Slide

1-1

Chapter

7 STOCKHOLDERS’
EQUITY:
PAID-IN CAPITAL

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Corporations

An
Anentity
entity
created
createdby
bylaw.
law.

Privately, or
Existence
Existenceis
is Closely, Held
Ownership
separate
separatefrom
from can be
owners.
owners.

Has
Hasrights
rightsand
and
privileges.
privileges.
Publicly Held

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Advantages of Incorporation
Limited
Limitedpersonal
personal
liability
liabilityfor
for
stockholders.
stockholders.

Transferability
Transferability of
of
ownership.
ownership.

Professional
Professional
management.
management.

Continuity
Continuityof
of
existence.
existence.

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Disadvantages of Incorporation

Heavy
Heavytaxation.
taxation.

Greater
Greaterregulation.
regulation.

Cost
Costof
offormation.
formation.

Separation
Separationofof
ownership
ownershipandand
management.
management.

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Publicly Owned Corporations Face

1-5

Different Rules
By
ByLAW,
LAW,publicly
publiclyowned
owned
corporations
corporationsmust:
must:
•• Prepare
Preparefinancial
financialstatements
statementsin in
accordance
accordancewithwithGAAP.
GAAP.
•• Have
Havetheir
theirfinancial
financialstatement
statement
audited
auditedbybyan
anindependent
independent
CPA.
CPA.
•• Comply
Complywith
withfederal
federalsecurities
securities
laws.
laws.
•• Submit
Submitfinancial
financialinformation
information
for
forSEC
SECreview.
review.
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Formation of a Corporation
• Each corporation is The
Thecosts
costsassociated
associatedwith
with
formed according to incorporation
incorporationare
areusually
usually
expensed
expensedimmediately,
immediately, but
but
the laws of the state amortized
amortizedover
over55years
yearsfor
for
where it is located. tax
taxpurposes.
purposes.
• The application for
corporate status is
called the Articles of
Incorporation.

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Rights of Stockholders
 Voting (in person
or by proxy).
 Proportionate
Right distribution of
s dividends.
 Proportionate
Stockholders distribution of
assets in a
liquidation.
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Rights of Stockholders
C orporate O rganization C hart
Stockholder
Stockholder Stockholders
Stockholders
ledgersUltimate
Ultimate
are often
ledgers are often Stockholders usually
usuallymeet
meet
control
controlby
maintained
maintained byaa once
onceaayear.
year.
stock
stocktransfer
transfer
agent B oa rd of D irectors
agentor orstock
stock
registrar.
registrar.
President

Secreta ry T rea surer C ontroller O ther Vice

Presidents
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Rights of Stockholders

Each unit of
ownership is
called a share of
stock.
A stock
certificate serves
as proof that a
stockholder has
purchased
shares.

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Rights of Stockholders

When the stock

is sold, the
stockholder
signs a transfer
endorsement on
the back of the
stock certificate.

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Functions of the Board of Directors

C orporate O rganization C hart
Stockholders
Overall
Overall
Selected
Selectedby byaa responsibility
responsibility
vote
voteof
ofthe
the B oa rd of D irectors for
formanaging
managing
stockholders
stockholders the
thecompany.
company.
President

Secreta ry T rea surer C ontroller O ther Vice

Presidents
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Functions of the Corporate Officers

C orporate O rganization C hart
Contractual
Contractualand
andlegal
legal
representation
representation Stockholders
Custodian Chief
Custodianof
of Chief
funds Accountant
Accountant
funds B oa rd of D irectors

President

Secreta ry T rea surer C ontroller O ther Vice

Presidents
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Paid-In Capital of a Corporation

S tockholders' equity is
increased in tw o w ays.

Contributions by Retention of profits

investors in exchange earned by the
for capital stock. corporation.

Paid-in Capital Retained E arnings

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Authorization and Issuance of Capital

1-14

Stock
Authorized
Authorized
Shares
Shares
The maximum
number of
shares of capital
stock that can be
sold to the
public.

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Authorization and Issuance of Capital

1-15

Stock
Authorized
Authorized
Shares
Shares
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
Usually
Usually stock that stock that
shares
sharesare
are have been never have
sold
sold sold. been sold.
through
throughanan
underwriter.
underwriter.

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Authorization and Issuance of Capital

1-16

Stock
Authorized Outstanding shares are
Authorized issued shares that are
Shares
Shares owned by
stockholders.
Outstanding
Unissued
Issued Shares
Issued Shares
Shares
Shares
Treasury shares are
Treasury issued shares that
Shares have been reacquired
by the corporation.

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Stockholders’ Equity
Par value is an
arbitrary
amount
assigned to
each share of
stock when it is
authorized.
Market
Marketprice
price isis
the
theamount
amountthatthat
each
eachshare
shareof of
stock
stockwill
will sell
sell
for
forin
inthe
the
market.
market.

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Stockholders’ Equity

Common
Common stock
stock can
can be
be issued
issued in
in three
three forms:
forms:

Par
ParValue
Value No-Par
No-Par Stated
StatedValue
Value
Common
Common Common
Common Common
Common
Stock
Stock Stock
Stock Stock
Stock

Let’s
Let’sexamine
examine All
All proceeds
proceeds Treated
Treatedlike
like
this
thisform
formof
of credited
creditedto
to par
parvalue
value
stock.
stock. Common
CommonStock
Stock common
commonstock
stock
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Issuance of Par Value Stock

Record:
Record:
The
Thecash
cashreceived.
received.
The
Thenumber
numberof ofshares
sharesissued
issued×× the
thepar
parvalue
value
per
pershare
shareininthe
the Common
CommonStock
Stock account.
account.
The
Theremainder
remainderis isassigned
assignedto
to Contributed
Contributed
Capital
Capital in
inExcess
ExcessofofPar.
Par.

Prepare
Prepare the
the journal
journal entry
entry to
to record
record an
an issuance
issuance
of
of 10,000
10,000 shares
shares ofof $2
$2 par
par value
value stock
stock for
for $25
$25
per
per share
share which
which occurred
occurred on
on September
September 1, 1, 2003.
2003.
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Issuance of Par Value Stock

The
The journal
journal entry
entry to
to record
record an
an issuance
issuance of of 10,000
10,000
shares
shares of
of $2
$2 par
par value
value stock
stock for
for $25
$25 per
per share
share on
on
September
September 1, 1, 2003,
2003, should
should include
include aa credit
credit to
to
common
common stock
stock for
for the
the par
par value
value of
of the
the shares
shares
issued.
issued.

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Issuance of Par Value Stock

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Preferred Stock
AAseparate
separateclass
classof
ofstock,
stock,typically
typicallyhaving
havingpriority
priorityover
overcommon
common
shares
sharesin in......
–– Dividend
Dividenddistributions
distributions(rate
(rateisisusually
usuallystated).
stated).
–– Distribution
Distributionofofassets
assetsin
incase
caseofofliquidation.
liquidation.

Other Features Include:

Cumulative
Cumulative Usually
Usually Normally
Normally has
has
dividend
dividend callable
callable by
by no
no voting
voting
rights.
rights. the
the company.
company. rights.
rights.
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Cumulative Preferred Stock

Cumulative Vs. Noncumulative

Dividends
Dividends in
in Undeclared
Undeclared
arrears
arrears must
must be
be dividends
dividends from
from
paid
paid before
before current
current and
and prior
prior
dividends
dividends may
may be
be years
years do
do not
not have
have
paid
paid on
on common
common to
to be
be paid
paid in
in future
future
stock.
stock. years.
years.

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Stock Preferred as to Dividends

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

During 2002, the directors declare cash dividends of

$5,000. In year 2003, the directors declare cash
dividends of $42,000.

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Stock Preferred as to Dividends

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.

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Convertible Preferred Stock

IIjust
justconverted
converted100
100shares
shares Gee,
Gee, II can’t
can’t
of
ofpreferred
preferredstock
stockinto
into do
dothat
thatwith
with
1,000
1,000shares
sharesof
ofcommon
common MYpreferred
MY preferred
stock
stockand
andended
endedupupwith
withaa stock!
stock!
higher
higherdividend
dividendyield!
yield!

Some preferred
stock is convertible
into shares of
common stock.

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Preferred Stock

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Stock Issued for Assets Other Than

1-28

Cash

Companies
Companiessometimes
sometimesissue
issue
stock
stockin
inexchange
exchangefor
fornon-
non-
cash
cashassets.
assets.

Since
Sinceno
nocash
cashisisreceived,
received,
record
recordthe
thetransaction
transactionatatthe
the
market
marketvalue
valueofofthe
thegoods
goodsor
or
services
servicesreceived.
received.

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I love this
stuff!
Can we do
some more?

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Market Value

Common
Common stock
stock isis
Accounting
Accounting by by carried
carried at
at original
original issue
issue
the
the issuer.
issuer. price.
price.

Investments
Investments inin
Accounting
Accounting by by marketable
marketable securities
securities
the
the investor.
investor. are
are carried
carried at
at market
market
value.
value.

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Market Price of Preferred Stock

Factors
Factorsaffecting
affectingmarket
marketprice
priceof
of The
Thereturn
returnbased
basedonon
preferred
preferredstock:
stock: the
themarket
marketvalue
valueis
is

 Dividend
Dividendrate
rate called
calledthe
the“dividend
“dividend

 Risk
Risk yield.”
yield.”

 Level
Levelof
ofinterest
interestrates
rates

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Market Price of Common Stock

Factors
Factors affecting
affecting Changes
Changesin
inmarket
marketvalue
value
market
market price
price of of have
haveno
noimpact
impactononthe
the
common
common stock:
stock: books
booksof
ofthe
theissuer.
issuer.

Investors’
Investors’
expectations
expectations of of
future
future profitability.
profitability.

Risk
Risk that
that this
this level
level
of
of profitability
profitability will
will
not
not be
be achieved.
achieved.
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Stock Splits

• Companies use stock

splits to reduce
market price. Ice Cream Parlor
• Outstanding shares
increase, but par Banana Splits
value is decreased On Sale Now

proportionately.

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Stock Splits - Example

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

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Treasury Stock
Treasury
Treasury
shares
sharesare
No voting are
Contra issued
issued
or shares
sharesthat
that
equity have
dividend havebeen
been
account reacquired
reacquired
rights by
bythe
the
corporation.
corporation.

When
When stock
stock is
is reacquired,
reacquired, the
the corporation
corporation
records
records the
the treasury
treasury stock
stock atat cost.
cost.
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Treasury Stock - Example

On May 1, 2003, East Corp. reacquired 3,000
shares of its common stock at $55 per share.
Prepare the journal entry for May 1.

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Treasury Stock - Example

On December 3, 2003, East Corp. reissued 1,000
shares of the stock at $75 per share.
Prepare the journal entry for December 3.
1,000
1,000shares
shares××$75
$75== $75,000
$75,000

1,000
1,000shares
shares×× $55
$55cost
cost ==$55,000
$55,000
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Stockholders’ Equity - Presentation

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End of Chapter 7

THANK YOU

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