Stockholders’ Equity:: Paid-in Capital
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Slide 1-1
STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL
Slide 1-2
Corporations Corporations An An entity entity created createdby bylaw. law. Existence Existenceis is separate separatefrom from owners. owners. Has Hasrights rightsand and privileges. privileges.
Ownership can be
Privately, or Closely, Held
Publicly Held
Slide 1-3
Advantages Advantages of of Incorporation Incorporation Limited Limitedpersonal personal liability liabilityfor for stockholders. stockholders. Transferability Transferability of of ownership. ownership. Professional Professional management. management. Continuity Continuity of of existence. existence.
Slide 1-4
Disadvantages Disadvantages of of Incorporation Incorporation Heavy Heavy taxation. taxation. Greater Greater regulation. regulation. Cost Cost of of formation. formation. Separation Separation of of ownership ownershipand and management. management.
Slide 1-5
Publicly Publicly Owned Owned Corporations Corporations Face Face Different Different Rules Rules By By LAW, LAW, publicly publicly owned owned corporations corporations must: must: Prepare Prepare financial financial statements statements in in accordance accordance with with GAAP. GAAP. Have Have their their financial financial statement statement audited audited by by an an independent independent CA. CA. Comply Comply with with SEBI SEBI laws. laws.
Slide 1-6
Formation Formation of of aa Corporation Corporation Each corporation is
formed according to the laws of the state where it is located. The application for corporate status is called the Articles of Incorporation.
The Thecosts costs associated associatedwith with incorporation incorporation are areusually usually expensed expensedimmediately, immediately, but but amortized amortized over over55years yearsfor for tax taxpurposes. purposes.
Slide 1-7
Rights Rights of of Stockholders Stockholders ❶ Voting (in person or by proxy). Right s Stockholders
❷ Proportionate distribution of dividends. ❸ Proportionate distribution of assets in a liquidation.
Slide 1-8
Rights Rights of of Stockholders Stockholders
C
o
Stockholder Stockholder Ultimate Ultimate ledgers are often ledgers are often control controlby maintained maintained byaa stock stock transfer transfer agent agentor or stock stock registrar. registrar.
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Stockholders Stockholders l d usually eusually r s meet meet once once aayear. year.
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s Cu ro e n r t r Oo l t l he er r V i c P r e s i d e n
Slide 1-9
Rights Rights of of Stockholders Stockholders Each unit of ownership is called a share of stock. A stock certificate serves as proof that a stockholder has purchased shares.
Slide 1-10
Rights Rights of of Stockholders Stockholders When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.
Slide 1-11
Functions Functions of of the the Board Board of of Directors Directors
C
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Selected Selected by by aa vote voteof ofthe the stockholders stockholders
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e r s Overall Overall responsibility responsibility i for r e managing c t o r s for managing the the company. company.
e n t
s Cu ro e n r t r Oo l t l he er r V i c P r e s i d e n
Slide 1-12
Functions Functions of of the the Corporate Corporate Officers Officers
C
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Contractual Contractualand andlegal legal representation representation Custodian Custodianof of funds funds
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Chief Chief Accountant Accountant
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Slide 1-13
Paid-In Paid-In Capital Capital of of aa Corporation Corporation S t o c k h o l d i n c r e a s e d
C i n
o
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v e f o r
P
a
e
r s ' e q i n t w o
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t r i b u t i oR n e s t e b n y t i o n o s t o r s i n ee xa cr nh ea dn g b e y c a p i t a l s ct o o c r kp .o r a t i o
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a Rp ei t ta a l i n
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Slide 1-14
Authorization Authorization and and Issuance Issuance of of Capital Capital Stock Stock Authorized Authorized Shares Shares
The maximum number of shares of capital stock that can be sold to the public.
Slide 1-15
Authorization Authorization and and Issuance Issuance of of Capital Capital Stock Stock Authorized Authorized Shares Shares
Usually Usually shares sharesare are sold sold through through an an underwriter. underwriter.
Issued shares are authorized shares of stock that have been sold.
Unissued shares are authorized shares of stock that never have been sold.
Slide 1-16
Authorization Authorization and and Issuance Issuance of of Capital Capital Stock Stock Outstanding shares are issued shares that are owned by stockholders.
Authorized Authorized Shares Shares
Issued Issued Shares Shares
Outstanding Shares Treasury Shares
Unissued Shares Treasury shares are issued shares that have been reacquired by the corporation.
Slide 1-17
Stockholders’ Stockholders’ Equity Equity Par value is an arbitrary amount assigned to each share of stock when it is authorized. Market Market price priceis is the theamount amountthat that each eachshare shareof of stock stockwill will sell sell for for in in the the market. market.
Slide 1-18
Stockholders’ Stockholders’ Equity Equity Common Common stock stock can can be be issued issued in in three three forms: forms: Par Par Value Value Common Common Stock Stock
No-Par No-Par Common Common Stock Stock
Stated Stated Value Value Common Common Stock Stock
Let’s Let’sexamine examine this thisform form of of stock. stock.
All All proceeds proceeds credited creditedto to Common CommonStock Stock
Treated Treated like like par par value value common commonstock stock
Slide 1-19
Issuance Issuance of of Par Par Value Value Stock Stock Record: Record: The The cash cash received. received. The The number numberof ofshares sharesissued issued×× the thepar parvalue value per per share sharein inthe the Common CommonStock Stockaccount. account. The The remainder remainder is is assigned assignedto to share share perimum. perimum.
Slide 1-20
Issuance Issuance of of Par Par Value Value Stock 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 RP2 RP2 par par value value stock stock for for RP25 RP25 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.
Slide 1-21
Preferred Preferred Stock Stock AAseparate separateclass classof of stock, stock, typically typicallyhaving havingpriority priorityover over common common shares shares in in.. .. .. Dividend Dividenddistributions distributions(rate (rateisisusually usuallystated). stated). Distribution Distributionof ofassets assetsin incase caseof ofliquidation. liquidation.
Other Features Include: Cumulative Cumulative dividend dividend rights. rights.
Usually Usually callable callable by by the the company. company.
Normally Normally has has no no voting voting rights. rights.
Slide 1-22
Cumulative Cumulative Preferred Preferred Stock Stock Cumulative Dividends Dividends in in arrears arrears must must be be paid paid before before dividends dividends may may be be paid paid on on common common stock. stock.
Vs.
Noncumulative Undeclared Undeclared dividends dividends from from current current and and prior prior years years do do not not have have to to be be paid paid in in future future years. years.
Slide 1-23
Convertible Convertible Preferred Preferred Stock Stock II just just converted converted100 100 shares sharesof ofpreferred preferred stock stock into into 1,000 1,000shares sharesof of common common stock stockand and ended ended up up with withaa higher higher dividend dividend yield! yield!
Some preferred stock is convertible into shares of common stock.
Gee, Gee, II can’t can’t do dothat that with with MY MY preferred preferred stock! stock!
Slide 1-24
Stock Stock Issued Issued for for Assets Assets Other Other Than Than Cash Cash Companies Companiessometimes sometimesissue issue stock stock in inexchange exchange for fornonnoncash cash assets. assets.
Since Sinceno nocash cash is isreceived, received, record recordthe thetransaction transactionat at the the market marketvalue value of of the the goods goods or or services servicesreceived. received.
Slide 1-25
Market Market Value Value
Accounting Accounting by by the the issuer. issuer.
Common Common stock stock is is carried carried at at original original issue issue price. price.
Accounting Accounting by by the the investor. investor.
Investments Investments in in marketable marketable securities securities are are carried carried at at market market value. value.
Slide 1-26
Market Market Price Price of of Preferred Preferred Stock Stock Factors Factors affecting affectingmarket market price price of ofpreferred preferredstock: stock: ●● Dividend Dividend rate rate ●● Risk Risk ●● Level Level of ofinterest interestrates rates
The Thereturn returnbased based on on the themarket market value valueis is called calledthe the“dividend “dividend yield.” yield.”
Slide 1-27
Market Market Price Price of of Common Common Stock Stock Factors Factors affecting affecting market market price price of of common common stock: stock: ● ●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.
Changes Changesin inmarket market value value have haveno noimpact impacton onthe the books booksof ofthe theissuer. issuer.
Slide 1-28
Stock Stock Splits Splits Companies use stock
splits to reduce market price. Outstanding shares increase, but par value is decreased proportionately.
Slide 1-29
Stock Stock Splits Splits -- Example 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
Slide 1-30
Treasury Treasury Stock Stock No voting or dividend rights
Contra equity account
Treasury Treasury shares shares are are issued issued shares sharesthat that have have been been reacquired reacquired 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 at at cost. cost.
Slide 1-31
Treasury Treasury Stock Stock -- Example 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.
Slide 1-32
Treasury Treasury Stock Stock -- Example 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 $55 cost cost == $55,000 $55,000
Slide 1-33
Stockholders’ Stockholders’ Equity Equity -- Presentation Presentation
Slide 1-34
Thanks Thanks
STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL
Slide 1-2
Corporations Corporations An An entity entity created createdby bylaw. law. Existence Existenceis is separate separatefrom from owners. owners. Has Hasrights rightsand and privileges. privileges.
Ownership can be
Privately, or Closely, Held
Publicly Held
Slide 1-3
Advantages Advantages of of Incorporation Incorporation Limited Limitedpersonal personal liability liabilityfor for stockholders. stockholders. Transferability Transferability of of ownership. ownership. Professional Professional management. management. Continuity Continuity of of existence. existence.
Slide 1-4
Disadvantages Disadvantages of of Incorporation Incorporation Heavy Heavy taxation. taxation. Greater Greater regulation. regulation. Cost Cost of of formation. formation. Separation Separation of of ownership ownershipand and management. management.
Slide 1-5
Publicly Publicly Owned Owned Corporations Corporations Face Face Different Different Rules Rules By By LAW, LAW, publicly publicly owned owned corporations corporations must: must: Prepare Prepare financial financial statements statements in in accordance accordance with with GAAP. GAAP. Have Have their their financial financial statement statement audited audited by by an an independent independent CA. CA. Comply Comply with with SEBI SEBI laws. laws.
Slide 1-6
Formation Formation of of aa Corporation Corporation Each corporation is
formed according to the laws of the state where it is located. The application for corporate status is called the Articles of Incorporation.
The Thecosts costs associated associatedwith with incorporation incorporation are areusually usually expensed expensedimmediately, immediately, but but amortized amortized over over55years yearsfor for tax taxpurposes. purposes.
Slide 1-7
Rights Rights of of Stockholders Stockholders ❶ Voting (in person or by proxy). Right s Stockholders
❷ Proportionate distribution of dividends. ❸ Proportionate distribution of assets in a liquidation.
Slide 1-8
Rights Rights of of Stockholders Stockholders
C
o
Stockholder Stockholder Ultimate Ultimate ledgers are often ledgers are often control controlby maintained maintained byaa stock stock transfer transfer agent agentor or stock stock registrar. registrar.
r p
o S
B
t o o
e c r e Tt a r er y a
t e
c k h o
a r d P
S
r a
o
r e s i d
f
O
r g
Stockholders Stockholders l d usually eusually r s meet meet once once aayear. year.
D
i r e c t o
r s
e n t
s Cu ro e n r t r Oo l t l he er r V i c P r e s i d e n
Slide 1-9
Rights Rights of of Stockholders Stockholders Each unit of ownership is called a share of stock. A stock certificate serves as proof that a stockholder has purchased shares.
Slide 1-10
Rights Rights of of Stockholders Stockholders When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.
Slide 1-11
Functions Functions of of the the Board Board of of Directors Directors
C
o
r p S
Selected Selected by by aa vote voteof ofthe the stockholders stockholders
B
o
r a
t o
c k h o
o
a r d P
S
e c r e Tt a r er y a
t e
o
r e s i d
f
l d D
O
r g
e r s Overall Overall responsibility responsibility i for r e managing c t o r s for managing the the company. company.
e n t
s Cu ro e n r t r Oo l t l he er r V i c P r e s i d e n
Slide 1-12
Functions Functions of of the the Corporate Corporate Officers Officers
C
o
r p
Contractual Contractualand andlegal legal representation representation Custodian Custodianof of funds funds
S B
o
r a
t o
c k h o
o
a r d P
S
e c r e Tt a r er y a
t e
o
r e s i d
f
O
l d D
r g
e r s
Chief Chief Accountant Accountant
i r e c t o
r s
e n t
s Cu ro e n r t r Oo l t l he er r V i c P r e s i d e n
Slide 1-13
Paid-In Paid-In Capital Capital of of aa Corporation Corporation S t o c k h o l d i n c r e a s e d
C i n
o
n
v e f o r
P
a
e
r s ' e q i n t w o
u
t r i b u t i oR n e s t e b n y t i o n o s t o r s i n ee xa cr nh ea dn g b e y c a p i t a l s ct o o c r kp .o r a t i o
i d
- i n
C
a Rp ei t ta a l i n
e
d
E
Slide 1-14
Authorization Authorization and and Issuance Issuance of of Capital Capital Stock Stock Authorized Authorized Shares Shares
The maximum number of shares of capital stock that can be sold to the public.
Slide 1-15
Authorization Authorization and and Issuance Issuance of of Capital Capital Stock Stock Authorized Authorized Shares Shares
Usually Usually shares sharesare are sold sold through through an an underwriter. underwriter.
Issued shares are authorized shares of stock that have been sold.
Unissued shares are authorized shares of stock that never have been sold.
Slide 1-16
Authorization Authorization and and Issuance Issuance of of Capital Capital Stock Stock Outstanding shares are issued shares that are owned by stockholders.
Authorized Authorized Shares Shares
Issued Issued Shares Shares
Outstanding Shares Treasury Shares
Unissued Shares Treasury shares are issued shares that have been reacquired by the corporation.
Slide 1-17
Stockholders’ Stockholders’ Equity Equity Par value is an arbitrary amount assigned to each share of stock when it is authorized. Market Market price priceis is the theamount amountthat that each eachshare shareof of stock stockwill will sell sell for for in in the the market. market.
Slide 1-18
Stockholders’ Stockholders’ Equity Equity Common Common stock stock can can be be issued issued in in three three forms: forms: Par Par Value Value Common Common Stock Stock
No-Par No-Par Common Common Stock Stock
Stated Stated Value Value Common Common Stock Stock
Let’s Let’sexamine examine this thisform form of of stock. stock.
All All proceeds proceeds credited creditedto to Common CommonStock Stock
Treated Treated like like par par value value common commonstock stock
Slide 1-19
Issuance Issuance of of Par Par Value Value Stock Stock Record: Record: The The cash cash received. received. The The number numberof ofshares sharesissued issued×× the thepar parvalue value per per share sharein inthe the Common CommonStock Stockaccount. account. The The remainder remainder is is assigned assignedto to share share perimum. perimum.
Slide 1-20
Issuance Issuance of of Par Par Value Value Stock 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 RP2 RP2 par par value value stock stock for for RP25 RP25 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.
Slide 1-21
Preferred Preferred Stock Stock AAseparate separateclass classof of stock, stock, typically typicallyhaving havingpriority priorityover over common common shares shares in in.. .. .. Dividend Dividenddistributions distributions(rate (rateisisusually usuallystated). stated). Distribution Distributionof ofassets assetsin incase caseof ofliquidation. liquidation.
Other Features Include: Cumulative Cumulative dividend dividend rights. rights.
Usually Usually callable callable by by the the company. company.
Normally Normally has has no no voting voting rights. rights.
Slide 1-22
Cumulative Cumulative Preferred Preferred Stock Stock Cumulative Dividends Dividends in in arrears arrears must must be be paid paid before before dividends dividends may may be be paid paid on on common common stock. stock.
Vs.
Noncumulative Undeclared Undeclared dividends dividends from from current current and and prior prior years years do do not not have have to to be be paid paid in in future future years. years.
Slide 1-23
Convertible Convertible Preferred Preferred Stock Stock II just just converted converted100 100 shares sharesof ofpreferred preferred stock stock into into 1,000 1,000shares sharesof of common common stock stockand and ended ended up up with withaa higher higher dividend dividend yield! yield!
Some preferred stock is convertible into shares of common stock.
Gee, Gee, II can’t can’t do dothat that with with MY MY preferred preferred stock! stock!
Slide 1-24
Stock Stock Issued Issued for for Assets Assets Other Other Than Than Cash Cash Companies Companiessometimes sometimesissue issue stock stock in inexchange exchange for fornonnoncash cash assets. assets.
Since Sinceno nocash cash is isreceived, received, record recordthe thetransaction transactionat at the the market marketvalue value of of the the goods goods or or services servicesreceived. received.
Slide 1-25
Market Market Value Value
Accounting Accounting by by the the issuer. issuer.
Common Common stock stock is is carried carried at at original original issue issue price. price.
Accounting Accounting by by the the investor. investor.
Investments Investments in in marketable marketable securities securities are are carried carried at at market market value. value.
Slide 1-26
Market Market Price Price of of Preferred Preferred Stock Stock Factors Factors affecting affectingmarket market price price of ofpreferred preferredstock: stock: ●● Dividend Dividend rate rate ●● Risk Risk ●● Level Level of ofinterest interestrates rates
The Thereturn returnbased based on on the themarket market value valueis is called calledthe the“dividend “dividend yield.” yield.”
Slide 1-27
Market Market Price Price of of Common Common Stock Stock Factors Factors affecting affecting market market price price of of common common stock: stock: ● ●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.
Changes Changesin inmarket market value value have haveno noimpact impacton onthe the books booksof ofthe theissuer. issuer.
Slide 1-28
Stock Stock Splits Splits Companies use stock
splits to reduce market price. Outstanding shares increase, but par value is decreased proportionately.
Slide 1-29
Stock Stock Splits Splits -- Example 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
Slide 1-30
Treasury Treasury Stock Stock No voting or dividend rights
Contra equity account
Treasury Treasury shares shares are are issued issued shares sharesthat that have have been been reacquired reacquired 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 at at cost. cost.
Slide 1-31
Treasury Treasury Stock Stock -- Example 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.
Slide 1-32
Treasury Treasury Stock Stock -- Example 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 $55 cost cost == $55,000 $55,000
Slide 1-33
Stockholders’ Stockholders’ Equity Equity -- Presentation Presentation
Slide 1-34
Thanks Thanks
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