Notes, M351 Class 13: Stockholders Equity, pages 740-756 A. Stockholders share proportionally: 1. 2. 3. 4. in profits and losses in management (right to vote for the board) in assets in liquidation in new issues of stock of the same class (preemptive right).
B. The class of stock that represents the basic ownership interest in a company is called common stock. That class of stock bears the ultimate risk of loss and receives the benefit of corporate success. 1. Usually controls management through election of the board of directors. C. Stockholders equity usually consists of: 1. capital stock 2. additional paid-in capital (sometimes paid-in capital in excess par) 3. retained earnings (earned capital) Capital stock plus additional paid-in capital is often called contributed capital. D. Stock can be: 1. Par value stock 2. No par stock
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E. Assume a corporation issues (sells) 10,000 shares of $5 par common stock for $16 per share. The company would make the following entry: Cash ($16 x 10,000)....................................................... 160,000 Common stock ($5 x 10,000).................................. Paid-in capital in excess par [($16-$5) x 10,000]... 50,000 110,000
Assume, instead, a corporation issues (sells) 10,000 shares of no -par common stock for $16 per share. The company would make the following entry: Cash ($16 x 10,000)....................................................... 160,000 Common stock........................................................ 160,000
F. See illustrations 15-1 and 15-2 (page 747) for calculations allocating capital received when common and preferred stock are issued together in a single transaction. G. See the discussion on pages 747-748 for the issuance of par value stock for non-cash items (property or services). H. Costs of issuing stock (underwriting costs, accounting fees, legal fees) should be accounted for as a reduction in the amounts received. I. Treasury stock represents the cost to the company of purchasing shares of its outstanding stock from stockholders. The purchase of treasury stock in M351 will be accounted using for the cost method. See pages 749-750 for an explanation of the reasons that a company would purchase treasury stock. Assume a corporation purchases 2,000 shares of its $5 par common stock for $21 per share. The company would make the following entry: Treasury stock ($21 x 2,000)......................................... 42,000 Cash......................................................................... 42,000
J.
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K. Treasury stock can be sold: 1. above cost 2. below cost When treasury stock is sold above cost, the excess of the selling price over cost is added to: Paid-in Capital from Treasury Stock Assume 500 shares of the treasury stock in item J above is sold for $25 per share: Cash ($25 x 500)............................................................ 12,500 Treasury stock ($21 x 500)..................................... Paid-in capital from treasury stock [($25-$21) x 500] 10,500 2,000
When treasury stock is sold below cost, the shortfall of the selling price below cost is subtracted from (1): Paid-in Capital from Treasury Stock or (2) Retained Earnings when Paid-in Capital from Treasury Stock is eliminated (see discussion on pages 752-753. L. Preferred stock is a class of stock that possesses certain preferences not possessed by common stock (e.g. dividend preferencepreferred is paid dividends before common). The dividend rate on preferred stock is sometimes a fixed amount (e.g. $4.50 per share) or sometimes a percentage of par (e.g. 6% $50 par preferred has an annual dividend of $3 per share). M. Common features of preferred stock are listed on pages 754 and 755. N. The entry to record issuance of preferred stock is similar but not identical to the entry to record issuance of common stock. Assume a corporation issues (sells) 8,000 shares of $40 par preferred stock for $$42 per share. The company would make the following entry: Cash ($42 x 8,000)......................................................... 336,000 Preferred stock ($40 x 8,000).................................. Paid-in capital in excess par [($42-$40) x 8,000]... 320,000 16,000
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