?The McGraw-Hill Companies,Inc.,1999
Slide
11-1
Irwin/McGraw-Hill
Chapter 11
Stockholders?Equity,Paid-in Capital
The McGraw-Hill Companies,Inc.,1999
Slide
11-2
Irwin/McGraw-Hill
Corporations
Existence is
separate from
owners.
An entity
created by law.
Has rights and
privileges.
Privately,or
Closely,Held
Publicly Held
Ownership
can be
The McGraw-Hill Companies,Inc.,1999
Slide
11-3
Irwin/McGraw-Hill
Why Businesses Incorporate
Stockholders have no
personal liability.
Privately,or
Closely Held
Publicly Held
Transferability of
ownership.
Professional
management.
Continuity of
existence.
The McGraw-Hill Companies,Inc.,1999
Slide
11-4
Irwin/McGraw-Hill
? Disclose financial
information.
? Financial statements
prepared in accordance with
GAAP.
? CPAs must audit the financial
statements.
? Must comply with federal
securities laws.
? Must submit financial
information for SEC review.
Publicly Owned Corporations face
Different Rules
The McGraw-Hill Companies,Inc.,1999
Slide
11-5
Irwin/McGraw-Hill
Rights of Stockholders
Stockholders
Rights
?Voting (in person
or by proxy).
?Proportionate
distribution of
dividends.
?Proportionate
distribution of
assets in a
liquidation.
The McGraw-Hill Companies,Inc.,1999
Slide
11-6
Irwin/McGraw-Hill
Rights of Stockholders
Ultimate
control
Stockholders
usually meet
once a year.
C o rp o ra t e O rg a n i z a t i o n C h a rt
Secr eta ry T rea s u rer Con tro l l er Oth er Vi ce
Pr es i de n ts
Pres i den t
Bo a rd of Di rec tor s
Stock h ol ders
The McGraw-Hill Companies,Inc.,1999
Slide
11-7
Irwin/McGraw-Hill
Rights of Stockholders
Stockholder
ledgers are often
maintained by a
stock transfer
agent or stock
registrar.
C o rp o ra t e O rg a n i z a t i o n C h a rt
Secr eta ry T rea s u rer Con tro l l er Oth er Vi ce
Pr es i de n ts
Pres i den t
Bo a rd of Di rec tor s
Stock h ol ders
The McGraw-Hill Companies,Inc.,1999
Slide
11-8
Irwin/McGraw-Hill
Each unit of
ownership is
called a share of
stock.
A stock
certificate serves
as proof that a
stockholder has
purchased
shares.
Rights of Stockholders
The McGraw-Hill Companies,Inc.,1999
Slide
11-9
Irwin/McGraw-Hill
When the stock
is sold,the
stockholder
signs a transfer
endorsement on
the back of the
stock certificate.
Rights of Stockholders
The McGraw-Hill Companies,Inc.,1999
Slide
11-10
Irwin/McGraw-Hill
Functions of the Board of Directors
Overall
responsibility
for managing
the company.
Selected by a
vote of the
stockholders
C o rp o ra t e O rg a n i z a t i o n C h a rt
Secr eta ry T rea s u rer Con tro l l er Oth er Vi ce
Pr es i de n ts
Pres i den t
Bo a rd of Di rec tor s
Stock h ol ders
The McGraw-Hill Companies,Inc.,1999
Slide
11-11
Irwin/McGraw-Hill
C o rp o ra t e O rg a n i z a t i o n C h a rt
Secr eta ry T rea s u rer Con tro l l er Oth er Vi ce
Pr es i de n ts
Pres i den t
Bo a rd of Di rec tor s
Stock h ol ders
Functions of the Corporate Officers
Chief
Accountant
Contractual and legal
representation
Custodian of
funds
The McGraw-Hill Companies,Inc.,1999
Slide
11-12
Irwin/McGraw-Hill
Authorization and Issuance of
Capital Stock
The maximum number
of shares of capital
stock that can be sold
to the public,
Authorized
Shares
The McGraw-Hill Companies,Inc.,1999
Slide
11-13
Irwin/McGraw-Hill
Authorized
Shares
Issued
shares are
authorized
shares of
stock that
have been
sold.
Unissued
shares are
authorized
shares of
stock that
never have
been sold.
Usually
shares are
sold
through an
underwriter.
Authorization and Issuance of
Capital Stock
The McGraw-Hill Companies,Inc.,1999
Slide
11-14
Irwin/McGraw-Hill
Unissued
Shares
Treasury
Shares
Outstanding
Shares
Treasury shares are
issued shares that have
been reacquired by the
corporation.
Issued
Shares
Outstanding shares are
issued shares that are
owned by stockholders.
Authorized
Shares
Authorization and Issuance of
Capital Stock
The McGraw-Hill Companies,Inc.,1999
Slide
11-15
Irwin/McGraw-Hill
Paid-In Capital of a Corporation
P a i d - i n C a p i t a l
C o n t ri b u t i o n s b y
i n v e s t o rs i n e x c h a n g e
f o r c a p i t a l s t o c k,
R e t a i n e d E a rn i n g s
R e t e n t i o n o f p rof i t s
e a rn e d b y t h e
c o rpo ra t i o n,
S t o c k h o l d e rs ' e q u i t y i s
i n c re a s e d i n t w o w a y s,
The McGraw-Hill Companies,Inc.,1999
Slide
11-16
Irwin/McGraw-Hill
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.
Stockholders?Equity
The McGraw-Hill Companies,Inc.,1999
Slide
11-17
Irwin/McGraw-Hill
Common stock can be issued in three forms:
No-Par
Common
Stock
Par Value
Common
Stock
Stated Value
Common
Stock
Let抯 examine
this form of
stock.
Stockholders?Equity
The McGraw-Hill Companies,Inc.,1999
Slide
11-18
Irwin/McGraw-Hill
Issuance of Par Value Stock
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 1,1999,
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.
The McGraw-Hill Companies,Inc.,1999
Slide
11-19
Irwin/McGraw-Hill
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 1,1999 should include a
credit to common stock for the par value of the
shares issued,
D a t e D e s c r i pt i on D e bi t C r e di t
1 - S e p C a s h 2 5 0,0 0 0
C o m m o n S t o c k 2 0,0 0 0
A d d i t i o n a l P a i d - i n C a p i t a l 2 3 0,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
11-20
Irwin/McGraw-Hill
S t o c k h o l d e r s ' E q u i t y w i t h C o m m o n S t o c k
S t o c k h o l d e rs ' E q u i t y
C o n t r i b u t e d c a p i t a l,
C o m m o n Sto c k - $ 2 p a r v a l u e ; 5 0,0 0 0 s h a r e s
a u th o r i z e d ; 1 0,0 0 0 s h a r e s i s s u e d a n d
o u ts ta n d i n g 2 0,0 0 0$
C o n tr i b u te d C a p i ta l i n Ex c e s s o f Pa r 2 3 0,0 0 0
R e t a i n e d e a r n i n g s 6 5,0 0 0
T o ta l s to c k h o l d e r s ' e q u i ty 3 1 5,0 0 0$
Issuance of Par Value Stock
The McGraw-Hill Companies,Inc.,1999
Slide
11-21
Irwin/McGraw-Hill
Common stock can be issued in three forms:
No-Par
Common
Stock
Par Value
Common
Stock
Stated Value
Common
Stock
Stockholders?Equity
All proceeds
credited to
Common Stock
Treated like par
value common
stock
The McGraw-Hill Companies,Inc.,1999
Slide
11-22
Irwin/McGraw-Hill
Preferred Stock
A separate class of stock,typically having
priority over common shares in,,,
? Dividend distributions.
? Distribution of assets in case of liquidation.
Usually has a
stated
dividend rate.
Normally has
no voting
rights.
Usually
callable by
the company.
The McGraw-Hill Companies,Inc.,1999
Slide
11-23
Irwin/McGraw-Hill
Cumulative Preferred Stock
Vs,NoncumulativeCumulative
Dividends in
arrears must be
paid before
dividends may be
paid on common
stock.
Undeclared
dividends from
current and prior
years do not have
to be paid in future
years.
The McGraw-Hill Companies,Inc.,1999
Slide
11-24
Irwin/McGraw-Hill
Stock Preferred as to Dividends
C om m on s t oc k,$ 5 0 pa r v a l ue ; 4,0 0 0 s ha r e s
a ut hor i z e d,i s s ue d a nd out s t a ndi ng 2 0 0,0 0 0$
P r e f e r r e d s t oc k,9 %,$ 1 0 0 pa r v a l ue ; 1,0 0 0
s ha r e s a ut hor i z e d,i s s ue d a nd out s t a ndi ng 1 0 0,0 0 0
Tot a l c ont r i but e d c a pi t a l 3 0 0,0 0 0$
Example,Consider the following partial Statement of
Stockholders?Equity.
During 1999,the directors declare cash dividends of
$5,000,In year 2000,the directors declare cash dividends
of $42,000.
The McGraw-Hill Companies,Inc.,1999
Slide
11-25
Irwin/McGraw-Hill
P r e f e r r e d C o m m o n
I f P r e f e r r e d S t o c k i s N o n c u m u l a t i v e,
Y e a r 1 9 9 9 $ 5,0 0 0 d i v i d e n d s d e c l a r e d 5,0 0 0$ -$
Y e a r 2 0 0 0
S t e p 1, C u r r e n t p r e f e r r e d d i v i d e n d 9,0 0 0$
S t e p 2, R e m a i n d e r t o c o m m o n s h a r e h o l d e r s 3 3,0 0 0$
I f P r e f e r r e d S t o c k i s C u m u l a t i v e,
Y e a r 1 9 9 9 $ 5,0 0 0 d i v i d e n d s d e c l a r e d 5,0 0 0$ -$
Y e a r 2 0 0 0
S t e p 1, D i v i d e n d s i n a r r e a r s 4,0 0 0$
S t e p 2, C u r r e n t p r e f e r r e d d i v i d e n d 9,0 0 0
S t e p 3, R e m a i n d e r t o c o m m o n s h a r e h o l d e r s 2 9,0 0 0$
T o t a l s 1 3,0 0 0$ 2 9,0 0 0$
Stock Preferred as to Dividends
The McGraw-Hill Companies,Inc.,1999
Slide
11-26
Irwin/McGraw-Hill
Convertible Preferred Stock
I just converted 100 shares
of preferred stock into
1,000 shares of common
stock and ended up with a
higher dividend yield!
Gee,I can’nt
do that with
my preferred
stock.
Some preferred
stock is convertible
into shares of
common stock.
The McGraw-Hill Companies,Inc.,1999
Slide
11-27
Irwin/McGraw-Hill
Preferred Stock
S t oc k hol de r s ' E qui t y w i t h C om m on a nd P r e f e r r e d S t oc k
S t oc k hol de r s ' E qui t y
C o n t r i b u t e d c a p i t a l,
C o m m o n S to c k - $ 1 0 p a r v a l u e ; 5 0,0 0 0 s h a r e s
a u th o r i z e d ; 3 0,0 0 0 s h a r e s i s s u e d a n d
o u ts ta n d i n g 3 0 0,0 0 0$
P r e f e r r e d S to c k - $ 1 0 0 p a r v a l u e ; 1,0 0 0 s h a r e s
a u th o r i z e d ; 5 0 s h a r e s i s s u e d a n d
o u ts ta n d i n g 5,0 0 0
C o n tr i b u te d C a p i ta l i n E x c e s s o f P a r 1,0 0 0
R e t a i n e d e a r n i n g s 6 5,0 0 0
T o ta l s to c k h o l d e r s ' e q u i ty 3 7 1,0 0 0$
The McGraw-Hill Companies,Inc.,1999
Slide
11-28
Irwin/McGraw-Hill
Stock Issued for Assets Other Than
Cash
Companies sometimes issue
stock in exchange for non-
cash assets.
Record the transaction at the
market value of the goods or
services received.
The McGraw-Hill Companies,Inc.,1999
Slide
11-29
Irwin/McGraw-Hill
I love this
stuff!
Can we do
some more?
The McGraw-Hill Companies,Inc.,1999
Slide
11-30
Irwin/McGraw-Hill
Market Value
Accounting by
the issuer.
Accounting by
the invester.
Common stock is carried
at original issue price,
Investments in marketable
securities are carried at
market value,
The McGraw-Hill Companies,Inc.,1999
Slide
11-31
Irwin/McGraw-Hill
Market Price of Preferred Stock
Factors affecting
market price of
preferred stock:
?Dividend rate
?Risk
?Level of interest
rates
The return based on the
market value is called
the 揹 ividend yield?
The McGraw-Hill Companies,Inc.,1999
Slide
11-32
Irwin/McGraw-Hill
Market Price of Common Stock
Factors affecting
market price of
common stock:
?Investors?expecta
tions 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.
The McGraw-Hill Companies,Inc.,1999
Slide
11-33
Irwin/McGraw-Hill
Stock Splits
Companies use
stock splits to
reduce market
price.
Outstanding shares
increase,but par
value is decreased
proportionately.
Ice Cream Parlor
Banana Splits
On Sale Now
The McGraw-Hill Companies,Inc.,1999
Slide
11-34
Irwin/McGraw-Hill
Stock Splits
Example
Assume that a corporation had 5,000 shares
of $1 par value common stock outstanding
before a 2杅 or? stock split.
B e fo r e
S p l i t
A ft e r
S p l i t
C o m m o n S to c k S h a r e s 5,0 0 0
P a r V a l u e p e r S h a r e 1, 0 0$
T o ta l P a r V a l u e 5,0 0 0$
The McGraw-Hill Companies,Inc.,1999
Slide
11-35
Irwin/McGraw-Hill
Assume that a corporation had 5,000 shares
of $1 par value common stock outstanding
before a 2杅 or? stock split.
Increase
Decrease
No
Change
B e fo r e
S p l i t
A ft e r
S p l i t
C o m m o n S to c k S h a r e s 5,0 0 0 1 0,0 0 0
P a r V a l u e p e r S h a r e 1, 0 0$ 0, 5 0$
T o ta l P a r V a l u e 5,0 0 0$ 5,0 0 0$
Stock Splits
Example
The McGraw-Hill Companies,Inc.,1999
Slide
11-36
Irwin/McGraw-Hill
Unissued
Shares
Treasury
Shares
Outstanding
Shares
Treasury shares are
issued shares that have
been reacquired by the
corporation.
Issued
Shares
Authorized
Shares
Treasury Stock
The McGraw-Hill Companies,Inc.,1999
Slide
11-37
Irwin/McGraw-Hill
Treasury Stock
No voting
or
dividend
rights
Contra
equity
account
When stock is reacquired,the corporation
records the treasury stock at cost.
The McGraw-Hill Companies,Inc.,1999
Slide
11-38
Irwin/McGraw-Hill
On May 1,1998 East Corp,reacquired 3,000 shares
of its common stock at $55 per share.
Prepare the journal entry for May 1.
Treasury Stock
Example
D a t e D e s c r i pt i on D e bi t C r e di t
The McGraw-Hill Companies,Inc.,1999
Slide
11-39
Irwin/McGraw-Hill
On May 1,1998 East Corp,reacquired 3,000 shares
of its common stock at $55 per share.
Prepare the journal entry for May 1.
Treasury Stock
Example
D a t e D e s c r i pt i on D e bi t C r e di t
1 - M a y T r e a s u r y S t o c k 1 6 5,0 0 0
C a s h 1 6 5,0 0 0
3 0 0 0 s ha r e s? $ 5 5 = $ 1 6 5,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
11-40
Irwin/McGraw-Hill
Treasury Stock
Example
On December 3,1999 East Corp,reissued 1,000
shares of the stock at $75 per share,
Prepare the journal entry for December 3.
D a t e D e s c r i pt i on D e bi t C r e di t
The McGraw-Hill Companies,Inc.,1999
Slide
11-41
Irwin/McGraw-Hill
D a t e D e s c r i pt i on D e bi t C r e di t
3 - M a y C a s h 7 5,0 0 0
T r e a s u r y S t o c k 5 5,0 0 0
A d d i t i o n a l P a i d - i n C a p i t a l,
T r e a s u r y S t o c k T r a n s a c t i o n s 2 0,0 0 0
On December 3,1999 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?$55 cost = $55,000
Treasury Stock
Example
The McGraw-Hill Companies,Inc.,1999
Slide
11-42
Irwin/McGraw-Hill
Stockholders?Equity Presentation
S t o c k h o l d e r s ' E q u i t y
C o n t r i b u t e d c a p i t a l,
C o m m o n S to c k - $ 1 0 p a r v a l u e ; 5 0,0 0 0 s h a r e s
a u th o r i z e d ; 3 0,0 0 0 s h a r e s i s s u e d a n d
o u ts ta n d i n g 3 0 0,0 0 0$
P r e f e r r e d S to c k - $ 1 0 0 p a r v a l u e ; 1,0 0 0 s h a r e s
a u th o r i z e d ; 5 0 s h a r e s i s s u e d & o u ts ta n d i n g 5,0 0 0
C o n tr i b u te d C a p i ta l i n E x c e s s o f P a r 2 1,0 0 0
R e t a i n e d e a r n i n g s 6 5,0 0 0
S u b t o t a l 3 9 1,0 0 0$
L e s s, T r e a s u r y s t o c k 1 1 0,0 0 0
T o t a l S t o c k h o l d e r s ' e q u i t y 2 8 1,0 0 0$
The McGraw-Hill Companies,Inc.,1999
Slide
11-43
Irwin/McGraw-Hill
End of Chapter 11 This is’nt what I meant when I
asked for stock
for my birthday!
Slide
11-1
Irwin/McGraw-Hill
Chapter 11
Stockholders?Equity,Paid-in Capital
The McGraw-Hill Companies,Inc.,1999
Slide
11-2
Irwin/McGraw-Hill
Corporations
Existence is
separate from
owners.
An entity
created by law.
Has rights and
privileges.
Privately,or
Closely,Held
Publicly Held
Ownership
can be
The McGraw-Hill Companies,Inc.,1999
Slide
11-3
Irwin/McGraw-Hill
Why Businesses Incorporate
Stockholders have no
personal liability.
Privately,or
Closely Held
Publicly Held
Transferability of
ownership.
Professional
management.
Continuity of
existence.
The McGraw-Hill Companies,Inc.,1999
Slide
11-4
Irwin/McGraw-Hill
? Disclose financial
information.
? Financial statements
prepared in accordance with
GAAP.
? CPAs must audit the financial
statements.
? Must comply with federal
securities laws.
? Must submit financial
information for SEC review.
Publicly Owned Corporations face
Different Rules
The McGraw-Hill Companies,Inc.,1999
Slide
11-5
Irwin/McGraw-Hill
Rights of Stockholders
Stockholders
Rights
?Voting (in person
or by proxy).
?Proportionate
distribution of
dividends.
?Proportionate
distribution of
assets in a
liquidation.
The McGraw-Hill Companies,Inc.,1999
Slide
11-6
Irwin/McGraw-Hill
Rights of Stockholders
Ultimate
control
Stockholders
usually meet
once a year.
C o rp o ra t e O rg a n i z a t i o n C h a rt
Secr eta ry T rea s u rer Con tro l l er Oth er Vi ce
Pr es i de n ts
Pres i den t
Bo a rd of Di rec tor s
Stock h ol ders
The McGraw-Hill Companies,Inc.,1999
Slide
11-7
Irwin/McGraw-Hill
Rights of Stockholders
Stockholder
ledgers are often
maintained by a
stock transfer
agent or stock
registrar.
C o rp o ra t e O rg a n i z a t i o n C h a rt
Secr eta ry T rea s u rer Con tro l l er Oth er Vi ce
Pr es i de n ts
Pres i den t
Bo a rd of Di rec tor s
Stock h ol ders
The McGraw-Hill Companies,Inc.,1999
Slide
11-8
Irwin/McGraw-Hill
Each unit of
ownership is
called a share of
stock.
A stock
certificate serves
as proof that a
stockholder has
purchased
shares.
Rights of Stockholders
The McGraw-Hill Companies,Inc.,1999
Slide
11-9
Irwin/McGraw-Hill
When the stock
is sold,the
stockholder
signs a transfer
endorsement on
the back of the
stock certificate.
Rights of Stockholders
The McGraw-Hill Companies,Inc.,1999
Slide
11-10
Irwin/McGraw-Hill
Functions of the Board of Directors
Overall
responsibility
for managing
the company.
Selected by a
vote of the
stockholders
C o rp o ra t e O rg a n i z a t i o n C h a rt
Secr eta ry T rea s u rer Con tro l l er Oth er Vi ce
Pr es i de n ts
Pres i den t
Bo a rd of Di rec tor s
Stock h ol ders
The McGraw-Hill Companies,Inc.,1999
Slide
11-11
Irwin/McGraw-Hill
C o rp o ra t e O rg a n i z a t i o n C h a rt
Secr eta ry T rea s u rer Con tro l l er Oth er Vi ce
Pr es i de n ts
Pres i den t
Bo a rd of Di rec tor s
Stock h ol ders
Functions of the Corporate Officers
Chief
Accountant
Contractual and legal
representation
Custodian of
funds
The McGraw-Hill Companies,Inc.,1999
Slide
11-12
Irwin/McGraw-Hill
Authorization and Issuance of
Capital Stock
The maximum number
of shares of capital
stock that can be sold
to the public,
Authorized
Shares
The McGraw-Hill Companies,Inc.,1999
Slide
11-13
Irwin/McGraw-Hill
Authorized
Shares
Issued
shares are
authorized
shares of
stock that
have been
sold.
Unissued
shares are
authorized
shares of
stock that
never have
been sold.
Usually
shares are
sold
through an
underwriter.
Authorization and Issuance of
Capital Stock
The McGraw-Hill Companies,Inc.,1999
Slide
11-14
Irwin/McGraw-Hill
Unissued
Shares
Treasury
Shares
Outstanding
Shares
Treasury shares are
issued shares that have
been reacquired by the
corporation.
Issued
Shares
Outstanding shares are
issued shares that are
owned by stockholders.
Authorized
Shares
Authorization and Issuance of
Capital Stock
The McGraw-Hill Companies,Inc.,1999
Slide
11-15
Irwin/McGraw-Hill
Paid-In Capital of a Corporation
P a i d - i n C a p i t a l
C o n t ri b u t i o n s b y
i n v e s t o rs i n e x c h a n g e
f o r c a p i t a l s t o c k,
R e t a i n e d E a rn i n g s
R e t e n t i o n o f p rof i t s
e a rn e d b y t h e
c o rpo ra t i o n,
S t o c k h o l d e rs ' e q u i t y i s
i n c re a s e d i n t w o w a y s,
The McGraw-Hill Companies,Inc.,1999
Slide
11-16
Irwin/McGraw-Hill
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.
Stockholders?Equity
The McGraw-Hill Companies,Inc.,1999
Slide
11-17
Irwin/McGraw-Hill
Common stock can be issued in three forms:
No-Par
Common
Stock
Par Value
Common
Stock
Stated Value
Common
Stock
Let抯 examine
this form of
stock.
Stockholders?Equity
The McGraw-Hill Companies,Inc.,1999
Slide
11-18
Irwin/McGraw-Hill
Issuance of Par Value Stock
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 1,1999,
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.
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
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 1,1999 should include a
credit to common stock for the par value of the
shares issued,
D a t e D e s c r i pt i on D e bi t C r e di t
1 - S e p C a s h 2 5 0,0 0 0
C o m m o n S t o c k 2 0,0 0 0
A d d i t i o n a l P a i d - i n C a p i t a l 2 3 0,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
S t o c k h o l d e r s ' E q u i t y w i t h C o m m o n S t o c k
S t o c k h o l d e rs ' E q u i t y
C o n t r i b u t e d c a p i t a l,
C o m m o n Sto c k - $ 2 p a r v a l u e ; 5 0,0 0 0 s h a r e s
a u th o r i z e d ; 1 0,0 0 0 s h a r e s i s s u e d a n d
o u ts ta n d i n g 2 0,0 0 0$
C o n tr i b u te d C a p i ta l i n Ex c e s s o f Pa r 2 3 0,0 0 0
R e t a i n e d e a r n i n g s 6 5,0 0 0
T o ta l s to c k h o l d e r s ' e q u i ty 3 1 5,0 0 0$
Issuance of Par Value Stock
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
Common stock can be issued in three forms:
No-Par
Common
Stock
Par Value
Common
Stock
Stated Value
Common
Stock
Stockholders?Equity
All proceeds
credited to
Common Stock
Treated like par
value common
stock
The McGraw-Hill Companies,Inc.,1999
Slide
11-22
Irwin/McGraw-Hill
Preferred Stock
A separate class of stock,typically having
priority over common shares in,,,
? Dividend distributions.
? Distribution of assets in case of liquidation.
Usually has a
stated
dividend rate.
Normally has
no voting
rights.
Usually
callable by
the company.
The McGraw-Hill Companies,Inc.,1999
Slide
11-23
Irwin/McGraw-Hill
Cumulative Preferred Stock
Vs,NoncumulativeCumulative
Dividends in
arrears must be
paid before
dividends may be
paid on common
stock.
Undeclared
dividends from
current and prior
years do not have
to be paid in future
years.
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
Stock Preferred as to Dividends
C om m on s t oc k,$ 5 0 pa r v a l ue ; 4,0 0 0 s ha r e s
a ut hor i z e d,i s s ue d a nd out s t a ndi ng 2 0 0,0 0 0$
P r e f e r r e d s t oc k,9 %,$ 1 0 0 pa r v a l ue ; 1,0 0 0
s ha r e s a ut hor i z e d,i s s ue d a nd out s t a ndi ng 1 0 0,0 0 0
Tot a l c ont r i but e d c a pi t a l 3 0 0,0 0 0$
Example,Consider the following partial Statement of
Stockholders?Equity.
During 1999,the directors declare cash dividends of
$5,000,In year 2000,the directors declare cash dividends
of $42,000.
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
P r e f e r r e d C o m m o n
I f P r e f e r r e d S t o c k i s N o n c u m u l a t i v e,
Y e a r 1 9 9 9 $ 5,0 0 0 d i v i d e n d s d e c l a r e d 5,0 0 0$ -$
Y e a r 2 0 0 0
S t e p 1, C u r r e n t p r e f e r r e d d i v i d e n d 9,0 0 0$
S t e p 2, R e m a i n d e r t o c o m m o n s h a r e h o l d e r s 3 3,0 0 0$
I f P r e f e r r e d S t o c k i s C u m u l a t i v e,
Y e a r 1 9 9 9 $ 5,0 0 0 d i v i d e n d s d e c l a r e d 5,0 0 0$ -$
Y e a r 2 0 0 0
S t e p 1, D i v i d e n d s i n a r r e a r s 4,0 0 0$
S t e p 2, C u r r e n t p r e f e r r e d d i v i d e n d 9,0 0 0
S t e p 3, R e m a i n d e r t o c o m m o n s h a r e h o l d e r s 2 9,0 0 0$
T o t a l s 1 3,0 0 0$ 2 9,0 0 0$
Stock Preferred as to Dividends
The McGraw-Hill Companies,Inc.,1999
Slide
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Convertible Preferred Stock
I just converted 100 shares
of preferred stock into
1,000 shares of common
stock and ended up with a
higher dividend yield!
Gee,I can’nt
do that with
my preferred
stock.
Some preferred
stock is convertible
into shares of
common stock.
The McGraw-Hill Companies,Inc.,1999
Slide
11-27
Irwin/McGraw-Hill
Preferred Stock
S t oc k hol de r s ' E qui t y w i t h C om m on a nd P r e f e r r e d S t oc k
S t oc k hol de r s ' E qui t y
C o n t r i b u t e d c a p i t a l,
C o m m o n S to c k - $ 1 0 p a r v a l u e ; 5 0,0 0 0 s h a r e s
a u th o r i z e d ; 3 0,0 0 0 s h a r e s i s s u e d a n d
o u ts ta n d i n g 3 0 0,0 0 0$
P r e f e r r e d S to c k - $ 1 0 0 p a r v a l u e ; 1,0 0 0 s h a r e s
a u th o r i z e d ; 5 0 s h a r e s i s s u e d a n d
o u ts ta n d i n g 5,0 0 0
C o n tr i b u te d C a p i ta l i n E x c e s s o f P a r 1,0 0 0
R e t a i n e d e a r n i n g s 6 5,0 0 0
T o ta l s to c k h o l d e r s ' e q u i ty 3 7 1,0 0 0$
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
Stock Issued for Assets Other Than
Cash
Companies sometimes issue
stock in exchange for non-
cash assets.
Record the transaction at the
market value of the goods or
services received.
The McGraw-Hill Companies,Inc.,1999
Slide
11-29
Irwin/McGraw-Hill
I love this
stuff!
Can we do
some more?
The McGraw-Hill Companies,Inc.,1999
Slide
11-30
Irwin/McGraw-Hill
Market Value
Accounting by
the issuer.
Accounting by
the invester.
Common stock is carried
at original issue price,
Investments in marketable
securities are carried at
market value,
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
Market Price of Preferred Stock
Factors affecting
market price of
preferred stock:
?Dividend rate
?Risk
?Level of interest
rates
The return based on the
market value is called
the 揹 ividend yield?
The McGraw-Hill Companies,Inc.,1999
Slide
11-32
Irwin/McGraw-Hill
Market Price of Common Stock
Factors affecting
market price of
common stock:
?Investors?expecta
tions 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.
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
Stock Splits
Companies use
stock splits to
reduce market
price.
Outstanding shares
increase,but par
value is decreased
proportionately.
Ice Cream Parlor
Banana Splits
On Sale Now
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
Stock Splits
Example
Assume that a corporation had 5,000 shares
of $1 par value common stock outstanding
before a 2杅 or? stock split.
B e fo r e
S p l i t
A ft e r
S p l i t
C o m m o n S to c k S h a r e s 5,0 0 0
P a r V a l u e p e r S h a r e 1, 0 0$
T o ta l P a r V a l u e 5,0 0 0$
The McGraw-Hill Companies,Inc.,1999
Slide
11-35
Irwin/McGraw-Hill
Assume that a corporation had 5,000 shares
of $1 par value common stock outstanding
before a 2杅 or? stock split.
Increase
Decrease
No
Change
B e fo r e
S p l i t
A ft e r
S p l i t
C o m m o n S to c k S h a r e s 5,0 0 0 1 0,0 0 0
P a r V a l u e p e r S h a r e 1, 0 0$ 0, 5 0$
T o ta l P a r V a l u e 5,0 0 0$ 5,0 0 0$
Stock Splits
Example
The McGraw-Hill Companies,Inc.,1999
Slide
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Unissued
Shares
Treasury
Shares
Outstanding
Shares
Treasury shares are
issued shares that have
been reacquired by the
corporation.
Issued
Shares
Authorized
Shares
Treasury Stock
The McGraw-Hill Companies,Inc.,1999
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Treasury Stock
No voting
or
dividend
rights
Contra
equity
account
When stock is reacquired,the corporation
records the treasury stock at cost.
The McGraw-Hill Companies,Inc.,1999
Slide
11-38
Irwin/McGraw-Hill
On May 1,1998 East Corp,reacquired 3,000 shares
of its common stock at $55 per share.
Prepare the journal entry for May 1.
Treasury Stock
Example
D a t e D e s c r i pt i on D e bi t C r e di t
The McGraw-Hill Companies,Inc.,1999
Slide
11-39
Irwin/McGraw-Hill
On May 1,1998 East Corp,reacquired 3,000 shares
of its common stock at $55 per share.
Prepare the journal entry for May 1.
Treasury Stock
Example
D a t e D e s c r i pt i on D e bi t C r e di t
1 - M a y T r e a s u r y S t o c k 1 6 5,0 0 0
C a s h 1 6 5,0 0 0
3 0 0 0 s ha r e s? $ 5 5 = $ 1 6 5,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
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Irwin/McGraw-Hill
Treasury Stock
Example
On December 3,1999 East Corp,reissued 1,000
shares of the stock at $75 per share,
Prepare the journal entry for December 3.
D a t e D e s c r i pt i on D e bi t C r e di t
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Slide
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Irwin/McGraw-Hill
D a t e D e s c r i pt i on D e bi t C r e di t
3 - M a y C a s h 7 5,0 0 0
T r e a s u r y S t o c k 5 5,0 0 0
A d d i t i o n a l P a i d - i n C a p i t a l,
T r e a s u r y S t o c k T r a n s a c t i o n s 2 0,0 0 0
On December 3,1999 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?$55 cost = $55,000
Treasury Stock
Example
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Stockholders?Equity Presentation
S t o c k h o l d e r s ' E q u i t y
C o n t r i b u t e d c a p i t a l,
C o m m o n S to c k - $ 1 0 p a r v a l u e ; 5 0,0 0 0 s h a r e s
a u th o r i z e d ; 3 0,0 0 0 s h a r e s i s s u e d a n d
o u ts ta n d i n g 3 0 0,0 0 0$
P r e f e r r e d S to c k - $ 1 0 0 p a r v a l u e ; 1,0 0 0 s h a r e s
a u th o r i z e d ; 5 0 s h a r e s i s s u e d & o u ts ta n d i n g 5,0 0 0
C o n tr i b u te d C a p i ta l i n E x c e s s o f P a r 2 1,0 0 0
R e t a i n e d e a r n i n g s 6 5,0 0 0
S u b t o t a l 3 9 1,0 0 0$
L e s s, T r e a s u r y s t o c k 1 1 0,0 0 0
T o t a l S t o c k h o l d e r s ' e q u i t y 2 8 1,0 0 0$
The McGraw-Hill Companies,Inc.,1999
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End of Chapter 11 This is’nt what I meant when I
asked for stock
for my birthday!
