Financing II: Stockholders’ Equity
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Transcript of Financing II: Stockholders’ Equity
Financing II: Stockholders’ Equity
Chapter 18 SpicelandSee example excel files
examples Earnings per share, stock
options, etc.
Topics: Types of stock
Common Preferred treasury
Issuance of stock Retained earnings Dividends Stock options
Common Stock: Residual Owners’ equity Voting right (most important:
election of directors) May or may not receive dividends May or may not have par value or
stated value – depends on state corporate and tax law
Common Stock Example: (Balance sheet presentation)
Common stock $1 par ($500,000
shares authorized, 100,000 issued, 95,000
outstanding) $100,000Additional paid in capital
$900,000
Preferred Stock Characteristics High par value No voting rights Fixed dividends - Dividends
cumulative Liquidation preference over common
stock May be redeemable May be convertible
Preferred Stock Example:
Balance sheet presentation:Preferred stock, $100 par, 8%
cumulative, convertible into 25 shares of common stock Issued and outstanding 2,000 shares
$200,000
Treasury Stock:
Stock repurchased by the company with the intent to reissue it in the future
Reasons: Stock options Plan to acquire another company Buy out dissident stockholder Drive up stock price Prevent take over
Treasury Stock:
Contra stockholders’ equity account (debit balance)
Usually carried at cost (may be at par value)
Treasury Stock Example:
1. Company repurchases 1,000 shares @ $25/share
Dr. treasury stock 25,000
Cr. Cash 25,0002. 700 shares are sold @ 15/share (stock option
exercise)
Dr. Cash 10,500
Dr. Additional paid in capital 7,000
Cr. Treasury stock 17,500
Treasury Stock Example:
Balance Sheet presentation:
Common stock $1 par, 100,000 shares issued,
95,000 shares outstanding$100,000
Additional paid in capital$900,000
Less treasury stock, 5,000 shares at an
average cost/share of $20 (100,000)
Retained Earnings Ultimate residual owners’ equity
account (ultimate plug figure) Sum of the earnings since the
company started Minus the sum of dividends paid Plus/minus other adjustments
Dividends Must be voted by the board of
directors Dividends on preferred stock first,
only then can common stock receive dividends!
Cash dividends Dividends in kind Stock dividends
Dividends Result in reduction of retained
earnings Require expenditure of cash or
other assets unless: Stock dividends – also referred to
as “capitalization of earnings”
Cash Dividends Journal Entry: 6/15 Dr. dividends$ 3,000 Cr. dividends payable $ 3,000 6/30 Dr. dividends payable $ 3,000 Cr. Cash $ 3,000 6/30 Dr. retained earnings $ 3,000 Cr. Dividends $ 3,000
B.S. Before Small Stock Dividend:
Common stock $1 par ($500,000
shares authorized, 100,000 issued, 95,000
outstanding) $100,000Additional paid in capital $900,000Treasury stock 5,000 shares
(100,000)Retained Earnings 1,200,000Total Stockholders’ Equity 2,100,000
Small Stock Dividend Journal Entry:
6/15 Dr. retained earnings $ 200,000 Cr. Common stock 10,000 Cr. Paid in capital 190,000
(issued a 10% stock dividend = 10,000 shares, market price/share: $20)
B. S. After Small Stock Dividend:
Common stock $1 par ($500,000
shares authorized, 110,000 issued,
104,500 outstanding) $ 110,000Additional paid in capital
1,090,000Treasury stock 5,500 shares(100,000)Retained Earnings 1,000,000Total Stockholders’ Equity 2,100,000
Large Stock Dividend Journal Entry: 6/15 Dr. retained earnings $
30,000 Cr. Common stock
30,000
(issued a 30% stock dividend = 30,000 shares, market price/share: $20)
B. S. After Large Stock Dividend:
Common stock $1 par ($500,000
shares authorized, 130,000 issued,
123,500 outstanding) $ 130,000 Additional paid in capital 900,000Treasury stock 6,500 shares (100,000)Retained Earnings 1,170,000Total Stockholders’ Equity 2,100,000
Stock Split Very large stock dividend No journal entry, memo entry only
to note new number of shares and new par value
2 for 1 stock split, new # of shares issued = 200,000, new par value: $ .50/share
Balance Sheet After Stock Split:
Common stock $ .50 par (1,000,000
shares authorized, 200,000 issued,
190,000 outstanding) $ 100,000 Additional paid in capital 900,000Treasury stock 10,000 shares (100,000)Retained Earnings 1,200,000Total Stockholders’ Equity 2,100,000
Reverse Stock Split Market price of stock falls “too
low” Companies sometimes try to
improve the appearance or prevent delisting from a stock exchange by issuing a reverse split: I.e., for every 5 old shares stockholders receive 1 new share.
Comprehensive Income Items whose market value (MV) has
changed and that may affect equity but have not yet been realized
Realized: Cash received (promise recognized) or paid (liability recognized) i.e., earned.
Change in MV: E.g., MV of stock investments has in(de)creased
Included in Comprehensive Income: Unrealized holding gains (losses)
from Stock investments Changes (amendments) of post
retirement benefit plans Foreign currency translation DerivativesNote: All items reported net of
related tax effect.
Reporting of Comprehensive Income Two possibilities: Right after net income (Income
Statement) OR: Separate section in the footnotes.
Again it starts with Net Income Ends with Comprehensive income
for the period
Accumulated Other Comprehensive Income (AOCI) Shown on the balance sheet
(component of owners’ equity) Consists of as the heading says, all
OCI (gains (losses) since company started to recognize it
Quasi – Reorganization I A reorganization of the balance sheet
generally in conjunction with a court adjudicated bankruptcy (Chapter 11)
Objective: Fresh start for the company Revaluation (up or down) of assets
(maybe liabilities) to market value Elimination of retained earnings deficit
Quasi – Reorganization II Revalued Assets and liabilities Zero Retained Earnings Contributed Capital adjusted to
balance This may require elimination of APIC
and Reduction of common stock par value
Quasi – Reorganization III
Example:Before After
Assets 250 260Liabilities 220 220Common Stock 190 40R/E -160 0Total Equity 250 260