11-1

Chapter Eleven:
Stockholders’ Equity:
Paid-in Capital

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 11-2

Corporations

An
Anentity
entity
created
createdby
bylaw.
law.

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

Has
Hasrights
rightsand
and
privileges.
privileges.
Publicly Held
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 11-3

Advantages of Incorporation
Limited
Limitedpersonal
personal
liability
liabilityfor
for
stockholders.
stockholders.

Transferability
Transferability of
of
ownership.
ownership.

Professional
Professional
management.
management.

Continuity
Continuityof
of
existence.
existence.

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 11-4

Disadvantages of Incorporation

Heavy
Heavytaxation.
taxation.

Greater
Greaterregulation.
regulation.

Cost
Cost of
of formation.
formation.

Separation
Separationofof
ownership
ownershipandand
management.
management.
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 11-5

Publicly Owned Corporations Face

Different Rules
By
By LAW,
LAW, publicly
publicly owned
owned corporations
corporations
must:
must:

 Prepare
Prepare financial
financial statements
statements in in
accordance
accordance withwith GAAP.
GAAP.
 Have
 Have their
their financial
financial statement
statement
audited
audited by
by an
an independent
independent CPA.
CPA.
 Comply
 Comply with
with federal
federal securities
securities laws.
laws.
 Submit
 Submit financial
financial information
information for
for SEC
SEC
review.
review.

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Formation of a Corporation
The
Thecosts
costsassociated
associatedwith
with
 Each corporation is incorporation
incorporation are
areusually
usually
formed according to expensed
expensedimmediately,
immediately,butbut
the laws of the state amortized
amortizedover
over55years
yearsfor
for
where it is located. tax
taxpurposes.
purposes.

 The application for

corporate status is
called the Articles of
Incorporation.

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 11-7

Rights of Stockholders
Voting (in person
or by proxy).
Proportionate
Right distribution of
s dividends.
Proportionate
Stockholders distribution of
assets in a
liquidation.
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 11-8

Rights of Stockholders

Stockholders
Stockholders
Ultimate
Ultimate usually
usuallymeet
meet
control
control once
onceaayear.
year.

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 11-9

Rights of Stockholders

Stockholder
Stockholder Stockholders
Stockholders
ledgersUltimate
Ultimate
are
ledgers areoften
often usually
usuallymeet
meet
control
controlby
maintained
maintained byaa once
onceaayear.
year.
stock
stocktransfer
transfer
agent
agentor or stock
stock
registrar.
registrar.

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 11-10

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.

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 11-11

Rights of Stockholders

When the stock

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

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 11-12

Functions of the Board of Directors

Overall
Overall
Selected
Selectedbybyaa responsibility
responsibility
vote
voteof
ofthe
the for
formanaging
managing
stockholders
stockholders the
thecompany.
company.

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 11-13

Functions of the Corporate Officers

Contractual
Contractualand
andlegal
legal
representation
representation

Custodian Chief
Custodianof
of Chief
funds Accountant
Accountant
funds

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 11-14

Stockholders’ Equity of a Corporation

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 11-15

Authorization and Issuance

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

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 11-16

Authorization and Issuance

of Capital Stock
Authorized
Authorized
Shares
Shares
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
Usually
Usually stock that stock that
shares
sharesare
are have been never have
sold
sold sold. been sold.
through
throughanan
underwriter.
underwriter.

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 11-17

Authorization and Issuance

of Capital Stock
Authorized Outstanding shares are
Authorized issued shares that are
Shares
Shares owned by
stockholders.
Outstanding
Unissued
Issued Shares
Issued Shares
Shares
Shares
Treasury shares are
Treasury issued shares that
Shares have been reacquired
by the corporation.

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 11-18

Stockholders’ Equity
Par value is an
arbitrary
amount
assigned to
each share of
stock when it is
authorized.
Market
Market price
price is
is
the
theamount
amountthat
that
each
eachshare
shareof of
stock
stockwill
willsell
sell
for
forin
inthe
the
market.
market.
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 11-19

Stockholders’ Equity

Common
Common stock
stock can
can be
be issued
issued in
in three
three forms:
forms:

Par
ParValue
Value No-Par
No-Par Stated
StatedValue
Value
Common
Common Common
Common Common
Common
Stock
Stock Stock
Stock Stock
Stock

Let’s
Let’sexamine
examine All
Allproceeds
proceeds Treated
Treated like
like
this
thisform
form of
of credited
creditedto
to par
par value
value
stock.
stock. Common
CommonStock
Stock common
commonstock
stock
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 11-20

Issuance of Par Value Stock

Record:
Record:
The
Thecash
cashreceived.
received.
The
Thenumber
numberof ofshares
sharesissued
issued×× the
thepar
parvalue
value
per
pershare
shareininthe
the Common
CommonStock
Stockaccount.
account.
The
Theremainder
remainderis isassigned
assignedto
to Contributed
Contributed
Capital
Capitalin
in Excess
Excess of
ofPar.
Par.

Matrix,
Matrix, Inc.
Inc. issues
issues 10,000
10,000 shares
shares of
of its
its
$2
$2 par
par value
value stock
stock for
for $25
$25 per
per share
share onon
September
September 1, 1, 2006.
2006.
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 11-21

Issuance of Par Value Stock

Matrix,
Matrix, Inc.
Inc. issues
issues 10,000
10,000 shares
shares of
of its
its
$2
$2 par
par value
value stock
stock for
for $25
$25 per
per share
share onon
September
September 1, 1, 2006.
2006.

10,000 × $2 = $20,000
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 11-22

Issuance of Par Value Stock

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 11-23

Preferred Stock
AA separate
separate class
class of
of stock,
stock, typically
typically having
having priority
priority
over
over common
common shares
shares in
in .. .. ..
Dividend
 Dividend distributions
distributions(rate
(rateis
isusually
usuallystated).
stated).
Distribution
 Distribution of
of assets
assetsin
incase
caseof
of liquidation.
liquidation.

Other Features Include:

Cumulative
Cumulative Usually
Usually Normally
Normally has
has
dividend
dividend callable
callable by
by no
no voting
voting
rights.
rights. the
the company.
company. rights.
rights.
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 11-24

Cumulative Preferred Stock

Cumulative Vs. Noncumulative

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

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 11-25

Stock Preferred as to Dividends

Example: Consider the following partial Statement of
Stockholders’ Equity.

During 2006, the directors declare cash dividends

of $5,000. In 2007, the directors declare cash
dividends of $42,000.

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 11-26

Stock Preferred as to Dividends

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 11-27

Other Features of Preferred Stock

Gee,
Gee,II can’t
can’t
IIjust
justconverted
converted100
100shares
shares do
dothat
that with
with
of
ofpreferred
preferredstock
stockinto
into1,000
1,000 MY preferred
MY preferred
shares
sharesof ofcommon
commonstock
stockand
and stock!
stock!
ended
endedupupwith
withaahigher
higher
dividend
dividendyield!
yield!

Some preferred
stock is convertible
into shares of
common stock.

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 11-28

Preferred Stock

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Market Value

Common
Common stock
stock isis
Accounting
Accounting byby carried
carried at
at original
original issue
issue
the
the issuer.
issuer. price.
price.

Investments
Investments in
in
Accounting
Accounting by by marketable
marketable securities
securities
the
the investor.
investor. are
are carried
carried at
at market
market
value.
value.

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Market Price of Preferred Stock

Factors
Factors affecting
affecting market
market price
price of
of preferred
preferred stock:
stock:
oo Dividend
Dividend rate
rate
oo Risk
Risk
oo Level
Level of
of interest
interest rates
rates

The
The return
return based
based on on the
the
market
market value
value is
is called
called the
the
“dividend
“dividend yield.”
yield.”

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 11-31

Market Price of Common Stock

Factors
Factors affecting
affecting Changes
Changesin
inmarket
market value
value
market
market price
price of
of have
haveno
noimpact
impactononthe
the
common
common stock:
stock: books
booksof
ofthe
theissuer.
issuer.
Investors’
Investors’
expectations
expectations ofof
future
future profitability.
profitability.
Risk
Risk that
that this
this level
level
of
of profitability
profitability will
will
not
not be
be achieved.
achieved.

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 11-32

Book Value per Share

of Common Stock
Preferred stock and preferred
dividends in arrears are deducted
from total stockholders’ equity.

Total Stockholders’ Equity

Number of Common Shares Outstanding

Book Value = Market Value

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 11-33

Stock Splits


 Companies
Companies use use
stock
stock splits
splits to
to
reduce
reduce market
market price.
price. Ice Cream Parlor


 Outstanding
Outstanding shares
shares
Banana Splits
increase,
increase, but
but par
par On Sale Now
value
value is
is decreased
decreased
proportionately.
proportionately.

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Stock Split
Assume a corporation has 5,000 shares of
$1 par value common stock outstanding
before a 2–for–1 stock split.

Increase

Decrease

No
Change

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 11-35

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

When
When stock
stock is
is reacquired,
reacquired, the
the corporation
corporation
records
records the
the treasury
treasury stock
stock at
at cost.
cost.
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Treasury Stock - Example

On May 1, 2006, East, Inc. reacquires 3,000 shares
of its common stock at $55 per share.
Prepare the journal entry for May 1.

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Treasury Stock - Example

On December 3, 2006, East Corp. reissued 1,000
shares of the stock at $75 per share.
Prepare the journal entry for December 3.
1,000
1,000 shares
shares ×× $75
$75 == $75,000
$75,000

1,000
1,000 shares
shares ×× $55
$55 cost
cost == $55,000
$55,000
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 11-38

Stockholders’ Equity - Presentation

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End of Chapter Eleven

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