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Stockholder’s Equity

Contributed Capital by owners. Earned Capital by firm; undistributed. Stockholder’s Equity. Owner’s Equity is comprised of three elements: Capital Stock Additional Paid-In Capital Retained Earnings. Owner’s Equity is a residual claim to net assets

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Stockholder’s Equity

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  1. Contributed Capital by owners Earned Capital by firm; undistributed Stockholder’s Equity • Owner’s Equity is comprised of three elements: • Capital Stock • Additional Paid-In Capital • Retained Earnings Owner’s Equity is a residual claim to net assets Also called Net Assets = Assets - Liabilities

  2. Common Stock Common Stock may have a Par Value • Arbitrary minimum contribution for one share of stock • Not required (can be issued no-par) • Not related to the market or sales price of the stock • Can be as low as 1 cent • Underfunded par represents contingent liability (rare) Recording issue of stock depends on par value.

  3. Common Stock Common Stock issue with Par: • Record Common Stock account at Par x shares sold • Record excess as Paid-In-Capital Example: Sell 2000 shares $1 par common for $8 per share Cash $16,000 Common Stock $2,000 PIC, Common $14,000

  4. Common Stock Common Stock issue without Par: • Record Common Stock account at sales value Example: Sell 2000 shares no par common for $8 per share Cash $16,000 Common Stock $16,000

  5. Common Stock Common Stock issue without Par: • Sometimes no-par has a “stated” amount. Treat • this just like a par amount Example: Sell 2000 shares no par, $1 stated value, common for $8 per share Cash $16,000 Common Stock $2,000 PIC, Common $14,000

  6. Common Stock Stock issued for other non-cash assets • Record at either FMV of stock issued or items • received, whichever is easier to determine Example: Trade 2000 shares no par $1 common for A truck with FMV of $20,000 Truck $20,000 Common Stock $2,000 PIC, Common $18,000

  7. Preferred Stock Preferred stock provides preferential dividend treatment to its owners over common stock shareholders. Most preferred certificates carry a stated dividend rate as a percentage of par value. This stated rate is guaranteed to the preferred shareholders only if dividends are declared for the period. If dividends are not declared, then the preferred dividends will go into an “arrears” status. (Note: this is for cumulative preferred). This means that these must be paid-in-full before any dividends can be paid to common shareholders. While dividends in arrears look like a liability, they technically are not, since management does not have any obligation to declare dividends in the future. Once declared, however, they become a current liability.

  8. Treasury Stock Purchase Transaction • Record purchase at current cost, which is the market • value of the stock • Par value and original sales price of stock have no • bearing on the purchase transaction

  9. Treasury Stock Purchase Transaction Example: Feb 15th, Purchase 10,000 shares of $1 par value common. Originally issued for $100,000. Purchased from NYSE at current market price of $22 per share. Feb. 15 Treasury Stock $220,000 Cash $220,000

  10. Treasury Stock Purchase Transaction Feb. 15 Treasury Stock $220,000 Cash $220,000 Treasury Stock Feb. 15 220,000 (10,000 x $22) Note that the Treasury Stock account is not an asset account, but it can be treated in a similar manner to other inventory accounts.

  11. Treasury Stock Purchase Transaction Feb. 15 Treasury Stock $220,000 Cash $220,000 Treasury Stock Feb. 15 220,000 (10,000 x $22) Note that the Treasury Stock account is not an asset account, but it can be treated in a similar manner to other inventory accounts. Therefore, if other layers are added at different values, the account can be managed using LIFO, FIFO, Specific Identification, or Weighted-Average methods. Mar. 12 400,000 (20,000 x $20) Aug. 5 240,000 (10,000 x $24)

  12. Treasury Stock Feb. 15 220,000 (10,000 x $22) Treasury Stock Sales Transaction When we sell Treasury Stock, this is our original cost.

  13. Treasury Stock Feb. 15 220,000 (10,000 x $22) Treasury Stock Sales Transaction When we sell Treasury Stock, this is our original cost. We first credit this account the number of shares sold at original cost.

  14. Treasury Stock Feb. 15 220,000 (10,000 x $22) Treasury Stock Sales Transaction When we sell Treasury Stock, this is our original cost.We first credit this account the number of shares sold at original cost. If we sell at more than cost, the amount above cost goes into a Paid-in-Capital for Treasury Stock account.

  15. Treasury Stock Feb. 15 220,000 (10,000 x $22) Mar. 12 110,000 (5,000 x $22) 110,000 Treasury Stock Sales Transaction Example: Mar 12th, sell 5,000 shares of Treasury Stock for $25 per share. Mar. 12 Cash $125,000 Treasury Stock $110,000 PIC, Treasury Stock $15,000

  16. Treasury Stock Sales Transaction If we sell treasury stock for less than cost, we still credit the Treasury Stock account at the cost amount. The amount below cost will be debited to the PIC, Treasury Stock account. If this account is zero or gets depleted to zero, the remaining below cost amount will be debited directly to retained earnings.

  17. Treasury Stock Sales Transaction Example: Apr. 15th, sell 5,000 shares of Treasury Stock for $13 per share Apr. 15 Cash $65,000 Treasury Stock $110,000 First, record cash receipts (5,000 x $13) and reduce Treasury Stock account at original cost (5,000 x $22).

  18. Treasury Stock Treasury Stock Sales Transaction Sales Transaction Example: Apr. 15th, sell 5,000 shares of Treasury Stock for $13 per share Apr. 15Cash $65,000 PIC, Treas. Stock $15,000 Treasury Stock $110,000 Next, debit PIC, Treasury Stock for the amount below cost. In this case, this will deplete the account to zero by debiting the prior balance of $15,000.

  19. Treasury Stock Treasury Stock Sales Transaction Sales Transaction Example: Apr. 15th, sell 5,000 shares of Treasury Stock for $13 per share Apr. 15Cash $65,000 PIC, Treas. Stock $15,000 Retained Earnings $30,000 Treasury Stock $110,000 Finally, debit Retained Earnings directly for the remainder of the amount below cost.

  20. Treasury Stock Treasury Stock Retirement of Treasury Stock Sometimes firms buy back common stock into the treasury so that they can retire the stock completely. Do the first three easy steps to eliminate accounts: • Credit the treasury stock account at cost • Remove the stock from the common stock account at par • Remove the stock from the PIC, common account at the • original sales amount (if applicable) Then handle the remaining balance as follows: • Need more debits? • Debit PIC, Treasury until depleted • Debit Retained Earnings • Need more credits? • Credit PIC, Treasury Retirement

  21. Remove from TS at cost Remove from original stock accounts at original amounts Retirement of Treasury Stock—Example 1 Ganter Corp. issues 10,000 shares of $1 par for $6 per share Cash $60,000 Common Stock (10,000 @ $1) $10,000 PIC, Common (10,000 @ $5) $50,000 Ganter purchases 5,000 shares of Treasury Stock at $15 per share Treasury Stock (5,000 @ $15) $75,000 Cash $75,000 Ganter retires 2,000 shares of Treasury Stock Common Stock (2,000 @ $1) $2,000 PIC, Common (2,000 @ $5) $10,000 Retained Earnings $18,000 Treasury Stock (2,000 @ $15) $30,000

  22. Retirement of Treasury Stock—Example 2 Remove from TS at cost Debit PIC, TS until eliminated Remove from original stock accounts at original amounts Rest from Ret Earns Ganter Corp. issues 10,000 shares of $1 par for $6 per share Cash $60,000 Common Stock (10,000 @ $1) $10,000 PIC, Common (10,000 @ $5) $50,000 Ganter purchases 5,000 shares of Treasury Stock at $15 per share Treasury Stock (5,000 @ $15) $75,000 Cash $75,000 Ganter sells 1,000 shares of Treasury Stock at $20 per share Cash (1,000 @ $20) $20,000 Treasury Stock (1,000 @ $15) $15,000 PIC, TS (1,000 @ $5) $5,000 Ganter retires 2,000 shares of Treasury Stock Common Stock (2,000 @ $1) $2,000 PIC, Common (2,000 @ $5) $10,000 PIC, Treasury Stock $5,000 Retained Earnings $13,000 Treasury Stock (2,000 @ $15) $30,000

  23. Retirement of Treasury Stock—Example 3 Remove from TS at cost Remove from original stock accounts at original amounts The rest goes here Ganter Corp. issues 10,000 shares of $1 par for $6 per share Cash $60,000 Common Stock (10,000 @ $1) $10,000 PIC, Common (10,000 @ $5) $50,000 Ganter purchases 5,000 shares of Treasury Stock at $4 per share Treasury Stock (5,000 @ $4) $20,000 Cash $20,000 Ganter retires 2,000 shares of Treasury Stock Common Stock (2,000 @ $1) $2,000 PIC, Common (2,000 @ $5) $10,000 Treasury Stock (2,000 @ $4) $8,000 PIC, TS Retirement $4,000

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