Contributed Capital - FTP Directory Listing

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Contributed Capital - FTP Directory Listing Powered By Docstoc
					Class today
pWhat is a corporation?
  lwhy corporate form?
pOwnership in a corporation
  lCommon Stock

    lBuyback   (Treasury)
  lPreferred Stock
pQuiz chapters 13 & 14
Business Forms

o Most numerous
  l Sole proprietorship
  l Partnership
p Highest dollar value assets
  l Corporations (dominant form)
     l   Closely-held (private).
     l   Openly-held, publicly traded (listed, over-the-
p Hybrid forms available
  l PCs, LLCs and LLPs, etc.                               5
Stockholders’ equity

 pContributed capital = stock
   lAccounting for issuance
   lBalance sheet presentation
   lTreasury stock
 pRetained earnings - next chapter
Contributed Capital

p basic concepts
p stock issue
p lump sum sales of stock
p stock subscriptions

p Stockholders’ rights
  l   Share in profits
  l   Voting
  l   Preemptive
  l   Proportionate share
p Limited liability
p Unlimited life
p Common vs. preferred
Authorized, Issued and

p authorized capital stock
  l number of shares that can be issued legally
    as defined in the corporate charter
p issued capital stock
  l number of shares that have been issued and
    have not been subsequently retired
p outstanding capital stock
  l number of shares currently trading
      authorized > issued > outstanding
Par, Stated or Assigned
p par value
  l minimum amount that must be contributed
    under the law to consider the shares fully
  l generally not related to market value
p nopar
  l true nopar stock
  l stated or assigned value
     l   basically takes the place of par value
Stock Issue

p Cash
  Cash          XXXX
          Common stock                      XX
          Paid in capital in excess        XXX
p Noncash consideration
  l record at FMV of asset received or stock
    issued whichever most clearly determinable
  l value assigned by the Board
Journal Entry to Record
Stock Issue

cash (other asset or expense)         xx
  capital stock                            yy
  contributed in excess of par*            zz
                 *or assigned value

xx = most clearly determinable fair value
yy = # shares x par value (or assigned value)
zz= whatever is left over!
Lump Sales of Stock

p proportional method
  l fair value available for each class
  l allocate based on ratio of each fair value to
    total fair value
p incremental method
  l fair value not available for at least one
  l assign fair value to classes with know fair
    value first; remainder to those with
    unknown fair value
Stock Subscriptions

 stock subscriptions receivable       xx
   capital stock subscribed                     yy
   contributed capital in excess of par*        zz
                   *or assigned value

Where does this account show up on the balance sheet?
Default on Subscriptions

p Return all payments made
p Issue shares equivalent to # paid in full
p All payments made forfeited
p Resale under a lien
  l reimbursed to extent net receipts > original
    subscription price
  l not to exceed payments made
Treasury Stock
p What is..
p Why?
  l Meet merger or compensation needs
  l Increase EPS
  l Make a ‘market’…
p How to account for
  l Cost method
  l Par/stated value method
p Carries a debit balance.
  l Contra owner equity.
  l NOT an asset!
Cost Method

p Repurchase and subsequent sale viewed
  as one continuous transaction (“one
  transaction approach”)

p journal entry:

  treasury stock       xx
     cash                       xx
Cost Method (cont.)

p Treasury stock account viewed as a
  “suspense account”

p Reported as a deduction from total
  shareholders’ equity

p Can either reissue (sell) or retire the stock

p Have 100 shares of treasury stock which
  was purchased for $1400
p Sold 50 shares for $800
p Sold 50 shares for $500
Cost Method - Resale

p When resale price > acquisition cost
  l Remove acquisition cost from treasury stock
  l difference between cost and sale price is
    credited to “contributed capital from TS
Cost Method - Resale
p When resale price < acquisition cost
  l Remove acquisition cost from treasury
    stock account
  l Then
     l   debit “contributed capital from TS transactions”
         (same class) if available
     l   remaining amount --debit retained earnings
Cost Method - Retirement
p Remove acquisition cost from treasury stock
p Then
  l reduce capital stock for par
  l reduce PIC for amount paid in when stock was

p If: debit difference to be allocated
   l contributed capital from TS transactions
     (same class)
   l retained earnings

p Have 100 shares of $1 par value treasury
  stock which was purchased for $1400

p Retire 50 shares with original issue price
  of $600
p Retire 50 shares with original issue price
  of $1000
Example Entries
Presentation of Treasury
B/S presentation of T/S

Cost method: T/S is subtracted at the
 bottom of the shareowner equity section
 at cost. It is included in the “regular”
 shares above as well.

             Preferred stock
p Exchange of rights for other rights: Hybrid of debt and
  ownership characteristics.
p Dividends paid are a % of par or $ per share.
p Preferred shareholders’ claim on earnings generally
  precedes common shareholders’
p Dividends
   l Cumulative (arrearages) vs. noncumulative stock
   l Participating
       l Fully

       l Partially

       l Non                                             35
Cash Dividends

p Example: 2,000 shares of P/S, $50 par, 8% cumulative,
  non-participating; 80,000 shares of C/S, $30 par.
p Dividends declared: Year 1, $0; Year 2, $6,000; Year
  3, $18,000; Year 4, $75,000.
  P/S dividend = 2,000 shares x $50 par x .08 = $8,000
                    To P/S       Arrearage     To C/S
       Year 1
       Year 2
       Year 3
       Year 4
Cash Dividends

Note: No formal liability arises when a
 dividend is not declared.
  l Memo only. Arrearages are paid before any
    current dividends are paid.
  l Entries at the date of declaration:

  Year 2

         Cash Dividends

Year 3

Year 4

    Convertible Preferred

Convertible P/S. To convert use book value

Debt or Equity?

p Debt related
  l   Stated return
  l   Non-voting
  l   Preference at liquidation
  l   Non-participating
p Equity
  l Return not mandatory
  l Dividends, not interest expense
  l Participating

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