Stockholders’ equity ACCTG 5120 David Plumlee

Business Forms What are the most numerous forms of business? Sole proprietorship and Partnership Which have the highest dollar value of assets? Corporations Closely-held (private) Openly-held, publicly traded (listed, over-the-counter). What hybrid business forms are available? PCs, LLCs and LLPs, etc. 5 5 5 5 5

Common Stock What advantages does a corporation offer? Limited liability Unlimited life What are common stockholders’ legal rights? Share in profits Voting Preemptive Proportionate share

Preferred Stock What is preferred stock? Preferred means preference in dividends and liquidation What are some of the features often found on preferred stock? Cumulative (dividend passed are paid before common) Participating Callable (usually redeemed at a premium) Convertible

Authorized, Issued and Outstanding What is “authorized capital stock?” The number of shares that can be issued legally as defined in the corporate charter What is “issued capital stock?” The number of shares that have been issued and have not been subsequently retired What is “Outstanding capital stock?” The number of shares currently trading authorized > issued > outstanding

Par, Stated or Assigned Value What does par value mean? The minimum amount that must be contributed under the law to consider the shares fully paid; generally not related to market value What does “no par” value mean? true no par stock has no legal minimum stated or assigned value basically takes the place of par value

Stock Issue What is the basic JE for Common Stk. issued for cash? Cash XXXX Common stock XX Paid in capital in excess XXX

Journal Entry to Record Stock Issue What about stock issued for non-cash consideration? other asset (or expense) xx capital stock yy contributed in excess of par* zz *or assigned value xx = most clearly determinable fair value yy = # shares x par value (or assigned value) zz= whatever is left over!

Lump Sales of Stock Proportional method fair value available for each class allocate based on ratio of each fair value to total fair value Incremental method fair value not available for at least one class assign fair value to classes with known fair value first; remainder to those with unknown fair value

How are stock subscriptions recorded? Where does this account show up on the balance sheet? stock subscriptions receivable xx capital stock subscribed yy contributed capital in excess of par* zz *or assigned value A contra-stock holders equity account offset against common stock subscribed.

Default on Subscriptions What if the subscriber defaults? Return all payments made Issue shares equivalent to # paid in full All payments made forfeited Resale under a lien reimbursed to extent net receipts > original subscription price not to exceed payments made

Treasury Stock What is treasury stock? Issued stock that a company has ‘bought’ from the market. Is it an asset of the company? NO, it reduces both assets and stockholder’s equity--a reduction in capitalization It provides no future expected economic benefit

Accounting for Treas. Stk. What “rights” does Treasury Stock have? Same as unissued stock---has no right to VOTE, SHARE in EARNINGS, PREEMPTIVE, or SHARE IN ASSETS What methods are available for accounting? Company can choose to either RETIRE stock or hold it as TREASURY stock. Cost method is more common.

Cost Method Repurchase and subsequent sale viewed as one continuous transaction (“one transaction approach”) What is the general form of the journal entry: treasury stock xx cash xx

Cost Method (cont.) Treasury stock account viewed as a “suspense account” Reported as a deduction from total shareholders’ equity Can either reissue (sell) or retire the stock

Treas. Stk. Example 100 shares of treasury stock purchased for $1400, then Sold 50 shares for $800 Sold 50 shares for $500 treasury stock $1400 cash 1400

Cost Method - Resale When resale price > acquisition cost Remove acquisition cost from treasury stock account difference between cost and sale price is credited to “contributed capital from TS transactions” Cash $800 Treasury stock 700 APIC – Treasury Stock 100

Cost Method - Resale When resale price < acquisition cost Cash $500 Remove acquisition cost from treasury stock account Then debit “contributed capital from TS transactions” (same class) if available remaining amount --debit retained earnings Cash $500 APIC – T/Stock 100 RE 100 Treasury stock 700

Cost Method - Retirement Remove acquisition cost from treasury stock Then remove stock… reduce capital stock for par reduce PIC for amount paid in when stock was issued If you need a debit to balance APIC from TS transactions (same class) retained earnings If you need a credit difference to be allocated contributed capital from TS transactions

Retirement Example You have 100 shares of $1 par value treasury stock which was purchased for $1400 Retire 50 shares with original issue price of $600 Retire 50 shares with original issue price of $1000

Example Entries Com/stk. $ 50 APIC in excess 550 RE 100 Treasury Stock $700 Com/stk. $ 50 APIC in excess 950 APIC-t/s retirement $ 300 Treasury Stock 700

Presentation of Treasury Stock Cost method: T/S is subtracted at the bottom of the shareowner equity section at cost. It is included in the “regular” shares above as well. 34 34 34 34 34 34

Preferred Stock Exchange of rights for other rights: Hybrid of debt and ownership characteristics. Dividends paid are a % of par or $ per share. Preferred shareholders’ claim on earnings generally precedes common shareholders’ Dividends Cumulative (arrearages) vs. noncumulative stock Participating Fully Partially Non 35 35 35 35 35 35

Debt or Equity? Debt related Equity Stated return Non-voting Preference at liquidation Non-participating Equity Return not mandatory Dividends, not interest expense Participating

Cash Dividend Example 2,000 shares of P/S, $50 par, 8% cumulative, non-participating; 80,000 shares of C/S, $30 par. Dividends declared: Year 1, $0; Year 2, $6,000; Year 3, $18,000; Year 4, $75,000. 36 36 36 36 36 36 36 36

Cash Dividends How much is the preferred dividend? P/S dividend = 2,000 shares x $50 par x .08 = $8,000 To P/S Arrearage To C/S Year 1 Year 2 Year 3 Year 4 $0 $8,000 $0 $6,000 $10,000 $0 $18,000 $0 $0 $8,000 $0 $67,000 36 36 36 36 36 36 36 36

Cash Dividends Note: No formal liability arises when a dividend is not declared. Memo only. Arrearages are paid before any current dividends are paid. Entries at the date of declaration: RE $6,000 P/S Div. Payable $6,000 37 37 37 37 37 37 37

Convertible Preferred Stock Convertible P/S. To convert use book value method P/S, par XX Paid in Capital, P/S (if any) XX Discount P/S (if any) XX C/S, par XX Paid in Capital, C/S (to balance) XX 39 39 39 39 39 39