Stice | Stice | Skousen Intermediate Accounting,17E Equity Financing PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine 13-1 University © 2010 Cengage Learning 13-2 Nature and Classifications of Paid-In Capital • A corporation is a legal artificial entity separate from its owners • Individuals contribute capital for which the corporation issues certificates making them stockholders • The board of directors is elected by the stockholders, and it is in charge of overseeing the long-run plan for the organization 13-3 Common and Preferred Stock • When a corporation is formed, a single class of stock, known as common stock, usually is issued • Corporations may later find that there are advantages to issuing one or more additional classes of stock with varying rights and priorities Stock with certain preferences (rights) over common stock is called preferred stock 13-4 Common Stock Unless restricted by terms of the articles of incorporation, certain basic rights are held by each common stockholder To vote in the election of directors and in the determination of certain corporate policies To maintain one’s proportional interest in the corporation through purchase of additional common stock if and when it is issued This right is known as the preemptive right 13-5 Par or Stated Value • Historically, par value was equal to the market value of the shares at issuance • Today, most stocks have a nominal par value or no par value • No-par stock sometimes has a stated value that for financial reporting purposes acts like a par value 13-6 Preferred Stock Rights of ownership given up by preferred stockholders: Voting—in most cases, preferred stockholders are not allowed to vote for the board of directors Sharing in success—cash dividends received by preferred stockholders are usually fixed in amount If the firm does extremely well, their dividend amount is not adjusted 13-7 Preferred Stock Rights enjoyed by preferred stockholders: Cash dividend preference Preferred stockholders are entitled to receive their full cash dividend before any cash dividends are paid to common stockholders Liquidation preference In the event of bankruptcy, preferred stockholders are entitled to have their investments repaid before common stockholders 13-8 Cumulative and Noncumulative Preferred Stock When a corporation fails to declare dividends on cumulative preferred stock, such dividends accumulate and require payment in the future before any dividends may be paid to common stockholders 13-9 Cumulative and Noncumulative Preferred Stock Good Time Corporation has outstanding 100,000 shares of 9% cumulative preferred stock, $10 par Dividends were last paid in 2008 Total dividends of $300,000 are declared in 2011 13-10 Cash Dividends ABC Corporation declares a $100,000 dividend; the following journal entries should be made: Declaration of Dividend: Dividends (or Retained Earnings) Dividends Payable Payment of Dividend: Dividends Payable Cash 100,000 100,000 100,000 100,000 13-66 Property Dividends • A property dividend is a distribution to stockholders that is payable in some asset other than cash • Bigler Corporation owns 100,000 shares in Tri-State Oil Co, carrying value $2,700,000, current market value $3,000,000, or $30 per share There are 1,000,000 shares of Bigler stock outstanding A dividend of 1/10 of a share of Tri-State Oil Co is declared for each share of Bigler stock outstanding 13-67 Property Dividends Declaration of Dividend: Dividends (or Retained Earnings) Property Dividends Payable Gain on Distribution of Property Dividends 3,000,000 2,700,000 300,000 Payment of Dividend: Property Dividends Payable Investment in Tri-State Oil Co Stock 2,700,000 2,700,000 13-68 Stock Dividends • Small: – Less than 20–25% of the outstanding shares – Debit Retained Earnings for the market value of the shares • Large: – Greater than 20–25% of the shares outstanding – Debit Retained Earnings for the par value of the shares 13-69 Small Dividend Example The stockholders’ equity section for the Fuji Company on July is as follows: Common Stock, $1 par, 100,000 shares outstanding $ 100,000 Paid-In Capital in Excess of Par The1,100,000 company declares a 10% stock dividend Before the Retained Earnings stock dividend, the stock is selling for $22 per share After the750,000 stock dividend, each original share sells for $20 (continues) 13-70 Small Dividend Example Declaration of Dividend: Retained Earnings Stock Dividends Distributable Paid-In Capital in Excess of Par 200,000 10,000 190,000 Payment of Dividend: Stock Dividends Distributable Common Stock, $1 par 10,000 10,000 13-71 Large Dividend Example The stockholders’ equity section for the Fuji Company on July is as follows: Common Stock, $1 par, 100,000 shares outstanding $ 100,000 Paid-In Capital in Excess of Par The1,100,000 company declares a 50% stock dividend Before the Retained Earnings stock dividend, the stock is selling for $22 per share 750,000 (continues) 13-72 Large Dividend Example Declaration of Dividend: Retained Earnings Stock Dividends Distributable OR Paid-In Capital in Excess of Par Stock Dividends Distributable 50,000 50,000 50,000 50,000 Payment of Dividend: Stock Dividends Distributable Common Stock, $1 par 50,000 50,000 13-73 Stock Dividends versus Stock Splits • A corporation may effect a stock split by reducing the par or stated value of each share of capital stock and proportionately increasing the number of shares outstanding • A stock dividend results in an increase in the number of shares outstanding The par or stated value remains unchanged • A stock split divides the existing Capital Stock balance into more parts, with a reduction in par or stated value of each share 13-74 Liquidating Dividends • A liquidating dividend is a distribution representing a return to stockholders of a portion of contribution capital • Example: Stubbs Corporation declared and paid a cash dividend ($10 cash dividend) totaling $100,000 and a partial liquidating dividend of $50,000 13-75 Foreign Currency Translation Adjustment • The foreign currency translation adjustment arises from the change in the equity of foreign subsidiaries (as measured in terms of U.S dollars) that occurs as a result of changes in foreign currency exchange rates • These changes are recorded as direct adjustments to equity 13-76 Unrealized Gains and Losses on Available-for-Sale Securities • Available-for-sale securities are those that were not purchased with immediate intention to resell, but that a company also doesn’t necessarily plan to hold forever • Reported on the balance sheet at their current market value 13-77 Unrealized Gains and Losses on Derivatives • A derivative is a financial instrument, such as an option or a future, that derives its value from the movement of a price, an exchange rate, or an interest rate associated with some other item • Derivatives are used to manage risk associated with sales or purchases that will not occur until a future period 13-78 International Accounting: Equity Reserves • In foreign countries, the payment of cash dividends is linked to the amount of distributable equity • Equity is divided among various equity reserve accounts, each with legal restrictions dictating whether it can be distributed to stockholders 13-79 International Accounting • Capital stock may be: Authorized but unissued Subscribed for and held for issuance pending receipt of cash for the full amount of the subscription price Outstanding in the hands of stockholders Reacquired and held by the corporation for subsequent reissuance Canceled by appropriate corporate action 13-80 ... (continues) 13- 11 Cumulative and Noncumulative Preferred Stock • Dividends may be declared on common stock as long as the noncumulative preferred stock receives its preferred rate 13- 12 Participating... the common stockholders A participative provision makes preferred stock more like common stock 13- 13 Convertible Preferred Stock • Preferred stock is convertible when it can be exchanged by its... reacquisition, reissuance, or retirement • May decrease Retained Earnings, but cannot increase it 13- 27 Cost Method of Accounting for Treasury Stock 2010—Newly organized corporation issued 10,000 shares of