Slide

11-1

Chapter

11 STOCKHOLDERS’
EQUITY:
PAID-IN CAPITAL

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-2

Corporations

An entity
created by law.

Privately, or
Existence is Closely, Held
Ownership
separate from
can be
owners.

Has rights and

privileges.
Publicly Held

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-3

Advantages of Incorporation
Limited personal
liability for
stockholders.

Transferability of
ownership.

Professional
management.

Continuity of
existence.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-4

Disadvantages of Incorporation

Heavy taxation.

Greater regulation.

Cost of formation.

Separation of
ownership and
management.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-5
Publicly Owned Corporations Face
Different Rules
By LAW, publicly owned
corporations must:
• Prepare financial statements in
accordance with GAAP/IFRS.
• Have their financial statement
audited by an independent
CPA.
• Comply with federal securities
laws.
• Submit financial information
for SEC review.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
11-6

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-7

Rights of Stockholders
 Voting (in person
or by proxy).
 Proportionate
Rights distribution of
dividends.
 Proportionate
Stockholders distribution of
assets in a
liquidation.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
11-8

Rights of Stockholders

Each unit of
ownership is
called a share of
stock.
A stock
certificate serves
as proof that a
stockholder has
purchased
shares.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-9

Rights of Stockholders

When the stock

is sold, the
stockholder
signs a transfer
endorsement on
the back of the
stock certificate.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-10

Balance Sheet of a Corporation

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-11

Paid-In Capital of a Corporation

Stockholders' equity is
increased in two ways.

Contributions by Retention of profits

investors in exchange earned by the
for capital stock. corporation.

Paid-in Capital Retained Earnings

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-12
Authorization and Issuance of Capital
Stock
Authorized
Shares
The maximum
number of
shares of capital
stock that can be
sold to the
public.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-13
Authorization and Issuance of Capital
Stock
Authorized
Shares
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
Usually stock that stock that
shares are have been never have
sold sold. been sold.
through an
underwriter.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-14

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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-15

Stockholders’ Equity
Common stock can be issued in

Par Value No-Par

Common Common
Stock Stock

Let’s examine All proceeds

this form of credited to
stock. Common Stock
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
11-16

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 Additional Paid in
capital

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.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-17

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.

Date Description Debit Credit

1-Sep Cash 250,000
Common Stock 20,000
Additional Paid in Capital 230,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-18

Issuance of Par Value Stock

Stockholders' Equity with Common Stock

Stockholders' Equity
Contributed capital:
Capital Stock - $2 par value; 50,000 shares
authorized; 10,000 shares issued and
outstanding $ 20,000
Additional paid-in Capital 230,000
Total Paid in capital 250,000
Retained earnings 65,000
Total stockholders' equity $ 565,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-19

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-20

Issuance of no Par Value

To illustrate, assume that the DeWitt Corporation, which is
authorized to issue 10,000 shares of common stock without
par value, assigns a stated value of $20 per share to its
stock. DeWitt issues the 10,000 shares for cash at $ 23 per
share. The entry to record this transaction is:

Debit Credit
Cash 250,000
Common Stock, no par 250,000

To record issuance of
10,000 shares for cash.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-21
Stock Issued for Assets Other Than
Cash
Companies sometimes issue
stock in exchange for non-
cash assets.

Since no cash is received, Assume that a company

record the transaction at the
market value of the goods or
services received OR market
value of the shares issued.
McGraw-Hill/Irwin
exchanged 10,000 shares of
its $1 Par value for land.
Competent appraisers have
different opinions on price of
land but share price is $ 90.
Record the journal entry.
© The McGraw-Hill Companies, Inc., 2002
Slide
11-22
Preferred Stock
A separate class of stock, typically having priority
over common shares in . . .
– Dividend distributions (rate is usually stated as a
percentage of Par.
– Distribution of assets in case of liquidation
– Normally has no voting rights.

Other Features Include:

Cumulative Usually Convertible

dividend callable by Into common
rights. the company. shares
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
11-23

Cumulative Preferred Stock

Cumulative Vs. Noncumulative

Dividends in Undeclared
arrears must be dividends from
paid before current and prior
dividends may be years do not have
paid on common to be paid in future
stock. years.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-24

Stock Preferred as to Dividends

Example: Consider the following partial Statement of
Stockholders’ Equity.
Preferred stock, 9%, $100 par value; 1,000
shares authorized, issued and outstanding 100,000
Common stock, $50 par value; 4,000 shares
authorized, issued and outstanding $ 200,000
Total contributed capital $ 300,000

During 2002, the directors declare cash dividends of

$5,000. In year 2003, the directors declare cash
dividends of $42,000.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-25

Stock Preferred as to Dividends

Preferred Common
If Preferred Stock is Noncumulative:
Example: Consider the following partial Statement of
Year 2002 $5,000 dividends declared $ 5,000 $ -
Stockholders’ Equity.
Year 2003
Step 1: stock,
Common Current$50
preferred dividend4,000 shares
par value; $ 9,000
authorized, issuedtoand
Step 2: Remainder outstanding
common shareholders $ 200,000
$ 33,000
Preferred stock, 9%, $100 par value; 1,000
shares authorized,
If Preferred issued and outstanding
Stock is Cumulative: 100,000
Total2002
Year contributed capital declared
$5,000 dividends $ $ 300,000
5,000 $ -
Year 2003
During
Step 1: 2000, thein directors
Dividends arrears declare cash$ dividends
4,000 of
Step 2: Current
$5,000. preferred
In year dividend
2001, 9,000cash
the directors declare
Step 3: Remainderdividends
to common shareholders
of $42,000. $ 29,000
Totals $ 13,000 $ 29,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
11-26

Preferred Stock
• Convertible Preferred Stock: Remington corp
issued 9% convertible p stock on Jan 1 at Par
$100 per share, each stock was convertible
into 4 stocks of common of $10 par trading at
@ 40 each.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-27

Stock Splits

• Companies use stock

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

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-28

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.
Before
Before After
After
Split
Split Split
Split
Increase
Common Stock
Common Stock Shares
Shares 5,000
5,000 10,000

Par Value
Value per
per Share
Share $ 1.00
1.00 $ 0.50 Decrease
Par $
No
Total Par
Total Par Value
Value $ 5,000
$ 5,000 $ 5,000 Change

Sept 30: memorandum: issued additional 5000 of common stock in

a 2 for1 stock split. Par Value reduced from $10 per share to $5 per
share.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
11-29

Stock Dividend
It is the distribution of
more shares of the
corporation's stock.
Perhaps a corporation
doesn’t want to let's assume a corporation has 2,000
distribute cash, but shares of common stock
wants to give something outstanding when it declares a 5%
to its stockholders. stock dividend. The stock has a par
value of $0.10 per share and a
If the board of directors
market value of $12 per share on
approves a 10% stock
the declaration date, the following
dividend, each stockholder
entry is made on the declaration
will get an additional share
date:
for each 10 shares held.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
11-30

Book Value Per share

• Calculated for Common Stock Only

• BVPS is different from Market Price

• Can be calculated in different ways

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-31

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-32

Note that p stock is callable at $110 and one year dividend are
in arrears.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-33

Treasury Stock
Treasury
No voting shares are
Contra issued
or shares that
equity have been
dividend
account reacquired
rights by the
corporation.

When stock is reacquired, the corporation

records the treasury stock at cost.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
11-34

Treasury Stock - Example

On May 1, 2015 East Corp. reacquired 1500 shares
of its common stock $5 Par at $100 per share.
Prepare the journal entry for May 1.

Date Description Debit Credit

Date Description Debit Credit
1-May Treasury Stock 150,000
Cash 150,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-35

Stockholders’ Equity - Presentation

Stockholders' Equity
Contributed capital:
Preferred Stock - $100 par value; 1,000 shares
authorized; 50 shares issued & outstanding $ 5,000
Common Stock - $10 par value; 50,000 shares
authorized; 30,000 shares issued and
outstanding 300,000
Additional Paid-in-capital -
Retained earnings 65,000
Subtotal $ 370,000
Less: Treasury stock (1500 shares at $100 cost) 150,000
Total Stockholders' equity $ 220,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-36

Treasury Stock - Example

On December 3, 2015, East Corp. reissued 1,000
shares of the stock at $115 per share.
Prepare the journal entry for December 3.

Date Description Debit Credit

3-Dec Cash 115,000
Treasury Stock 100,000
Additional Paid In capital: Teasury Stock
15,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-37

Stockholders’ Equity - Presentation

Stockholders' Equity
Contributed capital:
Preferred Stock - $100 par value; 1,000 shares
authorized; 50 shares issued & outstanding $ 5,000
Common Stock - $10 par value; 50,000 shares
authorized; 30,000 shares issued and
outstanding 300,000
Additional Paid-in-capital:Treasury Stock 15,000
Retained earnings 65,000
Subtotal $ 385,000
Less: Treasury stock (500 shares at $100 cost) 50,000
Total Stockholders' equity $ 335,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-38

Treasury Stock - Example

On Feb 10, 2016, East Corp. reissued remaining
500 shares of the stock at $95 per share.
Prepare the journal entry for Feb 10.

Date Description Debit Credit

10-Feb Cash 45,000
Additional Paid In capital: Teasury Stock 5,000
Treasury Stock 50,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
11-39

End of Chapter 11
This isn’t what I
meant when I asked
for stock for my
birthday!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002