© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin STOCKHOLDERS’ EQUITY: Paid-In Capital Chapter 11

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Existence is separate from owners. An entity created by law. Has rights and privileges. Privately, or Closely, Held Publicly Held Ownership can be Corporations

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO1 To discuss the advantages and disadvantages of organizing a business as a corporation.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Limited personal liability for stockholders Transferability of ownership Professional management Continuity of existence Advantages of Incorporation

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Heavy taxation Greater regulation Cost of formation Separation of ownership and management Disadvantages of Incorporation

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO2 To distinguish between publicly owned and closely held corporations.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Publicly Owned Corporations Face Different Rules By LAW, publicly owned corporations must: By LAW, publicly owned corporations must:  Prepare financial statements in accordance with GAAP.  Have their financial statement audited by an independent CPA.  Comply with federal securities laws.  Submit financial information for SEC review. By LAW, publicly owned corporations must: By LAW, publicly owned corporations must:  Prepare financial statements in accordance with GAAP.  Have their financial statement audited by an independent CPA.  Comply with federal securities laws.  Submit financial information for SEC review.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes. Formation of a Corporation Each corporation is formed according to the laws of the state where it is located. The application for corporate status is called the Articles of Incorporation.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO3 To explain the rights of stockholders and the roles of corporate directors and officers.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Stockholders Rights Voting (in person or by proxy). Proportionate distribution of dividends. Proportionate distribution of assets in a liquidation. Rights of Stockholders

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ultimate control Stockholders usually meet once a year. Rights of Stockholders

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ultimate control Stockholders usually meet once a year. Stockholder ledgers are often maintained by a stock transfer agent or stock registrar. Rights of Stockholders

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Each unit of ownership is called a share of stock. Stock certificates serve as proof that a stockholder has purchased shares. Each unit of ownership is called a share of stock. Stock certificates serve as proof that a stockholder has purchased shares. Rights of Stockholders

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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., 2008 McGraw-Hill/Irwin Overall responsibility for managing the company. Selected by a vote of the stockholders Functions of the Board of Directors

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Chief Accountant Contractual and legal representation Custodian of funds Functions of the Corporate Officers

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO4 To account for paid-in capital and prepare the equity section of a corporate balance sheet.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Stockholders’ Equity of a Corporation

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The maximum number of shares of capital stock that can be sold to the public. Authorized Shares Authorized Shares Authorization and Issuance of Capital Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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. Authorized Shares Authorized Shares Authorization and Issuance of Capital Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin UnissuedShares Treasury Shares Outstanding Shares Treasury shares are issued shares that have been reacquired by the corporation. Issued Shares Issued Shares Outstanding shares are issued shares that are owned by stockholders. Authorized Shares Authorized Shares Authorization and Issuance of Capital Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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., 2008 McGraw-Hill/Irwin Common stock can be issued in three forms: No-Par Common Stock Par Value Common Stock Stated Value Common Stock All proceeds credited to Common Stock Treated like par value common stock Stockholders’ Equity Let’s examine this form of stock.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Matrix, Inc. issues 10,000 shares of its $2 par value stock for $25 per share on September 1, 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. 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. Issuance of Par Value Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Issuance of Par Value Stock Matrix, Inc. issues 10,000 shares of its $2 par value stock for $25 per share on September 1, ,000 × $2 = $20,000

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Issuance of Par Value Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO5 To contrast the features of common stock with those of preferred stock.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin A separate class of stock, typically having priority over common shares in...  Dividend distributions (rate is usually stated).  Distribution of assets in case of liquidation. A separate class of stock, typically having priority over common shares in...  Dividend distributions (rate is usually stated).  Distribution of assets in case of liquidation. Cumulative dividend rights. Normally has no voting rights. Usually callable by the company. Other Features Include: Preferred Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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. Cumulative Preferred Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Example: Consider the following partial Statement of Stockholders’ Equity. During 2007, the directors declare cash dividends of $5,000. In 2008, the directors declare cash dividends of $42,000. Stock Preferred as to Dividends

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Stock Preferred as to Dividends

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin I just converted 100 shares of preferred stock into 1,000 shares of common stock and ended up with a higher dividend yield! MY Gee, I can’t do that with MY preferred stock! Some preferred stock is convertible into shares of common stock. Other Features of Preferred Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Preferred Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO6 To discuss the factors affecting the market price of preferred stock and common stock.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Accounting by the issuer. Accounting by the investor. Common stock is carried at original issue price. Investments in marketable securities are carried at market value. Market Value

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Factors affecting market price of preferred stock: Factors affecting market price of preferred stock: Dividend rateDividend rate RiskRisk Level of interest ratesLevel of interest rates Factors affecting market price of preferred stock: Factors affecting market price of preferred stock: Dividend rateDividend rate RiskRisk Level of interest ratesLevel of interest rates The return based on the market value is called the “dividend yield.” Market Price of Preferred Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Factors affecting market price of common stock: Investors’ expectations of future profitability. Risk that this level of profitability will not be achieved. Factors affecting market price of common stock: Investors’ expectations 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. Market Price of Common Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO7 To explain the significance of par value, book value, and market value of capital stock.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Book Value per Share of Common Stock Total Stockholders’ Equity Number of Common Shares Outstanding Preferred stock and preferred dividends in arrears are deducted from total stockholders’ equity. Book Value Market Value =

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO8 To explain the purpose and effects of a stock split.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ice Cream Parlor Banana Splits On Sale Now Stock Splits  Companies use stock splits to reduce market price.  Outstanding shares increase, but par value is decreased proportionately.  Companies use stock splits to reduce market price.  Outstanding shares increase, but par value is decreased proportionately.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Assume a corporation has 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split. Increase Decrease No Change Stock Split

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO9 To account for treasury stock transactions.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin No voting or dividend rights Contra equity account When stock is reacquired, the corporation records the treasury stock at cost. Treasury shares are issued shares that have been reacquired by the corporation. Treasury Stock

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin On May 1, 2007, East, Inc. reacquires 3,000 shares of its common stock at $55 per share. Prepare the journal entry for May 1. Treasury Stock - Example

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin On December 3, 2007, East Corp. reissued 1,000 shares of the stock at $75 per share. Prepare the journal entry for December 3. Treasury Stock - Example 1,000 shares × $55 cost = $55,000 1,000 shares × $75 = $75,000

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Stockholders’ Equity - Presentation

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin End of Chapter 11