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STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL

Lecture # 13

Chapter

11

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Paid-in Capital

Contributions byinvestors in exchange

for capital stock.

Retained Earnings

Retention of profitsearned by thecorporation.

Stockholders ' equity isincreased in tw o w ays.

Stockholders’ Equity of a Corporation

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The maximum number of

shares of capital stock that can be

sold to the public.

AuthorizedShares

Authorization and Issuanceof Capital Stock

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Issued shares are authorized shares of stock that have been

sold.

Unissued shares are authorized shares of stock that

never have been sold.

Usually shares are

sold through an underwriter.

AuthorizedShares

Authorization and Issuanceof Capital Stock

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UnissuedShares

TreasuryShares

OutstandingShares

Treasury shares are issued shares that

have been reacquired by the corporation.

IssuedShares

Outstanding shares are issued shares that are

owned by stockholders.

AuthorizedShares

Authorization and Issuanceof Capital Stock

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Par value is an arbitrary amount

assigned to each share of

stock when it is authorized.

Market price is the amount that each share of stock will sell

for in the market.

Stockholders’ Equity

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Common stock can be issued in three forms:

No-Par Common

Stock

Par Value Common

Stock

Stated Value Common

Stock

Let’s examine this form of

stock.

All proceeds credited to

Common Stock

Treated like par value common

stock

Stockholders’ Equity

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Prepare the journal entry to record an issuance of 10,000 shares of $2 par value stock for $25

per share which occurred on September 1, 2005.

Record:The cash received.The number of shares issued × the par value per share in the Common Stock account.The remainder is assigned to Contributed Capital in Excess of Par.

Issuance of Par Value Stock

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The journal entry to record an issuance of 10,000 shares of $2 par value stock for $25 per share on

September 1, 2005, should include a credit to common stock for the par value of the shares

issued.

Date Description Debit CreditSept. 1 Cash 250,000

Common Stock 20,000 Contributed Capital in Excess of Par 230,000

Issuance of Par Value Stock

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Stockholders' Equity with Common StockStockholders' Equity Contributed capital: Common Stock - $2 par value; 50,000 shares authorized; 10,000 shares issued and outstanding 20,000$ Contributed Capital in Excess of Par 230,000 Retained earnings 65,000 Total stockholders' equity 315,000$

Issuance of Par Value Stock

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A separate class of stock, typically having priority over common shares in . . .

Dividend distributions (rate is usually stated). Distribution of assets in case of liquidation.

Cumulative dividend rights.

Normally has no voting

rights.

Usually callable by

the company.

Other Features Include:

Preferred Stock

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Vs. NoncumulativeCumulativeDividends in

arrears must be paid before

dividends may be paid on common

stock.

Undeclared dividends from

current and prior years do not have to be paid in future

years.

Cumulative Preferred Stock

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Common stock, $50 par value; 4,000 shares authorized, issued and outstanding 200,000$ Preferred stock, 9%, $100 par value; 1,000 shares authorized, issued and outstanding 100,000 Total contributed capital 300,000$

Example: Consider the following partial Statement of Stockholders’ Equity.

During 2004, the directors declare cash dividends of $5,000. In year 2005, the directors declare cash

dividends of $42,000.

Stock Preferred as to Dividends

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Common stock, $50 par value; 4,000 shares authorized, issued and outstanding 200,000$ Preferred stock, 9%, $100 par value; 1,000 shares authorized, issued and outstanding 100,000 Total contributed capital 300,000$

Example: Consider the following partial Statement of Stockholders’ Equity.

During 2000, the directors declare cash dividends of $5,000. In year 2001, the directors declare cash

dividends of $42,000.

Stock Preferred as to DividendsPreferred Common

If Preferred Stock is Noncumulative:Year 2004 $5,000 dividends declared 5,000$ -$ Year 2005 Step 1: Current preferred dividend 9,000$ Step 2: Remainder to common shareholders 33,000$

If Preferred Stock is Cumulative:Year 2004 $5,000 dividends declared 5,000$ -$ Year 2005 Step 1: Dividends in arrears 4,000$ Step 2: Current preferred dividend 9,000 Step 3: Remainder to common shareholders 29,000$ Totals 13,000$ 29,000$

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I just converted 100 shares of preferred stock into

1,000 shares of common stock and ended up with a

higher dividend yield!

Gee, I can’t do that with MY preferred

stock!

Some preferred stock is convertible

into shares of common stock.

Other Features of Preferred Stock

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Preferred Stock

Stockholders' Equity with Common and Preferred StockStockholders' Equity Contributed capital: Preferred Stock - $100 par value; 1,000 shares authorized; 50 shares issued and outstanding 5,000$ Common Stock - $10 par value; 50,000 shares authorized; 30,000 shares issued and outstanding 300,000 Contributed Capital in Excess of Par 1,000 Retained earnings 65,000 Total stockholders' equity 371,000$