Stockholders Equity: Contributed Capital

1
Chapter 15

• Stockholders Equity Contributed Capital

2
Corporate Form of Entity

• Public Sector
• Private Sector
• Nonstockchurches, charities, colleges
• Stock for profit
• Closedfamily-held corporations
• Openstock widely held
• Listed on organized stock exchange
• Unlisted or over-the-counter

3
Influence of State Laws

• Each state has its own business corporation act.
  Each states act is complex and varies in the
  provisions and definitions.

4
Capital Stock System

• Each share represents ownership and right to
  proportionately
• Share in profits or losses
• Share in management (vote)
• Share in corporate assets upon liquidation
• Share in any new issues of stock in same class
  (preemptive right)

5
Variety of Stock Ownership

• Common stock--residual interest that bears
  ultimate risks and receives the benefits
• Preferred stock--in return for certain
  preferences may sacrifice voice in management
  (vote) or earnings above stated rate
• Different classes of common stock may differ in
  voting rights

6
Limited Liability

• Stockholder cannot lose more than their
  investment
• If stock is purchased below par a contingent
  liability exists for the stockholder to the
  creditors

7
Profit Distribution

• Must be in compliance with state laws governing
  corporations
• Must be formally approved by the board of
  directors
• Must be in full agreement with contracts as to
  preferences and participation

8
Stockholder Equity

• Is a residual interest derived from equation of
  assets less liabilities equals stockholders
  equity

9
Sources of Stockholder Equity

• Two primary sources of equity
• Stockholders investments (contributed capital)
• Legal capital is the par or stated value of all
  issued stock, however, when no par stock is
  issued it is the total consideration paid in
• Retained earnings (earned capital)

10
Issuance of Stock

• Par value stock
• Paid in capital in excess of par
• Discount on stock
• No-par stock
• Avoids any contingent liability
• Prevents par value being used for value
• Sometimes given a stated or minimum value

11
Sales of Stock on Subscription

• Partial payment is received originally and the
  stock is not issued until the full subscription
  price is received. Individuals who have signed a
  valid subscription contract have the same rights
  and privileges as a stockholder.

12
Sales of Stock on Subscription

• Common or Preferred Stock Subscribed is reported
  as an equity account below Common or Preferred
  Stock
• Subscriptions Receivable is a contra equity
  account that is deducted from stockholders
  equity. Balance indicates amount to be collected
  before stock will be issued.

13
Lump Sum Sales of Stock

• Use either the proportional or the incremental
  method to allocate proceeds among the different
  securities

14
Noncash Stock Transactions

• When stock is issued for services or property
  other than cash, the property or services should
  be recorded at either its fair market value, or
  the fair market value of the stock issued,
  whichever is more clearly determinable

15
Assessments on Stock

• Allowed in some states
• Recorded as an increase to Additional Paid-In
  Capital

16
Costs of Issuing Stock

• Generally treated as a reduction of the amounts
  paid in and debited to Additional Paid-In Capital

17
Reacquisition of Shares

• Corporations may buy own stock
• To provide tax efficient distributions of excess
  cash to shareholders
• To increase earnings per share and return on
  equity
• To provide stock for employee stock compensation
  contracts or to meet potential merger needs

18
Reacquisition of Shares

• Corporations may buy their own shares
• To thwart takeover attempts or to reduce the
  number of shareholders
• To make a market for the stock

19
Treasury Stock

• Stock reacquired by a corporation is Treasury
  Stock
• Treasury stock is not an asset. A corporation
  cannot own a part of itself. It is a contra
  stockholders equity account

20
Accounting for Treasury Stock

• Two method of accounting for treasury stock
• Cost method
• Par value method

21
Cost Method for Treasury Stock

• Results in debiting Treasury Stock for
  acquisition cost and reporting this amount as a
  deduction from total paid-in capital and retained
  earnings on balance sheet

22
Cost MethodSale of Treasury Stock

• Sale of Treasury Stock above cost, difference is
  credited to Paid-In Capital from Treasury Stock
• Sale of Treasury Stock below cost, difference is
  debited to Paid-In Capital from Treasury Stock
  until depleted then debited to Retained Earnings

23
Cost MethodRetiring Treasury Stock

• If the cost of the treasury stock was more than
  the original issuance price, the difference is
  debited to Retained Earnings
• If the cost of the treasury stock was less than
  original issuance price, the difference is
  credited to Paid-In Capital from Retirement of
  Treasury Stock

24
Par Value Method

• Records all treasury stock transactions at par
  value and reports the amount as a deduction from
  issued shares of the same class of stock
• Discussed in Appendix, but not in this course

25
Characteristics of Preferred Stock

• Usually issued with a par value
• Sometimes has more debt characteristics than
  stock characteristics
• Preference as to dividends
• Preference as to assets in event of liquidation
• Convertible into common stock

26
Preferences as to Dividends

• Preferred stockholders are paid before common
  stockholders
• Dividend is expressed as percentage of par value
• Cumulative preferred stockdividends in arrears
  must be paid before current years dividend is
  paid to either preferred or common stockholders

27
Preference as to Dividends

• Participatingpreferred stockholders share
  ratably with common stockholders in any dividends
  beyond the prescribed rate

28
Characteristics of Preferred Stock

• Callable at the option of the corporation at set
  prices
• Nonvoting
• Debt characteristics some preferred stock has
  characteristics of debt (fixed return, no vote,
  and redeemable)
• SEC requires redeemable preferred stock be
  excluded from stockholders equity

29
Paid-In Capital Presentation

• Paid-In Capital arises from sale of capital stock
• Basic transactions increase or decrease Paid-In
  Capital

30
Increases (Credits) to Paid-In Capital

• Premiums on stock issued
• Sale of treasury stock above cost
• Additional capital arising in a quasi
  reorganization
• Additional assessments
• Conversion of convertible securities
• Declaration of a small stock dividend

31
Decreases (Debits) to Paid-In Capital

• Discounts on stock issued
• Sale of treasury stock below cost
• Absorption of a deficit in a quasi reorganization
• Declaration of a liquidating dividend