Contributed Capital

1
Contributed Capital

• Chapter 12

2
Sources of capital

• In 1997, the amount of new corporate capital was
  1291 billion, of which 1,139 billion, or 88
  percent, came from new bond issues 118 billion,
  or 9 percent from new common stock issues and 34
  billion, or 2.6 percent, came from preferred
  stock issues.

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Advantages of the corporation

• Separate legal entity
• Limited liability
• Ease of capital generation
• Ease of transfer of ownership
• Lack of mutual agency
• Continuous existence
• Centralized authority and responsibility
• Professional management

4
disadvantages

• Government regulation
• Taxation double taxation
• Limited liability
• Separation of ownership and control

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Equity Financing

• Stock certificate
• Authorized stock
• Par value
• Legal capital

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Dividend

• A distribution of a corporations assets
  generated by past earnings to its stockholders
• Dividend yield (dividends per share) / (market
  price per share)

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P/E ratio

• Price / earnings ratio
• Through internet we can check P/E ratio of GE,
  IBM, AOL, McDonald, Wal mart, etc.
• What is your understanding on P/E ratio?

8
ROE

• Return on Equity
• ROE (Net income) / (Average Stockholders
  Equity)

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Stockholders Equity

• Contributed capital
• Preferred stock
• Common stock
• Paid in capital in excess of par value, common
• Retained earnings
• Total stockholders equity

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shares

• Authorized stock
• Issued stock
• Outstanding stock
• Floating stock
• Treasury stock

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Dividends

• Liquidating dividend declared dividend exceeding
  retained earnings
• 3 important dates
• Date of declaration
• Date of record
• Date of payment
• Between 2 and 3, the stock is said to be
  ex-dividend

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Date of declaration

• Debit Cash Dividends Declared
• Credit Cash Dividends payable

13
Date of record

• No entry is required

14
Date of payment

• Debit Cash Dividends payable
• Credit cash

15
Cash dividends declared

• A temporary stockholders equity account
• Closed at the end of the accounting period by
  debiting retained earnings and crediting cash
  dividend declared.

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Preferred stock

• Preference as to dividends
• Preference as to assets of the business in
  liquidation
• Convertibility
• A callable option

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Preference as to Dividends

• A preference over common stock in the receipt of
  dividends however,
• Preferred stockholders have no guarantee of ever
  receiving dividends
• The company must have earnings
• The board of directors must declare dividends on
  preferred shares before any liability arises.

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Dividends in arears

• Dividends not paid in the year they are due
• In the case of cumulative preferred stock, the
  fixed dividend amount per share accumulates from
  year to year, and the whole amount must be paid
  before common dividends can be paid.

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Dividends in areas

• See spreadsheet demo for computation of dividends
  distribution

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Accounting for Stock Issuance

• Par value stock
• Debit cash
• Credit common stock
• Credit paid-in capital in excess of Par value,
  common

21
No-Par stock

• Debit cash
• Credit common stock
• With stated value
• Debit cash
• Credit common stock
• Credit Paid-in Capital in Excess of Stated value,
  common

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Issuance of stock for noncash assets

• Debit expense account or
• Debit asset account like land
• Credit common stock
• Credit paid-in capital in excess of par value,
  common

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Treasury Stock

• Capital stock that has been issued and later
  reacquired by the issuing company and has not
  subsequently been resold or retired.
• Stock buyback is what is called in the press
• A T/S purchase reduces the assets and
  stockholders equity of the company

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Shares

• Authorized issued non-issued
• Issued T/S outstanding stock
• Outstanding floating restriction

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Purchase of T/S

• When T/S is purchased, it is normally recorded at
  cost.
• The par value, stated value, or original issue
  price of the stock is ignored.
• The stockholders equity section shows the cost
  of the T/S as a deduction from the total of
  contributed capital and retained earnings.

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Sale of T/S

• T/S can be sold at cost, above cost, or below
  cost
• When sold above cost, the excess is credited to
  paid-in capital, treasury stock. No gain should
  be recorded.

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Sale of T/S (below cost)

• The difference is deducted from paid-in capital,
  T/S
• When paid-in capital, T/S does not exist, or is
  not enough, retained earnings absorbs the excess.
• No loss is recorded

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Retirement of T/S

• When T/S was acquired less than the original
  issuance price, then use paid-in capital,
  retirement of stock.
• When T/S was acquired more than the original
  issuance price, then retained earnings should be
  debited.

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