class today pwhat is a corporation? lwhy corporate form? pownership in a corporation lcommon stock l...
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Class today
What is a corporation?why corporate form?
Ownership in a corporationCommon Stock
Sale/IssuanceBuyback (Treasury)
Preferred StockQuiz chapters 13 & 14
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Business Forms
Most numerousSole proprietorshipPartnership
Highest dollar value assetsCorporations (dominant form)
Closely-held (private). Openly-held, publicly traded (listed, over-the-
counter).
Hybrid forms availablePCs, LLCs and LLPs, etc.
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Stockholders’ equity
Contributed capital = stockTypesAccounting for issuanceBalance sheet presentationTreasury stock
Retained earnings - next chapter
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Contributed Capital
basic concepts stock issue lump sum sales of stock stock subscriptions
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Stock
Stockholders’ rightsShare in profitsVotingPreemptive Proportionate share
Limited liability Unlimited life Common vs. preferred
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Authorized, Issued and Outstanding
authorized capital stocknumber of shares that can be issued
legally as defined in the corporate charter issued capital stock
number of shares that have been issued and have not been subsequently retired
outstanding capital stocknumber of shares currently trading
authorized > issued > outstanding
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Par, Stated or Assigned Value
par valueminimum amount that must be
contributed under the law to consider the shares fully paid
generally not related to market value nopar
true nopar stockstated or assigned value
basically takes the place of par value
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Stock Issue
CashCash XXXX
Common stock XXPaid in capital in excess XXX
Noncash considerationrecord at FMV of asset received or stock
issued whichever most clearly determinablevalue assigned by the Board
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Journal Entry to Record Stock Issue
cash (other asset or expense) xxcapital stock yycontributed in excess of par* zz
*or assigned value
xx = most clearly determinable fair valueyy = # shares x par value (or assigned
value)zz= whatever is left over!
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Lump Sales of Stock
proportional methodfair value available for each classallocate based on ratio of each fair
value to total fair value incremental method
fair value not available for at least one class
assign fair value to classes with know fair value first; remainder to those with unknown fair value
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Stock Subscriptions
stock subscriptions receivable xxcapital stock subscribed yycontributed capital in excess of par*
zz*or assigned value
Where does this account show up on the balance sheet?
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Default on Subscriptions
Return all payments made Issue shares equivalent to # paid in
full All payments made forfeited Resale under a lien
reimbursed to extent net receipts > original subscription price
not to exceed payments made
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Treasury Stock What is.. Why?
Meet merger or compensation needsIncrease EPSMake a ‘market’…
How to account forCost methodPar/stated value method
Carries a debit balance.Contra owner equity.NOT an asset!
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Cost Method
Repurchase and subsequent sale viewed as one continuous transaction (“one transaction approach”)
journal entry:
treasury stock xxcash xx
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Cost Method (cont.)
Treasury stock account viewed as a “suspense account”
Reported as a deduction from total shareholders’ equity
Can either reissue (sell) or retire the stock
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Example
Have 100 shares of treasury stock which was purchased for $1400
Sold 50 shares for $800 Sold 50 shares for $500
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Cost Method - Resale
When resale price > acquisition costRemove acquisition cost from treasury
stock accountdifference between cost and sale price
is credited to “contributed capital from TS transactions”
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Cost Method - Resale When resale price < acquisition
costRemove acquisition cost from treasury
stock accountThen
debit “contributed capital from TS transactions” (same class) if available
remaining amount --debit retained earnings
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Cost Method - Retirement
Remove acquisition cost from treasury stock Then
reduce capital stock for par reduce PIC for amount paid in when stock was issued
If: debit difference to be allocatedcontributed capital from TS transactions (same
class)retained earnings
If: credit difference to be allocatedcontributed capital from TS transactions
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Example
Have 100 shares of $1 par value treasury stock which was purchased for $1400
Retire 50 shares with original issue price of $600
Retire 50 shares with original issue price of $1000
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Example Entries
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B/S presentation of T/S
Cost method: T/S is subtracted at the bottom of the shareowner equity section at cost. It is included in the “regular” shares above as well.
Presentation of Treasury Stock
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Exchange of rights for other rights: Hybrid of debt and ownership characteristics.
Dividends paid are a % of par or $ per share. Preferred shareholders’ claim on earnings generally
precedes common shareholders’ Dividends
Cumulative (arrearages) vs. noncumulative stockParticipating
Fully Partially Non
Preferred stock
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Example: 2,000 shares of P/S, $50 par, 8% cumulative, non-participating; 80,000 shares of C/S, $30 par.
Dividends declared: Year 1, $0; Year 2, $6,000; Year 3, $18,000; Year 4, $75,000.P/S dividend = 2,000 shares x $50 par x .08 = $8,000
To P/S Arrearage To C/S Year 1 Year 2
Year 3 Year 4
Cash Dividends
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Note: No formal liability arises when a dividend is not declared. Memo only. Arrearages are paid before any
current dividends are paid.Entries at the date of declaration:Entries at the date of declaration:
Cash Dividends
Year 2Year 2
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Cash Dividends
Year 3
Year 4Year 4
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Convertible P/S. To convert use book value method
Convertible Preferred Stock
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Debt or Equity?
Debt relatedStated returnNon-votingPreference at liquidationNon-participating
EquityReturn not mandatoryDividends, not interest expenseParticipating