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© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-1
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-2
Issued shares are authorized shares of stock that have been
sold.
Unissued shares are authorized shares of stock that
never have been sold.
Usually shares are
sold through an
underwriter.
Usually shares are
sold through an
underwriter.
AuthorizedShares
AuthorizedShares
Authorization and Issuanceof Capital Stock
Authorization and Issuanceof Capital Stock
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-3
UnissuedUnissuedSharesShares
TreasuryShares
OutstandingShares
Treasury shares are issued shares that
have been reacquired by the corporation.
IssuedShares
IssuedShares
Outstanding shares are issued shares that are
owned by stockholders.
AuthorizedShares
AuthorizedShares
Authorization and Issuanceof Capital Stock
Authorization and Issuanceof Capital Stock
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-4
Par value is an arbitrary amount
assigned to each share of
stock when it is authorized.
Market price is the amount that each share of stock will sell
for in the market.
Market price is the amount that each share of stock will sell
for in the market.
Stockholders’ EquityStockholders’ Equity
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-5
Common stock can be issued in three forms:Common stock can be issued in three forms:
No-Par Common
Stock
No-Par Common
Stock
Par Value Common
Stock
Par Value Common
Stock
Stated Value Common
Stock
Stated Value Common
Stock
All proceeds credited to
Common Stock
All proceeds credited to
Common Stock
Treated like par value
common stock
Treated like par value
common stock
Stockholders’ EquityStockholders’ Equity
Let’s examine this form of
stock.
Let’s examine this form of
stock.
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-6
Matrix, Inc. issues 10,000 shares of its $2 par value stock for $25 per share on
September 1, 2007.
Matrix, Inc. issues 10,000 shares of its $2 par value stock for $25 per share on
September 1, 2007.
Record:
The cash received.
The number of shares issued × the par value per share in the Common Stock account.
The remainder is assigned to Contributed Capital in Excess of Par.
Record:
The cash received.
The number of shares issued × the par value per share in the Common Stock account.
The remainder is assigned to Contributed Capital in Excess of Par.
Issuance of Par Value StockIssuance of Par Value Stock
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-7
Issuance of Par Value StockIssuance of Par Value Stock
Matrix, Inc. issues 10,000 shares of its $2 par value stock for $25 per share on
September 1, 2007.
Matrix, Inc. issues 10,000 shares of its $2 par value stock for $25 per share on
September 1, 2007.
10,000 × $2 = $20,00010,000 × $2 = $20,000
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-8
Issuance of Par Value StockIssuance of Par Value Stock
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-9
A separate class of stock, typically having priority over common shares in . . .
Dividend distributions (rate is usually stated).
Distribution of assets in case of liquidation.
A separate class of stock, typically having priority over common shares in . . .
Dividend distributions (rate is usually stated).
Distribution of assets in case of liquidation.
Cumulative dividend rights.
Cumulative dividend rights.
Normally has no voting
rights.
Normally has no voting
rights.
Usually callable by
the company.
Usually callable by
the company.
Other Features Include:
Preferred vs. Common StockPreferred Stock
Preferred vs. Common StockPreferred Stock
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-10
Vs. NoncumulativeCumulative
Dividends in arrears must be
paid before dividends may be paid on common
stock.
Dividends in arrears must be
paid before dividends may be paid on common
stock.
Undeclared dividends from
current and prior years do not have to be paid in future
years.
Undeclared dividends from
current and prior years do not have to be paid in future
years.
Cumulative Preferred StockCumulative Preferred Stock
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-11
Example: Consider the following partial Statement of Stockholders’ Equity.
During 2007, the directors declare cash dividends of $5,000 (note $9,000 s/b paid to P.S.). In 2008, the directors declare cash dividends of $42,000.
Stock Preferred as to DividendsStock Preferred as to Dividends
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-12
Stock Preferred as to DividendsStock Preferred as to Dividends
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-13
Accounting by the issuer.
Accounting by the issuer.
Accounting by the investor.
Accounting by the investor.
Common stock is carried at original issue
price.
Common stock is carried at original issue
price.
Investments in marketable securities are carried at market
value.
Investments in marketable securities are carried at market
value.
Market ValueMarket Value
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-14
Factors affecting market price of preferred stock:Factors affecting market price of preferred stock:
• Dividend rateDividend rate• RiskRisk• Level of interest ratesLevel of interest rates
Factors affecting market price of preferred stock:Factors affecting market price of preferred stock:
• Dividend rateDividend rate• RiskRisk• Level of interest ratesLevel of interest rates
The return based on the market value is called the
“dividend yield.”
The return based on the market value is called the
“dividend yield.”
Market Price of Preferred StockMarket Price of Preferred Stock
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-15
Factors affecting market price of common stock:
Investors’ expectations of future profitability.
Risk that this level of profitability will not be achieved.
Factors affecting market price of common stock:
Investors’ expectations of future profitability.
Risk that this level of profitability will not be achieved.
Changes in market value have no impact on the
books of the issuer.
Changes in market value have no impact on the
books of the issuer.
Market Price of Common StockMarket Price of Common Stock
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-16
Book Value per Shareof Common Stock
Book Value per Shareof Common Stock
Total Stockholders’ EquityNumber of Common Shares Outstanding
Preferred stock at par value only and preferred dividends in arrears are deducted from total stockholders’ equity.
Book Value Market Value=
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-17
Stock SplitsStock Splits
Companies use stock splits to reduce market price.
Outstanding shares increase, but par value is decreased proportionately.
No journal entry
Companies use stock splits to reduce market price.
Outstanding shares increase, but par value is decreased proportionately.
No journal entry
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-18
Assume a corporation has 5,000 shares of $1 par value common stock outstanding
before a 2–for–1 stock split.
Increase
Decrease
No Change
Stock SplitStock Split
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-19
No voting No voting or or
dividend dividend rightsrights
Contra equity
account
When stock is reacquired, the corporation records the treasury stock at cost.
When stock is reacquired, the corporation records the treasury stock at cost.
Treasury shares are
issued shares that have been reacquired
by the corporation.
Treasury shares are
issued shares that have been reacquired
by the corporation.
Treasury StockTreasury Stock
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-20
On May 1, 2007, East, Inc. reacquires 3,000 shares of its common stock at $55 per share.
Prepare the journal entry for May 1.
Treasury Stock - ExampleTreasury Stock - Example
© The McGraw-Hill Companies, Inc., 2008McGraw-Hill/Irwin
11-21
On December 3, 2007, East Corp. reissued 1,000 shares of the stock at $75 per share. (What if reissued at
$50 per share?)
Prepare the journal entry for December 3.
Treasury Stock - ExampleTreasury Stock - Example
1,000 shares × $55 cost = $55,0001,000 shares × $55 cost = $55,000
1,000 shares × $75 = $75,0001,000 shares × $75 = $75,000
