stockholder’s equity. why are we studying stockholders’ equity owners investments residual...

Stockholder’s Equity

Why are we studying Stockholders’ Equity Owners Investments Residual Equity Required Reconciliation Statement

2. Components of Shareholders Equity

Capital Stock Preferred Stock Additional Paid in Capital Treasury Stock Other changes in Assets Accounts

Investments Pensions Foreign Currency

Preferred Stock

1. preferred as to dividends 2. preference as to assets upon

liquidation 3. convertible into common stock 4. callable at option of corporation 5. non-voting

Preferred Stock

Cumulative preferred Dividends in arrears

Participating preferred Convertible preferred

Participation limited Callable preferred

Call premium

Convertible Preferred

Assume 500s of $100 par sold at $120s

1 Cash 500 x $120 60,000

Preferred Stock 500 x 100 50,000

Paid in Capital Preferred stock 10,000

Assume each preferred=4 shares of CS

Preferred Stock 500 x 100 50,000

Paid in Capital Preferred stock 10,000

Common Stock 4 x 500 x $20

40,000

Paid in Capital PS conversion

20,000

Book value Method

Preferred Stock Conversion

Assume each preferred=7 shares of CS

Preferred Stock 500 x 100 50,000

Paid in Capital Preferred stock 10,000

Retained Earnings ( 70,000-60,000)

10,000

Common Stock 7 x 500 x $20 70,000

Book value Method

Preferred Stock With WarrantsAPB 14

PS$ = FMV-PS/ (FMV-PS+FMV-warrants) x proceeds

W$ = FMV-Warrants/ (FMV-PS+FMV-warrants) x proceeds

PS = 115,192 = 119,000/(119,000+6,000)x121,000

Warrants = 5,808 = 6,000/(119,000+6,000)x121,000

Preferred Stock with warrants

Cash 1000 x$121 121,000

Preferred Stock , 1000 x 100 100,000

Paid in capital preferred 115,192 - 100,000 15,192

Common Stock warrants 5,808

Assume all warrants are exercised

Cash 1000 x 40 40,000

Common Stock warrants 5,808

Common Stock 1000 x 10 10,000

Paid in capital 35.808

4. Treasury Stock

Why? Non taxable to shareholders Increase Earnings per Share Increase return on Equity To provide shares for compensation

agreements To thwart take over attempts To make a market for the stock

Treasury Stock

Treasury stock is not an asset Treasury stock is issued but not

outstanding Accounting for Purchase

Cost method Par value method (seldom used)

Purchase and sale of treasury Stock

1 Cash 72,000

Common Stock 6000 x $10 60,000

Paid in Capital 12,000

2 Treasury Stock 1,000s x $13 13,000

Cash 13,000

3 Cash 600 x $15 9,000

Treasury Stock 600 x 13 7,800

Paid in capital – Treasury Stock 1,200

Purchase and sale of treasury Stock

4 Cash 200 x $8 1600

Paid in Capital –Treasury Stock 1000

Treasury Stock 200 x $13 2600

Analysis of PIC Treasury stock: Debit Credit

1 1200

2 1000

Balance is now 200 credit

Purchase and sale of treasury Stock

5 Cash 100 x $10 1,000

Paid in capital Treasury stock 200

Retained Earnings 100

Treasury Stock 100 x $13 1,300

Retirement of Treasury StockCommon Stock 100s x $10 1,000

Paid in Capital Common Stock($12,000/6,000s) X 100 shares

200

Retained Earnings 100

Treasury Stock 100 x $13 1,300

$12,000 is remaining par value

6,000s remaining shares

Green MailBlack Mail?

When Common stock is re-acquired at a price substantially greater than the market value Thwart takeover attempt Seller may agree to

Restrict purchases Abandon acquisition

Green Mail

6 Treasury Stock 2000 x $13 26,000

Paid In capital Treasury Stock (NO) 0

Litigation expense settlement 2000 x $13

26,000

Cash 2,000 x 26 52,000