Reporting Stockholders Equity

Topics: Stock, Preferred stock, Corporate finance Pages: 9 (1256 words) Published: December 2, 2012
ckChapter 11 – Reporting and Analyzing Stockholders’ Equity

I. Characteristics of a Corporation (Publicly held (closely held))

* Separate legal existence;

* Limited liability of stockholders; limited to investment

* Transferable ownership rights;

* Ability to acquire capital;

* Continuous life;

* Corporation management:



* Voting rights
* Profit sharing
* Preemptive right
* Residual claim
Board of Directors
Board of Directors



. other vps

. other vps






* Government regulations; file application with state government-> corportate charter by-law

* Additional taxes. Double taxation

II. Stock Issue

1. Basics of Stock Issue:

(1) Authorized Stock: The maximum amount of stock that a corporation is authorized to sell by corporate charter.

(2) Outstanding Stock: Capital stock that has been issued and is being held by stockholders. Legal capital= # of issued shares x par value per share

(3) Par Value Stock: Capital stock that has been assigned an arbitrary value per share in the corporate charter.

(4) No-par value Stock: Capital stock that has not been assigned a value in the corporate charter.

(5) Stated Value of No-par value Stock: Value per share assigned by the board of directors to no-par value stock.




(6) Paid-in Capital: Amount paid to corporation by stockholders for shares of ownership.

(7) Retained Earnings: Earned capital held for future use in the business.

2. Accounting for Common Stock Issues:

(1) Issuing Stock at Par

Example 1:
On March 1, 2002, XYZ Company issued 10,000 shares of $10 par value common stock at par.

(2) Issuing Stock above Par

Example 2:
On June 10, XYZ Company issued 5,000 shares of $10 par value common stock at $12 per share. Cash 60,000(=5,000x12)
Common Stock50,000
Additional paid in capital14,000
(Paid in capital in excess of par)

What if the common stock issued on June 10 is no par stock with a stated value of $10? Cash60,000
Common Stock50,000
Additional Paid in capital10,000

3. Treasury Stock:
* A corporation’s own stock that has been issued, fully paid for, and reacquired by the corporation but not retired. * Issued but not outstanding

(1) Corporations acquire treasury stock to …

* reissue shares to employees under bonus and stock compensation plans; * increase trading of company’s stock in securities market to enhance market value; * reduce number of shares outstanding , and therefore increase earnings per share (EPS); * prevent a hostile takeover.

(2) Purchasing Treasury Stock:

* Cost method: Treasury stock is increased by the amount paid to reacquire the shares, and is decreased by the same amount when the shares are later sold.

Example 3:
On October 15, 2002, XYZ Company acquired 2,000 shares of the stock issued on June 10 in Example 2 at $9 per share.

On the balance sheet:
Stockholders equity
Paid in capital
Common stock (par)
Additional paid in capital
Retained earnings
Less: Treasury stock (a contra equity account)

* Effect of purchasing treasury stock on common stock:

* Effect of purchasing treasury stock on stockholders’ equity:

III. Preferred Stock

* Preferred stock has contractual provisions that give it preferences over common stock in dividends and assets in the event of liquidation.

* Preferred stockholders do not have voting rights.

Example 4:
On November 5, 2002, XYZ Company issued 5,000 shares of $10 par value preferred stock for $13 per share. Cash65,000
Preferred Stock50,000
Additional Paid in capital15,000

1. Dividend Preference

* Preferred stockholders have the right to share in the distribution of corporate...
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