Stockholders Equity Assets Liabilities Stockholders Equity Assets Liabilities

Stockholders’ Equity Assets Liabilities Stockholders’ Equity = Assets – Liabilities Represents the stockholders’ share of the total assets.

Stockholders’ Equity Liabilities There Assets are two sources Stockholders’ of stockholders’Stockholders’ Equity equity.

Stockholders’ Equity Assets Liabilities Stockholders’ Equity 1 Stockholders’ Equity: Paid-in capital: Common stock $xxxxx Retained earnings xxxx Total $xxxxx Stockholder investments

Stockholders’ Equity Assets Liabilities Stockholders’ Equity: Paid-in capital: Common stock $xxxxx Retained earnings xxxx Total $xxxxx 2 Reinvested earnings

Sources of Paid-In Capital Authorized Issued Outstanding Number of Shares

Sources of Paid-In Capital Major Rights that Accompany Ownership of a Share of Stock 1. The right to vote in matters concerning the corporation. 2. The right to share in distribution of earnings. 3. The right to share in assets on liquidation.

Classes of Stockholders The two primary classes of paid-in capital are common stock and preferred stock. The primary attractiveness of preferred stocks is that they are preferred over common as to dividends. Money available for dividends Preferred Stockholders Common Stockholders

Classes of Stockholders Common Stock—the basic ownership of stock with rights to vote in election of directors, share in distribution of earnings, and purchase additional shares. Preferred Stock—A class of stock with preferential rights over common stock in payment of dividends and company liquidation.

Nonparticipating Preferred Stock A nonparticipating preferred stock is limited to a certain amount. Assume 1, 000 shares of $4 nonparticipating preferred stock and 4, 000 shares of common stock and the following: 2005 Net income Amount retained 40, 000 Amount distributed 2006 2007 $20, 000 $55, 000 $62, 000 10, 000 20, 000 $10, 000 $35, 000 $22, 000

Nonparticipating Preferred Stock Amount distributed $10, 000 $35, 000 $22, 000 Preferred dividend (1, 000 shares) 4, 000 Common dividend (4, 000 shares) $6, 000 $31, 000 Dividends per share: $18, 000$ 4. 00 Preferred $ 4. 00 Common $ 1. 50 $ 7. 75 $ 4. 50

Other Sources of Paid-in Capital On April 20 the city of Moraine donated land to Merrick Corporation as an incentive to relocate its headquarters to Moraine. The land was valued at $500, 000. Apr. 20 Land 500 00 Donated Capital Recorded land donated by the city of Moraine. 500 00

Treasury Stock Transactions Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This stock is referred to as treasury stock.

Treasury Stock Transactions Treasury stock is stock that: 1. has been issued as fully paid. 2. has been reacquired by the corporation. 3. has not been canceled or reissued. A commonly used method of accounting for treasury stock is the cost method.

Treasury Stock Transactions Cost Method On January 5, a firm purchased 1, 000 shares of treasury stock (common stock, $25 par) at $45 per share. Jan. 5 Treasury Stock Cash Purchased 1, 000 shares of treasury stock at $45. 45 000 00

Treasury Stock Transactions Cost Method On June 2, sold 200 shares of treasury stock at $60 per share. June 2 Cash 12 000 00 Treasury Stock 9 000 00 Paid-in Capital from sale of Treasury Stock Sold 200 shares of treasury stock at $60. 3 000 00

Treasury Stock Transactions Cost Method On September 3, sold 200 shares of treasury stock at $40 per share. Sep. 3 Cash 8 000 00 Paid-in Capital from Sale of Treasury Stock Sold 200 shares of treasury stock at $60. 1 000 00 9 000 00

Stock Splits A corporation sometimes reduces the par or stated value of their common stock and issues a proportionate number of additional shares. This is called a stock split.

Stock Splits BEFORE STOCK SPLIT AFTER 5 -1 STOCK SPLIT 4 shares, $100 par 20 shares, $20 par $400 total par value

Stock Splits A stock split does not change the balance of any corporation accounts. However, it can make the stock more attractive to investors by reducing the price of a share,

There are two ways to report stockholders’ equity in the balance sheet. In Slide 58, each class of stock is listed first, followed by its related paid-in capital accounts.

61 Stockholders’ Equity Paid-in capital: Preferred 10% stock, $50 par, cumulative (2, 000 shares authorized and issued) Excess of issue price over par Common stock, $20 par (50, 000 shares authorized, 45, 000 issued) Excess of issue price over par From sale of treasury stock 2, 000 Total paid-in capital $1, 202, 000 Retained earnings 350, 000 Total $1, 552, 000 $100, 000 10, 000 $900, 000 190, 000 $ 110, 000 1, 090, 000

Slide 60 shows the second method. Note that the stock accounts are listed first. The other paid-in capital accounts are listed as a single item described as Additional paidin capital.

Stockholders’ Equity Contributed capital: Preferred 10% stock, cumulative $50 par (2, 000 shares authorized and issued) $100, 000 Common stock, $20 par (50, 000 shares authorized, 45, 000 issued) Additional paid-in capital 202, 000 Total contributed capital $1, 202, 000 Retained earnings 350, 000 Total $1, 552, 000 900, 000