ch12 - Chapter 12 Chapter Shareholders Equity Shareholders...

This preview shows page 1 - 9 out of 26 pages.

1 Chapter 12 Chapter 12 Shareholders Shareholders ’ Equity ’ Equity
2 How to Finance the Corporation? Borrow Notes, Bonds, Leases The debt holders are legally entitled to repayment of their principal and interest claims Issue Equity Common and Preferred Stock The shareholders, as owners, have voting rights, limited liability, and a residual interest in the corporate assets Retained Earnings Chapter 12: Shareholders Chapter 12: Shareholders ’ Equity ’ Equity
3 Debt versus Equity Debt versus Equity Debt Equity Formal legal contract No legal contract Fixed maturity date No fixed maturity date Fixed periodic payments Discretionary dividends Security in case of default Residual asset interest No voice in management Voting rights - common Interest expense deductible Dividends not deductible Double taxation
4 Interested Party Debt Equity Investors / Creditors Lower investment risk Higher investment risk Management Fixed cash receipts Variable cash receipts Contractual future cash payments Dividends are discretionary Effects on credit rating Effects of dilution/ takeover Interest is tax deductible Dividends are not tax deductible Accountants/ Auditors Liabilities section of the balance sheet Shareholders’ equity of the balance sheet Income statement effects from debt No income statement effects from equity Distinctions between Debt and Equity Distinctions between Debt and Equity
5 Preferred Stock vs Common Stock Preferred Stock vs Common Stock Preferred Stock Common Stock Advantages Preference over common in liquidation Voting Rights Stated dividend Rights to residual profits (after preferred) Preference over common in dividend payout Disadvantages Subordinate to debt in liquidation Last in liquidation Stated dividend can be skipped No guaranteed return No voting rights (versus common) Debt or Equity? Components of both Usually classified as equity
6 Sample Co. Shareholders Sample Co. Shareholders ’ Equity ’ Equity Common stock, $1 par value, 500,000 shares authorized, 80,000 shares issued, and 75,000 shares outstanding $ 80,000 Common stock dividends distributable 2,000 Preferred stock, $100 par value, 1,000 shares authorized, 100 shares issued and outstanding 10,000 Paid in capital on common $ 20,000 Paid in capital on preferred 3,000 Paid in capital on treasury stock 2,000 25,000 Retained earnings: Unappropriated $18,000 Appropriated 4,000 22,000 Less: Treasury stock, 5,000 shares (at cost) (6,000) Less: Other comprehensive income items (unrealized loss on AFS securities) (2,000) Total Shareholders’ Equity $131,000
7 Journal Entries-Sample Co. Journal Entries-Sample Co. Now, using Sample Company information, record the following additional issues of common (CS) and preferred stock (PS): Issued 100 shares of PS at $102 per share: Cash (100 x $102) 10,200 PS (100 x $100 par) 10,000 APIC - PS (plug) 200 Issued 500 shares of CS at $5 per share: Cash (500 x $5) 2,500 CS (500 x $1 par) 500 APIC - CS (plug) 2,000
8 Treasury Stock Treasury Stock Created when a company buys back shares of its own common stock.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture