stockholders’ equity: paid-in capital lecture # 14

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STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL

Lecture # 14

Chapter

11

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Accounting by the issuer.

Accounting by the investor.

Common stock is carried at original issue

price.

Investments in marketable securities are carried at market

value.

Market Value

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Factors affecting marketprice of preferred stock:Dividend rateRiskLevel of interest rates

The return based on the market value is called the “dividend

yield.”

Market Price of Preferred Stock

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Factors affecting market price of common stock:Investors’

expectations of future profitability.

Risk that this level of profitability will not be achieved.

Changes in market value have no impact on the

books of the issuer.

Market Price of Common Stock

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11-5Book Value per Shareof Common Stock

Total Stockholders’ EquityNumber of Common Shares Outstanding

Preferred stock and preferreddividends in arrears are deductedfrom total stockholders’ equity.

Book Value Market Value=

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Ice Cream Parlor

Banana Splits On Sale Now

Stock Splits

Companies use stock splits to reduce market price.

Outstanding shares increase, but par value is decreased proportionately.

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Before Split

After Split

Common Stock Shares 5,000

Par Value per Share 1.00$

Total Par Value 5,000$

Before Split

After Split

Common Stock Shares 5,000 10,000

Par Value per Share 1.00$ 0.50$

Total Par Value 5,000$ 5,000$

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

Stock Splits - Example

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No voting or

dividend rights

Contra equity

account

When stock is reacquired, the corporation records the treasury stock at cost.

Treasury shares are

issued shares that have been reacquired

by the corporation.

Treasury Stock

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Date Description Debit CreditDate Description Debit CreditMay 1 Treasury Stock 165,000

Cash 165,000 3000 shares × $55 = $165,000

On May 1, 2005, East Corp. reacquired 3,000 shares of its common stock at $55 per share.

Prepare the journal entry for May 1.

Treasury Stock - Example

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Date Description Debit CreditDate Description Debit CreditDec. 3 Cash 75,000

Treasury Stock 55,000 Contributed Capital in Excess of Par 20,000

On December 3, 2005, 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

Treasury Stock - Example

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Stockholders' Equity Contributed capital: Preferred Stock - $100 par value; 1,000 shares authorized; 50 shares issued & outstanding 5,000$ Common Stock - $10 par value; 50,000 shares authorized; 30,000 shares issued and outstanding 300,000 Contributed Capital in Excess of Par 21,000 Retained earnings 65,000 Subtotal 391,000$ Less: Treasury stock 110,000 Total Stockholders' equity 281,000$

Stockholders’ Equity - Presentation