Contributed Capital 1 Why are we studying Stockholders Equity Owners Investments Residual Equity Required Reconciliation Statement Expanded to included Non-Equity Transactions Increase/Decrease in security values Foreign currency gains and losses
2 Equity_Book v Market Value BV determined by accounting rules Market value determined by investors perception of growth, dividend or other potential market opportunities Competitors products Net income Cash flows Regulatory climate
3 Characteristic of Corporate Form Forms of Business Operations Proprietorship Partnership Corporations 4 Form Ease of
raising capital Double Life Taxation Liability Proprietorship Not easy No limited
unlimited Partnership Not easy No limited unlimited Corporation Yes Yes unlimited limited 5
Types of Corporations Private Open Closed Public Domestic Foreign 6
Charted in one State Domestic v Foreign Corporation NYSE over 2/3 Delaware Corporations Board fiduciary responsibility to shareholders Officers are Agents of Corporation 7 8
Ownership represented by Shares Right to share proportionally in Profit and loss Management election of directors Assets upon liquidation New issue proportionally(preemptive right) 9
Types of Stock, Characteristics Common Voting (Google, Microsoft, Coke) Non-voting Preferred Dividend preferences Liquidation preferences 10
Components of Shareholders Equity Capital Stock Additional Paid in Capital Other changes in Assets Accounts Comprehensive Income 11 Procedure for Issuing Stock
Issue for Cash At par, above par, below par No par, stated value Issue Common stock in combination with preferred stock or bond. Issue stock for non cash transaction Services, equipment 12
Basic Terminology Authorized Capital Stock Issued capital Stock Outstanding capital Stock Treasury Stock Subscribed capital Stock 13 Terminology
Legal capital Par value Stock No Par Stock Stated value 14 Sale At Par Cash $18 x 500 9000
Common Stock 500 x $10 5000 Additional PIC 500 x $8 4000 15 Sale at Stated Value Cash $18 x 500 9000
Common Stock $10 stated value 5000 Additional PIC 500 x $8 4000 16 No Stated value Cash $18 x 500 Common Stock no par 500s 9000
9000 17 Package-Unit Lump Sale Issue stock Lump Sum Sale Proportional Market value of each security is known Incremental method >
Method > Market value of one or more securities is unknown 18 Allocation of Package proceeds Allocation to Common:
(FMV common/(FMV common+FMV Other))*Proceeds (FMV Other /(FMV common+FMV Other))*Proceeds Other = Preferred Stock or Bond Proceeds = amount realized from sales of all packages E16-2 Common and Preferred E16-3 Common and a Bond 19 Non-Monetary Exchange E16-4
Stock issued for non-cash transaction Use fair value more readily determinable Is stock widely traded Is the appraisal independent Acquire a patent> 20 Cost of Issuing Stock
Debit additional paid in capital Reduction of proceeds Note Receivable arising from sale of stock should be classified as contraequity account You can not have a receivable from yourself. Enron inflated assets and equity to create watered down stock 21 Stock Split E16-6
Proportional Multiply split time # of shares outstanding Divide split amount by par value Memo entry Nonproportional Journal entry is required 22
Nonproportional stock Split Debit Common stock for pre-split shares times pre-split par value Credit common stock for pre-split shares, times split, times new par value assigned Debit or credit additional PIC for balance 23
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