1. Chapter 15 Intermediate Accounting II Otto Chang Professor of Accounting

2. Issuance of stock Par value indicates minimum legal capital Par value or stated value stock Cash 1100 Common Stock (Par value $5.00) 500 Paid-in Capital in excess of par 600 No par value Cash 1100 Common Stock--No Par Value 1100

3. Sale of Subscribed Stock 500 shares of stock subscribed, par value $5, fair value $20, 50% cash down required Subscriptions Receivable* ($20 x 500) 10,000 Common stock Subscribed ($5 x 500) 2,500 Paid-in Capital in Excess of Par 7,500 Cash 5,000 Subscriptions Receivable 5,000 *Subscriptions Receivable is not enforceable, therefore, not an asset, but a contra-equity A/C

4. When Final Payment is Received Six months later, final payment is received Cash 5,000 Subscriptions Receivable 5,000 Common Stock Subscribed 2,500 Common Stock 2,500

5. Defaulted Subscriptions Accounts In states allow the down payment to be kept: Common Stock Subscribed 2,500 Paid-in Capital in Excess of Par 2,500 Subscription Receivable 5,000 In states require the excess of resale value over balance due to be returned to subscriber: Example: the 500 shares are resold at $20 Paid-in Capital in Excess of Par 5,000 Cash ($20-$10) x 500 5,000

6. Costs of Issuing Stock Examples: accountants’, attorneys’ and underwriters’ fee, expense for printing, advertising, and filing and registration Method 1: treat as a reduction of paid-in capital in excess of par. Method 2: treat as an organization cost. Method 1 is more popular.

7. Reasons for Reacquisition of Shares For employee stock compensation contract Meet Potential merger needs To increase EPS Reduce the number of share held by public to thwart takeover To make a market in the stock To contract operation

8. Purchase of Treasury Stock Cost method –Treasury Stock is debited at cost when required Example 1: A company issued 1000 shares of stock at $110 per share (par value is $100), later 100 shares are reacquired at $112 Cash ($112 x 100) 1120 Treasury Stock 1120 Note: the original issue price is not used

9. Reissue of Treasury Stock: Cost Method When reissued, credit Treasury Stock at its purchase cost Example A: 10 shares reissued at $130/share Cash 1300 Treasury Stock 1120 Paid-in Capital from T/S 180 Example B: 10 shares reissued at $98/share Cash 980 Paid-in Capital from T/S 140 Treasury Stock 1120

10. Retirement of Treasury Stock: Cost Method Example C: retire 10 shares of treasury stock (issued at $110; reacquired at $112) Common Stock (10 x par $100) 1000 Paid-in Capital in Excess of Par 100 Retained Earning* 20 Treasury Stock 1120 * or Paid-in Capital from T/S, depending on the state law

11. Retirement of Treasury Stock: Cost Method Example D: retire 10 shares of treasury stock (issued at $100; reacquired at $98) Common Stock 1000 Paid-in Capital in Excess of Par 100 Paid-in Capital from Retirement 120 Treasury stock 980

12. Par Value Method Reacquired treasury stock treated as “constructively retired” Example 2: 100 shares reacquired at $112 (originally issued at $110/share; par=$100) Treasury Stock (100 x par $100) 10,000 Paid-in Capital in Excess of Par 1,000 Retained Earning 200 Cash 11,200

13. Purchase of Treasury Stock: Par Value Method Example 3: same 100 shares reacquired at $98 Treasury Stock(100 x Par $100) 10,000 Paid-in Capital in Excess of Par 1,000 Paid-in Capital from T/S 1,200 Cash 9,800

14. Reissue of Treasury Stock: Par Value Method Treated as “new issue” Example (a): 10 shares treasury stock were reissued at $130 /share (par=$100, issued at $100, reacquired at $112) Cash 1,300 Treasury Stock (10 x Par $100) 1,000 Paid-in Capital in Excess of Par 300

15. Reissue Treasury Stock: Par Value Method Example (b): same 10 shares reissued at $98 Cash 980 Paid-in Capital from T/S 20 Treasury Stock (10 x Par $100) 1,000

16. Retirement of Treasury Stock: Par Value Method “Constructive” retirement becomes actual retirement of common stock Example (c): 10 shares of treasury stock were retired Common Stock (10 x par $100) 1,000 Treasury Stock (10 x par$100) 1,000

17. Balance Sheet Presentation Cost method: debit balance of Treasury Stock is a contra-stockholders’ equity account, subtracted from the total of stockholder’s equity. Par value method: debit balance of Treasury Stock is subtracted from the Capital- Common Stock account Retained earning should be restricted to the extent of balance in the Treasury Stock