S TOCKHOLDERS’ E QUITY: C LASSES O F C APITAL S TOCK

1. CHAPTER 12 STOCKHOLDERS’ EQUITY: CLASSES OF CAPITAL STOCK

2. Sue and be sued Enter into contracts A corporation can . . . Hire and fire employees Buy, sell, or hold property Borrow money The Corporation A business entity recognized by law with existence separate and distinct from its owners. 433

3. Limited liability Easy transfer of ownership Easy capital generation Continuous existence Professional management Separation of owners and entity Advantages of the Corporate Form of Business* 434 * Relative to a Partnership

4. Double taxation Governmental regulation Entrenched, inefficient management Limited ability to raise creditor capital Disadvantages of the Corporate Form of Business* 434 * Relative to a Partnership

5.  CorporationsGeneral Terminology • Incorporators • Persons who form corporation • Articles of incorporation • Application for corporate charter • Corporate Charter • Contract between state and incorporators granting legal existence to corporation

6. CorporationsGeneral Terminology • Corporate bylaws • Rules adopted by board of directors to govern conduct of corporate affairs • Organization costs • Intangible assets subject to amortization • e.g., Legal and accounting costs • Domestic vs. Foreign Corporation • Depends on state in which chartered

7. Directing the Corporation Stockholder Rights • To dispose of their shares • Preemptive right to buy new shares in proportion to shares already owned • To share in dividends when declared • To share in assets in event of liquidation • To participate in management by voting at stockholders’ meetings

8. Board of Directors Directing the Corporation Hires corporate officers Formulates corporate policies Elected by whom? Composition of board?

9. Directing the Corporation Includes president, vice presidents, secretary, and treasurer Responsible for routine corporate operations Carry out the policies set by the board of directors Corporate Officers

10. Stockholders Board of Directors President (CEO) Secretary Treasurer Vice President Vice President Production Sales Directing the Corporation Corporate Organization Chart

11. Stock Certificate 100 Shares VidTel, Inc. Common Stock Capital Stock A share of stock is a transferable unit of ownership. Stock ownership records may be kept by external parties called stock-transfer agents and stock registrars.

12. Stock Certificate 100 Shares VidTel, Inc. Common Stock Capital Stock The two classes of capital stock are common and preferred. Capital Stock may have • Par value • No par value • No par value with a stated value

13. Stock Certificate 100 Shares VidTel, Inc. Common Stock $5 par value Capital Stock Par value is an arbitrary amount assigned to each share of stock • Par is not an indication of market value!!!

14. Stock Certificate 100 Shares VidTel, Inc. Common Stock No-par value Capital Stock No-par stock has no par or stated value. (This is permitted in most states.) • Why would no-par stock be used?

15. Stock Certificate Capital Stock • No-par, stated value stock 100 Shares VidTel, Inc. Common Stock No-par, $5 stated value • Stock without par value, but to which • a stated value has been assigned • by the board of directors.

16. Capital Stock Market Value Price at which a seller is willing to sell for and a buyer is willing to buy for in the marketplace.

17. Capital Stock Liquidation Value Amount each share of stock would receive if assets are sold, liabilities are paid, and remainder is distributed to shareholders.

18. Capital Stock Three Important Numbers • No. of shares authorized • No. of shares issued • No. of shares outstanding

19. Authorized Shares Capital Stock The maximum number of shares the corporation may issue as designated in its charter is the authorized number of shares.

20. Authorized Shares Capital Stock Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that have never been sold.

21. Authorized Shares Outstanding shares are shares that were sold and issued and are still held by stockholders. Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Capital Stock Outstanding Shares Unissued Shares Treasury Shares

22. Question Ace Company’s corporate charter authorizes 1,000,000 shares of common stock. Ace issued 600,000 shares and later reacquired 100,000 shares. How many shares are outstanding and how many are unissued respectively? a. 600,000 & 300,000 b. 500,000 & 500,000 c. 500,000 & 400,000 d. 400,000 & 500,000

23. Issued 600,000 Reacquired 100,000 Outstanding 500,000 Authorized 1,000,000 Issued 600,000 Unissued 400,000 Question Ace Company’s corporate charter authorizes 1,000,000 shares of common stock. Ace issued 600,000 shares and later reacquired 100,000 shares. How many shares are outstanding and how many are unissued respectively? a. 600,000 & 300,000 b. 500,000 & 500,000 c. 500,000 & 400,000 d. 400,000 & 500,000

24. Claims Classes of Capital Stock Common Stock Residual Equity - all other claims against corporation’s assets, including those of creditors, rank above the claims of common stockholders. • 1. Is not automatically entitled to dividends • 2. Does not have asset preference in liquidation

25. Classes of Capital Stock Preferred Stock • Preferences include • 1. Dividends • 2. Priority in case of liquidation • A dividend rate is usually expressed either as a percent of par value or as a dollar amount per share

26. Classes of Capital Stock Companies issue preferred stock to avoid • Using bonds with fixed interest charges • Issuing so many additional shares of common stock • Diluting the common stockholders’ control of the corporation

27. Attributes of Preferred Stock • Voting or Nonvoting • Preferred stock normally does not vote. • Cumulative or Noncumulative • Right to dividends accumulates if not paid. • Unpaid dividends (called what?) must be paid before dividends may be paid to common shareholders.

28. Attributes of Preferred Stock • Convertible or Nonconvertible • May be exchanged for shares of common stock - a “sweetener” • Callable or Noncallable • Corporation may require shareholders to surrender shares of stock for a specified amount of cash

29. Types of Preferred Stock Preference as to dividends: Noncumulative Unpaid current dividends need not be paid in future years. Cumulative Unpaid dividends must be paid before any distribution to common stockholders.

30. Balance Sheet Presentation On the Balance Sheet, stockholders’ equity is divided into two parts. Paid-in Capital Investment by owners in exchange for shares of stock Retained Earnings Earnings that have been retained and reinvested in the business

31. Stockholders’ Equity: Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding $ 1,000,000 Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding 400,000 Total Paid-in Capital $ 1,400,000 Retained Earnings 300,000 Total Stockholders' Equity $ 1,700,000 (Similar) 444 Balance Sheet Presentation TwoParts

32. Stock Issued for Cash Let’s take a closer look at the journal entries when stock is sold for cash.

33. Stock Issued for CashGuidelines for Journal Entry • Debit cash for number of shares times price per share. • Credit common (or preferred) stock • If Par Value Stock • number of shares × par value per share • If Stated Value Stock • number of shares × stated value per share • If No-Par Stock • amount of cash received

34. Stock Issued for CashGuidelines for Journal Entry • If cash received differs from par or stated value • Credit Paid-in Capital in Excess of Par Value for difference between cash received and total par value. • Credit Paid-in Capital in Excess of Stated Value for difference between cash received and total stated value.

35. GENERAL JOURNAL Page: 1 Date Description PR Debit Credit Stock Issued for CashPar Value Example On September 1st, 10,000 shares of $20 par value common stock were sold for cash of $25 per share.

36. GENERAL JOURNAL Page: 1 Date Description PR Debit Credit 9/1 Cash 250,000 Common Stock 200,000 Paid-in Capital in Excess of Par Value 50,000 To record issuance of stock for cash Stock Issued for CashPar Value Example On September 1st, 10,000 shares of $20 par value common stock were sold for cash of $25 per share.

37. Dollars per Shares share Total Cash 10,000 × $ 25 = $ 250,000 GENERAL JOURNAL Page: 1 Common stock 10,000 × (Par) 20 = 200,000 Paid-in capital 10,000 × 5 = 50,000 Date Description PR Debit Credit 9/1 Cash 250,000 Common Stock 200,000 Paid-in Capital in Excess of Par Value 50,000 To record issuance of stock for cash Stock Issued for CashPar Value Example On September 1st, 10,000 shares of $20 par value common stock were sold for cash of $25 per share.

38. GENERAL JOURNAL Page: 1 Date Description PR Debit Credit Stock Issued for CashStated Value Example On September 1st, 10,000 shares of no-par, $20 stated valuecommon stock were sold for cash of $25 per share.

39. GENERAL JOURNAL Page: 1 Date Description PR Debit Credit 9/1 Cash 250,000 Common Stock 200,000 Paid-in Capital in Excess of Stated Value 50,000 To record issuance of stock for cash Stock Issued for CashStated Value Example On September 1st, 10,000 shares of no-par, $20 stated valuecommon stock were sold for cash of $25 per share.

40. GENERAL JOURNAL Page: 1 Date Description PR Debit Credit 9/1 Cash 250,000 Common Stock 200,000 Paid-in Capital in Excess of Stated Value 50,000 To record issuance of stock for cash Stock Issued for CashStated Value Example On September 1st, 10,000 shares of no-par, $20 stated valuecommon stock were sold for cash of $25 per share. Stated value is treated just like par value for accounting purposes.

41. GENERAL JOURNAL Page: 1 Date Description PR Debit Credit 9/1 Cash 250,000 Common Stock 250,000 To record issuance of stock for cash Stock Issued for CashNo-Par Example On September 1st, 10,000 shares of no-par valuecommon stock were sold for cash of $25 per share.

42. GENERAL JOURNAL Page: 1 Date Description PR Debit Credit 9/1 Cash 250,000 Common Stock 250,000 To record issuance of stock for cash Stock Issued for CashNo-Par Example On September 1st, 10,000 shares of no-par valuecommon stock were sold for cash of $25 per share. For true no-par stock, credit the Common Stock account for the total cash received.

43. Stock Issued for Property or Services Record transaction at fair value of property or services received or fair value of stock issued, whichever is more clearly evident. Fair value of stock Fair value of property

44. GENERAL JOURNAL Page: 1 Date Description PR Debit Credit Stock Issued for Property or Services On May 1st, 10,000 shares of $20 par value stock were exchanged for land valued at $350,000. We do not know the fair value of the stock issued because it is not actively traded in the market.

45. GENERAL JOURNAL Page: 1 Date Description PR Debit Credit Stock Issued for Property or Services On May 1st, 10,000 shares of $20 par value stock were exchanged for land valued at $350,000. 5/1 Land 350,000 Common Stock 200,000 Paid-in Capital in Excess of Par 150,000

46. Balance Sheet PresentationPaid-in Capital in Excess of Par Value The following slide illustrates a typical Balance Sheet presentation of Stockholders’ Equity. All numbers are assumed and are not taken from previous or text examples.

47. Balance Sheet PresentationPaid-in Capital in Excess of Par Value Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding $ 1,000,000 Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding 400,000 Paid-in Capital in excess of Par Value Preferred Stock $ 100,000 Common Stock 80,000 180,000 Total Paid-in Capital $ 1,580,000 Retained Earnings 300,000 Total Stockholders' Equity $ 1,880,000

48. Book Value in Total Not per share book value • The theoretical liquidation value [Rice] • i.e., • Total stockholders’ equity • i.e., • Net assets (assets minus liabilities)

49. Book Value Per Share • If no Preferred Stock is outstanding • Book Value per share of common stock equals total Stockholders’ Equity divided by number of shares of common stock outstanding. • If Preferred Stock is outstanding • To get BV per share for common, subtract: (1) liquidating value of preferred and (2) cumulative preferred dividends in arrears from Stockholders’ Equity, before dividing by no. of common shares outstanding.

50. No Preferred Stock Total stockholders’ equity Number of common shares outstanding. Book value per share = Preferred Stock Outstanding Total stockholders’ equity Less: Liquidating value of preferred Less: Cumulative dividends in arrears Number of common shares outstanding Book value per share = Book Value Per Share