1. STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL
Chapter 11 2

2. Privately, or Closely, Held
Corporations
Privately, or Closely, Held
Publicly Held
An entity created by law.
Ownership can be
Existence is separate from owners.
Has rights and privileges.

3. Advantages of Incorporation
Limited personal liability for stockholders.
Transferability of ownership.
Professional management.
Continuity of existence.

4. Disadvantages of Incorporation
Heavy taxation.
Greater regulation.
Cost of formation.
Separation of ownership and management.

5. Publicly Owned Corporations Face Different Rules
Corporations are required by law to:
Prepare financial statements in accordance with GAAP.
Have their financial statements audited by an independent CPA.
Comply with federal securities laws.
Submit financial information for SEC review.

6. 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.
Costs associated with incorporation are usually expensed immediately, but amortized over 5 years for tax purposes.

7. Rights of Stockholders
Voting (in person or by proxy).
Proportionate distribution of dividends.
Proportionate distribution of assets in a liquidation.
Rights
Stockholders

8. Functions of the Corporate Officers
Contractual and legal representation
Chief Accountant
Custodian of funds

9. Paid-In Capital of a Corporation

10. Authorization and Issuance of Capital Stock
Authorized
Shares
Outstanding shares are issued shares that are owned by stockholders.
Outstanding
Shares
Unissued
Shares
Issued
Shares
Treasury shares are issued shares that have been reacquired by the corporation.
Treasury
Shares

11. Stockholders’ Equity
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.

12. Stockholders’ Equity Common stock can be issued in three forms:
Par Value Common Stock
No-Par Common Stock
Stated Value Common Stock
Let’s examine this form of stock.
All proceeds credited to Common Stock
Treated like par value common stock

13. Issuance of Par Value Stock
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.
Prepare the journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 per share which occurred on September 1, 2003.

14. Issuance of Par Value Stock
The journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 per share on September 1, 2003, should include a credit to common stock for the par value of the shares issued.

15. Issuance of Par Value Stock

16. Preferred Stock Other Features Include:
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.
Other Features Include:
Cumulative dividend rights.
Usually callable by the company.
Normally has no voting rights.

17. Cumulative Preferred Stock
Vs.
Noncumulative
Cumulative
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.

18. Stock Preferred as to Dividends
Example: Consider the following partial Statement of Stockholders’ Equity.
During 2002, the directors declare cash dividends of $5,000. In year 2003, the directors declare cash dividends of $42,000.

19. Stock Preferred as to Dividends
Example: Consider the following partial Statement of Stockholders’ Equity.
During 2002, the directors declare cash dividends of $5,000. In year 2003, the directors declare cash dividends of $42,000.

20. Stock Issued for Assets Other Than Cash
Companies sometimes issue stock in exchange for non-cash assets.
Since no cash is received, record the transaction at the market value of the goods or services received.

21. Banana Splits On Sale Now
Stock Splits
Companies use stock splits to reduce market price.
Outstanding shares increase, but par value is decreased proportionately.
Ice Cream Parlor
Banana Splits On Sale Now

22. Stock Splits - Example
Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.
Increase
Decrease
No Change

23. No voting or dividend rights
Treasury Stock
Treasury shares are issued shares that have been reacquired by the corporation.
No voting or dividend rights
Contra equity account
When stock is reacquired, the corporation records the treasury stock at cost.

24. Treasury Stock - Example
On May 1, 2003, East Corp. reacquired 3,000 shares of its common stock at $55 per share.
Prepare the journal entry for May 1.

25. Treasury Stock - Example
On December 3, 2003, East Corp. reissued 1,000 shares of the stock at $75 per share.
Prepare the journal entry for December 3.
1,000 shares × $75 = $75,000
1,000 shares × $55 cost = $55,000

26. Stockholders’ Equity - Presentation