STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different Rules Formation of a Corporation Rights of Stockholders 1

Functions of the Board of Directors Corporate Organization Chart Paid-In Capital of a Corporation Sources of Paid-In Capital Authorization and Issuance of Capital Stock Stockholders’ Equity Classes of Stockholders Issuance of Par Value Stock 2

Preferred Stock Nonparticipating Preferred Stock Cumulative Preferred Stock Convertible Preferred Stock Stock Issued for Assets Other Than Cash 3

MARKET VALUATION 4

A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and 100,000 shares of common stock, $20 par. Issuing Stock 5

On April 1, one-half of each class of authorized stock is issued at par for cash. Apr.1Cash1, Issued preferred stock and common stock at par. Preferred Stock Common Stock1,

Issuing Stock Common Stock and Preferred Stock accounts are controlling accounts. A record of each stockholders’ name, address, and number of shares is kept in a stockholders’ subsidiary ledger. 7

Issuing Stock at a Premium On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. Mar.15Cash Issued 2,000 shares of $50 par preferred stock at $55. Preferred Stock Paid-in Capital in Excess of Par-- Preferred Stock

When stock is issued for more than its par, the stock has sold at a premium. It has sold at a discount if issued for less than its par. The $10,000 excess is recorded in a separate account because some states do not consider this to be part of legal capital and may be used for dividends. Issuing Stock at a Premium 9

On Nov. 12, a corporation acquired land for which the fair market value cannot be determined. The corporation issued 10,000 shares of $10 par common that has a current market value of $12 in exchange for the land. Nov.12Land Issued $10 par common stock valued at $12 per share, for land. Common Stock Paid-in Capital in Excess of Par Issuing Stock at a Premium 10

Stock issued for assets other than cash should be recorded at the fair market value of the asset or fair market value of the stock, whichever can be more clearly determined. Issuing Stock at a Premium 11

Investopedia explains; No-par value stock prices are determined by what investors are willing to pay for them in the market. Companies find it beneficial to issue no-par value stock as they have flexibility in setting higher prices for future public offerings and have less liability to shareholders in the case that their stock falls dramatically. 12 Issuing Stock at No-Par

On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share. Feb.23Cash Issued 10,000 shares of no-par common stock at $40. Common Stock

Issuing Stock at No-Par Later, on March 9, the corporation issues 1,000 additional shares at $36. Mar.9Cash Issued 1,000 shares of no-par common stock at $36. Common Stock

Issuing Stock at No-Par Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital. 15

Issuing Stock at No-Par Also, no-par stock may be assigned a stated value per share. The stated value is recorded similar to a par value. 16

Issuing Stock with a Stated Value On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25. Mar.30Cash Issued 1,000 shares of no-par common stock at $36; stated value, $25. Common Stock Paid-in Capital in Excess of Stated Value

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 18

Market Price of Preferred Stock Factors affecting market price of preferred stock: lDividend rate lRisk lLevel of interest rates Factors affecting market price of preferred stock: lDividend rate lRisk lLevel of interest rates The return based on the market value is called the “dividend yield.” 19

Factors affecting market price of common stock: l Investors’ expectations of future profitability. l Risk that this level of profitability will not be achieved. Factors affecting market price of common stock: l Investors’ expectations of future profitability. l 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 20

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 21

Treasury Stock Transactions Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This stock is referred to as treasury stock. 22

Treasury stock is stock that: 1. has been issued as fully paid. 2.has been reacquired by the corporation. 3.has not been canceled or reissued. Treasury Stock Transactions A commonly used method of accounting for treasury stock is the cost method. 23

Treasury Stock Transactions Cost Method On January 5, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share. Jan.5Treasury Stock Purchased 1,000 shares of treasury stock at $45. Cash

On June 2, sold 200 shares of treasury stock at $60 per share. June 2Cash Sold 200 shares of treasury stock at $60. Treasury Stock Paid-in Capital from sale of Treasury Stock Treasury Stock Transactions Cost Method 25

On September 3, sold 200 shares of treasury stock at $40 per share. Sep.3Cash Paid-in Capital from Sale of Treasury Stock Sold 200 shares of treasury stock at $60. Treasury Stock Treasury Stock Transactions Cost Method 26

Stock Splits A corporation sometimes reduces the par or stated value of their common stock and issues a proportionate number of additional shares. This is called a stock split. 27

Stock Splits BEFORE STOCK SPLIT 4 shares, $100 par $400 total par value 20 shares, $20 par AFTER 5-1 STOCK SPLIT $400 total par value 28

Stock Splits A stock split does not change the balance of any corporation accounts. However, it can make the stock more attractive to investors by reducing the price of a share, 29

Accounting for Cash Dividends Dividends are distributions of retained earnings to stockholders. Dividends may be paid in cash, stock, or property. Dividends, even on cumulative preferred stock, are never required, but once declared become a legal liability of the corporation. 30

Corporations generally declare and pay cash dividends on shares outstanding when three conditions exist: 1. Sufficient retained earnings Accounting for Cash Dividends 2. Sufficient cash 3. Formal action by the board of directors Retained Earnings 50,000 31

Accounting for Cash Dividends There are three important dates relating the dividends. 32

Accounting for Cash Dividends First is the date of declaration. Assume that on December 1, Hiber Corporation declares a $42,500 dividend. 33

Dec.1Cash Dividends Declared cash dividend. Cash Dividend Payable Date of Declaration Accounting for Cash Dividends 34

The second important date is the date of record. For Hiber Corporation this would be December 11. Accounting for Cash Dividends 35

Accounting for Cash Dividends On this date, ownership of shares determines who receives the dividend. No entry is required. 36

The third important date is the date of payment. On January 2, Hiber issues dividend checks. Accounting for Cash Dividends 2 37

Accounting for Cash Dividends Jan.2Cash Dividends Payable Paid cash dividends. Cash Date of Payment 38

Accounting for Stock Dividends A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend. 39

Accounting for Stock Dividends Stock dividends transfer pro data shares of stock to stockholders. Assume Hendrix Corporation issues a 5% stock dividend on common stock, $20 par, 2,000,000 shares issued. 40

Accounting for Stock Dividends Dec.15Stock Dividends 3, Declared stock dividend. Hendrix Corporation, December 15 (before dividend) Common Stock, $20 par$40,000,000 Paid-in Capital in Excess of Par--Common Stock9,000,000 Retained Earnings26,600,000 Stock Dividends Distributable2, Paid-in Capital in Excess of Par—Common Stock1,

Accounting for Stock Dividends Jan. 10Stock Dividends Distributable 2, Issued stocks for the stock dividend. Common Stock2, On January 10, Hendix Corporation issues the stock. This action increases the number of shares outstanding by 100,

Accounting for Stock Dividends Hendrix Corporation, December 15 (before dividend) Common Stock, $20 par$40,000,000 Paid-in Capital in Excess of Par--Common Stock9,000,000 Retained Earnings 26,600,000 $75,600,000 Hendrix Corporation, January 10 (after dividend) Common Stock, $20 par$42,000,000 Paid-in Capital in Excess of Par--Common Stock10,100,000 Retained Earnings 23,500,000 $75,600,000 43

There are two ways to report stockholders’ equity in the balance sheet. In Next Slide, each class of stock is listed first, followed by its related paid-in capital accounts. Reporting Stockholders’ Equity 44

Paid-in capital: Preferred 10% stock, $50 par, cumulative (2,000 shares authorized and issued) $100,000 Excess of issue price over par 10,000$ 110,000 Common stock, $20 par (50,000 shares authorized, 45,000 issued)$900,000 Excess of issue price over par 190,0001,090,000 From sale of treasury stock 2,000 Total paid-in capital$1,202,000 Retained earnings 350,000 Total$1,552,000 Deduct treasury stock (600 shares at cost) 27,000 Total stockholders’ equity$1,525,000 Stockholders’ Equity 45

Next Slide shows the second method. Note that the stock accounts are listed first. The other paid-in capital accounts are listed as a single item described as Additional paid-in capital. 46

Contributed capital: Preferred 10% stock, cumulative $50 par (2,000 shares authorized and issued) $100,000 Common stock, $20 par (50,000 shares authorized, 45,000 issued)900,000 Additional paid-in capital 202,000 Total contributed capital$1,202,000 Retained earnings 350,000 Total$1,552,000 Deduct treasury stock (600 shares at cost) 27,000 Total stockholders’ equity$1,525,000 Stockholders’ Equity 47

Financial Analysis and Interpretation Dividend Yield Dividends per share of common$ 0.80$ 0.60 Market price per share of common$20.50$13.50 Dividends per Share of Common Stock Market Price per Share of Common Stock Dividend Yield $.60 $13.50 Dividend Yield, 2003 = 4.4% Dividend Yield, 2004 $.80 $20.50 = 3.9% Use:To indicate the rate of return to common stockholders in terms of dividends 48

End of Chapter 11 49