Stockholder’s Equity

Owner’s Equity is comprised of three elements:

• Capital Stock• Additional Paid-In Capital• Retained Earnings

Contributed Capitalby owners

Earned Capital by firm;undistributed

Owner’s Equity is a residual claim to net assetsAlso called Net Assets = Assets - Liabilities

Common Stock

Common Stock may have a Par Value

• Arbitrary minimum contribution for one share of stock• Not required (can be issued no-par)• Not related to the market or sales price of the stock• Can be as low as 1 cent• Underfunded par represents contingent liability (rare)

Recording issue of stock depends on par value.

Common Stock

Common Stock issue with Par:

• Record Common Stock account at Par x shares sold• Record excess as Paid-In-Capital

Example: Sell 2000 shares $1 par common for $8 per share

Cash $16,000Common Stock $2,000PIC, Common $14,000

Common Stock

Common Stock issue without Par:

• Record Common Stock account at sales value

Example: Sell 2000 shares no par common for $8 per share

Cash $16,000Common Stock $16,000

Common Stock

Common Stock issue without Par:

• Sometimes no-par has a “stated” amount. Treat this just like a par amount

Example: Sell 2000 shares no par, $1 stated value, common for $8 per share

Cash $16,000Common Stock $2,000PIC, Common $14,000

Common Stock

Stock issued for other non-cash assets

• Record at either FMV of stock issued or items received, whichever is easier to determine

Example: Trade 2000 shares no par $1 common for A truck with FMV of $20,000

Truck $20,000

Common Stock $2,000PIC, Common $18,000

Preferred stock provides preferential dividend treatment to its owners over common stock shareholders.

Most preferred certificates carry a stated dividend rate as a percentage of par value. This stated rate is guaranteed to the preferred shareholders only if dividends are declared for the period.

If dividends are not declared, then the preferred dividends will go into an “arrears” status. (Note: this is for cumulative preferred).

This means that these must be paid-in-full before any dividends can be paid to common shareholders.

While dividends in arrears look like a liability, they technically are not, since management does not have any obligation to declare dividends in the future. Once declared, however, they become a current liability.

Preferred Stock

Treasury Stock

• Record purchase at current cost, which is the market value of the stock

Purchase Transaction

• Par value and original sales price of stock have no

bearing on the purchase transaction

Treasury Stock

Purchase Transaction

Example: Feb 15th, Purchase 10,000 shares of $1 par value common. Originally issued for $100,000. Purchased from NYSE at current market price of $22 per share.

Feb. 15 Treasury Stock $220,000Cash $220,000

Treasury Stock

Purchase Transaction

Feb. 15 Treasury Stock $220,000Cash $220,000

Treasury Stock

Feb. 15 220,000(10,000 x $22) Note that the Treasury Stock account is not an

asset account, but it can be treated in a similar manner to other inventory accounts.

Treasury Stock

Purchase Transaction

Feb. 15 Treasury Stock $220,000Cash $220,000

Treasury Stock

Note that the Treasury Stock account is not anasset account, but it can be treated in a similar manner to other inventory accounts. Therefore, if other layers are added at different values, the account can be managed using LIFO, FIFO, Specific Identification, or Weighted-Average methods.

Mar. 12 400,000(20,000 x $20)

Aug. 5 240,000(10,000 x $24)

Feb. 15 220,000(10,000 x $22)

Treasury Stock

Sales Transaction

Treasury Stock

Feb. 15 220,000(10,000 x $22) When we sell Treasury Stock,

this is our original cost.

Treasury Stock

Sales Transaction

Treasury Stock

Feb. 15 220,000(10,000 x $22) When we sell Treasury Stock,

this is our original cost. We first credit this account the number of shares sold at original cost.

Treasury Stock

Sales Transaction

Treasury Stock

Feb. 15 220,000(10,000 x $22) When we sell Treasury Stock,

this is our original cost. We first credit this account the number of shares sold at original cost. If we sell at more than cost, the amount above cost goes into a Paid-in-Capital for Treasury Stock account.

Treasury Stock

Sales Transaction

Example: Mar 12th, sell 5,000 shares of Treasury Stock for $25 per share.

Mar. 12 Cash $125,000Treasury Stock $110,000PIC, Treasury Stock $15,000

Treasury Stock

Feb. 15 220,000(10,000 x $22)

Mar. 12 110,000(5,000 x $22)

110,000

Treasury Stock

Sales Transaction

If we sell treasury stock for less than cost, we still credit the Treasury Stock account at the cost amount.

The amount below cost will be debited to the PIC, Treasury Stock account.

If this account is zero or gets depleted to zero, the remaining below cost amount will be debited directly to retained earnings.

Treasury Stock

Sales Transaction

Apr. 15 Cash $65,000Treasury Stock $110,000

First, record cash receipts (5,000 x $13) and reduce Treasury Stock account at original cost (5,000 x $22).

Example: Apr. 15th, sell 5,000 shares of Treasury Stock for $13 per share

Treasury Stock

Sales Transaction

Next, debit PIC, Treasury Stock for the amount below cost. In this case, this will deplete the account to zero by debiting the prior balance

of $15,000.

Treasury Stock

Sales Transaction

Apr. 15 Cash $65,000 PIC, Treas. Stock $15,000

Treasury Stock $110,000

Example: Apr. 15th, sell 5,000 shares of Treasury Stock for $13 per share

Treasury Stock

Sales Transaction

Finally, debit Retained Earnings directly for the remainder of the amount below cost.

Treasury Stock

Sales Transaction

Apr. 15 Cash $65,000 PIC, Treas. Stock $15,000 Retained Earnings $30,000

Treasury Stock $110,000

Example: Apr. 15th, sell 5,000 shares of Treasury Stock for $13 per share

Treasury Stock

Retirement of Treasury Stock

Treasury Stock

Sometimes firms buy back common stock into the treasury so that they can retire the stock completely.

• Credit the treasury stock account at cost• Remove the stock from the common stock account at par• Remove the stock from the PIC, common account at the original sales amount (if applicable)

Do the first three easy steps to eliminate accounts:

Then handle the remaining balance as follows:

Need more debits? • Debit PIC, Treasury until depleted• Debit Retained Earnings

Need more credits? • Credit PIC, Treasury Retirement

Retirement of Treasury Stock—Example 1

Ganter Corp. issues 10,000 shares of $1 par for $6 per share

Cash $60,000Common Stock (10,000 @ $1) $10,000PIC, Common (10,000 @ $5) $50,000

Ganter purchases 5,000 shares of Treasury Stock at $15 per share

Treasury Stock (5,000 @ $15) $75,000

Cash $75,000

Ganter retires 2,000 shares of Treasury Stock

Treasury Stock (2,000 @ $15) $30,000

Common Stock (2,000 @ $1) $2,000PIC, Common (2,000 @ $5) $10,000

Remove from TS at cost

Remove from original stock accounts at original amounts

Retained Earnings $18,000

Retirement of Treasury Stock—Example 2Ganter Corp. issues 10,000 shares of $1 par for $6 per share

Cash $60,000Common Stock (10,000 @ $1) $10,000PIC, Common (10,000 @ $5) $50,000

Ganter purchases 5,000 shares of Treasury Stock at $15 per share

Treasury Stock (5,000 @ $15) $75,000

Cash $75,000

Ganter sells 1,000 shares of Treasury Stock at $20 per share

Treasury Stock (2,000 @ $15) $30,000

Common Stock (2,000 @ $1) $2,000PIC, Common (2,000 @ $5) $10,000

Retained Earnings $13,000

Cash (1,000 @ $20) $20,000Treasury Stock (1,000 @ $15) $15,000PIC, TS (1,000 @ $5) $5,000

Ganter retires 2,000 shares of Treasury Stock

PIC, Treasury Stock $5,000

Remove from TS at cost

Remove from original stock accounts at original amounts

Debit PIC, TS untileliminated

Rest from Ret Earns

Retirement of Treasury Stock—Example 3Ganter Corp. issues 10,000 shares of $1 par for $6 per share

Cash $60,000Common Stock (10,000 @ $1) $10,000PIC, Common (10,000 @ $5) $50,000

Ganter purchases 5,000 shares of Treasury Stock at $4 per share

Treasury Stock (5,000 @ $4) $20,000

Cash $20,000

Treasury Stock (2,000 @ $4) $8,000

Common Stock (2,000 @ $1) $2,000PIC, Common (2,000 @ $5) $10,000

Ganter retires 2,000 shares of Treasury StockRemove from TS at cost

Remove from original stock accounts at original amounts PIC, TS Retirement $4,000

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