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upon liquidation share proportionately in any new issues of stock of the same class (preemptive right)
The first two represent contributed capital, whereas retained earnings is earned capital.
Components of Equity
EQUITY
Less:T.Stock at COST Contributed capital
Paid-in capital
preferred
Additional Paid-in
common preferred
common
No par stock
preferred stock or common stock paid-in capital in excess of par
Stock Issuance
Par value has no economic significance. When par value stock is issued for cash:
Cash (proceeds) Common Stock (# of Sh. X Par value) Paid in Capital in Excess of Par (balance)
Many states permit no-par stock. When no-par stock is issued for cash:
Cash (proceeds) Common Stock (proceeds)
When stock is issued for services or property other than cash, the property or services are recorded at
either the fair market value of assets received or the fair value of the non-cash consideration received,
Treasury Stock
Outstanding stock, purchased by the corporation, is known as treasury stock. The reasons as to why corporations buy back their outstanding stock may include: to increase earnings per share and return on equity to provide tax efficient distributions of excess cash to shareholders to provide stock for employee stock compensation contracts to thwart takeover attempts to create or improve the market for the stock
1.
2. 3. 4. 5.
Cash 110,000 Common stock 100,000 Additional PIC: Common stock 10,000 Treasury stock Cash
Cash Treasury stock
11,200
11,200 1,120 1,120
3
10 shares reissued @ 112.
1,300
1,120 180
5 10 shares reissued at $98. Cash 980 Additional PIC: (T/stock) 140 Treasury stock
1,120
1120
retirement Retired stock becomes authorized/unissued stock Active retirement is effected by application to the State Constructive retirement is effected by Board Resolution
Preferred Stock
Preferred stock has certain preferences or features not possessed by common stock. These features are:
preference as to dividends preference as to assets in the event of liquidation may be convertibility into common stock at the option of the stockholders may be callable at the option of the issuer absence of voting rights
Legality of Dividends
Dividends come from present and past earnings in majority of states. Dividends come also from appreciation of assets in some states. Dividends restrictions are based on liquidity and solvency tests.
Types of Dividends
1. 2. 3. 4. Cash dividends Property dividends Stock dividends Liquidating dividends
Property Dividends
Are payable in assets of company Are non-reciprocal transfers between
corporation and shareholders Are equal to the fair market value of assets distributed at time of declaration [except in spin-offs and reorganizations] Corporation recognizes gain/loss on the distribution
issued as dividend (no cash flow is involved). Small stock dividends involve issues of less than 20%25% of stock. The accounting for small stock dividends is based on the fair market value of stock issued. The accounting for large stock dividends (more than 20%25%) is based on the par value of stock issued.
Stock Splits
Par value of a share decreases Total number of shares increases Total stockholders equity does not change The composition of equity does not change (same amounts of stock and RE) Stock splits do not require journal entries
Analysis
Commonly used ratios: 1. Rate of return on equity:
Net income Preferred dividends Average common equity
2.
Payout ratio:
Cash dividends Net income preferred dividends
3.
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