Chap011

Topics: Stock, Stock market, Corporate finance Pages: 32 (1665 words) Published: March 6, 2015
Chapter 11 Owners’ Equity
A Overview of Capital Stocks
B Sale and Issuance of Common Stock
C Treasury Stock
D Cash Dividends, Stock Dividends, and Stock
Splits
E Preferred Stock

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A. Authorized, Issued, and Outstanding Shares
Authorized shares are the maximum
number of shares of capital stock that
can be sold to the public.

Issued
shares are
authorized
shares of
stock that
have been
sold.

Unissued
shares are
authorized
shares of
stock that
never have
been sold.
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Authorized, Issued, and Outstanding Shares
Outstanding shares are
issued shares that are
owned by stockholders.

Issued
Shares

Outstanding
Shares

Unissued
Shares
Treasury shares are
issued shares that have
been reacquired by the
corporation.

Treasury
Shares

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Common Stock
Basic
voting
stock

Dividend set
by board of
directors

Ranks after
Preferred
Stock

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Preferred Stock
Preference
over common
stock

Usually has a
fixed dividend
rate

Usually has
no voting rights

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Accounting for Capital Stock
Two primary sources of
stockholders’ equity
Contributed
capital
Common
stock, par
value

Retained
earnings

Capital in
excess of
par value
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Stockholders’ Equity Section of
Balance Sheet
Quest, Inc.
Balance Sheet (Stockholders' Equity Section)
December 31, 2012
Preferred stock, $1 par value,
100,000 shares authorized; none issued
Common stock - $1 par value,
250,000 shares authorized;
100,000 shares issued
Capital in excess of par value
Treasury Stock, at cost, 5,000 shares
Total contributed capital
Retained earnings
Total stockholders' equity

-----

$

$
$

100,000
8,000
(5,200)
102,800
35,000
137,800
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B. Sale and Issuance of Common Stock
Initial public offering
(IPO)

Seasoned new issue

The first time a
corporation sells
stock to the public.

Subsequent sales of
new stock to the
public.

Sonic

Sonic
issues new
stock.
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Sale and Issuance of Capital Stock
On July 6, Sonic issued 100,000 shares of $0.01
par value common stock for $20 per share.
100,000 shares × $0.01 par value = $1,000

GENERAL JOURNAL
Date

Description

July 6 Cash (+A)

Debit

Credit

2,000,000

Common stock (+SE)

1,000

Capital In excess of par value (+SE)

1,999,000
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Issuing Stock for Noncash Assets
Par Value Stock
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value stock for land valued at
$2,500,000. Let’s record this transaction.

GENERAL JOURNAL
Date

Description

July 6 Land

Common Stock

Debit
2,500,000

Credit

200,000

Paid-in Capital in Excess of Par

2,300,000
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Secondary Markets
Transactions between two investors
that do not affect the corporation’s
accounting records.
I’d like to buy
some of your
Sonic stock.

I’d like to sell
some of my
Sonic stock.

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Stock Issued for Employee Compensation
Employee
compensation
package includes
salary and stock
options.

Stock options allow employees
to purchase stock from the
corporation at a predetermined,
fixed price over a specified
period of time.
If the market price of the stock
rises, holders of stock options
can exercise those options and
then sell the stock at a profit.

Employee

Stock options can motivate
employees to increase financial
performance which can increase
the stock price.
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C. Treasury Stock
Treasury stock represents shares of a company’s own stock
that has been bought back. Corporations might acquire its
own stock to:
1.Use their shares to buy other companies.
2.Avoid a hostile takeover.
3.Reissue to employees as...
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