Date post: | 01-Apr-2015 |
Category: |
Documents |
Upload: | jacob-nasby |
View: | 216 times |
Download: | 0 times |
Stockholder’s Equity
Owner’s Equity is comprised of three elements:
• Capital Stock• Additional Paid-In Capital• Retained Earnings
Contributed Capitalby owners
Earned Capital by firm;undistributed
Owner’s Equity is a residual claim to net assetsAlso called Net Assets = Assets - Liabilities
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.
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 $16,000Common Stock $2,000PIC, Common $14,000
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 $16,000Common Stock $16,000
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 $16,000Common Stock $2,000PIC, Common $14,000
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 $2,000PIC, Common $18,000
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.
Preferred Stock
Treasury Stock
• Record purchase at current cost, which is the market value of the stock
Purchase Transaction
• Par value and original sales price of stock have no
bearing on the purchase transaction
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 $220,000Cash $220,000
Treasury Stock
Purchase Transaction
Feb. 15 Treasury Stock $220,000Cash $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.
Treasury Stock
Purchase Transaction
Feb. 15 Treasury Stock $220,000Cash $220,000
Treasury Stock
Note that the Treasury Stock account is not anasset 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)
Feb. 15 220,000(10,000 x $22)
Treasury Stock
Sales Transaction
Treasury Stock
Feb. 15 220,000(10,000 x $22) When we sell Treasury Stock,
this is our original cost.
Treasury Stock
Sales Transaction
Treasury Stock
Feb. 15 220,000(10,000 x $22) When we sell Treasury Stock,
this is our original cost. We first credit this account the number of shares sold at original cost.
Treasury Stock
Sales Transaction
Treasury Stock
Feb. 15 220,000(10,000 x $22) 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.
Treasury Stock
Sales Transaction
Example: Mar 12th, sell 5,000 shares of Treasury Stock for $25 per share.
Mar. 12 Cash $125,000Treasury Stock $110,000PIC, Treasury Stock $15,000
Treasury Stock
Feb. 15 220,000(10,000 x $22)
Mar. 12 110,000(5,000 x $22)
110,000
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.
Treasury Stock
Sales Transaction
Apr. 15 Cash $65,000Treasury Stock $110,000
First, record cash receipts (5,000 x $13) and reduce Treasury Stock account at original cost (5,000 x $22).
Example: Apr. 15th, sell 5,000 shares of Treasury Stock for $13 per share
Treasury Stock
Sales Transaction
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.
Treasury Stock
Sales Transaction
Apr. 15 Cash $65,000 PIC, Treas. Stock $15,000
Treasury Stock $110,000
Example: Apr. 15th, sell 5,000 shares of Treasury Stock for $13 per share
Treasury Stock
Sales Transaction
Finally, debit Retained Earnings directly for the remainder of the amount below cost.
Treasury Stock
Sales Transaction
Apr. 15 Cash $65,000 PIC, Treas. Stock $15,000 Retained Earnings $30,000
Treasury Stock $110,000
Example: Apr. 15th, sell 5,000 shares of Treasury Stock for $13 per share
Treasury Stock
Retirement of Treasury Stock
Treasury Stock
Sometimes firms buy back common stock into the treasury so that they can retire the stock completely.
• 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)
Do the first three easy steps to eliminate accounts:
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
Retirement of Treasury Stock—Example 1
Ganter Corp. issues 10,000 shares of $1 par for $6 per share
Cash $60,000Common Stock (10,000 @ $1) $10,000PIC, 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
Treasury Stock (2,000 @ $15) $30,000
Common Stock (2,000 @ $1) $2,000PIC, Common (2,000 @ $5) $10,000
Remove from TS at cost
Remove from original stock accounts at original amounts
Retained Earnings $18,000
Retirement of Treasury Stock—Example 2Ganter Corp. issues 10,000 shares of $1 par for $6 per share
Cash $60,000Common Stock (10,000 @ $1) $10,000PIC, 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
Treasury Stock (2,000 @ $15) $30,000
Common Stock (2,000 @ $1) $2,000PIC, Common (2,000 @ $5) $10,000
Retained Earnings $13,000
Cash (1,000 @ $20) $20,000Treasury Stock (1,000 @ $15) $15,000PIC, TS (1,000 @ $5) $5,000
Ganter retires 2,000 shares of Treasury Stock
PIC, Treasury Stock $5,000
Remove from TS at cost
Remove from original stock accounts at original amounts
Debit PIC, TS untileliminated
Rest from Ret Earns
Retirement of Treasury Stock—Example 3Ganter Corp. issues 10,000 shares of $1 par for $6 per share
Cash $60,000Common Stock (10,000 @ $1) $10,000PIC, 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
Treasury Stock (2,000 @ $4) $8,000
Common Stock (2,000 @ $1) $2,000PIC, Common (2,000 @ $5) $10,000
Ganter retires 2,000 shares of Treasury StockRemove from TS at cost
Remove from original stock accounts at original amounts PIC, TS Retirement $4,000
The rest goes here