Reporting and Interpreting Owners’ Equity Chapter 11 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

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Reporting and Interpreting Owners’ Equity Chapter 11 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Understanding The Business Simple to become an owner Easy to transfer ownership Provides limited liability Advantages of a corporation Because a corporation is a separate legal entity, it can... Own assets. Sue and be sued. Incur liabilities. Enter into contracts.

Ownership of a Corporation  Voting (in person or by proxy).  Proportionate distributions of profits.  Proportionate distributions of assets in a liquidation. Rights Stockholders’

Elected by shareholders Appointed by directors Ownership of a Corporation

Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold. Authorized shares are the maximum number of shares of capital stock that can be sold to the public. Authorized, Issued, and Outstanding Shares

Unissued Shares Treasury Shares Outstanding Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Outstanding shares are issued shares that are owned by stockholders. Authorized, Issued, and Outstanding Shares

Accounts used when accounting for Common Stock Common Stock: Always recorded at PAR value or STATED value. – Par value is a value in the articles of incorporation that sets the minimum level of capital required. It is a state requirement. Some states may not require a par value, but may require some value be stated (Stated value). – Par value/Stated value are often minimal values. Capital in Excess of Par – the difference between the cash received from issuing stock and the par value.

Sale and Issuance of Capital Stock Prepare the journal entry to record this transaction. On July 6, Sonic issued 100,000 shares of $0.01 par value common stock for $20 per share. 100,000 shares × $20 per share = $2,000, ,000 shares × $0.01 par value = $1,000

Secondary Markets Transactions between two investors that do not affect the corporation’s accounting records. I’d like to sell some of my Sonic stock. I’d like to buy some of your Sonic stock.

Stock Issued for Employee Compensation Employee Employee compensation package includes salary and stock options. Stock options allow employees to purchase stock from the corporation at a predetermined, fixed price. If Sonic does not have new stock to issue when the stock options are exercised, then.. Sonic

Repurchase of Stock Sonic buys its own stock in the secondary market. (Treasury stock) Stockholders Management compensation package includes salary and stock options. Sonic Management Stock options allow employees to purchase stock from the corporation at a predetermined, fixed price.

On May 1, Sonic reacquired 100,000 shares of its common stock at $20 per share. The journal entry for May 1 is.... Treasury Stock When stock is reacquired, the corporation records the treasury stock at cost. Treasury stock has no voting or dividend rights. Treasury stock is not an asset. It is a contra equity account.

10,000 shares × $30 = $300,000 10,000 shares × $20 cost = $200,000 On December 3, Sonic reissued 10,000 shares of the treasury stock at $30 per share. The journal entry for December 3 is... Treasury Stock