Financing II: Stockholders’ Equity

Chapter 18 SpicelandSee example excel files

examples Earnings per share, stock

options, etc.

Topics: Types of stock

Common Preferred treasury

Issuance of stock Retained earnings Dividends Stock options

Common Stock: Residual Owners’ equity Voting right (most important:

election of directors) May or may not receive dividends May or may not have par value or

stated value – depends on state corporate and tax law

Common Stock Example: (Balance sheet presentation)

Common stock $1 par ($500,000

shares authorized, 100,000 issued, 95,000

outstanding) $100,000Additional paid in capital

$900,000

Preferred Stock Characteristics High par value No voting rights Fixed dividends - Dividends

cumulative Liquidation preference over common

stock May be redeemable May be convertible

Preferred Stock Example:

Balance sheet presentation:Preferred stock, $100 par, 8%

cumulative, convertible into 25 shares of common stock Issued and outstanding 2,000 shares

$200,000

Treasury Stock:

Stock repurchased by the company with the intent to reissue it in the future

Reasons: Stock options Plan to acquire another company Buy out dissident stockholder Drive up stock price Prevent take over

Treasury Stock:

Contra stockholders’ equity account (debit balance)

Usually carried at cost (may be at par value)

Treasury Stock Example:

1. Company repurchases 1,000 shares @ $25/share

Dr. treasury stock 25,000

Cr. Cash 25,0002. 700 shares are sold @ 15/share (stock option

exercise)

Dr. Cash 10,500

Dr. Additional paid in capital 7,000

Cr. Treasury stock 17,500

Treasury Stock Example:

Balance Sheet presentation:

Common stock $1 par, 100,000 shares issued,

95,000 shares outstanding$100,000

Additional paid in capital$900,000

Less treasury stock, 5,000 shares at an

average cost/share of $20 (100,000)

Retained Earnings Ultimate residual owners’ equity

account (ultimate plug figure) Sum of the earnings since the

company started Minus the sum of dividends paid Plus/minus other adjustments

Dividends Must be voted by the board of

directors Dividends on preferred stock first,

only then can common stock receive dividends!

Cash dividends Dividends in kind Stock dividends

Dividends Result in reduction of retained

earnings Require expenditure of cash or

other assets unless: Stock dividends – also referred to

as “capitalization of earnings”

Cash Dividends Journal Entry: 6/15 Dr. dividends$ 3,000 Cr. dividends payable $ 3,000 6/30 Dr. dividends payable $ 3,000 Cr. Cash $ 3,000 6/30 Dr. retained earnings $ 3,000 Cr. Dividends $ 3,000

B.S. Before Small Stock Dividend:

Common stock $1 par ($500,000

shares authorized, 100,000 issued, 95,000

outstanding) $100,000Additional paid in capital $900,000Treasury stock 5,000 shares

(100,000)Retained Earnings 1,200,000Total Stockholders’ Equity 2,100,000

Small Stock Dividend Journal Entry:

6/15 Dr. retained earnings $ 200,000 Cr. Common stock 10,000 Cr. Paid in capital 190,000

(issued a 10% stock dividend = 10,000 shares, market price/share: $20)

B. S. After Small Stock Dividend:

Common stock $1 par ($500,000

shares authorized, 110,000 issued,

104,500 outstanding) $ 110,000Additional paid in capital

1,090,000Treasury stock 5,500 shares(100,000)Retained Earnings 1,000,000Total Stockholders’ Equity 2,100,000

Large Stock Dividend Journal Entry: 6/15 Dr. retained earnings $

30,000 Cr. Common stock

30,000

(issued a 30% stock dividend = 30,000 shares, market price/share: $20)

B. S. After Large Stock Dividend:

Common stock $1 par ($500,000

shares authorized, 130,000 issued,

123,500 outstanding) $ 130,000 Additional paid in capital 900,000Treasury stock 6,500 shares (100,000)Retained Earnings 1,170,000Total Stockholders’ Equity 2,100,000

Stock Split Very large stock dividend No journal entry, memo entry only

to note new number of shares and new par value

2 for 1 stock split, new # of shares issued = 200,000, new par value: $ .50/share

Balance Sheet After Stock Split:

Common stock $ .50 par (1,000,000

shares authorized, 200,000 issued,

190,000 outstanding) $ 100,000 Additional paid in capital 900,000Treasury stock 10,000 shares (100,000)Retained Earnings 1,200,000Total Stockholders’ Equity 2,100,000

Reverse Stock Split Market price of stock falls “too

low” Companies sometimes try to

improve the appearance or prevent delisting from a stock exchange by issuing a reverse split: I.e., for every 5 old shares stockholders receive 1 new share.

Comprehensive Income Items whose market value (MV) has

changed and that may affect equity but have not yet been realized

Realized: Cash received (promise recognized) or paid (liability recognized) i.e., earned.

Change in MV: E.g., MV of stock investments has in(de)creased

Included in Comprehensive Income: Unrealized holding gains (losses)

from Stock investments Changes (amendments) of post

retirement benefit plans Foreign currency translation DerivativesNote: All items reported net of

related tax effect.

Reporting of Comprehensive Income Two possibilities: Right after net income (Income

Statement) OR: Separate section in the footnotes.

Again it starts with Net Income Ends with Comprehensive income

for the period

Accumulated Other Comprehensive Income (AOCI) Shown on the balance sheet

(component of owners’ equity) Consists of as the heading says, all

OCI (gains (losses) since company started to recognize it

Quasi – Reorganization I A reorganization of the balance sheet

generally in conjunction with a court adjudicated bankruptcy (Chapter 11)

Objective: Fresh start for the company Revaluation (up or down) of assets

(maybe liabilities) to market value Elimination of retained earnings deficit

Quasi – Reorganization II Revalued Assets and liabilities Zero Retained Earnings Contributed Capital adjusted to

balance This may require elimination of APIC

and Reduction of common stock par value

Quasi – Reorganization III

Example:Before After

Assets 250 260Liabilities 220 220Common Stock 190 40R/E -160 0Total Equity 250 260