stockholders’ equity: paid-in capital lecture # 14
DESCRIPTION
Chapter 11. STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Lecture # 14. Market Value. Common stock is carried at original issue price. . Accounting by the issuer. Investments in marketable securities are carried at market value. . Accounting by the investor. - PowerPoint PPT PresentationTRANSCRIPT
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-1
STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL
Lecture # 14
Chapter
11
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-2
Accounting by the issuer.
Accounting by the investor.
Common stock is carried at original issue
price.
Investments in marketable securities are carried at market
value.
Market Value
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-3
Factors affecting marketprice of preferred stock:Dividend rateRiskLevel of interest rates
The return based on the market value is called the “dividend
yield.”
Market Price of Preferred Stock
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-4
Factors affecting market price of common stock:Investors’
expectations of future profitability.
Risk that this level of profitability will not be achieved.
Changes in market value have no impact on the
books of the issuer.
Market Price of Common Stock
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-5Book Value per Shareof Common Stock
Total Stockholders’ EquityNumber of Common Shares Outstanding
Preferred stock and preferreddividends in arrears are deductedfrom total stockholders’ equity.
Book Value Market Value=
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-6
Ice Cream Parlor
Banana Splits On Sale Now
Stock Splits
Companies use stock splits to reduce market price.
Outstanding shares increase, but par value is decreased proportionately.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-7
Before Split
After Split
Common Stock Shares 5,000
Par Value per Share 1.00$
Total Par Value 5,000$
Before Split
After Split
Common Stock Shares 5,000 10,000
Par Value per Share 1.00$ 0.50$
Total Par Value 5,000$ 5,000$
Assume that a corporation had 5,000 shares of $1 par value common stock outstanding
before a 2–for–1 stock split.
Increase
Decrease
No Change
Stock Splits - Example
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-8
No voting or
dividend rights
Contra equity
account
When stock is reacquired, the corporation records the treasury stock at cost.
Treasury shares are
issued shares that have been reacquired
by the corporation.
Treasury Stock
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-9
Date Description Debit CreditDate Description Debit CreditMay 1 Treasury Stock 165,000
Cash 165,000 3000 shares × $55 = $165,000
On May 1, 2005, East Corp. reacquired 3,000 shares of its common stock at $55 per share.
Prepare the journal entry for May 1.
Treasury Stock - Example
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-10
Date Description Debit CreditDate Description Debit CreditDec. 3 Cash 75,000
Treasury Stock 55,000 Contributed Capital in Excess of Par 20,000
On December 3, 2005, East Corp. reissued 1,000 shares of the stock at $75 per share.
Prepare the journal entry for December 3.1,000 shares × $75 = $75,000
1,000 shares × $55 cost = $55,000
Treasury Stock - Example
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
11-11
Stockholders' Equity Contributed capital: Preferred Stock - $100 par value; 1,000 shares authorized; 50 shares issued & outstanding 5,000$ Common Stock - $10 par value; 50,000 shares authorized; 30,000 shares issued and outstanding 300,000 Contributed Capital in Excess of Par 21,000 Retained earnings 65,000 Subtotal 391,000$ Less: Treasury stock 110,000 Total Stockholders' equity 281,000$
Stockholders’ Equity - Presentation