Class today

What is a corporation?why corporate form?

Ownership in a corporationCommon Stock

Sale/IssuanceBuyback (Treasury)

Preferred StockQuiz chapters 13 & 14

55

Business Forms

Most numerousSole proprietorshipPartnership

Highest dollar value assetsCorporations (dominant form)

Closely-held (private). Openly-held, publicly traded (listed, over-the-

counter).

Hybrid forms availablePCs, LLCs and LLPs, etc.

Stockholders’ equity

Contributed capital = stockTypesAccounting for issuanceBalance sheet presentationTreasury stock

Retained earnings - next chapter

Contributed Capital

basic concepts stock issue lump sum sales of stock stock subscriptions

Stock

Stockholders’ rightsShare in profitsVotingPreemptive Proportionate share

Limited liability Unlimited life Common vs. preferred

Authorized, Issued and Outstanding

authorized capital stocknumber of shares that can be issued

legally as defined in the corporate charter issued capital stock

number of shares that have been issued and have not been subsequently retired

outstanding capital stocknumber of shares currently trading

authorized > issued > outstanding

Par, Stated or Assigned Value

par valueminimum amount that must be

contributed under the law to consider the shares fully paid

generally not related to market value nopar

true nopar stockstated or assigned value

basically takes the place of par value

Stock Issue

CashCash XXXX

Common stock XXPaid in capital in excess XXX

Noncash considerationrecord at FMV of asset received or stock

issued whichever most clearly determinablevalue assigned by the Board

Journal Entry to Record Stock Issue

cash (other asset or expense) xxcapital stock yycontributed in excess of par* zz

*or assigned value

xx = most clearly determinable fair valueyy = # shares x par value (or assigned

value)zz= whatever is left over!

Lump Sales of Stock

proportional methodfair value available for each classallocate based on ratio of each fair

value to total fair value incremental method

fair value not available for at least one class

assign fair value to classes with know fair value first; remainder to those with unknown fair value

Stock Subscriptions

stock subscriptions receivable xxcapital stock subscribed yycontributed capital in excess of par*

zz*or assigned value

Where does this account show up on the balance sheet?

Default on Subscriptions

Return all payments made Issue shares equivalent to # paid in

full All payments made forfeited Resale under a lien

reimbursed to extent net receipts > original subscription price

not to exceed payments made

Treasury Stock What is.. Why?

Meet merger or compensation needsIncrease EPSMake a ‘market’…

How to account forCost methodPar/stated value method

Carries a debit balance.Contra owner equity.NOT an asset!

Cost Method

Repurchase and subsequent sale viewed as one continuous transaction (“one transaction approach”)

journal entry:

treasury stock xxcash xx

Cost Method (cont.)

Treasury stock account viewed as a “suspense account”

Reported as a deduction from total shareholders’ equity

Can either reissue (sell) or retire the stock

Example

Have 100 shares of treasury stock which was purchased for $1400

Sold 50 shares for $800 Sold 50 shares for $500

Cost Method - Resale

When resale price > acquisition costRemove acquisition cost from treasury

stock accountdifference between cost and sale price

is credited to “contributed capital from TS transactions”

Cost Method - Resale When resale price < acquisition

costRemove acquisition cost from treasury

stock accountThen

debit “contributed capital from TS transactions” (same class) if available

remaining amount --debit retained earnings

Cost Method - Retirement

Remove acquisition cost from treasury stock Then

reduce capital stock for par reduce PIC for amount paid in when stock was issued

If: debit difference to be allocatedcontributed capital from TS transactions (same

class)retained earnings

If: credit difference to be allocatedcontributed capital from TS transactions

Example

Have 100 shares of $1 par value treasury stock which was purchased for $1400

Retire 50 shares with original issue price of $600

Retire 50 shares with original issue price of $1000

Example Entries

3434

B/S presentation of T/S

Cost method: T/S is subtracted at the bottom of the shareowner equity section at cost. It is included in the “regular” shares above as well.

Presentation of Treasury Stock

3535

Exchange of rights for other rights: Hybrid of debt and ownership characteristics.

Dividends paid are a % of par or $ per share. Preferred shareholders’ claim on earnings generally

precedes common shareholders’ Dividends

Cumulative (arrearages) vs. noncumulative stockParticipating

Fully Partially Non

Preferred stock

3636

Example: 2,000 shares of P/S, $50 par, 8% cumulative, non-participating; 80,000 shares of C/S, $30 par.

Dividends declared: Year 1, $0; Year 2, $6,000; Year 3, $18,000; Year 4, $75,000.P/S dividend = 2,000 shares x $50 par x .08 = $8,000

To P/S Arrearage To C/S Year 1 Year 2

Year 3 Year 4

Cash Dividends

3737

Note: No formal liability arises when a dividend is not declared. Memo only. Arrearages are paid before any

current dividends are paid.Entries at the date of declaration:Entries at the date of declaration:

Cash Dividends

Year 2Year 2

3838

Cash Dividends

Year 3

Year 4Year 4

3939

Convertible P/S. To convert use book value method

Convertible Preferred Stock

Debt or Equity?

Debt relatedStated returnNon-votingPreference at liquidationNon-participating

EquityReturn not mandatoryDividends, not interest expenseParticipating