Stockholder’s Equity Owner’s Equity is comprised of three elements: Capital Stock Additional Paid-In Capital Retained Earnings Contributed Capital by owners Earned Capital by firm; undistributed Owner’s Equity is a residual claim to net assets Also called Net Assets = Assets - Liabilities

Common Stock Common Stock may have a Par Value Arbitrary minimum contribution for one share of stock Not required (can be issued no-par) Not related to the market or sales price of the stock Can be as low as 1 cent Underfunded par represents contingent liability (rare) Recording issue of stock depends on par value.

Common Stock Common Stock issue with Par: Record Common Stock account at Par x shares sold Record excess as Paid-In-Capital Example: Sell 2000 shares $1 par common for $8 per share Cash$16,000 Common Stock $2,000 PIC, Common $14,000

Common Stock Common Stock issue without Par: Record Common Stock account at sales value Example: Sell 2000 shares no par common for $8 per share Cash$16,000 Common Stock $16,000

Common Stock Common Stock issue without Par: Sometimes no-par has a “stated” amount. Treat this just like a par amount Example: Sell 2000 shares no par, $1 stated value, common for $8 per share Cash$16,000 Common Stock $2,000 PIC, Common $14,000

Common Stock Stock issued for other non-cash assets Record at either FMV of stock issued or items received, whichever is easier to determine Example: Trade 2000 shares no par $1 common for A truck with FMV of $20,000 Truck$20,000 Common Stock $2,000 PIC, Common $18,000

Preferred stock provides preferential dividend treatment to its owners over common stock shareholders. Most preferred certificates carry a stated dividend rate as a percentage of par value. This stated rate is guaranteed to the preferred shareholders only if dividends are declared for the period. If dividends are not declared, then the preferred dividends will go into an “arrears” status. (Note: this is for cumulative preferred). This means that these must be paid-in-full before any dividends can be paid to common shareholders. While dividends in arrears look like a liability, they technically are not, since management does not have any obligation to declare dividends in the future. Once declared, however, they become a current liability. Preferred Stock

Treasury Stock Record purchase at current cost, which is the market value of the stock Purchase Transaction Par value and original sales price of stock have no bearing on the purchase transaction

Treasury Stock Purchase Transaction Example: Feb 15 th, Purchase 10,000 shares of $1 par value common. Originally issued for $100,000. Purchased from NYSE at current market price of $22 per share. Feb. 15 Treasury Stock$220,000 Cash$220,000

Treasury Stock Purchase Transaction Feb. 15 Treasury Stock$220,000 Cash$220,000 Treasury Stock Feb ,000 (10,000 x $22) Note that the Treasury Stock account is not an asset account, but it can be treated in a similar manner to other inventory accounts.

Treasury Stock Purchase Transaction Feb. 15 Treasury Stock$220,000 Cash$220,000 Treasury Stock Note that the Treasury Stock account is not an asset account, but it can be treated in a similar manner to other inventory accounts. Therefore, if other layers are added at different values, the account can be managed using LIFO, FIFO, Specific Identification, or Weighted-Average methods. Mar ,000 (20,000 x $20) Aug. 5240,000 (10,000 x $24) Feb ,000 (10,000 x $22)

Treasury Stock Sales Transaction Treasury Stock Feb ,000 (10,000 x $22) When we sell Treasury Stock, this is our original cost.

Treasury Stock Sales Transaction Treasury Stock Feb ,000 (10,000 x $22) When we sell Treasury Stock, this is our original cost. We first credit this account the number of shares sold at original cost.

Treasury Stock Sales Transaction Treasury Stock Feb ,000 (10,000 x $22) When we sell Treasury Stock, this is our original cost. We first credit this account the number of shares sold at original cost. If we sell at more than cost, the amount above cost goes into a Paid-in- Capital for Treasury Stock account.

Treasury Stock Sales Transaction Example: Mar 12 th, sell 5,000 shares of Treasury Stock for $25 per share. Mar. 12 Cash$125,000 Treasury Stock$110,000 PIC, Treasury Stock$15,000 Treasury Stock Feb ,000 (10,000 x $22) Mar ,000 (5,000 x $22) 110,000

Treasury Stock Sales Transaction If we sell treasury stock for less than cost, we still credit the Treasury Stock account at the cost amount. The amount below cost will be debited to the PIC, Treasury Stock account. If this account is zero or gets depleted to zero, the remaining below cost amount will be debited directly to retained earnings.

Treasury Stock Sales Transaction Apr. 15 Cash$65,000 Treasury Stock$110,000 First, record cash receipts (5,000 x $13) and reduce Treasury Stock account at original cost (5,000 x $22). Example: Apr. 15 th, sell 5,000 shares of Treasury Stock for $13 per share

Treasury Stock Sales Transaction Next, debit PIC, Treasury Stock for the amount below cost. In this case, this will deplete the account to zero by debiting the prior balance of $15,000. Treasury Stock Sales Transaction Apr. 15 Cash$65,000 PIC, Treas. Stock$15,000 Treasury Stock$110,000 Example: Apr. 15 th, sell 5,000 shares of Treasury Stock for $13 per share

Treasury Stock Sales Transaction Finally, debit Retained Earnings directly for the remainder of the amount below cost. Treasury Stock Sales Transaction Apr. 15 Cash$65,000 PIC, Treas. Stock$15,000 Retained Earnings$30,000 Treasury Stock$110,000 Example: Apr. 15 th, sell 5,000 shares of Treasury Stock for $13 per share

Treasury Stock Retirement of Treasury Stock Treasury Stock Sometimes firms buy back common stock into the treasury so that they can retire the stock completely. Credit the treasury stock account at cost Remove the stock from the common stock account at par Remove the stock from the PIC, common account at the original sales amount (if applicable) Do the first three easy steps to eliminate accounts: Then handle the remaining balance as follows: Need more debits? Debit PIC, Treasury until depleted Debit Retained Earnings Need more credits? Credit PIC, Treasury Retirement

Retirement of Treasury Stock—Example 1 Ganter Corp. issues 10,000 shares of $1 par for $6 per share Cash$60,000 Common Stock $1)$10,000 PIC, Common $5)$50,000 Ganter purchases 5,000 shares of Treasury Stock at $15 per share Treasury Stock $15) $75,000 Cash$75,000 Ganter retires 2,000 shares of Treasury Stock Treasury Stock $15) $30,000 Common Stock $1) $2,000 PIC, Common $5) $10,000 Remove from TS at cost Remove from original stock accounts at original amounts Retained Earnings$18,000

Retirement of Treasury Stock—Example 2 Ganter Corp. issues 10,000 shares of $1 par for $6 per share Cash$60,000 Common Stock $1)$10,000 PIC, Common $5)$50,000 Ganter purchases 5,000 shares of Treasury Stock at $15 per share Treasury Stock $15) $75,000 Cash$75,000 Ganter sells 1,000 shares of Treasury Stock at $20 per share Treasury Stock $15) $30,000 Common Stock $1) $2,000 PIC, Common $5) $10,000 Retained Earnings$13,000 Cash $20) $20,000 Treasury Stock $15) $15,000 PIC, $5) $5,000 Ganter retires 2,000 shares of Treasury Stock PIC, Treasury Stock $5,000 Remove from TS at cost Remove from original stock accounts at original amounts Debit PIC, TS until eliminated Rest from Ret Earns

Retirement of Treasury Stock—Example 3 Ganter Corp. issues 10,000 shares of $1 par for $6 per share Cash$60,000 Common Stock $1)$10,000 PIC, Common $5)$50,000 Ganter purchases 5,000 shares of Treasury Stock at $4 per share Treasury Stock $4) $20,000 Cash$20,000 Treasury Stock $4) $8,000 Common Stock $1) $2,000 PIC, Common $5) $10,000 Ganter retires 2,000 shares of Treasury Stock Remove from TS at cost Remove from original stock accounts at original amounts PIC, TS Retirement $4,000 The rest goes here