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Chapter 11

Chapter 11. Stockholders?Equity: Paid-in Capital. Publicly Held. Corporations. An entity created by law. Privately, or Closely, Held. Existence is separate from owners. Ownership can be. Has rights and privileges. Publicly Held. Why Businesses Incorporate.

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Chapter 11

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  1. Chapter 11 Stockholders?Equity: Paid-in Capital

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

  3. Publicly Held Why Businesses Incorporate Stockholders have no personal liability. Transferability of ownership. Privately, or Closely Held Professional management. Continuity of existence.

  4. Publicly Owned Corporations face Different Rules • Disclose financial information. • Financial statements prepared in accordance with GAAP. • CPAs must audit the financial statements. • Must comply with federal securities laws. • Must submit financial information for SEC review.

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

  6. Stockholders usually meet once a year. Ultimate control Rights of Stockholders

  7. Rights of Stockholders Stockholder ledgers are often maintained by a stock transfer agent or stock registrar.

  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.

  9. Rights of Stockholders When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.

  10. Functions of the Board of Directors Overall responsibility for managing the company. Selected by a vote of the stockholders

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

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

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

  14. 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

  15. Paid-In Capital of a Corporation

  16. 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.

  17. Stockholders?Equity Common stock can be issued in three forms: Par Value Common Stock No-Par Common Stock Stated Value Common Stock Let抯 examine this form of stock.

  18. 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, 1999.

  19. 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, 1999 should include a credit to common stock for the par value of the shares issued.

  20. Issuance of Par Value Stock

  21. Stockholders?Equity Common stock can be issued in three forms: Par Value Common Stock No-Par Common Stock Stated Value Common Stock All proceeds credited to Common Stock Treated like par value common stock

  22. Usually has a stated dividend rate. Usually callable by the company. Normally has no voting rights. Preferred Stock A separate class of stock, typically having priority over common shares in . . . • Dividend distributions. • Distribution of assets in case of liquidation.

  23. Cumulative Vs. Noncumulative Cumulative Preferred Stock 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.

  24. Stock Preferred as to Dividends Example: Consider the following partial Statement of Stockholders?Equity. During 1999, the directors declare cash dividends of $5,000. In year 2000, the directors declare cash dividends of $42,000.

  25. Stock Preferred as to Dividends

  26. Convertible Preferred Stock Gee, I can’nt do that with my preferred stock. I just converted 100 shares of preferred stock into 1,000 shares of common stock and ended up with a higher dividend yield! Some preferred stock is convertible into shares of common stock.

  27. Preferred Stock

  28. Stock Issued for Assets Other Than Cash Companies sometimes issue stock in exchange for non-cash assets. Record the transaction at the market value of the goods or services received.

  29. I love this stuff! Can we do some more?

  30. Market Value Common stock is carried at original issue price. Accounting by the issuer. Investments in marketable securities are carried at market value. Accounting by the invester.

  31. Market Price of Preferred Stock Factors affecting market price of preferred stock: • Dividend rate • Risk • Level of interest rates The return based on the market value is called the 揹ividend yield?

  32. Market Price of Common Stock • Factors affecting market price of common stock: • Investors?expectations of future profitability. • Risk that this level of profitability will not be achieved. Changes in market value have no impact on the books of the issuer.

  33. 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

  34. Stock SplitsExample Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2杅or? stock split.

  35. Stock SplitsExample Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2杅or? stock split. Increase Decrease No Change

  36. Treasury Stock Authorized Shares Outstanding Shares Unissued Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Treasury Shares

  37. No voting or dividend rights Contra equity account Treasury Stock When stock is reacquired, the corporation records the treasury stock at cost.

  38. Treasury StockExample On May 1, 1998 East Corp. reacquired 3,000 shares of its common stock at $55 per share. Prepare the journal entry for May 1.

  39. Treasury StockExample On May 1, 1998 East Corp. reacquired 3,000 shares of its common stock at $55 per share. Prepare the journal entry for May 1.

  40. Treasury StockExample On December 3, 1999 East Corp. reissued 1,000 shares of the stock at $75 per share. Prepare the journal entry for December 3.

  41. 1,000 shares ?$75 = $75,000 Treasury StockExample On December 3, 1999 East Corp. reissued 1,000 shares of the stock at $75 per share. Prepare the journal entry for December 3. 1,000 shares ?$55 cost = $55,000

  42. Stockholders?Equity Presentation

  43. End of Chapter 11 This is’nt what I meant when I asked for stock for my birthday!

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