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Chapter

11 STOCKHOLDERS’
EQUITY:
PAID-IN CAPITAL

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Corporations

An entity
created by law.

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

Has rights and

privileges.
Publicly Held

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Advantages of Incorporation

Limited personal
liability for
stockholders.

Transferability of
ownership.

Professional
management.

Continuity of
existence.

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Disadvantages of Incorporation

Heavy taxation.

Greater regulation.

Cost of formation.

Separation of
ownership and
management.

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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.
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Formation of a Corporation

 Each corporation is The costs associated with

formed according to incorporation are usually
the laws of the state expensed immediately, but
where it is located. amortized over 5 years for
tax purposes.
 The application for
corporate status is
called the Articles of
Incorporation.

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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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Rights of Stockholders

C orporate O rganization C hart

Stockholder Stockholders
Ultimate
ledgers are often Stockholders usually meet
controlby a
maintained once a year.
stock transfer
agent or stock B oa rd of D irectors
registrar.
President

Secreta ry T rea surer C ontroller O ther Vice

Presidents
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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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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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Functions of the Board of Directors

C orporate O rganization C hart

Stockholders
Overall
Selected by a
responsibility
vote of the B oa rd of D irectors for managing
stockholders
the company.
President

Secreta ry T rea surer C ontroller O ther Vice

Presidents
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Functions of the Corporate Officers

C orporate O rganization C hart

Contractual and legal
representation
Stockholders
Custodian of Chief
funds Accountant
B oa rd of D irectors

President

Secreta ry T rea surer C ontroller O ther Vice

Presidents
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Paid-In Capital 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.

Paid-in Capital Retained Earnings

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

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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.

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Authorization and Issuance of
Capital Stock
When a large amount of stock is to be issued, most corporations
use the services of an investment banking firm, frequently referred
to as an underwriter. The underwriter guarantees the issuing
corporation a specific price for the stock and earns a profit by
selling the shares to
the investing public at a slightly higher price.
The price that a corporation will seek for a new issue of stock is
based on such factors as
(1)expected future earnings and dividends,
(2)the financial strength of the company, and
(3)the current state of the investment markets.

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

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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.

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Stockholders’ Equity

Common stock can be issued in three forms:

Par Value No-Par Stated Value

Common Common Common
Stock Stock Stock

Let’s examine All proceeds Treated like

this form of credited to par value
stock. Common Stock common stock
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Issuance of Par Value Stock

Record:
The cash received.
The number of shares issued × the par value
per share in the Common Stock account.
The remainder is assigned to Contributed
Capital in Excess of Par.

Prepare the journal entry to record an issuance

of 10,000 shares of $2 par value stock for $25
per share which occurred on September 1, 2003.

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Issuance of Par Value Stock

The journal entry to record an issuance of 10,000

shares of $2 par value stock for $25 per share on
September 1, 2003, should include a credit to
common stock for the par value of the shares
issued.

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Issuance of Par Value Stock

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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.
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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.

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Stock Preferred as to Dividends

Example: Consider the following partial Statement of

Stockholders’ Equity.

During 2002, the directors declare cash dividends of

$5,000. In year 2003, the directors declare cash
dividends of $42,000.

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Stock Preferred as to Dividends

Example: Consider the following partial Statement of

Stockholders’ Equity.

During 2000, the directors declare cash dividends of

$5,000. In year 2001, the directors declare cash
dividends of $42,000.

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Convertible Preferred Stock

I just converted 100

Gee, I can’t
shares of preferred stock
do that with
into 1,000 shares of
MY preferred
common stock and ended
stock!
up with a higher dividend
yield!

Some preferred
stock is convertible
into shares of
common stock.

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Preferred Stock

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Stock Issued for Assets Other Than
Cash

Companies sometimes issue

stock in exchange for non-
cash assets.

Since no cash is received,

record the transaction at the
market value of the goods or
services received.

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I love this
stuff!
Can we do
some more?

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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.

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Market Price of Preferred Stock

Factors affecting market price The return based on

of preferred stock: the market value is
 Dividend rate called the “dividend
 Risk yield.”
 Level of interest rates

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Market Price of Common Stock

Factors affecting Changes in market value

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

 Companies use stock

splits to reduce market
price.
Ice Cream Parlor
 Outstanding shares
increase, but par value
is decreased Banana Splits
On Sale Now
proportionately.

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Stock Splits - Example

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

When stock is reacquired, the corporation

records the treasury stock at cost.
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Treasury Stock - Example

On May 1, 2003, East Corp. reacquired 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, 2003, East Corp. reissued 1,000
shares of the stock at $75 per share.
Prepare the journal entry for December 3.
1,000 shares × $75 = $75,000

1,000 shares × $55 cost = $55,000

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Stockholders’ Equity - Presentation

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End of Chapter 11

This isn’t what I

meant when I asked
for stock for my
birthday!

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