1
Chapter 15
Contributed
Capital
An electronic presentation
by Douglas Cloud
Pepperdine University
2
Objectives
1. Explain the corporate form of
organization.
2. Know the rights and terms that apply to
capital stock.
3. Account for the issuance of capital stock.
4. Describe a compensatory stock option
plan.
5. Recognize compensation expense for a
compensatory stock option plan.
6. Account for a fixed compensatory stock
option plan. Continued
3
Objectives
7. Account for a performance-based
compensatory stock option plan.
8. Understand how to use the intrinsic value
method to account for a compensatory
stock option plan.
9. Know the components of contributed
capital.
10. Understand the accounting for treasury
stock.
4
Types of Corporations
1) Private Corporations
(stock and nonstock;
open and closed)
2) Public corporations
universities,
Available
for corporations
hospitals,
3) Domestic
purchase by churches
4)theForeign
public corporations
5
Changes in Equity Affecting
Assets or Liabilities
Comprehensive
Income
Net
Income
Other
Comprehensive
Income
Revenues
and
Expenses
Gains and Losses
Included in Net
Income
Continued
on next
slide
Transfers Between
Entity and Owners
Investments
by Owners
Distributions
to Owners
6
Continued
from
previous
slide
Changes in Equity Not
Affecting Assets or
Liabilities
Stock
Dividends
and Splits
Conversions of
Preferred Stock
to Common
Stock
7
Stockholders’ Rights
• The right to share in the profits when a
dividend is declared.
• The right to elect directors and to establish
corporate policies.
• The right (called a preemptive right) to
maintain a proportionate interest.
• The right to share in the distribution of the
assets of the corporation if it is liquidated.
8
Basic Terminology
Subscribed capital
Issued capital
stock—The
Authorized
capital
stock—The
number of shares
Treasury stock—
stock—The
Outstanding capitalnumber of shares
of capital
stock
The number of
number
of shares
stock—The number ofof capital stock
a corporation
shares of capital
ofthat
capital
stock
shares of capital stock
that a corporation
issue upon the
stock that a
thatwill
a corporation
that a corporation hashas issued to its
of an
corporation has
maycompletion
issue as stated
issued to its stockholders as of
issued to its
in itsinstallment
charter.
stockholders and that a specific date.
purchase contract
stockholders and
are still being held by
with an investor.
has reacquired but
them on a specific date.
not retired.
9
Basic Terminology
Authorized
Capital Stock
Issued Capital Stock
* Outstanding capital
stock
* Treasury stock
Unissued Capital Stock
* Subscribed capital
stock
10
Legal Capital
Legal capital is the amount
of stockholders’ equity that
the corporation cannot
distribute to stockholders.
11
Issuance of Capital Stock
When only one class of
stock is issued, it is referred
to as common stock.
12
Issuance of Capital Stock
A corporation issues 500 shares of its $10
par common stock for $18.
Cash
Common Stock, $10 par
Additional Paid-in Capital
on Common Stock
9,000
5,000
4,000
13
Issuance of Capital Stock
A corporation issues 500 shares of its nopar stock common stock with a stated
value of $10 for $18 per share.
Cash
9,000
Common Stock, $10 stated value
Additional Paid-in Capital
on Common Stock
5,000
4,000
14
Issuance of Capital Stock
A corporation issues 500 shares
of its no-par, no-stated value
common stock for $18 per share.
Cash
Common Stock, no-par (500
shares)
9,000
9,000
15
Stock Subscriptions
A corporation enters into a subscription contract with
several subscribers that calls for the purchase of
1,000 shares of $6 par common stock at a price of
$13 per share. A $3 per share down payment is
required, with the remaining $10 due in one month.
Cash
3,000 $6 x 1,000
Subscription Receivable: Common
Stock
10,000
Common Stock Subscribed
6,000
Additional Paid-in Capital on
Common Stock
7,000
16
Stock Subscriptions
The $10 per share final payment was received from
subscribers to 950 of the 1,000 shares.
Cash
Subscription Receivable:
Common Stock
9,500
Common Stock Subscribed
Common Stock, $6 par
5,700
9,500
5,700
950 x $6
17
Stock Subscriptions
When a default occurs, the accounting is determined
by the relevant contract provisions, such as-1) Return to the subscriber the entire amount paid
in.
2) Return to the subscriber the entire amount paid
in, less any costs incurred to reissue the stock.
3) Issue to the subscriber a lesser number of shares
based upon the total amount of payment received.
4) Require the forfeiture of all amounts paid in.
18
Stock Subscriptions
The subscriber to the 50 remaining shares defaults
on the contract. The contract requires the forfeiture
of all amounts paid in (Option 4 in Slide 17).
Common Stock Subscribed
300
Additional Paid-in Capital on Common
Stock
50350
x $6
Subscription Receivable:
Common Stock
500
50 x $7
Additional Paid-in Capital from
Subscription Default
50150
x $10
19
Combined Sales of Stock
A corporation issues 100 packages of securities for
$82.80 per package. Each package consists of two
shares of $10 par common stock (market value, $16
per share) and one share of $50 par preferred stock
(market value, $60 per share).
Common Stock: $16 x 2 shares x 100
Preferred Stock: $60 x 1 share x 100
Total market value
= $ 3,200
= 6,000
$9,200
20
Combined Sales of Stock
A corporation issues 100 packages of securities for
$82.80 per package. Each package consists of two
shares of $10 par common stock (market value, $16
per share) and one share of $50 par preferred stock
(market value, $60 per share).
$3,200
Common Stock:
x $8,280
$9,200
$6,000
Preferred Stock:
x $8,280
$9,200
= $2,880
= 5,400
$8,280
21
Combined Sales of Stock
A corporation issues 100 packages of securities for
$82.80 per package. Each package consists of two
shares of $10 par common stock (market value, $16
per share) and one share of $50 par preferred stock
(market value, $60 per share).
Cash
8,280
Common Stock
Additional Paid-in Capital on Com. Stock
Preferred Stock, $50 par
Additional Paid-in Capital on Pref. Stock
2,000
880
5,000
400
22
Combined Sales of Stock
If only the separate market value of $16 per share for
the common stock is known, a corporation assigns a
$3,200 ($16 x 2 shares x 100 packages) of the
proceeds to the common stock, and allocates the
remainder to the preferred stock.
Cash
8,280
Common Stock
Additional Paid-in Capital on Com. Stock
Preferred Stock, $50 par
Additional Paid-in Capital on Pref. Stock
2,000
1,200
5,000
80
23
Stock Splits
A stock split results in a
decrease in the par value per
share of stock accompanied
by a proportional increase in
the number of shares issued.
A stock split ordinarily is recorded
by a memorandum entry.
24
Stock Splits
X Corporation issues a disproportionate stock split in
which the reduction in par is not proportionate to the
increase in the number of shares. Assume the par is
reduced from $10 to $4.
Common Stock, $10 par
Common Stock, $4 par
Additional Paid-in Capital from
Stock Split
600,000
480,000
60,000 x $10
120,000
60,000
x
2 x $4
25
Noncompensatory Stock
Option Plans
The plan has no option
Substantially all
The discount from features
the
other than the
full-time employees
market price does not following:
who meet limited
exceed the greater
of: purchase
• The
is a
employment
Employees
areprice
allowed
• The
a per-share
per-share
discount
amount
based
solely
on the date
qualifications
may
short time
from
that
of
stock
would
issuance
be market
price price
of theisstock
participate in
the
the purchase
set
reasonable
costs
avoided
in an
byto
offer
not
on
the purchase
date,
plan on an
decide
whether
to and
of stockthe
issuing
to stockemployees
to in theare
permitted
equitable basis.
enroll
plan,
and...
stockholders
the
public. or to cancel their
others, or...
participation.
26
Compensatory Stock
Option Plans
Measure Fair Value
of Stock Options
Use Fair Value
on Grant Date
Recognize
Periodic Cost
Allocate over
Service Period
Continued
Report in Financial
Statements
Income
Statement
Balance Sheet
27
Compensatory Stock
Option Plans
Report in Financial
Statements
Disclose in Notes to
Financial Statements
• Description of Plan
Income Statement
• Increase Compensation Expense
(in Operating Expenses)
Balance Sheet
• Increase Contributed Capital (in
Stockholders’ Equity)
• Information about
Options Granted,
Exercised, and
Outstanding
• Other Information
28
Recognition of
Compensation Expense
On January 1, 2004 Fox Corporation adopts a
compensatory stock option plan and grants 9,000
stock options with a maximum life of 10 years to 30
selected employees. The $50 exercise price is equal
to the market price of the stock on this grant date.
At the end of 2006, a total of 7,500 stock options for
25 employees actually vest and the other 1,500 are
forfeited. Fox determines that the fair value of each
option is $17.15 on the grant date.
Continued
29
Recognition of
Compensation Expense
Fox multiplies the fair value per stock option times
the estimated stock options that will become vested
[$17.15 x (9,000 x 0.97 x 0.97 x 0.97)] = $140,871.
Memorandum entry: On January 1, 2004 the company granted
a compensatory stock option plan to 30 employees. The plan
allows each employee to exercise 300 stock options to acquire
the same number of shares of the company’s common stock at
an exercise price of $50 per share. The option vest at the end
of 3 years and expire at the end of 10 years. The estimated
value of the stock options expected to be exercised is
$140,871.
Continued
30
Recognition of
Compensation Expense
On December 31, 2004, Fox Corporation records the
compensation expense by multiplying the $140,871
by the fraction of the service period that expired.
Compensation Expense
Common Stock Option Warrants
46,957
46,957
$140,871 x 1/3
Continued
31
Recognition of
Compensation Expense
Based on new estimations, at the end of 2005 Fox
Corporation revises total compensation cost to $128,201
[$17.15 x (9,000 x 0.94 x 0.94 x 0.94)]. Two-thirds of
$128,201, or $85,467, has expired. Fox previously
recorded $46,957 in 2004, so a “catch-up” entry is
needed ($85,467 – $46,957 = $38,510).
Compensation Expense
Common Stock Option Warrants
Continued
38,510
38,510
32
Recognition of
Compensation Expense
On January 5, 2005 one employee exercises options
to purchase 300 shares of Fox Corporation’s $10 par
common stock. On this date the stock is selling for
$90 per share. Fair market value of warrants, $17.15.
Cash
15,000
Common Stock Option Warrants
5,145
Common Stock, $10 par
300 x $503,000
Additional Paid-in Capital on Common300 x $17.15
Stock
17,145
33
Performance-Based Stock
A performancebased plan is set upOption Plan
so that the terms will
In other words, the
vary depending on
better the employee
how well the
manages the
selected employee
corporation, the better
performs.
the terms.
34
Performance-Based Stock
Option Plan
The terms
optionfor
plan
on theplan
increase
insame
market
The
thedepends
stock option
are the
as
share of
Fox’sFox
products
3-year
service
before
except
grantsover
eachthe
of the
30 selected
period.
The terms
are as follows
eachoptions.
employee:
employees
a maximum
of 300for
stock
1) If the market share has increased 5 percent, at
least 100 stock options will vest on that date.
2) If the market share has increased by at least 10
percent, another 100 stock options will vest.
3) If the market share has increased by more than
20%, all 300 stock options will vest.
35
Performance-Based Stock
Option Plan
2004
2005
2006
Estimated (actual) total
compensation cost
$93,914 $85,467 128,625
Fraction of service period expired
x 1/3
x 2/3
x 3/3
Est. compensation expense to date $31,305 $56,978 $128,625
Previously recognized com. exp.
(0 ) (31,305 ) (56,978 )
200 x (30$31,305
employees
200 x (30$25,673
x300
employees
0.97x x25$x71,647
x$17.15
0.94 x
Current compensation expense
0.97 x 0.97)0.94
x $17.15
x 0.94)
(fair
x $17.15
value (fair value
per option) per option)
36
Additional Disclosures About a
Compensatory Stock Option Plan
1. A description of the plan, including the general
terms.
2. The number and weighted-average exercise prices
for options granted, exercised, outstanding,
forfeited, and expired during the year.
3. The weighted-average grant-date fair values of
options granted during the year.
4. A description of the method and assumptions used
during the year to estimate the fair values of
options.
37
Preferred Stock Characteristics








Preference as to dividends.
Accumulation of dividends.
Participation in excess dividends.
Convertibility into common stock.
Attachment of stock warrants (rights).
Callability by the corporation.
Redemption at a future maturity date.
Preference as to assets upon liquidation of the
corporation.
 Lack of voting rights.
38
Cumulative Preferred Stock
J Corporation has outstanding 1,000 shares of 10%,
$100 par cumulative preferred stock and 10,000 shares
of $10 par common stock. The dividends are two
years in arrears when a $30,000 dividend is declared.
Preferred stockholders would receive all of it.
1,000 shares x $100 x 0.10 x 3 years = $30,000
39
Convertible Preferred Stock
Z Corporation originally issued 500 shares of $100
par convertible preferred stock at $120 per share.
Each share of preferred stock may be converted into
four shares of $20 par common stock.
Preferred Stock, $100 par
50,000
Additional Paid-in Capital on Preferred
Stock
10,000
Common Stock, $20 par
40,000
Additional Paid-in Capital from
Preferred Stock Conversion
20,000
Continued
40
Convertible Preferred Stock
Alternatively, assume each preferred share may be
converted into seven shares of common stock.
Preferred Stock, $100 par
50,000
Additional Paid-in Capital on Preferred
Stock
10,000
Retained Earnings
10,000
Common Stock, $20 par
70,000
$70,000 – $60,000
7 x $500 x $20
41
Preferred Stock with Stock
Warrants (Rights)
M Corporation issues 1,000 shares of $100 par value
preferred stock at a price of $121 per share. It
attaches a warrant to each share of stock that allows
the holder to purchase one share of $10 par common
stock at $40 per share. Immediately after the
issuance, the preferred stock begins selling ex-rights
for $119 per share and the warrants for $6 each.
Preferred Stock:
$119,000
x $121,000 = $115,192
$119,000 + $6,000
Common Stock
$6,000
Continued x $121,000 =
Warrants:
$119,000 + $6,000
$5,808
42
Preferred Stock with Stock
Warrants (Rights)
All warrants are exercised.
Cash
Common Stock Warrants
Common Stock, $20 par
Additional Paid-in Capital on
Common Stock
40,000
5,808
$40 x 1,00010,000
35,808
43
Callable Preferred Stock
Callable preferred stock
may be retired under
specified conditions by a
corporation at its option.
44
Callable Preferred Stock
Y Corporation has outstanding 1,000 shares of
$100 par callable preferred stock that were issued
at $110 per share and no dividends are in arrears.
The call price is $112 per share.
Preferred Stock, $100 par
100,000
Additional Paid-in Capital on Preferred
Stock
10,000
Retained Earnings
2,000
Cash
112,000
45
Callable Preferred Stock
Y Corporation has outstanding 1,000 shares of
$100 par callable preferred stock that were issued
at $110 per share and no dividends are in arrears.
The call price is $105 per share.
Preferred Stock, $100 par
100,000
Additional Paid-in Capital on Preferred
Stock
10,000
Cash
105,000
Additional Paid-in Capital from
Recall of Preferred Stock
5,000
46
Contributed Capital Section
Stockholders’ Equity
Contributed Capital:
Preferred stock, $100 par (9%, cumulative, convertible,
10,000 shares authorized, 4,300 shares issued and
outstanding)
$ 430,000
Common stock, $5 par (80,000 shares authorized,
32,800 shares issued and outstanding)
164,000
Common stock subscribed, $5 par (3,600 shares at a
subscription price of $34 per share)
18,000
Common stock option warrants
23,000
Additional paid-in capital on preferred stock
107,500
Additional paid-in capital on common stock
590,400
Additional paid-in capital from conversion of p.s.
10,100
Total Contributed Capital
$1,343,000
47
Treasury Stock
Treasury stock is a
corporation’s own
capital stock that...
 has been fully paid for
by stockholders,
 has been legally issued,
 is reacquired by the
corporation, and
 is being held by the
corporation for future
reissuance.
48
Treasury Stock
Cost Method
Issuance of 6,000 shares of $10 par common stock for
$12 per share.
Cash
Common Stock $10 par
Additional Paid-in Capital on
Common Stock
72,000
60,000
12,000
49
Treasury Stock
Cost Method
Reacquisition of 1,000 shares of common stock at $13
per share.
Treasury Stock
Cash
13,000
13,000
50
Treasury Stock
Cost Method
Reissuance of 600 shares of treasury stock at $15 per
share.
Cash
Treasury Stock
Additional Paid-in Capital from
Treasury Stock
9,000
7,800
1,200
51
Treasury Stock
Cost Method
Reissuance of another 200 shares of treasury stock at
$8 per share.
Cash
Additional Paid-in Capital from
Treasury Stock
Treasury Stock
1,600
1,000
2,600
52
Treasury Stock
Cost Method
Reissuance of another 100 shares of treasury stock at
$10 per share.
Cash
Additional Paid-in Capital from
Treasury Stock
Retained Earnings
Treasury Stock
1,000
200
100
1,300
53
Treasury Stock
Cost Method
Contributed Capital:
Common stock, $10 par (20,000 shares authorized,
6,000 shares issued , of which 100 are being held
in treasury)
Additional paid-in capital on common stock
Total contributed capital
Retained earnings
Accumulated other comprehensive income
Total contributed capital, retained earnings, and
accumulated other comprehensive income
Less: Treasury stock (100 shares at cost)
Total Stockholders’ Equity
$ 60,000
12,000
$ 72,000
39,900
10,000
$121,900
(1,300 )
$120,600
54
Treasury Stock
Par Value Method
Issuance of 6,000 shares of $10 par common stock for
$12 per share.
Cash
Common Stock $10 par
Additional Paid-in Capital on
Common Stock
72,000
60,000
12,000
55
Treasury Stock
Par Value Method
Reacquisition of 1,000 shares of common stock at $13
per share.
Treasury Stock
10,000
Additional Paid-in Capital on Common
Stock
2,000
Retained Earnings
1,000
Cash
13,000
56
Treasury Stock
Par Value Method
Reissuance of 600 shares of treasury stock at $15 per
share.
Cash
Treasury Stock
Additional Paid-in Capital on
Common Stock
9,000
6,000
3,000
57
Treasury Stock
Par Value Method
Reissuance of another 200 shares of treasury stock at
$8 per share.
Cash
Additional Paid-in Capital on
Common Stock
Treasury Stock
1,600
400
2,000
58
Treasury Stock
Par Value Method
Reissuance of another 100 shares of treasury stock at
$10 per share.
Cash
Treasury Stock
1,000
1,000
59
Treasury Stock
Par Value Method
Contributed Capital:
Common stock, $10 par (20,000 shares authorized,
6,000 shares issued)
Less: Treasury stock (100 shares at par)
Common stock outstanding (5,900 shares)
Additional paid-in capital on common stock
Total contributed capital
Retained earnings
Accumulated other comprehensive income
Total Stockholders’ Equity
$ 60,000
(1,000 )
$ 59,000
12,600
$ 71,600
39,000
10,000
$120,600
60
Conceptual Overview of
Treasury Stock
1. Treasury stock is not an asset.
2. Treasury stock does not vote, has no
preemptive rights, ordinarily does not share
in dividends, or participate in the company’s
liquidation assets, but does participate in
stock splits.
3. Treasury stock transactions do not result in
gains or losses.
Continued
61
Conceptual Overview of
Treasury Stock
4. Treasury stock transactions may reduce
retained earnings, but may never increase it.
5. Retained earnings usually must be
restricted regarding dividends when
treasury stock is held.
6. Total corporate stockholders’ equity is not
affected by whether cost or par value
method is used.
62
Chapter 15
The End
63