Chapter 12: Contributed Capital

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Chapter 12 Contributed Capital

• By. J. Paquette
• Bellevue Community College

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Chapter 12 Contributed Capital

• Management issues
• Start-up organization costs
• Stockholders' Equitycomponents
• Journal Entries
• Issuance of common stock
• Cash dividends.

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Chapter 12 Contributed Capital

• THEORY ONLY
• Preferred stock, including dividends
• Treasury stock
• Stock option exercise
• Evaluate a corporation's performance
• dividends
• earnings

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What is a Corporation?
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Illustration 11-1
Corporate Organization Chart
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Separate Legal Entity
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Limited Liability of Stockholders
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Ability to Acquire Capital

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Transferable Ownership Rights
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Continuous Life
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Page 513 of text
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Additional Taxes

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Start up Organization costs

• Eat it! (expense it), for example
• State incorp fees
• Atty accountant fees
• Printing stock certificates

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Stockholders Equity Section of a Corporations
Balance Sheet...

• P. 543, Two Parts
• Contributed capital (paid-in capital)
• Retained earnings (earned capital).

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Stock Certificate Shows...
Illustration 11-4

• Corporations name
• Stockholder's name
• Class/special features of the stock
• Number of shares owned
• Signatures

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Authorized Stock...

• Maximum amount of stock a corporation is allowed
  to sell as authorized by corporate charter.

Outstanding Stock...
Number of shares of issued stock that are
being held by stockholders.
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Par Value Stock...

• An arbitrary value assigned to capital stock.
• Usually low
• The legal capital per share that must be
  retained in the business.

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Accounting for Common Stock Issues

• Only par value of the shares is credited to
  Common Stock.
• The difference is recorded in a separate paid-in
  capital account.

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JOURNAL ENTRIES. . . .
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Issuing Stock at Par

• Assume Hydro-Slide, Inc., issues 1,000 shares
  of 1 par value of common stock at par for cash.
• Cash 1,000 Common Stock 1,000

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Issuing Stock Above Par

• If Hydro-Slide, Inc., issues an additional
  1,000 shares of the 1 par value common stock for
  cash at 5 per share, the entry is
• Cash 5,000
• Common Stock 1,000
• Paid-in Capital in 4,000
• Excess of Par Value

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Hydro-Slide, Inc. Balance Sheet (partial)
Illustration 11-6

• Stockholders' equity
• Paid-in capital
• Common stock 2,000
• Paid-in capital in excess of par 4,000
• Total paid-in capital 6,000
• Retained earnings 27,000
• Total stockholders' equity 33,000

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Accounting for Stock

• To par or not to par?
• No par with or without a Stated Value
• Needed for defining Legal Capital (which
  represents the entry to Common Stock)
• Question What is Legal Capital for NO PAR stock
  with NO STATED VALUE?

All the Proceeds. . . .
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Dividend...

• Is a distribution by a corporation to its
  stockholders
• Dividend forms
• cash
• property
• script (promissory note to pay cash)
• stock

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Cash Dividend

• A corporation must have
• Retained earnings
• And it must have the

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Cash Dividend

• Laws vary (by state) on payment of dividends
  from
• Legal Capital
• Paid in Capital in excess of Par

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Entries for Cash Dividends

• Three dates are important in connection with
  dividends
• the declaration date
• the record date
• the payment date

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The Declaration Date...

• On February 21, 2001 the directors of Media
  General declare a .56 per share cash dividend on
  100,000 shares of 10 par value common stock.
• (The dividend is 56,000 (100,000 x .56)).

2/21 (Cash) Dividends
Declared 56,000 Dividends Payable
56,000
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The Record Date...

• The date ownership of the outstanding shares is
  determined for dividend purposes.
• 3/1 No Entry Necessary.

The Payment Date...
The date dividend checks are mailed. March 11th
is the payment date for Media
General. 3/11 Dividends Payable
56,000 Cash 56,000
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Preferred Stock...

• Capital stock with contractual preferences
• Dividends
• Assets (liquidation)
• Preferred stockholders do not have
  voting rights.

But. . . . .you might have cumulative dividend
rights
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Dividends in Arrears...

• Preferred dividends--were scheduled to be
  declared but were not declared
• HOWEVER No liability exists until dividends is
  declared by board of directors. But must be
  disclosed in the notes to the Financial
  Statements.

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Convertible Preferred Stock...

• Changed into common stock at the preferred
  stockholders option.

Callable Preferred Stock Changed into common
stock at the issuers option.
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Mead, Inc. Balance Sheet (partial)
Illustration 11-7

• Stockholders' equity
• Contributed capital
• Common stock,5par value,
• 250,000 shares authorized,
• 100,000 shares issued and
• outstanding 500,000
• Retained Earnings 200,000
• Total stockholders equity
  700,000

BEFORE TREASURY STOCK TRANSACTION
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Treasury Stock...

• Is a corporation's own stock
• has been issued
• paid for
• now reacquired corporation
• held in its treasury for future use.

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Corporations Acquire Treasury Stock to...

• Bonus/stock option plans.
• Increase trading--enhance market.
• Have shares available for other company
  purchases (MA).
• Reduce number of shares outstanding thereby
  increasing earnings per share.
• Prevent a hostile takeover.

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TREASURY STOCK IS

• NOT the same as UNISSUED shares!

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Purchase of Treasury Stock

• On Sept. 15, 2001, Mead acquires 4,000
  shares of its stock at 12.50 per share.
• Treasury Stock 50,000
• Cash 50,000

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Treasury Stock

• The Treasury Stock increases by the cost of the
  shares purchased - 50,000.
• Common Stock is not affected WHY?
• Treasury stock is deducted

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Mead, Inc. Balance Sheet (partial)
Illustration 11-8

• Stockholders' equity
• Contributed capital
• Common stock,5par value,
• 250,000 shares authorized
• 100,000 shares issued and
• 96,000 outstanding
  500,000
• Retained Earnings 200,000
• Total Contrib. Cap. Retained Earn.
  700,000
• Less Treasury Stock (4,000 shares)
  50,000
• Total stockholders equity 650,000

AFTER TREASURY STOCK TRANSACTION
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Relationship of Shares
ISSUED SHARES
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STOCK OPTIONS

• When granted, FMV of stock option (notes in FS)
• When exercised
• Treat the same as any stock sale
• Gain to the employee is NOT recorded.

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The Dividend Yield
Illustration 11-19

• DIVIDENDS PER SHARE OF C/S
• STOCK PRICE AT END OF YEAR
• reports the rate of return an investor earned
  from dividends declared.

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Earnings Per Share
Illustration 11-21

• NET INCOME - PFD STOCK DIVIDENDS
• AVERAGE COMMON SHARES OUTSTANDING
• ...measures the net income earned on each
  share of common stock.

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Price-Earnings Ratio
Illustration 11-21

• MARKET PRICE PER SHARE
• EARNINGS PER SHARE
• Note in the 90s, P/E ratios have ?
• While Dividends Yield have ?

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Return on Common Stockholders Equity Ratio
Illustration 11-23

• NET INCOME -PFD STK DIVIDENDS
• AVERAGE COMMON STOCKHOLDERS EQUITY

...measures the profitability from the
stockholders point of view.
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Publicly Held Corporation...

• May have thousands of stockholders and its stock
  is regularly traded on national securities
  markets.

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Privately Held Corporation...

• May have few stockholders and does not offer its
  stock for sale to general public.

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Characteristics of a Corporation

• Separate legal entity
• Limited liability of stockholders
• Ability to acquire capital easier
• Transfer of ownership easier
• Lack of mutual agency
• Continuous existence
• Centralized Authority Responsibility
• Professional management

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Characteristics of a Corporation

• - Government regulations
• - Additional taxes
• - Limited Liability
• - Separation of Ownership Control

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Forming a Corporation

• A corporation can operate in various states (must
  have a license from each state in which it does
  business) but can be incorporated in only one
  state.

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Questions in Issuing Stock...

• How many shares should be authorized for sale?
• How should the stock be issued?
• At what price should the shares be issued?
• What value should be assigned to the stock?

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Corporations Can Issue Stock...

• Directly to investors (typical in privately held
  corporations).
• Indirectly through an investment banking firm
  (customary with publicly held corporations).

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Cumulative Dividend...

• Preferred stockholder receives current and
  unpaid prior-year dividends before common
  stockholders receive any dividends.

Oink. . .
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Dividends in Arrears-calc.
Illustration 11-9
Scientific-Leasing has 5,000 shares of 7, 100
par value cumulative preferred stock outstanding.
The annual dividend is 35,000 (5,000 x 7 per
share). Dividends are 2 years in arrears for
the years 2000 and 2001. Calculate preferred
dividends as of year end 2002

• Dividends in arrears (35,000 x 2 years)
  70,000 Current-year dividends
  35,000 Total preferred dividends
  105,000

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Preferred vs. Common

• A dividend is declared for 150,000
• What is available to Common Stockholders?

45,000
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Treasury Stock, other issues

• Sale of Treasury Stock
• At, below or above their COST?
• Difference to
• PAID-IN CAPITAL, TREASURY STOCK (DEBIT OR CREDIT)
• Note report in Contributed Capital

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Treasury Stock, Retirement (p. 571)

• All related accounts include
• Capital Stock (at par value)
• Paid in Capital in Excess of Par (for original
  sale)
• Treasury stock (at full proceeds)
• Difference
• Retained Earnings (Treas gt Issue price)
• Or, Paid-in Capital, Retirement of Stock