12-1 S TOCKHOLDERS’ E QUITY: C LASSES O F C APITAL S TOCK CHAPTER 12

12-2 The Corporation A business entity recognized by law with existence separate and distinct from its owners. A corporation can... A corporation can... Enter into contracts Enter into contracts Buy, sell, or hold property Buy, sell, or hold property Borrow money Borrow money Hire and fire employees Hire and fire employees Sue and be sued Sue and be sued 433

12-3 Advantages of the Corporate Form of Business* Easy capital generation Easy capital generation Continuous existence Continuous existence Limited liability Limited liability Easy transfer of ownership Easy transfer of ownership Separation of owners and entity Separation of owners and entity Professional management Professional management * Relative to a Partnership 434

12-4 Disadvantages of the Corporate Form of Business* Governmental regulation Governmental regulation Double taxation Double taxation Limited ability to raise creditor capital Limited ability to raise creditor capital Entrenched, inefficient management Entrenched, inefficient management * Relative to a Partnership 434

12-5  l Incorporators u Persons who form corporation l Articles of incorporation u Application for corporate charter l Corporate Charter u Contract between state and incorporators granting legal existence to corporation Corporations General Terminology

12-6 Corporations General Terminology l Corporate bylaws u Rules adopted by board of directors to govern conduct of corporate affairs l Organization costs u Intangible assets subject to amortization e.g., Legal and accounting costs l Domestic vs. Foreign Corporation u Depends on state in which chartered

12-7 Directing the Corporation Stockholder Rights u To dispose of their shares u Preemptive right u Preemptive right to buy new shares in proportion to shares already owned u To share in dividends when declared u To share in assets in event of liquidation u To participate in management by voting at stockholders’ meetings

12-8 Directing the Corporation Elected by whom? Elected by whom? Formulates corporate policies Formulates corporate policies Hires corporate officers Hires corporate officers Board of Directors Composition of board?

12-9 Directing the Corporation Includes president, vice presidents, secretary, and treasurer Includes president, vice presidents, secretary, and treasurer Responsible for routine corporate operations Responsible for routine corporate operations Carry out the policies set by the board of directors Carry out the policies set by the board of directors Corporate Officers

12-10 Directing the Corporation Corporate Organization Chart SecretaryTreasurerVice President Production Vice President Sales President (CEO) Board of Directors Stockholders

12-11 Capital Stock A share of stock is a transferable unit of ownership. Stock ownership records may be kept by external parties called stock-transfer agents and stock registrars. 100 Shares VidTel, Inc. Common Stock Stock Certificate

12-12 Capital Stock The two classes of capital stock are common and preferred. 100 Shares VidTel, Inc. Common Stock Capital Stock may have u Par value u No par value u No par value with a stated value Stock Certificate

12-13 Capital Stock Par value is an arbitrary amount assigned to each share of stock Par is not an indication of market value!!! 100 Shares $5 par value VidTel, Inc. Common Stock Stock Certificate

12-14 Capital Stock 100 Shares No-par value VidTel, Inc. Common Stock No-par stock has no par or stated value. (This is permitted in most states.) No-par stock has no par or stated value. (This is permitted in most states.) Why would no-par stock be used? Stock Certificate

12-15 Capital Stock 100 Shares No-par, $5 stated value VidTel, Inc. Common Stock No-par, stated value stock Stock without par value, but to which a stated value has been assigned by the board of directors. Stock without par value, but to which a stated value has been assigned by the board of directors. Stock Certificate

12-16 Capital Stock Market Value Price at which a seller is willing to sell for and a buyer is willing to buy for in the marketplace.

12-17 Capital Stock Liquidation Value Amount each share of stock would receive if assets are sold, liabilities are paid, and remainder is distributed to shareholders.

12-18 Capital Stock Three Important Numbers  No. of shares authorized  No. of shares issued  No. of shares outstanding

12-19 Capital Stock Authorized Shares The maximum number of shares the corporation may issue as designated in its charter is the authorized number of shares.

12-20 Capital Stock Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that have never been sold. Authorized Shares

12-21 Capital Stock Unissued Shares Treasury Shares Outstanding Shares Issued Shares Outstanding shares are shares that were sold and issued and are still held by stockholders. Authorized Shares Treasury shares are issued shares that have been reacquired by the corporation.

12-22Question Ace Company’s corporate charter authorizes 1,000,000 shares of common stock. Ace issued 600,000 shares and later reacquired 100,000 shares. How many shares are outstanding and how many are unissued respectively? a. 600,000 & 300,000 b. 500,000 & 500,000 c. 500,000 & 400,000 d. 400,000 & 500,000 Ace Company’s corporate charter authorizes 1,000,000 shares of common stock. Ace issued 600,000 shares and later reacquired 100,000 shares. How many shares are outstanding and how many are unissued respectively? a. 600,000 & 300,000 b. 500,000 & 500,000 c. 500,000 & 400,000 d. 400,000 & 500,000

12-23 Ace Company’s corporate charter authorizes 1,000,000 shares of common stock. Ace issued 600,000 shares and later reacquired 100,000 shares. How many shares are outstanding and how many are unissued respectively? a. 600,000 & 300,000 b. 500,000 & 500,000 c. 500,000 & 400,000 d. 400,000 & 500,000 Ace Company’s corporate charter authorizes 1,000,000 shares of common stock. Ace issued 600,000 shares and later reacquired 100,000 shares. How many shares are outstanding and how many are unissued respectively? a. 600,000 & 300,000 b. 500,000 & 500,000 c. 500,000 & 400,000 d. 400,000 & 500,000 Question Issued600,000 Reacquired100,000 Outstanding500,000 Authorized1,000,000 Issued600,000 Unissued400,000

12-24 Classes of Capital Stock Common Stock Residual Equity - all other claims against corporation’s assets, including those of creditors, rank above the claims of common stockholders. 1. Is not automatically entitled to dividends 2. Does not have asset preference in liquidation Claims

12-25 Classes of Capital Stock Preferred Stock u Preferences include 1. Dividends 2. Priority in case of liquidation u A dividend rate is usually expressed either as a percent of par value or as a dollar amount per share

12-26 Classes of Capital Stock Companies issue preferred stock to avoid u Using bonds with fixed interest charges u Issuing so many additional shares of common stock u Diluting the common stockholders’ control of the corporation

12-27 Attributes of Preferred Stock l Voting or Nonvoting u Preferred stock normally does not vote. l Cumulative or Noncumulative u Right to dividends accumulates if not paid. must u Unpaid dividends (called what?) must be paid before dividends may be paid to common shareholders.

12-28 l Convertible or Nonconvertible u May be exchanged for shares of common stock - a “sweetener” l Callable or Noncallable u Corporation may require shareholders to surrender shares of stock for a specified amount of cash Attributes of Preferred Stock

12-29 Types of Preferred Stock Preference as to dividends: Noncumulative Unpaid current dividends need not be paid in future years. Cumulative Unpaid dividends must be paid before any distribution to common stockholders.

12-30 Balance Sheet Presentation On the Balance Sheet, stockholders’ equity is divided into two parts. Paid-in Capital Investment by owners in exchange for shares of stock Paid-in Capital Investment by owners in exchange for shares of stock Retained Earnings Earnings that have been retained and reinvested in the business Retained Earnings Earnings that have been retained and reinvested in the business

12-31 Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding1,000,000$ Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding400,000 Total Paid-in Capital1,400,000$ Retained Earnings300,000 Total Stockholders' Equity1,700,000$ Stockholders’ Equity: (Similar) 444 Balance Sheet Presentation Two Parts

12-32 Stock Issued for Cash Let’s take a closer look at the journal entries when stock is sold for cash.

12-33 Stock Issued for Cash Guidelines for Journal Entry  Debit cash for number of shares times price per share.  Credit common (or preferred) stock u If Par Value Stock number of shares × par value per share u If Stated Value Stock number of shares × stated value per share u If No-Par Stock amount of cash received

12-34 Stock Issued for Cash Guidelines for Journal Entry  If cash received differs from par or stated value Paid-in Capital in Excess of Par Value u Credit Paid-in Capital in Excess of Par Value for difference between cash received and total par value. Paid-in Capital in Excess of Stated Value u Credit Paid-in Capital in Excess of Stated Value for difference between cash received and total stated value.

12-35 Stock Issued for Cash Par Value Example On September 1st, 10,000 shares of $20 par value common stock were sold for cash of $25 per share. GENERAL JOURNALPage:1 DateDescriptionPRDebitCredit

12-36 Stock Issued for Cash Par Value Example On September 1st, 10,000 shares of $20 par value common stock were sold for cash of $25 per share. GENERAL JOURNALPage:1 DateDescriptionPRDebitCredit 9/1Cash250,000 Common Stock200,000 Paid-in Capital in Excess of Par Value50,000 To record issuance of stock for cash

12-37 GENERAL JOURNALPage:1 DateDescriptionPRDebitCredit 9/1Cash250,000 Common Stock200,000 Paid-in Capital in Excess of Par Value50,000 To record issuance of stock for cash Stock Issued for Cash Par Value Example On September 1st, 10,000 shares of $20 par value common stock were sold for cash of $25 per share. Shares Dollars per shareTotal Cash10,000 ×25$ =250,000$ Common stock10,000 ×20(Par) =200,000 Paid-in capital10,000 ×5 =50,000

12-38 Stock Issued for Cash Stated Value Example stated value On September 1st, 10,000 shares of no-par, $20 stated value common stock were sold for cash of $25 per share. GENERAL JOURNALPage:1 DateDescriptionPRDebitCredit

12-39 Stock Issued for Cash Stated Value Example stated value On September 1st, 10,000 shares of no-par, $20 stated value common stock were sold for cash of $25 per share. GENERAL JOURNALPage:1 DateDescriptionPRDebitCredit 9/1Cash250,000 Common Stock200,000 Paid-in Capital in Excess of Stated Value50,000 To record issuance of stock for cash

12-40 GENERAL JOURNALPage:1 DateDescriptionPRDebitCredit 9/1Cash250,000 Common Stock200,000 Paid-in Capital in Excess of Stated Value50,000 To record issuance of stock for cash stated value On September 1st, 10,000 shares of no-par, $20 stated value common stock were sold for cash of $25 per share. Stock Issued for Cash Stated Value Example Stated value is treated just like par value for accounting purposes.

12-41 Stock Issued for Cash No-Par Example GENERAL JOURNALPage:1 DateDescriptionPRDebitCredit 9/1Cash250,000 Common Stock250,000 To record issuance of stock for cash no-par value On September 1st, 10,000 shares of no-par value common stock were sold for cash of $25 per share.

12-42 GENERAL JOURNALPage:1 DateDescriptionPRDebitCredit 9/1Cash250,000 Common Stock250,000 To record issuance of stock for cash Stock Issued for Cash No-Par Example For true no-par stock, credit the Common Stock account for the total cash received. no-par value On September 1st, 10,000 shares of no-par value common stock were sold for cash of $25 per share.

12-43 Stock Issued for Property or Services Record transaction at fair value of property or services received or fair value of stock issued, whichever is more clearly evident. Fair value of property Fair value of stock

12-44 GENERAL JOURNALPage:1 DateDescriptionPRDebitCredit On May 1st, 10,000 shares of $20 par value stock were exchanged for land valued at $350,000. Stock Issued for Property or Services We do not know the fair value of the stock issued because it is not actively traded in the market.

12-45 GENERAL JOURNALPage:1 DateDescriptionPRDebitCredit Stock Issued for Property or Services 5/1Land350,000 Common Stock200,000 Paid-in Capital in Excess of Par150,000 On May 1st, 10,000 shares of $20 par value stock were exchanged for land valued at $350,000.

12-46 Balance Sheet Presentation Paid-in Capital in Excess of Par Value The following slide illustrates a typical Balance Sheet presentation of Stockholders’ Equity. All numbers are assumed and are not taken from previous or text examples.

12-47 Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding1,000,000$ Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding400,000 Paid-in Capital in excess of Par Value Preferred Stock100,000$ Common Stock80, ,000 Total Paid-in Capital1,580,000$ Retained Earnings300,000 Total Stockholders' Equity1,880,000$ Balance Sheet Presentation Paid-in Capital in Excess of Par Value

12-48 Not per share book value u The theoretical liquidation value [Rice] i.e., u Total stockholders’ equity i.e., u Net assets (assets minus liabilities) Book Value in Total

12-49 Book Value Per Share l If no Preferred Stock is outstanding u Book Value per share of common stock equals total Stockholders’ Equity divided by number of shares of common stock outstanding. l If Preferred Stock is outstanding u To get BV per share for common, subtract: (1) liquidating value of preferred and (2) cumulative preferred dividends in arrears from Stockholders’ Equity, before dividing by no. of common shares outstanding.

12-50 Book Value Per Share Total stockholders’ equity Less: Liquidating value of preferred Less: Cumulative dividends in arrears Number of common shares outstanding Book value per share = Preferred Stock Outstanding No Preferred Stock Book value per share = Total stockholders’ equity Number of common shares outstanding.

12-51 End of Chapter 12