• STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL• Corporations• Advantages of Incorporation• Disadvantages of Incorporation• Publicly Owned Corporations Face Different
Rules• Formation of a Corporation• Rights of Stockholders
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• Functions of the Board of Directors• Corporate Organization Chart• Paid-In Capital of a Corporation• Sources of Paid-In Capital• Authorization and Issuance of Capital Stock• Stockholders’ Equity• Classes of Stockholders• Issuance of Par Value Stock
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• Preferred Stock• Nonparticipating Preferred Stock• Cumulative Preferred Stock• Convertible Preferred Stock• Stock Issued for Assets Other Than Cash
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MARKET VALUATION
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A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and
100,000 shares of common stock, $20 par.
Issuing StockIssuing StockIssuing StockIssuing Stock
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Issuing StockIssuing StockIssuing StockIssuing Stock
On April 1, one-half of each class of authorized stock is issued at par for cash.
On April 1, one-half of each class of authorized stock is issued at par for cash.
Apr. 1 Cash 1,500000 00
Issued preferred stock and
common stock at par.
Preferred Stock500 000 00
Common Stock1,000000 00
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Issuing StockIssuing StockIssuing StockIssuing Stock
Common Stock and Preferred Stock accounts are controlling accounts. A record of each
stockholders’ name, address, and number of shares is kept in a stockholders’ subsidiary ledger.
Common Stock and Preferred Stock accounts are controlling accounts. A record of each
stockholders’ name, address, and number of shares is kept in a stockholders’ subsidiary ledger.
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Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium
On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.
On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.
Mar. 15 Cash 110 000 00
Issued 2,000 shares of $50 par
preferred stock at $55.
Preferred Stock100 000 00
Paid-in Capital in Excess of Par--
Preferred Stock10 000 00
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When stock is issued for more than its par, the stock has sold at a
premium. It has sold at a discount if issued for less than its par.
When stock is issued for more than its par, the stock has sold at a
premium. It has sold at a discount if issued for less than its par.
The $10,000 excess is recorded in a separate account because some states do
not consider this to be part of legal capital and may be used for dividends.
The $10,000 excess is recorded in a separate account because some states do
not consider this to be part of legal capital and may be used for dividends.
Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium
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On Nov. 12, a corporation acquired land for which the fair market value cannot be determined. The corporation
issued 10,000 shares of $10 par common that has a current market value of $12 in exchange for the land.
On Nov. 12, a corporation acquired land for which the fair market value cannot be determined. The corporation
issued 10,000 shares of $10 par common that has a current market value of $12 in exchange for the land.
Nov.12 Land 120 000 00
Issued $10 par common stock
valued at $12 per share, for
land.
Common Stock100 000 00
Paid-in Capital in Excess of Par20 000 00
Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium
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Stock issued for assets other than cash should be recorded at the fair market value of the asset or fair market value of the stock, whichever can be
more clearly determined.
Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium
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• Investopedia explains; No-par value stock prices are determined by what investors are willing to pay for them in the market.
• Companies find it beneficial to issue no-par value stock as they have flexibility in setting higher prices for future public offerings and have less liability to shareholders in the case that their stock falls dramatically.
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Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par
Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par
On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share.
On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share.
Feb. 23 Cash 400 000 00
Issued 10,000 shares of no-par
common stock at $40.
Common Stock400 000 00
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Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par
Later, on March 9, the corporation issues 1,000 additional shares at $36.
Later, on March 9, the corporation issues 1,000 additional shares at $36.
Mar. 9 Cash 36 000 00
Issued 1,000 shares of no-par
common stock at $36.
Common Stock36 000 00
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Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par
Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital.
Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital.
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Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par
Also, no-par stock may be assigned a stated value per share. The stated value is
recorded similar to a par value.
Also, no-par stock may be assigned a stated value per share. The stated value is
recorded similar to a par value.
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Issuing Stock with a Stated ValueIssuing Stock with a Stated ValueIssuing Stock with a Stated ValueIssuing Stock with a Stated Value
On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25.
On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25.
Mar. 30 Cash 40 000 00
Issued 1,000 shares of no-par common stock at $36; stated value, $25.
Common Stock25 000 00
Paid-in Capital in Excess of
Stated Value15 000 00
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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 Value
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Market Price of Preferred Stock
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.”
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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 Stock
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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 Stock
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Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions
Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This stock is
referred to as treasury stock.
Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This stock is
referred to as treasury stock.
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Treasury stock is stock that:1. has been issued as fully paid.2. has been reacquired by the corporation.3. has not been canceled or reissued.
Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions
A commonly used method of accounting for treasury stock is the cost method.
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Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions
Cost Method
On January 5, a firm purchased 1,000 shares of treasury stock (common stock,
$25 par) at $45 per share.
On January 5, a firm purchased 1,000 shares of treasury stock (common stock,
$25 par) at $45 per share.
Jan. 5 Treasury Stock 45 000 00
Purchased 1,000 shares of
treasury stock at $45.
Cash 45 000 00
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On June 2, sold 200 shares of treasury stock at $60 per share.
On June 2, sold 200 shares of treasury stock at $60 per share.
June 2 Cash 12 000 00
Sold 200 shares of treasury
stock at $60.
Treasury Stock9 000 00
Paid-in Capital from sale of
Treasury Stock3 000 00
Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions
Cost Method
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On September 3, sold 200 shares of treasury stock at $40 per share.
On September 3, sold 200 shares of treasury stock at $40 per share.
Sep. 3 Cash 8 000 00
Paid-in Capital from Sale of
Treasury Stock 1 000 00
Sold 200 shares of treasury
stock at $60.
Treasury Stock9 000 00
Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions
Cost Method
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Stock SplitsStock SplitsStock SplitsStock Splits
A corporation sometimes reduces the par or stated value of their common stock and
issues a proportionate number of additional shares. This is called a stock split.
A corporation sometimes reduces the par or stated value of their common stock and
issues a proportionate number of additional shares. This is called a stock split.
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Stock SplitsStock SplitsStock SplitsStock Splits
BEFORE BEFORE STOCK SPLITSTOCK SPLIT
4 shares, $100 par
$400 total par value
20 shares, $20 par
AFTER 5-1 AFTER 5-1 STOCK SPLITSTOCK SPLIT
$400 total par value
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Stock SplitsStock SplitsStock SplitsStock Splits
A stock split does not change the balance of any corporation accounts. However, it
can make the stock more attractive to investors by reducing the price of a
share,
A stock split does not change the balance of any corporation accounts. However, it
can make the stock more attractive to investors by reducing the price of a
share,
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Accounting for Cash DividendsAccounting for Cash Dividends Dividends are distributions of
retained earnings to stockholders.
Dividends may be paid in cash, stock, or property.
Dividends, even on cumulative preferred stock, are never required, but once declared become a legal liability of the corporation.
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Corporations generally declare and pay cash dividends on shares outstanding when three conditions exist:
1. Sufficient retained earnings
Accounting for Cash DividendsAccounting for Cash Dividends
2. Sufficient cash3. Formal action by the board of
directorsRetained Earnings
50,000
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Accounting for Cash DividendsAccounting for Cash Dividends
There are three important dates relating
the dividends.
There are three important dates relating
the dividends.
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Accounting for Cash DividendsAccounting for Cash Dividends
First is the date of declaration. Assume that on December 1, Hiber Corporation declares a
$42,500 dividend.
First is the date of declaration. Assume that on December 1, Hiber Corporation declares a
$42,500 dividend.
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Dec. 1 Cash Dividends 42 500 00
Declared cash dividend.
Cash Dividend Payable42 500 00
Date of DeclarationDate of Declaration
Accounting for Cash DividendsAccounting for Cash Dividends
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The second important date is the date of record. For Hiber
Corporation this would be December 11.
The second important date is the date of record. For Hiber
Corporation this would be December 11.
Accounting for Cash DividendsAccounting for Cash Dividends
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Accounting for Cash DividendsAccounting for Cash Dividends
On this date, ownership of shares determines who receives the
dividend. No entry is required.
On this date, ownership of shares determines who receives the
dividend. No entry is required.
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The third important date is the date of payment. On January 2, Hiber
issues dividend checks.
The third important date is the date of payment. On January 2, Hiber
issues dividend checks.
Accounting for Cash DividendsAccounting for Cash Dividends
2
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Accounting for Cash DividendsAccounting for Cash Dividends
Jan. 2 Cash Dividends Payable 42 500 00
Paid cash dividends.
Cash 42 500 00
Date of PaymentDate of Payment
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Accounting for Stock DividendsAccounting for Stock Dividends
A distribution of dividends to stockholders in the form of the firm’s own shares is called a
stock dividend.
A distribution of dividends to stockholders in the form of the firm’s own shares is called a
stock dividend.
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Accounting for Stock DividendsAccounting for Stock Dividends
Stock dividends transfer pro data shares of stock to stockholders. Assume
Hendrix Corporation issues a 5% stock dividend on common stock, $20 par,
2,000,000 shares issued.
Stock dividends transfer pro data shares of stock to stockholders. Assume
Hendrix Corporation issues a 5% stock dividend on common stock, $20 par,
2,000,000 shares issued.
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Accounting for Stock DividendsAccounting for Stock Dividends
Dec. 15 Stock Dividends 3,100 000 00
Declared stock dividend.
Hendrix Corporation, December 15 (before dividend)Common Stock, $20 par $40,000,000Paid-in Capital in Excess of Par--Common Stock 9,000,000Retained Earnings 26,600,000
Stock Dividends Distributable2,000000 00
Paid-in Capital in Excess of
Par—Common Stock1,100000 00
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Accounting for Stock DividendsAccounting for Stock Dividends
Jan. 10 Stock Dividends Distributable 2,000 000 00
Issued stocks for the stock
dividend.
Common Stock2,000000 00
On January 10, Hendix Corporation issues the stock. This action increases the number
of shares outstanding by 100,000.
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Accounting for Stock DividendsAccounting for Stock DividendsHendrix Corporation, December 15 (before dividend)
Common Stock, $20 par $40,000,000Paid-in Capital in Excess of Par--Common Stock 9,000,000Retained Earnings 26,600,000
$75,600,000
Hendrix Corporation, January 10 (after dividend)
Common Stock, $20 par $42,000,000Paid-in Capital in Excess of Par--Common Stock 10,100,000Retained Earnings 23,500,000
$75,600,000
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There are two ways to report stockholders’ equity in the balance sheet. In Next Slide, each class of stock is listed first, followed by its
related paid-in capital accounts.
There are two ways to report stockholders’ equity in the balance sheet. In Next Slide, each class of stock is listed first, followed by its
related paid-in capital accounts.
Reporting Stockholders’ EquityReporting Stockholders’ EquityReporting Stockholders’ EquityReporting Stockholders’ Equity
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Paid-in capital:
Preferred 10% stock, $50 par,
cumulative (2,000 shares
authorized and issued) $100,000
Excess of issue price over par 10,000 $ 110,000
Common stock, $20 par
(50,000 shares authorized, 45,000
issued) $900,000
Excess of issue price over par 190,000 1,090,000
From sale of treasury stock 2,000
Total paid-in capital $1,202,000
Retained earnings 350,000
Total $1,552,000
Deduct treasury stock (600 shares at cost) 27,000
Total stockholders’ equity $1,525,000
Stockholders’ Equity
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Next Slide shows the second method. Note that the stock accounts are listed
first. The other paid-in capital accounts are listed as a single item described as
Additional paid-in capital.
Next Slide shows the second method. Note that the stock accounts are listed
first. The other paid-in capital accounts are listed as a single item described as
Additional paid-in capital.
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Contributed capital:
Preferred 10% stock, cumulative
$50 par (2,000 shares authorized
and issued) $100,000
Common stock, $20 par
(50,000 shares authorized, 45,000
issued) 900,000
Additional paid-in capital 202,000
Total contributed capital $1,202,000
Retained earnings 350,000
Total $1,552,000
Deduct treasury stock (600 shares at cost) 27,000
Total stockholders’ equity $1,525,000
Stockholders’ Equity
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Financial Analysis and Financial Analysis and InterpretationInterpretation
Financial Analysis and Financial Analysis and InterpretationInterpretation
Dividend YieldDividend YieldDividend YieldDividend Yield
2004 2003Dividends per share of common $ 0.80 $ 0.60Market price per share of common $20.50 $13.50
Dividends per Share of Common Stock
Market Price per Share of Common StockDividend YieldDividend YieldDividend YieldDividend Yield
$.60
$13.50Dividend Yield, 2003Dividend Yield, 2003Dividend Yield, 2003Dividend Yield, 2003 = 4.4%
Dividend Yield, 2004Dividend Yield, 2004Dividend Yield, 2004Dividend Yield, 2004$.80
$20.50= 3.9%
Use: To indicate the rate of return to common stockholders in terms of dividends
Use: To indicate the rate of return to common stockholders in terms of dividends
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End of Chapter 11
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