Stockholders’ Equity:

Paid-In Capital
Chapter 11

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Corporations

An
An entity
entity created
created
by
by law.
law.

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

Has
Has rights
rights and
and
privileges.
privileges.
Publicly Held

11-2
Advantages of Incorporation

Limited personal
liability for
stockholders

Transferability of
ownership

Professional
management

Continuity of
existence

11-3
Disadvantages of Incorporation

Heavy taxation

Greater regulation

Cost of formation

Separation of
ownership and
management

11-4
 Formation of a Corporation

• Each corporation is The costs associated with

incorporation are usually
formed according to 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.

11-5
Rights of Stockholders

Voting (in person

or by proxy).
Proportionate
Rights distribution of
dividends.

Stockholders Proportionate
distribution of
assets in a
liquidation.
11-6
Rights of Stockholders
Corporate Organization Chart

Ultimate
Ultimate Stockholders
Stockholders
control
control usually
usually meet
meet
once
once aa year.
year.

11-7
Functions of the Board of Directors
Corporate Organization Chart

Primary functions
are to set
corporate policies
ad protect
stockholders.

11-8
Functions of the Corporate Officers
Corporate Organization Chart

Contractual
Contractual and
and
legal
legal representation
representation

Chief
Chief
Accountant
Accountant

Custodian
Custodian
of
of funds
funds

11-9
Publicly Owned Corporations Face
Different Rules
By law, publicly owned corporations must:
 Prepare financial statements in accordance with
GAAP.
 Have their financial statement audited by an
independent CPA.
 Comply with federal securities laws.
 Submit financial information for SEC review.

11-10
Stockholder Records in a
Corporation
Stockholder ledgers are often maintained by a
stock transfer agent or stock registrar.

Stockholders usually meet once a year.

Each unit of ownership is called a share of stock.

Stock certificates serve as proof that a
stockholder has purchased shares.

When the stock is sold, the stockholder signs a

transfer endorsement on the back of the stock
certificate.

11-11
Stockholders’ Equity of a Corporation

S tockholders' equity is
increased in tw o w ays.

Contributions by Retention of profits

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

P aid-in Capital Retained Earnings

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.

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.

11-14
Authorization and Issuance
of Capital Stock

Authorized Outstanding shares are

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

11-15
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.

11-16
Stockholders’ Equity

Common stock can be issued in three forms:

Par Value No-Par Stated Value

Common Common Common
Stock Stock Stock

Let’s
Let’s examine
examine All
All proceeds
proceeds Treated
Treated like
like par
par
this
this form
form of
of credited
credited to
to value
value common
common
stock.
stock. Common
Common Stock
Stock stock
stock

11-17
Issuance of Par Value Stock
Record:
1.The cash received.
2.The number of shares issued × the par value
per share in the Common Stock account.
3.The remainder is assigned to Additional Paid-
in Capital.

Assume a corporation issues 10,000 shares

of its $2 par value stock for $8 per share.

11-18
Issuance of Par Value Stock
Assume a corporation issues 10,000 shares
of its $2 par value stock for $8 per share.
Description Debit Credit
Cash 80,000
Common Stock 20,000
Additional Paid-in Capital 60,000

10,000 × $2 = $20,000

11-19
Issuance of Par Value Stock

Stockholders' Equity with Common Stock

Stockholders' Equity
Contributed capital:
Common stock - $2 par value; 50,000 shares
authorized; 10,000 shares issued and
outstanding $ 20,000
Additional paid-in capital 60,000
Total Paid-in Capital $ 80,000
Retained earnings 150,000
Total stockholders' equity $ 230,000

11-20
Common Stock and Preferred Stock
The following stockholders’ equity section illustrates the balance
sheet presentation for a company that has both common and
preferred stock outstanding.
Stockholders' equity:
Preferred stock, 9% cumulative, $100 par value, authorized
100,000 shares, issued and outstanding 50,000 shares $ 5,000,000
Common stock, $5 par value, authorized 3,000,000 shares,
issued and outstanding 2,000,000 shares 10,000,000
Additional paid-in capital:
Preferred stock 500,000
Common stock 20,000,000
Total paid-in capital 35,500,000
Retained earnings 17,500,000
Total stockholders' equity $ 53,000,000

11-21
Preferred Stock
A separate class of stock, typically having priority
over common shares in . . .
 Dividend distributions (rate is usually stated).
 Distribution of assets in case of liquidation.

Other Features Include:

Cumulative Usually Normally has
dividend callable by no voting
rights. the company. rights.
11-22
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.

11-23
Stock Preferred as to Dividends
Assume that a corporation is organized on January 1, 2013, with 10,000
shares of $8 preferred stock and 50,000 shares of common stock. If the
preferred stock is noncumulative, the $8 per share dividend does not
carry forward if it is not paid each year. On the other hand, if the
preferred stock is cumulative, the $8 per share dividend carries forward
to future years if it is not paid and the accumulated amount must be
paid before any dividend can be paid on common stock. Assume that
the $8 preferred dividend is paid in 2013, a partial dividend of $2 per
share is paid on preferred stock in 2014, and no preferred dividend is
paid in 2015.

11-24
Other Features of Preferred Stock

II just
just converted
converted 100
100 shares
shares
of
of preferred
preferred stock
stock into
into
1,000
1,000 shares
shares of
of common
common
stock
stock and
and ended
ended upup with
with aa
higher
higher dividend
dividend yield!
yield!

Some preferred
stock is
convertible into
shares of
common stock.
11-25
The Primary Sources of Corporate
Equity

11-26
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

11-27
Book Value With Both Preferred and
Common Stock
Hart Company has paid no dividends in the current year. As of
December 31st, dividends in arrears on cumulated preferred
stock total $80,000. All equity belongs to common stockholders
except the $1,000,000 applicable to preferred stock and the
$80,000 dividends in arrears. Here is the calculation of book
value for common stock:

Total stockholders' equity $ 2,380,000

Less: Equity of preferred stockholders"
Par value of preferred stock $ 1,000,000
Dividends in arrears 80,000 1,080,000
Equity of common stockholders 1,300,000
Number of common shares outstanding 50,000
Book value per share of common stock $ 26.00

11-28
Market Value

Common stock is
Accounting by
carried at original issue
the issuer.
price.

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

11-29
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
“dividend yield.”

11-30
Market Price of Common Stock

Factors affecting
market price of Changes in
common stock: market value
 Investors’ have no impact
expectations of on the books
future profitability.
 Risk that this level
of the issuer.
of profitability will
not be achieved.

11-31
Stock Splits

 Companies use
stock splits to
reduce market Ice Cream Parlor
price.
Stock Splits
 Outstanding shares Now
increase, but par Available

value is decreased
proportionately.

11-32
Stock Split
Assume that Felix Corporation has
1,000,000 shares of $10 par value
common stock outstanding with a
market price of $90 before a 2–for–1
stock split.
Before Split After Split
Increase
Common Stock Shares 1,000,000 2,000,000
Decrease
Par Value per Share $ 10.00 $ 5.00
No
Total Par Value $ 10,000,000 $ 10,000,000 Change

11-33
Treasury Stock

Treasury
shares are
issued
shares that
have been
reacquired
by the
corporation.

When stock is reacquired, the corporation

records the treasury stock at cost.
11-34
Recording Purchases of
Treasury Stock
Riley Corporation reacquires 1,600 of its
own $5 par common shares in the open
market at $90 per share.
Prepare the journal entry to record the
purchase of treasury stock.

Description Debit Credit

Treasury Stock 144,000
Cash 144,000
1,600 shares × $90 = $144,000

11-35
Recording Reissuance of
Treasury Stock
Riley Corporation reissued 1,000 shares of
the treasury stock originally purchased for
$90 per share. The shares were reissued at
$115 per share.

1,000 shares × $115 = $115,000

Description Debit Credit
Cash 115,000
Treasury Stock 90,000
Additional Paid-in Capital: Treasury Stock 25,000

1,000 shares × $90 cost = $90,000

11-36
Stockholders’ Equity Presentation

Stockholders' Equity
Contributed capital:
Common Stock - $5 par value; 250,000 shares
authorized; 100,000 shares issued (600 held in treasury) $ 500,000
Additional Paid-in Capital:
Common Stock $ 800,000
Treasury Stock 25,000
Total Paid-in Capital $ 1,325,000
Retained earnings 650,000
Subtotal $ 1,975,000
Less: Treasury stock (600 x $90) 54,000
Total Stockholders' equity $ 1,921,000

11-37
Stock Buyback Programs
Some corporations have buyback programs, in which
they repurchase large amounts of their own common
stock. As a result of these programs, treasury stock
has become a material item in the balance sheet of
many corporations.

Stock option plans are an important part of employee

compensation for many companies. Treasury stock
purchases are an effective means by which the
company can have available the shares of stock
needed to satisfy the requirement of stock option plans
to issue the shares of stock to employees.

11-38
Financial Analysis and
Decision Making

Return on Common Net Income

Stockholders’ Equity = Average Common Stockholders’ Equity

11-39
End of Chapter 11

11-40