Shareholders’ Equity

• Shareholders’ equity is the residual claim on assets after settling

claims of creditors (i.e. assets – liabilities)
• Shareholders’ equity due to share issuance:
– Contributed capital
• Common stock
• Preferred stock
– Treasury Stock
• Repurchased shares that may be reissued
• Shareholders’ equity due to operations:
– Retained earnings
• End Retained Earnings = Beg Retained Earnings + Net Income – Dividends
– Accumulated Other Comprehensive Income
• Items that bypass the Income Statement

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Types of Stock
• Preferred stock
– Between debt holders and common stock holders in claim on assets
– No voting rights, but pay a fixed dividend that must be paid before common
dividends
– May be callable, convertible, or redeemable
• Common Stock
– Voting rights, but residual claimant to assets
• Par Value
– Stated value on shares used to compute balance in Common Stock or Preferred
Stock
• Additional Paid In Capital (APIC)
– Amount received in excess of par value

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Contributed Capital Terminology
• Shares Authorized
– Total number of shares the firm could issue
• Shares Issued
– Number of shares that have been sold to the public
– Balance in Common Stock at Par based on this amount
• Shares Outstanding
– Number of shares currently held by the public
– Shares issued minus “treasury shares”
– Dividends and Earnings Per Share based on this amount

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Example: Issuing Stock - Preferred
• On 1/14/2012, Stack Inc. issued 10,000 shares of no-par preferred
stock for proceeds of $7 per share. The preferred stock specifies
cumulative $1 annual dividends per share.

• Journal entry
1/14/12 Dr. Cash (+A) 70,000 (10,000 x 7)
Cr. Preferred Stock (+SE) 70,000

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Example: Issuing Stock - Common
• On 1/14/2012, Stack Inc. issued 12,000 shares of $1 par value stock for
proceeds of $10 per share

• Journal entry
1/14/12 Dr. Cash (+A) 120,000 (12,000 x 10)
Cr. Common Stock (+SE) 12,000 (12,000 x 1)
Cr. Add’l Paid in Capital (+SE) 108,000 (Plug)

• Shares issued: 12,000

• Shares outstanding: 12,000

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Share Repurchases and Treasury Stock
• Companies sometimes repurchase their own shares
• Repurchased shares are carried in the Treasury Stock (XSE) account
• Treasury stock does not have voting rights or dividend rights
• Treasury stock can be reissued by the firm
– Reissued treasury stock is removed from the Treasury Stock account at the
original price paid to repurchase
– APIC or Retained Earnings are used to balance the journal entry if reissue price
differs from repurchase price
• Companies cannot book gains or losses in trading in their own stock!

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Example: Treasury Stock Purchase
• On 3/3/2012, Stack Inc. repurchased 4,000 shares of its common
stock at a price of $11 per share

• Journal entry
3/3/12 Dr. Treasury Stock (+XSE) 44,000 (4,000 x 11)
Cr. Cash (-A) 44,000

• Shares issued: 12,000

• Shares outstanding: 8,000

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Example: Treasury Stock Sale – Price Increase
• On 4/4/2012, Stack Inc. sold 1,000 shares of its treasury stock at a
price of $14 per share

• Journal entry
4/4/12 Dr. Cash (+A) 14,000 (1,000 x 14)
Cr. Add’l Paid in Capital (+SE) 3,000 (Plug)
Cr. Treasury Stock (-XSE) 11,000 (Original cost)

• Shares issued: 12,000

• Shares outstanding: 9,000

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Example: Treasury Stock Sale – Price Decrease
• On 5/5/2012, Stack Inc. sold 1,000 shares of its treasury stock at a
price of $9 per share

• Journal entry
5/5/12 Dr. Cash (+A) 9,000 (1,000 x 9)
Dr. Add’l Paid in Capital (-SE) 2,000 (Plug)
Cr. Treasury Stock (-XSE) 11,000 (Original cost)

• Shares issued: 12,000

• Shares outstanding: 10,000

• Note: if APIC has a zero balance, debit Retained Earnings

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Example: Treasury Stock Retirement
• On 5/15/2012, Stack Inc. decided to retire 1,000 shares of its treasury
stock

• Journal entry
5/15/12 Dr. Common Stock (-SE) 1,000 (1,000 x 1)
Dr. Add’l Paid in Capital (-SE) 10,000 (Plug)
Cr. Treasury Stock (-XSE) 11,000 (Original cost)

• Shares issued: 11,000

• Shares outstanding: 10,000

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