Stockholders' Equity Chapter 15

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					Stockholders’ Equity
     Chapter 15




                       1
  The nature of shareholders’ equity


Assets – Liabilities = Shareholders’ Equity

   Net Assets
(Residual Interest)




                                              2
       Sources of shareholders’ equity




Amounts invested              Amounts earned
 by shareholders               by corporation

            Stockholders’ Equity
               Paid-in Capital
             Retained Earnings




                                                3
            Shareholders’ rights

The shareholders have the right to:
– Share proportionately in profits and losses
– Share proportionately in management (right to vote)
– Share proportionately in corporate assets upon
  liquidation
– Share proportionately in any new issues of stock of the
  same class (preemptive rights)




                                                            4
                Stock terminology

• Authorized

• Issued / Un-issued

• Outstanding

• Treasury




                                    5
                         Par value


     Par value stock                  No-par stock
 Designated dollar amount      Dollar amount per share
  per share stated in the        not designated in corporate
  corporate charter.             charter.
 Par value has no              Corporations can assign a
  relationship to market         stated value per share
  value.                         (treated as if par value).




                                                               6
    Types of capital stock – common stock

• The basic voting stock of the corporation.

• Ranks after preferred stock for dividend and
  liquidation distribution.

• Dividends determined by the board of directors.




                                                    7
   Types of capital stock – preferred stock


Generally does not             Usually has a
have voting rights.         par or stated value.



  Dividend and
                            May be convertible,
   liquidation
                             callable, and/or
 preference over
                              redeemable.
 common stock.




                                                   8
                Preferred stock
• Dividends are usually stated as a percentage of
  par or stated value (otherwise fixed $ amount)

• Dividends may be cumulative or non-cumulative

• Dividends may be non-participating, partially
  participating, or fully participating

• Preferred stock may be convertible or callable.




                                                    9
                  Cornell Company
STOCK SOLD FOR CASH
 Cornell Company issues 10,000 shares of $1 par value stock for
 $100,000.

      What is the journal entry to record this transaction?



      What if stock is “no par” common stock?




                                                                  10
                  Cornell Company
STOCK SOLD ON CREDIT
 Cornell issues 10,000 shares of $1 par value stock for
 $100,000. $70,000 is received at the time the shares are issued
 and the remaining $30,000 is in the form of a note due in six
 months .

      What is the journal entry to record this transaction?




                                                                   11
       Issuing stock for non-cash assets

• Apply the general valuation principle by using
  fair value of stock given up or fair value of asset
  received, whichever is more clearly evident.

• If market values cannot be determined, use
  appraised values.




                                                        12
                  Cornell Company
STOCK SOLD FOR NONCASH CONSIDERATION
 Cornell issues 10,000 shares of $1 par value stock in exchange
 for a piece of equipment without a clear market value.
 Cornell’s stock is currently trading at $12 per share.

      What is the journal entry to record this transaction?




                                                                  13
               Package (lump-sum) sales


• Allocate the lump-sum received based on the
  relative fair values of the two classes (proportional
  method).
• If only one fair value is known, allocate a portion of
  the lump-sum received based on that fair value and
  allocate the remainder to the other security
  (incremental method).




                                                           14
                  Cornell Company
PACKAGE (LUMP-SUM) SALES
 Cornell issues 5,000 shares of $1 par value stock and 3,000
 shares of $5 par value preferred stock for $100,000. The
 market value of the common stock is $12 per share and the
 market value of the preferred shares is $30 per share.

      What is the journal entry to record this transaction?




                                                               15
           Share Issue Costs

    • Registration fees
    • Underwriter commissions
    • Printing and clerical costs
    • Legal and accounting fees
    • Promotional costs




  Share issue costs reduce net proceeds
 from selling shares, resulting in a lower
amount of Paid-in Capital in Excess of Par.




                                              16
                  Cornell Company
SHARE ISSUE COSTS
 Cornell issues 10,000 shares of $1 par value stock for
 $100,000. Cornell paid an investment banking firm $3,000 to
 issue the shares.

      What is the journal entry to record this transaction?




                                                               17
              Link to the business world
• “Stock buyback announcements”
   – Dow Jones Newswire (7-8-04)

      7/7 Men’s Wearhouse        MW             $50 million
          SRS Labs               SRSL            $3 million
      7/2 Capital Bank           CBKN    50 thousand shares
          Informatica            INFA       5 million shares
     6/30 TXU Corp.              TXU      20 million shares
     6/29 Citadel Broadcasting   CDL           $100 million
          Union Bankshares       UBSH   150 thousand shares
     6/28 Christopher & Banks    CBK            $15 million
          Covance Inc.           CVD        3 million shares
          Provident Financial    PROV    5% of outstanding




                                                               18
                Reacquired shares

A corporation might reacquire shares of its stock
to . . .
    •   Support the market price.
    •   Increase earnings per share.
    •   Distribute for stock option plans.
    •   Issue as a stock dividend.
    •   Use in mergers and acquisitions.
    •   Thwart takeover attempts.




                                                    19
             Reacquired shares
– Initially, firms issue shares from authorized shares
– From issued (and outstanding) shares, firms may
  reacquire the shares
– Once reacquired:
   • Shares may be held in the treasury and later reissued:
     these shares are called Treasury Stock. Treasury stock
     are authorized shares that are issued, but not
     outstanding. When resold, treasury stock becomes
     issued stock.

   • Shares may be retired and removed from the books.
     Retired shares have the status of authorized and un-
     issued shares.




                                                              20
                  Treasury Stock
• Usually does not have:
      Voting rights.
      Dividend rights (cash dividends).
      Preemptive rights.
      Liquidation rights.


• Reduces both assets and stockholders’ equity.




                                                  21
          Recording Treasury Stock
• COST METHOD (most common)
  – Treasury stock is recorded at cost to acquire


• PAR VALUE METHOD
  – Treasury stock is recorded at par value

 Both methods are acceptable




                                                    22
                   Cornell Company
TREASURY STOCK: COST AND PAR VALUE METHODS
 Cornell issues 10,000 shares of $25 par value stock for $260,000
 Cornell buys back 2,000 shares at $28 per share
 Cornell resells 500 shares of treasury stock at $30 per share
 Cornell resells 500 shares of treasury stock at $19 per share

      What are the journal entries to record these transactions
       under the cost method and the par value method?




                                                                    23
                Cornell Company
TREASURY STOCK: COST AND PAR VALUE METHODS

    What is the journal entry if Cornell decides to retire the
     remaining 1,000 shares of treasury stock?




                                                                  24
                Cost method quiz
1.   On 5/1/02, Cornell Company reacquired 3,000
     shares of its common stock at $55 per share. On
     12/3/02, Cornell reissued 1,000 shares of the stock
     at $75 per share.

2.   On 5/1/02, Columbia Company reacquired 3,000
     shares of its common stock at $55 per share. On
     12/3/02, Columbia reissued 1,000 shares of the
     stock at $45 per share. The balance in the
     “APIC—TS” account is $5,000.

     Provide the 12/3/02 journal entries for Cornell
      and Columbia.




                                                           25
              Par value method quiz
1.   On 1/1/02, Brown reacquired 3,000 shares of its $10 par
     value common stock for $38 per share. The balance in the
     “APIC—CS” account is $400,000 and there are 20,000
     shares of common stock outstanding.

      Provide the 1/1/02 journal entry for Brown.

 On 1/1/02, Columbia Company reacquired 3,000 shares of
   its $10 par value common stock for $38 per share. The
   balance in the “APIC—CS” account is $400,000 and there
   are 20,000 shares of common stock outstanding. On
   10/15/02 Columbia reissued 1,000 shares of the stock at
   $45.

      Provide the 10/15/02 journal entry for Columbia.




                                                                26
                     Dividends

Important dates




u Declaration date (create liability)
v Ex-dividend date (no entry)
w Record date (no entry)
x Payment date (record payment)




                                        27
                 Types of Dividends

•   Cash dividends
•   Scrip dividends
•   Property dividends
•   Liquidating dividends [return of capital]
•   Stock dividends




                                                28
                     Cash dividend
On 6/1/02, Brown declares a cash dividend of $1 per share on its
20,000 common shares to be paid on 10/1/02.

       What are the journal entries to record these events?




                                                                   29
                 Property Dividends
• Are payable in non-cash assets.

• Record at fair value of non-cash asset on date of
  declaration.

• Recognize gain or loss for difference between
  book value and fair value on date of declaration.
  Report gain/loss as ordinary gain/loss on I/S.




                                                      30
                   Property dividend
Brown is a candy company. On 6/1/02, Brown declares a property
dividend of one candy bar per share of common stock payable on
10/1/02. The candy bars have a book value of $1 per bar and a
market value of $2 per bar and there are 20,000 shares outstanding.

       What are the journal entries to record these events?




                                                                      31
                 Stock Dividends

    Distribution of additional shares of stock
                 to stockholders.


 No change in total                No change in par
stockholders’ equity.                  values.


                    All stockholders
                   receive the same
                  percentage increase
                        in shares.




                                                      32
                 Stock Dividends
Reasons for stock dividends:
      • To preserve cash.
      • To decrease market price of stock.
      • To reduce existing balance in Retained Earnings.




                                                           33
                 Stock Dividends

      Small                        Large
Stock dividend < 25%        Stock dividend > 25%



  Record at current        Record at par or stated
   market value               value of stock.
     of stock.

                           Often referred to as a
                                stock split.




                                                     34
                 Small stock dividend
Brown declares and distributes a 20% stock dividend on 20,000
common shares. Par value is $1 and market value is $20.

       What is the journal entry to record these events?




                                                                35
                   Large stock dividend
Brown declares and distributes a 100% stock dividend (a 2-for-1
stock split) on 20,000 common shares. Par value is $1 and market
value is $20.

       What is the journal entry to record these events as (1) a
        straight stock split and (2) a stock split effected in the
        form of a dividend?




                                                                     36
             Link to the business world
• Berkshire Hathaway Company (as of 7/8, AM)
   – Two types of common shares
      • Class A shares:   $90,300 per share
      • Class B shares:   $3,003 per share




                                               37
              Reverse Stock Split
• A reverse stock split occurs when a company
  decreases, rather than increases, its outstanding
  shares.

• Example: after a 1-for-4 reverse stock split, 100
  million shares, $1 par per share, would be 25
  million shares, $4 par per share.

• No journal entry is necessary [only memo record].




                                                      38