12-1
CHAPTER 12
STOCKHOLDERS’ EQUITY:
CLASSES OF CAPITAL STOCK
12-2
The Corporation
A business entity recognized by law with
existence separate and distinct from its
owners.
Sue and be
sued
Hire and fire
employees
Enter into
contracts
A
corporation
can . . .
Borrow
money
Buy, sell, or
hold property
433
12-3
Advantages of the
Corporate Form of Business*
Limited
liability
Easy transfer
of ownership
Easy capital
generation
Continuous
existence
Professional
management
Separation of
owners and entity
434
* Relative to a Partnership
12-4
Disadvantages of the
Corporate Form of Business*
Double
taxation
Governmental
regulation
Entrenched,
inefficient
management
Limited ability to
raise creditor
capital
434
* Relative to a Partnership
12-5
Corporations
General Terminology

Incorporators


Articles of incorporation


Persons who form corporation
Application for corporate charter
Corporate Charter


Contract between state and incorporators
granting legal existence to corporation
12-6
Corporations
General Terminology

Corporate bylaws


Rules adopted by board of directors to
govern conduct of corporate affairs
Organization costs

Intangible assets subject to amortization
e.g., Legal and accounting costs

Domestic vs. Foreign Corporation

Depends on state in which chartered
12-7
Directing the Corporation
Stockholder Rights

To dispose of their shares

Preemptive right to buy new shares in
proportion to shares already owned

To share in dividends when declared

To share in assets in
event of liquidation

To participate in
management by voting
at stockholders’ meetings
12-8
Directing the Corporation
Hires corporate
officers
Formulates
corporate policies
Elected by
whom?
Board
of
Directors
Composition of
board?
12-9
Directing the Corporation
Includes president,
vice presidents,
secretary, and
treasurer
Responsible for
routine corporate
operations
Carry out the
policies set by the
board of directors
Corporate Officers
12-10
Directing the Corporation
Corporate Organization Chart
Stockholders
Board of Directors
President (CEO)
Secretary
Treasurer
Vice President Vice President
Production
Sales
12-11
Capital Stock
A share of stock is a transferable unit of
ownership.
100 Shares
Stock Certificate
VidTel, Inc.
Common Stock
Stock ownership records may be kept by
external parties called stock-transfer
agents and stock registrars.
12-12
Capital Stock
The two classes of capital stock are
common and preferred.
100 Shares
Stock Certificate
VidTel, Inc.
Common Stock
Capital Stock may have
Par value
 No par value
 No par value with a stated value

12-13
Capital Stock
Par value is an arbitrary amount
assigned to each share of stock
100 Shares
Stock Certificate
VidTel, Inc.
Common Stock
$5 par value
Par is not an indication of market value!!!
12-14
Capital Stock
No-par stock has no par or stated value.
(This is permitted in most states.)
100 Shares
Stock Certificate
VidTel, Inc.
Common Stock
No-par value
Why would no-par stock be used?
12-15
Capital Stock
No-par, stated value stock
100 Shares
Stock Certificate
VidTel, Inc.
Common Stock
No-par,
$5 stated value
Stock without par value, but to which
a stated value has been assigned
by the board of directors.
12-16
Capital Stock
Market Value
Price at which a seller is willing to sell for
and a buyer is willing to buy for in the
marketplace.
12-17
Capital Stock
Liquidation Value
Amount each share of stock would receive if
assets are sold, liabilities are paid, and
remainder is distributed to shareholders.
12-18
Capital Stock
Three Important
Numbers

No. of shares authorized


No. of shares issued
No. of shares outstanding
12-19
Capital Stock
Authorized
Shares
The maximum number
of shares the
corporation may issue
as designated in its
charter is the
authorized number of
shares.
12-20
Capital Stock
Authorized
Shares
Issued
shares are
authorized
shares of
stock that
have been
sold.
Unissued
shares are
authorized
shares of
stock that
have never
been sold.
12-21
Capital Stock
Authorized
Shares
Issued
Shares
Outstanding
Shares
Treasury
Shares
Outstanding shares
are shares that were
sold and issued and
are still held by
stockholders.
Unissued
Shares
Treasury shares are
issued shares that have
been reacquired by the
corporation.
12-22
Question
Ace Company’s corporate charter authorizes
1,000,000 shares of common stock. Ace issued
600,000 shares and later reacquired 100,000
shares. How many shares are outstanding and
how many are unissued respectively?
a.
b.
c.
d.
600,000 & 300,000
500,000 & 500,000
500,000 & 400,000
400,000 & 500,000
12-23
Question
Ace Company’s corporate charter authorizes
1,000,000 shares of common stock. Ace issued
600,000 shares and later reacquired 100,000
shares. How many shares are outstanding and
how many are unissued respectively?
a.
b.
c.
d.
600,000 & 300,000
500,000 & 500,000
500,000 & 400,000
400,000 & 500,000
Issued
Reacquired
Outstanding
Authorized
Issued
Unissued
600,000
100,000
500,000
1,000,000
600,000
400,000
12-24
Classes of Capital Stock
Common Stock
Residual Equity - all other claims against
corporation’s assets, including those of
creditors, rank above the claims of common
stockholders.
1. Is not automatically entitled to dividends
2. Does not have asset preference
in liquidation
12-25
Classes of Capital Stock
Preferred Stock

Preferences include
1. Dividends
2. Priority in case of liquidation

A dividend rate is usually
expressed either as a percent
of par value or as a dollar
amount per share
12-26
Classes of Capital Stock
Companies issue preferred
stock to avoid
Using bonds with fixed interest
charges
 Issuing so many additional
shares of common stock
 Diluting the common
stockholders’ control of the
corporation

12-27
Attributes of Preferred Stock

Voting or Nonvoting


Preferred stock normally does not vote.
Cumulative or Noncumulative
Right to dividends accumulates if not paid.
 Unpaid dividends (called what?) must be
paid before dividends may be paid to
common shareholders.

12-28
Attributes of Preferred Stock

Convertible or Nonconvertible


May be exchanged for shares of common
stock - a “sweetener”
Callable or Noncallable

Corporation may require shareholders to
surrender shares of stock for a specified
amount of cash
12-29
Types of Preferred Stock
Preference as to dividends:
Noncumulative
Cumulative
Unpaid current
dividends need
not be paid in
future years.
Unpaid dividends
must be paid
before any
distribution to
common
stockholders.
12-30
Balance Sheet Presentation
On the Balance Sheet, stockholders’
equity is divided into two parts.
Paid-in Capital
Investment by owners in
exchange for shares of stock
Retained Earnings
Earnings that have been
retained and reinvested
in the business
12-31
Balance Sheet Presentation
Stockholders’ Equity:
Paid-in Capital
Preferred Stock - $100 par, 7%,
Cumulative; 10,000 shares authorized,
issued, and outstanding
Two
Parts
$ 1,000,000
Common Stock - $10 par, 300,000
shares authorized, 40,000 issued and
outstanding
Total Paid-in Capital
Retained Earnings
Total Stockholders' Equity
(Similar) 444
400,000
$ 1,400,000
300,000
$ 1,700,000
12-32
Stock Issued for Cash
Let’s take a closer look at the journal
entries when stock is sold for cash.
12-33
Stock Issued for Cash
Guidelines for Journal Entry
 Debit cash for number of shares times
price per share.
 Credit common (or preferred) stock

If Par Value Stock
number of shares × par value per share

If Stated Value Stock
number of shares × stated value per share

If No-Par Stock
amount of cash received
12-34
Stock Issued for Cash
Guidelines for Journal Entry
 If cash received differs from par or
stated value
Credit Paid-in Capital in Excess of Par
Value for difference between cash received
and total par value.
 Credit Paid-in Capital in Excess of Stated
Value for difference between cash received
and total stated value.

12-35
Stock Issued for Cash
Par Value Example
On September 1st, 10,000 shares of $20 par value
common stock were sold for cash of $25 per share.
GENERAL JOURNAL
Date Description
Page:
PR
Debit
1
Credit
12-36
Stock Issued for Cash
Par Value Example
On September 1st, 10,000 shares of $20 par value
common stock were sold for cash of $25 per share.
GENERAL JOURNAL
Date Description
9/1
Cash
Common Stock
Paid-in Capital in
Excess of Par Value
To record issuance of stock for cash
Page:
PR
Debit
1
Credit
250,000
200,000
50,000
12-37
Stock Issued for Cash
Par Value Example
On September 1st, 10,000 shares of $20 par value
common stock were sold Dollars
for cash
perof $25 per share.
Shares
share
Total
Cash
10,000 × $
25 = $ Page:
250,000 1
GENERAL
JOURNAL
Common stock
10,000 × (Par) 20 =
200,000
Paid-inDescription
capital
10,000 ×
5PR
= Debit
50,000 Credit
Date
9/1 Cash
250,000
Common Stock
200,000
Paid-in Capital in
Excess of Par Value
50,000
To record issuance of stock for cash
12-38
Stock Issued for Cash
Stated Value Example
On September 1st, 10,000 shares of no-par, $20
stated value common stock were sold for cash of
$25 per share.
GENERAL JOURNAL
Date Description
Page:
PR
Debit
1
Credit
12-39
Stock Issued for Cash
Stated Value Example
On September 1st, 10,000 shares of no-par, $20
stated value common stock were sold for cash of
$25 per share.
GENERAL JOURNAL
Date Description
9/1
Cash
Common Stock
Paid-in Capital in
Excess of Stated Value
To record issuance of stock for cash
Page:
PR
Debit
1
Credit
250,000
200,000
50,000
12-40
Stock Issued for Cash
Stated Value Example
On September 1st, 10,000 shares of no-par, $20
stated value common stock were sold for cash of
$25 per share.
Stated value is treated just like
GENERAL JOURNAL
Page:
1
par value for accounting purposes.
Date Description
9/1
Cash
Common Stock
Paid-in Capital in
Excess of Stated Value
To record issuance of stock for cash
PR
Debit
Credit
250,000
200,000
50,000
12-41
Stock Issued for Cash
No-Par Example
On September 1st, 10,000 shares of no-par value
common stock were sold for cash of $25 per share.
GENERAL JOURNAL
Date Description
9/1
Cash
Common Stock
To record issuance of stock for cash
Page:
PR
Debit
1
Credit
250,000
250,000
12-42
Stock Issued for Cash
No-Par Example
On September 1st, 10,000 shares of no-par value
common stock were sold for cash of $25 per share.
For true no-par stock, credit the
GENERAL JOURNAL
Page:for the
1
Common Stock account
total cash received.
Date Description
9/1
Cash
Common Stock
To record issuance of stock for cash
PR
Debit
Credit
250,000
250,000
12-43
Stock Issued for
Property or Services
Record transaction at fair value of
property or services received or fair
value of stock issued, whichever is
more clearly evident.
Fair value
of stock
Fair value
of property
12-44
Stock Issued for
Property or Services
On May 1st, 10,000 shares of $20 par value stock
were exchanged for land valued at $350,000.
GENERAL JOURNAL
Date Description
Page:
PR
Debit
We do not know the fair value of the
stock issued because it is not
actively traded in the market.
1
Credit
12-45
Stock Issued for
Property or Services
On May 1st, 10,000 shares of $20 par value stock
were exchanged for land valued at $350,000.
GENERAL JOURNAL
Date Description
5/1
Land
Common Stock
Paid-in Capital in
Excess of Par
Page:
PR
Debit
1
Credit
350,000
200,000
150,000
12-46
Balance Sheet Presentation
Paid-in Capital in Excess of Par Value
The following slide illustrates a
typical Balance Sheet
presentation of Stockholders’
Equity. All numbers are
assumed and are not taken
from previous or text
examples.
12-47
Balance Sheet Presentation
Paid-in Capital in Excess of Par Value
Paid-in Capital
Preferred Stock - $100 par, 7%,
Cumulative; 10,000 shares authorized,
issued, and outstanding
Common Stock - $10 par, 300,000
shares authorized, 40,000 issued and
outstanding
Paid-in Capital in excess of Par Value
Preferred Stock
$ 100,000
Common Stock
80,000
Total Paid-in Capital
Retained Earnings
Total Stockholders' Equity
$ 1,000,000
400,000
180,000
$ 1,580,000
300,000
$ 1,880,000
12-48
Book Value in Total
Not per share book value

The theoretical liquidation value [Rice]
i.e.,

Total stockholders’ equity
i.e.,

Net assets (assets minus liabilities)
12-49
Book Value Per Share

If no Preferred Stock is outstanding


Book Value per share of common stock
equals total Stockholders’ Equity divided
by number of shares of common stock
outstanding.
If Preferred Stock is outstanding

To get BV per share for common, subtract:
(1) liquidating value of preferred and (2)
cumulative preferred dividends in arrears
from Stockholders’ Equity, before dividing
by no. of common shares outstanding.
12-50
Book Value Per Share
No Preferred Stock
Book value
per share
=
Total stockholders’ equity
Number of common shares
outstanding.
Preferred Stock Outstanding
Book value
=
per share
Total stockholders’ equity
Less: Liquidating value of preferred
Less: Cumulative dividends in arrears
Number of common shares
outstanding
12-51
End of Chapter 12