11-1
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Authorization and Issuance
of Capital Stock
11-2
Authorized
Shares
Usually
shares are
sold
through an
underwriter.
McGraw-Hill/Irwin
Issued
shares are
authorized
shares of
stock that
have been
sold.
Unissued
shares are
authorized
shares of
stock that
never have
been sold.
© The McGraw-Hill Companies, Inc., 2008
Authorization and Issuance
of Capital Stock
Outstanding shares are
issued shares that are
owned by
stockholders.
Authorized
Shares
Issued
Shares
Outstanding
Shares
Treasury
Shares
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11-3
Unissued
Shares
Treasury shares are
issued shares that
have been reacquired
by the corporation.
© The McGraw-Hill Companies, Inc., 2008
11-4
Stockholders’ Equity
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.
McGraw-Hill/Irwin
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11-5
Stockholders’ Equity
Common stock can be issued in three forms:
Par Value
Common
Stock
No-Par
Common
Stock
Stated Value
Common
Stock
Let’s examine
this form of
stock.
All proceeds
credited to
Common Stock
Treated like par
value common
stock
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11-6
Issuance of Par Value Stock
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.
Matrix, Inc. issues 10,000 shares of its
$2 par value stock for $25 per share on
September 1, 2007.
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© The McGraw-Hill Companies, Inc., 2008
11-7
Issuance of Par Value Stock
Matrix, Inc. issues 10,000 shares of its
$2 par value stock for $25 per share on
September 1, 2007.
Date
Description
Sept. 1 Cash
Common Stock
Contributed Capital in Excess of Par:
Common Stock
Debit
Credit
250,000
20,000
230,000
10,000 × $2 =
$20,000
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11-8
Issuance of Par Value Stock
Stockholders' Equity with Common Stock
Stockholders' Equity
Contributed capital:
Common Stock - $2 par value; 50,000 shares
authorized; 10,000 shares issued and
outstanding
$ 20,000
Contributed Capital in Excess of Par
Common stock
230,000
Retained earnings
65,000
Total stockholders' equity
$ 315,000
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11-9
Preferred vs. Common Stock
Preferred Stock
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.
Other Features Include:
Cumulative
dividend
rights.
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Usually
callable by
the company.
Normally has
no voting
rights.
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11-10
Cumulative Preferred Stock
Cumulative
Dividends in
arrears must be
paid before
dividends may be
paid on common
stock.
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Vs.
Noncumulative
Undeclared
dividends from
current and prior
years do not have
to be paid in future
years.
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11-11
Stock Preferred as to Dividends
Example: Consider the following partial Statement of
Stockholders’ Equity.
Common stock, $50 par value; 4,000 shares
authorized, issued and outstanding
Preferred stock, 9%, $100 par value; 1,000
shares authorized, issued and outstanding
Total contributed capital
$ 200,000
100,000
$ 300,000
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.
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11-12
Stock Preferred as to Dividends
Preferred
If Preferred Stock is Noncumulative:
Year 2007
$
2006 $5,000 dividends declared
Year 2008
2007
Step 1: Current preferred dividend
$
Step 2: Remainder to common shareholders
If Preferred Stock is Cumulative:
Year 2007
$
2006 $5,000 dividends declared
Year 2008
2007
Step 1: Dividends in arrears
$
Step 2: Current preferred dividend
Step 3: Remainder to common shareholders
Totals
$
McGraw-Hill/Irwin
Common
5,000 $
-
9,000
$ 33,000
5,000 $
-
4,000
9,000
$ 29,000
13,000 $ 29,000
© The McGraw-Hill Companies, Inc., 2008
11-13
Market Value
Accounting by
the issuer.
Common stock is
carried at original issue
price.
Accounting by
the investor.
Investments in
marketable securities
are carried at market
value.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2008
11-14
Market Price of Preferred Stock
Factors affecting market price of preferred stock:
• Dividend rate
• Risk
• Level of interest rates
The return based on the
market value is called the
“dividend yield.”
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11-15
Market Price of Common Stock
Factors affecting
market price of
common stock:
Changes in market value
have no impact on the
books of the issuer.
 Investors’
expectations of
future profitability.
 Risk
that this level
of profitability will
not be achieved.
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Book Value per Share
of Common Stock
11-16
Preferred stock at par value only and
preferred dividends in arrears are
deducted from total stockholders’ equity.
Total Stockholders’ Equity
Number of Common Shares Outstanding
Book Value
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=
Market Value
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11-17
Stock Splits
 Companies use stock splits to reduce
market price.
 Outstanding shares increase, but par value
is decreased proportionately.
 No journal entry
McGraw-Hill/Irwin
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11-18
Stock Split
Assume a corporation has 5,000 shares of
$1 par value common stock outstanding
before a 2–for–1 stock split.
Before
Split
Common Stock Shares
5,000
Par Value per Share
$
Total Par Value
$ 5,000
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1.00
After
Split
10,000
$
0.50
$ 5,000
Increase
Decrease
No
Change
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11-19
Treasury Stock
No voting
or
dividend
rights
Contra
equity
account
Treasury
shares are
issued
shares that
have been
reacquired
by the
corporation.
When stock is reacquired, the corporation
records the treasury stock at cost.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2008
11-20
Treasury Stock - Example
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.
Date
Date
Description
Description
May 1 Treasury Stock
Cash
Debit
Debit
Credit
Credit
165,000
165,000
3,000 shares × $55 = $165,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2008
11-21
Treasury Stock - Example
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.
1,000 shares × $75 = $75,000
Date
Description
Dec. 3 Cash
Treasury Stock
Additional Paid-in Capital:
Treasury stock transactions
Debit
Credit
75,000
55,000
20,000
1,000 shares × $55 cost = $55,000
McGraw-Hill/Irwin
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