Financing II: Stockholders’
Equity
Chapter 18 Spiceland
See 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)
Additional paid in capital
$100,000
$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
25,000
2. 700 shares are sold @ 15/share (stock option exercise)
Dr. Cash
Dr. Additional paid in capital
Cr. Treasury stock
10,500
7,000
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
$
Cr. dividends payable
6/30 Dr. dividends payable $
Cr. Cash
6/30 Dr. retained earnings $
Cr. Dividends
3,000
$ 3,000
3,000
$ 3,000
3,000
$ 3,000
B.S. Before Small Stock Dividend:
Common stock $1 par
($500,000
shares authorized, 100,000 issued, 95,000
outstanding)
Additional paid in capital
Treasury stock 5,000 shares
Retained Earnings
Total Stockholders’ Equity
$100,000
$900,000
(100,000)
1,200,000
2,100,000
Small Stock Dividend
Journal Entry:




6/15 Dr. retained earnings $ 200,000
Cr. Common stock
Cr. Paid in capital
10,000
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,
$ 110,000
Additional paid in capital
1,090,000
Treasury stock 5,500 shares (100,000)
Retained Earnings
1,000,000
Total Stockholders’ Equity
2,100,000
104,500 outstanding)
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,
$ 130,000
Additional paid in capital
900,000
Treasury stock 6,500 shares (100,000)
Retained Earnings
1,170,000
Total Stockholders’ Equity
2,100,000
123,500 outstanding)
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,
$ 100,000
Additional paid in capital
900,000
Treasury stock 10,000 shares (100,000)
Retained Earnings
1,200,000
Total Stockholders’ Equity
2,100,000
190,000 outstanding)
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
 Derivatives
Note: 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
Assets
250
Liabilities
220
Common Stock 190
R/E
-160
Total Equity 250
After
260
220
40
0
260