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Stockholders’ Equity

Stockholders’ Equity. Chapter 9. ( In thousands, except shares amounts). December 31 2000 1999. Preferred stock, $1 par value, 10,000 shares authorized; shares issued and outstanding; 2000 and 1999, none – – Common stock, $.01 par value,

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Stockholders’ Equity

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  1. Stockholders’ Equity Chapter 9

  2. (In thousands, except shares amounts) December 31 2000 1999 Preferred stock, $1 par value, 10,000 shares authorized; shares issued and outstanding; 2000 and 1999, none – – Common stock, $.01 par value, 40,000,000 shares authorized: 2000; 20,299,091 shares issued and 20,011,240 shares outstanding 1999; 20,117,314 shares issued and outstanding $203 $201 IHOP Corp. Stockholders’ Equity

  3. IHOP Corp. Stockholders’ Equity (In thousands, except shares amounts) December 31 2000 1999 Additional paid-in capital 69,655 66,485 Retained earnings 193,632 158,294 Treasury stock, at cost (2000; 287,750 shares; 1999; none (5,170) – Other 1,675 1,500 Total shareholders’ equity $259,995 $226,480

  4. Learning Objective 1 Explain the advantages and disadvantages of a corporation.

  5. What is the Best Way toOrganize a Business? Proprietorship Partnership Corporation

  6. Characteristics of a Corporation Separate legal entity Continuous life and transferability of ownership Limited liability Separation of ownership and management Corporate taxation Government regulation

  7. Advantages 1. Can raise more capital than a proprietorship or partnership can 2. Continuous life 3. Ease of transferring ownership 4. Limited liability of stockholders Disadvantages 1. Separation of ownership 2. Corporate taxation 3. Government regulation Advantages and Disadvantagesof a Corporation

  8. obtain Organizing a Corporation Charter Incorporators Set bylaws

  9. Authority Structureof a Corporation Stockholders Board of Directors Chairperson of the Board (CEO) President (Chief Operating Officer)

  10. VP Sales VP Manufacturing CFO VP Personnel Secretary Controller (Accounting Officer) Treasurer (Finance Officer) Authority Structureof a Corporation President (Chief Operating Officer)

  11. Vote Dividends Liquidation Preemption Stockholders’ Rights

  12. Stockholders’ Equity Owners’ equity in a corporation has two main components: Paid-in capital (contributed capital) Retained earnings

  13. Capital Stock Corporate ownership is evidenced by a stock certificate which may be for any number of shares. The total number of shares authorized is limited by charter.

  14. Preferred Stock A class of stock that has several preferences over common stock. Capital Stock Common Stock The most basic form of capital stock issued by every corporation.

  15. No-par Stock Does not have a par value, but may have a stated value (an arbitrary amount). Capital Stock Par Value Stock It is an arbitrary amount assigned by a company to a share of its stock.

  16. Learning Objective 2 Measure the effect of issuing stock on a company’s financial position.

  17. Issuing Stock Corporations need money to operate from sources other than borrowing. They sell (issue) stock directly to the stockholders or use the service of an underwriter.

  18. Common Stock at Par Suppose IHOP’s common stock carries a par value of $10 per share. The company issues 6,200,000 shares of common stock at par. What is the entry?

  19. Common Stock at Par January 8 Cash (6,200,000 × $10) 62,000,000 Common Stock 62,000,000 To issue common stock

  20. Common Stock Above Par IHOP’s common stock has a par value of $0.01 per share. The company issues 6,200,000 shares of common stock at $10 per share. What is the entry?

  21. Common Stock Above Par July 23 Cash (6,200,000 × $10) 62,000,000 Common Stock (6,200,000 × $0.01) 62,000 Paid-in Capital in Excess of Par – Common (6,200,000 × $9.99) 61,938,000 To issue common stock

  22. Common Stock Above Par Stockholders’ Equity Common Stock, $.01 par; 40 million shares authorized, 6.2 million shares issued $ 62,000 Paid-in capital in excess of par 61,938,000 Total paid-in capital $ 62,000,000 Retained earnings 194,000,000 Total stockholders’ equity $256,000,000

  23. No-Par Common Stock When a company issues no-par stock, it debits the asset receivedand credits the stock account. August 14 Cash (3,000 × $20) 60,000 Common Stock 60,000 To issue no-par common stock

  24. Preferred Stock Accounting for preferred stock follows the pattern illustrated for common stock. Stockholders’ equity on the balance sheet lists preferred stock, common stock, and retained earnings – in that order.

  25. Ethical Considerations Issuing stock for assets other than cash can pose an ethical challenge. The company issuing the stock often wishes to record a large amount for the noncash asset received and for the stock that it is issuing.

  26. Learning Objective 3 Describe how treasury stock transactions affect a company.

  27. Treasury Stock Transactions Treasury stock are shares that a company has issued and later reacquired. Reasons for purchasing their own stock: Stock purchase plan distribution Increase net assets Avoidance of a takeover

  28. Stockholder’s Equity at December 31, 2000 (if no treasury stock purchased – $000) Common Stock $ 203 Paid-in capital in excess of par 69,655 Retained earnings 193,632 Total equity $263,490 IHOP Corp. Before Purchaseof Treasury Stock

  29. ($000) During 2000, IHOP paid $5,170 to purchase 288 shares of its common stock as treasury stock. IHOP Corp. Purchaseof Treasury Stock November 12, 2000 Treasury Stock 5,170 Cash 5,170 Purchased treasury stock

  30. Stockholder’s Equity at December 31, 2000 (with treasury stock purchased – $000) Common Stock $ 203 Paid-in capital in excess of par 69,655 Retained earnings 193,632 Less: Treasury stock (288 shares at cost) – 5,170 Total equity $258,320 IHOP Corp. After Purchaseof Treasury Stock

  31. Sale of Treasury Stock Assume that on July 22, 2002, the shares of treasury stock are sold for $5,300. Cash 5,300 Treasury Stock 5,170 Paid-In Capital from Treasury Stock Transactions 130 Sold treasury stock

  32. Stockholder’s Equity at December 31, 2002 ($000) Common Stock $ 203 Paid-in capital in excess of par 69,785 Retained earnings 193,632 Total equity $263,620 Equity before purchase of treasury stocks 263,490 Increase in stockholders’ equity $ 130 IHOP Corp. After Saleof Treasury Stock

  33. Retirement of Stock It decreases the outstanding stock of the corporation. Retired shares cannotbe reissued. There is no gain or loss on retirement.

  34. Retained Earnings,Dividends, and Splits The Retained Earnings account carries the balance of the business’s net income less its net losses and less any declared dividends accumulated over the corporation's lifetime.

  35. Retained Earnings,Dividends, and Splits A dividendis a corporation’s return to its stockholders of some of the benefits of earnings. A stock splitis an increase in the number of authorized, issued, and outstanding shares.

  36. Dividend Dates Three relevant dates for dividends are: Declaration date Date of record Payment date

  37. Learning Objective 4 Account for dividends and measure their impact on a company.

  38. Preferred Stock Dividends When a company has issued both preferred and common stock, the preferred stockholders receive their dividends first. Pinecraft Industries, Inc., has both common stock and 90,000 shares of preferred stock outstanding.

  39. Preferred Stock Dividends Preferred dividends are paid at the annual rate of $1.75 per share. Assume that in 2004, the company declares an annual dividend of $1,500,000. Preferred dividend (90,000 × $1.75 per share) $157,500 Common dividend (remainder: $1,500,000 – $157,500) 1,342,500 Total dividend $1,500,000

  40. Expressing the Dividend Rateon Preferred Stock Percentage rate Dollar amount

  41. Preferred Stock Dividends The preferred stock of Pinecraft is cumulative. Suppose the company passed the 2004 preferred dividend of $157,500. In 2005, the company declares a $500,000 dividend. Retained Earnings 500,000 Dividends Payable, Preferred 315,000* Dividends Payable, Common ($500,000 – $315,000) 185,000 To declare a cash dividend *($157,500 × 2 years)

  42. Why Issue a Stock Dividend? To continue dividends but conserve cash To reduce the per-share market price of its stock GAAP Identifies: Small stock dividends: 25% or less Large stock dividends: above 25%

  43. Stock Dividend IHOP declared a 10% stock dividend in 2001. Assume IHOP had 20,000,000 shares of common stock outstanding. The stock is trading for $15 per share. How would this stock dividend be recorded?

  44. Retained Earnings (20,000,000 × 10% × $15) 30,000,000 Common Stock (20,000,000 × 10% × $0.01) 20,000 Paid-in Capital in Excess of Par Common 29,980,000 Distributed a 10% stock dividend Stock Dividend For a large stock dividend, debit Retained Earnings and credit Common Stock for the par value of the shares.

  45. Stock Splits A stock split is an increase in the number of authorized, issued, and outstanding shares of stock, coupled with a proportionate reduction in the stock’s par value. A stock split decreases the market price of stock.

  46. Stock Splits The market price of a share of Quaker Oats has been approximately $25. Assume that the company wants to decrease it to $12.50. This 2-for-1 split means that the company would have twice as many shares outstanding after the split as is had before the split.

  47. Learning Objective 5 Use different stock values in decision making.

  48. Stock Values Market value Redemption value Liquidation value Book value

  49. Book Value Book value per share of preferred stock = (Redemption value + Dividendsin arrears) ÷ Number of shares of preferred outstanding Book value per share of common stock = (Total stockholders’ equity – Preferred equity) ÷ Number of shares of common stock outstanding

  50. Stockholders’ Equity Preferred stock, 6%, $100 par, 5,000 shares authorized, 400 shares issued, redemption value $130 per share $ 40,000 Additional paid-in capital in excess of par – preferred 4,000 Common stock, $10 par, 20,000 shares authorized, 5,500 shares issued 55,000 Additional paid-in capital in excess of par – common 72,000 Retained earnings 85,000 Treasury stock – common, 500 shares at cost – 15,000 Total stockholders’ equity $241,000 Book Value Assume that a company’s balance sheet reports the following:

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