1
Contributed Capital
2
Why are we studying Stockholders’ Equity Owners Investments Residual Equity Required Reconciliation Statement Expanded to included Non-Equity
Transactions Increase/Decrease in security values Foreign currency gains and losses
3
Equity_Book v Market Value BV determined by accounting rules Market value determined by investors
perception of growth, dividend or other potential market opportunities
Competitors products Net income Cash flows Regulatory climate
4
Characteristic of Corporate Form
Forms of Business Operations Proprietorship Partnership Corporations
5
Form Ease of raising capital
Double Taxation
Life Liability
Proprietorship Not easy No limited unlimited
Partnership Not easy No limited unlimited
Corporation Yes Yes unlimited limited
6
Types of Corporations
Private Open Closed
Public Domestic Foreign
7
Charted in one State Domestic v Foreign Corporation NYSE over 2/3 Delaware Corporations Board fiduciary responsibility to
shareholders Officers are Agents of Corporation
8
9
Ownership represented by Shares Right to share proportionally in
Profit and loss Management –election of directors Assets upon liquidation New issue proportionally—(preemptive
right)
10
Types of Stock, Characteristics Common
Voting (Google, Microsoft, Coke) Non-voting
Preferred Dividend preferences Liquidation preferences
11
Components of Shareholders Equity
Capital Stock Additional Paid in Capital Other changes in Assets Accounts
Comprehensive Income
12
Procedure for Issuing Stock
Issue for Cash At par, above par, below par No par, stated value
Issue Common stock in combination with preferred stock or bond.
Issue stock for non cash transaction Services, equipment
13
Basic Terminology
Authorized Capital Stock Issued capital Stock Outstanding capital Stock Treasury Stock Subscribed capital Stock
14
Terminology
Legal capital Par value Stock No Par Stock Stated value
15
Sale At Par
Cash $18 x 500 9000
Common Stock 500 x $10 5000
Additional PIC 500 x $8 4000
Cash $18 x 500 9000
5000
Additional PIC 500 x $8 4000
16
Sale at Stated Value
Cash $18 x 500 9000
Common Stock $10 stated value 5000
Additional PIC 500 x $8 4000
17
No Stated value
Cash $18 x 500 9000
Common Stock no par 500s 9000
18
Package-Unit – Lump Sale
Issue stock Lump Sum Sale Proportional method >
Market value of each security is known Incremental Method >
Market value of one or more securities is unknown
19
Allocation of Package proceeds
Allocation to Common: (FMV common/(FMV common+FMV Other))*Proceeds (FMV Other /(FMV common+FMV Other))*Proceeds
Other = Preferred Stock or Bond Proceeds = amount realized from sales of all packages
E16-2 Common and Preferred E16-3 Common and a Bond
20
Non-Monetary Exchange E16-4
Stock issued for non-cash transaction
Use fair value more readily determinable Is stock widely traded Is the appraisal independent
Acquire a patent>
21
Cost of Issuing Stock Debit additional paid in capital Reduction of proceeds
Note Receivable arising from sale of stock should be classified as contra-equity account You can not have a receivable from
yourself. Enron inflated assets and equity to create watered down stock
22
Stock Split E16-6
Proportional Multiply split time # of shares
outstanding Divide split amount by par value Memo entry
Nonproportional Journal entry is required
23
Nonproportional stock Split
Debit Common stock for pre-split shares times pre-split par value
Credit common stock for pre-split shares, times split, times new par value assigned
Debit or credit additional PIC for balance
