Stockholders Equity

1
Stockholders Equity

• Electronic Presentations for Chapter 12

2
Key Points

• The three forms of financing and their relative
  importance to major U.S. Corporations.
• Distinctions between debt and equity.
• Economic consequences associated with the methods
  used to account for stockholders equity.
• Rights associated with preferred and common stock
  and the methods used to account for stock
  issuances.
• Distinctions among the market value, book value,
  and par (stated) value of a share of common
  stock.
• Treasury stock.
• Cash dividends and dividend strategies followed
  by corporations.
• Stock dividends and stock splits.

3
Relative Importance of Liabilities, Capital, and
Retained Earnings
4
Debt vs. Equity
Debt Equity

• Formal legal contract No legal contract
• Fixed maturity date No fixed maturity date
• Fixed periodic payments Discretionary dividends
• Security in case of default Residual asset
  interest
• No voice in management Vote - board of
  directors
• Interest expense Dividends reduce RE

5
Distinctions Between Debt and Equity
Interested Party Debt Equity
Investors / Creditors
Lower investment risk
Higher investment risk
Fixed cash receipts
Variable cash receipts
6
Distinctions Between Debt and Equity
Interested Party Debt Equity
Investors / Creditors
Lower investment risk
Higher investment risk
Fixed cash receipts
Variable cash receipts
Management
Contractual future cash payments
Dividends are discretionary
Effects on credit rating
Effects of dilution/ takeover
Interest is tax deductible
Dividends are not tax deductible
7
Distinctions Between Debt and Equity
Interested Party Debt Equity
Investors / Creditors
Lower investment risk
Higher investment risk
Fixed cash receipts
Variable cash receipts
Management
Contractual future cash payments
Dividends are discretionary
Effects on credit rating
Effects of dilution/ takeover
Interest is tax deductible
Dividends are not tax deductible
Accountants/ Auditors
Liabilities section of the balance sheet
Stockholders equity of the balance sheet
Income statement effects from debt
No income statement effects from equity
8
Accounting for Stockholders Equity

• Preferred stock
• Common stock
• Treasury stock
• Stock options
• Dividends

9
Preferred Stock

• Authorized, issued, and outstanding preferred
  shares
• Preferred dividend payments
• Cumulative preferred stock
• Participating preferred stock
• Debt or equity?

10
Common Stock

• Market value
• Book value
• Par value
• Accounting for issuances

11
Treasury Stock

• Why companies purchase treasury stock
• Purchasing treasury stock
• Reissuing treasury stock for more than
  acquisition cost
• Reissuing treasury stock for less than
  acquisition cost
• The magnitude of the treasury stock account

12
Stock Options

• Stock options as a means of compensation
• Methods used to account for stock options
• Are stock options compensation expense?

13
Dividends

• Dividend strategy
• Accounting for cash dividends
• Stock splits
• Stock dividends
• Retained earnings appropriations

14
Review Problem - 1998
The company issued 1,000 shares of 1 par value
stock for 70 per share.
15
Review Problem - 1998
The company issued 1,000 shares of 1 par value
stock for 70 per share.
Cash (A) 70,000 Common Stock (SE) 1,000 Addit
ional Paid-In Capital (SE) 69,000 Issued
common stock.
16
Review Problem - 1998
The company issued 500 shares of no par value,
5, cumulative preferred stock for 50 per share.
17
Review Problem - 1998
The company issued 500 shares of no par value,
5, cumulative preferred stock for 50 per share.
Cash (A) 25,000 Preferred Stock
(SE) 25,000 Issued preferred stock.
18
Review Problem - 1998
Net income during the year 2,000 Dividends
0
19
Review Problem - 1998
Net income during the year 2,000 Dividends
0
No entry
20
Review Problem - 1998
Pike Place Corporation Balance Sheet December 31,
1998 Stockholders Equity Preferred stock (500
sh., no par value) 25,000 Common stock (1,000
sh. _at_ 1 par value) 1,000 Additional paid-in
capital (C/S) 69,000 Retained earnings 2,000 Total
stockholders equity 97,000
21
Review Problem - 1998
Pike Place Corporation Balance Sheet December 31,
1998 Stockholders Equity Preferred stock (500
sh., no par value) 25,000 Common stock (1,000
sh. _at_ 1 par value) 1,000 Additional paid-in
capital (C/S) 69,000 Retained earnings 2,000 Total
stockholders equity 97,000 Note Dividends in
arrears on cumulative preferred stock 2,500
(500 sh. x 5/sh.)
22
Review Problem - 1999
The company purchased 200 treasury (common)
shares for 60 per share.
23
Review Problem - 1999
The company purchased 200 treasury (common)
shares for 60 per share.
Treasury Stock (-SE) 12,000 Cash
(-A) 12,000 Acquired treasury stock.
24
Review Problem - 1999
Net income for the year 20,000. Dividends
6,600 5,000 for preferred shareholders 2,500
dividends in arrears and 2,500 (500 sh. x
5/sh.), and 1,600 for the common stockholders
(800 outstanding sh. x 2/sh.). The dividends
were declared and paid.
25
Review Problem - 1999
Net income for the year 20,000. Dividends
6,600 5,000 for preferred shareholders 2,500
dividends in arrears and 2,500 (500 sh. x
5/sh.), and 1,600 for the common stockholders
(800 outstanding sh. x 2/sh.). The dividends
were declared and paid.
Preferred Dividends (-SE) 5,000 Common Dividends
(-SE) 1,600 Dividends Payable (L) 6,600 Declare
d dividends. Dividends Payable (-L) 6,600 Cash
(-A) 6,600 Paid dividends.
26
Review Problem - 1999
27
Review Problem - 2000
The company reissued 100 treasury shares for 65
each.
28
Review Problem - 2000
The company reissued 100 treasury shares for 65
each.
Cash (A) 6,500 Treasury Stock
(SE) 6,000 Additional Paid-In Capital, T/S
(SE) 500 Reissued treasury stock.
29
Review Problem - 2000
The company reissued 50 treasury shares for 40
each.
30
Review Problem - 2000
The company reissued 50 treasury shares for 40
each.
Cash (A) 2,000 Additional Paid-In Capital, T/S
(-SE) 500 Retained Earnings (-SE) 500 Treasury
Stock (SE) 3,000 Reissued treasury stock.
31
Review Problem - 2000
The company declared a 10 percent stock dividend.
There were 950 common shares outstanding at the
time of the split, each with a fair value of 5.
32
Review Problem - 2000
The company declared a 10 percent stock dividend.
There were 950 common shares outstanding at the
time of the split, each with a fair value of 5.
Stock Dividend (-SE) 475 Common Stock
(SE) 95 Additional Paid-In Capital
(SE) 380 Declared stock dividend.
33
Review Problem - 2000
Net income for the year 35,000 Dividends
4,590 2,500 to preferred shareholders and
2,090 to common shareholders (1,045 sh.
outstanding x 2/sh.). The dividends were
declared but unpaid at year-end.
34
Review Problem - 2000
Net income for the year 35,000 Dividends
4,590 2,500 to preferred shareholders and
2,090 to common shareholders (1,045 sh.
outstanding x 2/sh.). The dividends were
declared but unpaid at year-end.
Preferred Dividends (-SE) 2,500 Common Dividends
(-SE) 2,090 Dividends Payable(L) 4,590 Declared
dividends.
35
Review Problem - 2000

1,000 45
36
Review Problem - 2000
Pike Place Corporation Balance Sheet December 31,
2000 Stockholders Equity Preferred stock (500
sh. no par value) 25,000 Common stock (1,045
sh. _at_ 1 par value) 1,045 Additional paid-in
capital 69,380


69,000 500 - 500 380
37
Review Problem - 2000
Pike Place Corporation Balance Sheet December 31,
2000 Stockholders Equity Preferred stock (500
sh. no par value) 25,000 Common stock (1,045
sh. _at_ 1 par value) 1,045 Additional paid-in
capital 69,380 Retained earnings Restricted 30,0
00 Unrestricted 14,835 44,835


15,400 - 500 - 475 35,000 - 4,590
38
Review Problem - 2000
Pike Place Corporation Balance Sheet December 31,
2000 Stockholders Equity Preferred stock (500
sh. no par value) 25,000 Common stock (1,045
sh. _at_ 1 par value) 1,045 Additional paid-in
capital 69,380 Retained earnings Restricted 3
0,000 Unrestricted 14,835 44,835 Less Treasury
stock (3,000) Total stockholders
equity 137,260


50 sh. x 60/sh. or 12,000 - 6,000 - 3,000