Description PR Debit Credit9/1 Cash 250,000
Common Stock 250,000
To record issuance of stock for cash
On September 1st, 10,000 shares of no-par valueno-par value common stock were sold for cash of $25 per share.
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GENERAL JOURNAL Page: 1
Date Description PR Debit Credit9/1 Cash 250,000
Common Stock 250,000
To record issuance of stock for cash
Stock Issued for CashStock Issued for CashNo-Par ExampleNo-Par Example
For true no-par stock, credit theCommon Stock account for the
total cash received.
On September 1st, 10,000 shares of no-par valueno-par value common stock were sold for cash of $25 per share.
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Stock Issued for Stock Issued for Property or ServicesProperty or Services
Record transaction at fair value of property or services received or fair value of stock issued, whichever is
more clearly evident.
Fair valueof property
Fair valueof stock
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GENERAL JOURNAL Page: 1
Date Description PR Debit Credit
On May 1st, 10,000 shares of $20 par value stock were exchanged for land valued at $350,000.
Stock Issued for Stock Issued for Property or ServicesProperty or Services
We do not know the fair value of thestock issued because it is notactively traded in the market.
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GENERAL JOURNAL Page: 1
Date Description PR Debit Credit
Stock Issued for Stock Issued for Property or ServicesProperty or Services
5/1 Land 350,000 Common Stock 200,000 Paid-in Capital in Excess of Par 150,000
On May 1st, 10,000 shares of $20 par value stock were exchanged for land valued at $350,000.
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Balance Sheet PresentationBalance Sheet PresentationPaid-in Capital in Excess of Par ValuePaid-in Capital in Excess of Par Value
The following slide illustrates a typical Balance Sheet
presentation of Stockholders’ Equity. All numbers are
assumed and are not taken from previous or text
examples.
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Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding 1,000,000$ Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding 400,000 Paid-in Capital in excess of Par Value Preferred Stock 100,000$ Common Stock 80,000 180,000
Total Paid-in Capital 1,580,000$Retained Earnings 300,000
Total Stockholders' Equity 1,880,000$
Balance Sheet PresentationBalance Sheet PresentationPaid-in Capital in Excess of Par Value Paid-in Capital in Excess of Par Value
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Not per share book value
The theoretical liquidation value [Rice]
i.e.,
Total stockholders’ equity
i.e.,
Net assets (assets minus liabilities)
Book Value in TotalBook Value in Total
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Book Value Per ShareBook Value Per Share If no Preferred Stock is outstanding
Book Value per share of common stock equals total Stockholders’ Equity divided by number of shares of common stock outstanding.
If Preferred Stock is outstanding To get BV per share for common, subtract:
(1) liquidating value of preferred and (2) cumulative preferred dividends in arrears from Stockholders’ Equity, before dividing by no. of common shares outstanding.
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Book Value Per ShareBook Value Per Share
Total stockholders’ equity Less: Liquidating value of preferred Less: Cumulative dividends in arrears Number of common shares outstanding
Book valueper share
=
Preferred Stock Outstanding
No Preferred Stock
Book valueper share
= Total stockholders’ equity
Number of common sharesoutstanding.
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End of Chapter 12End of Chapter 12