Reporting and Interpreting
Owners’ Equity
Chapter 11
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
Understanding The Business
Advantages of a corporation
Simple to
become an
owner
Easy to transfer
ownership
Provides limited
liability
Because a corporation is a separate legal entity, it can . . .
Own assets.
Incur liabilities.
Sue and be sued.
Enter into contracts.
Ownership of a Corporation
Voting (in person or
by proxy).
 Proportionate
distributions of
profits.
Stockholders’
Rights
 Proportionate
distributions of assets
in a liquidation.
Ownership of a Corporation
Stockholders
(Owners of voting shares)
Board of Directors
Internal (managers) and
External (non-managers)
Appointed
by directors
Vice President
(Production)
Elected by
shareholders
President
Vice President
(Marketing)
Vice President
(Finance)
Vice President
(Controller)
Authorized, Issued, and Outstanding
Shares
Authorized shares are the maximum
number of shares of capital stock that
can be sold to the public.
Issued
shares are
authorized
shares of
stock that
have been
sold.
Unissued
shares are
authorized
shares of
stock that
never have
been sold.
Authorized, Issued, and Outstanding
Shares
Outstanding shares are issued
shares that are owned by
stockholders.
Issued
Shares
Outstanding
Shares
Treasury
Shares
Unissued
Shares
Treasury shares are issued
shares that have been
reacquired by the
corporation.
Accounts used when accounting for
Common Stock
• Common Stock: Always recorded at PAR value or
STATED value.
– Par value is a value in the articles of incorporation that sets
the minimum level of capital required. It is a state
requirement. Some states may not require a par value, but
may require some value be stated (Stated value).
– Par value/Stated value are often minimal values.
• Capital in Excess of Par – the difference between the
cash received from issuing stock and the par value.
Sale and Issuance of Capital Stock
On July 6, Sonic issued 100,000 shares of $0.01 par
value common stock for $20 per share.
Prepare the journal entry to record
this transaction.
100,000 shares × $0.01 par value = $1,000
100,000 shares × $20 per share = $2,000,000
GENERAL JOURNAL
Date
Description
July 6 Cash (+A)
Common stock (+SE)
Capital In excess of par value (+SE)
Debit
Credit
2,000,000
1,000
1,999,000
Secondary Markets
Transactions between two investors
that do not affect the corporation’s
accounting records.
I’d like to sell some
of my
Sonic stock.
I’d like to buy some
of your
Sonic stock.
Stock Issued for Employee
Compensation
Sonic
If Sonic does not have new stock to
issue when the stock options are
exercised, then . .
Employee
compensation
package includes
salary and stock
options.
Stock options allow employees
to purchase stock from the
corporation at a
predetermined, fixed price.
Employee
Repurchase of Stock
Sonic
Sonic buys
its own stock in
the secondary
market.
(Treasury stock)
Management
compensation
package includes
salary and stock
options.
Stockholders
Stock options allow employees
to purchase stock from the
corporation at a
predetermined, fixed price.
Management
Treasury Stock
When stock is reacquired, the corporation records the treasury
stock at cost. Treasury stock has no voting or dividend rights.
Treasury stock is not an asset. It is a contra equity account.
On May 1, Sonic reacquired 100,000
shares of its common stock at $20 per share.
The journal entry for May 1 is . . . .
GENERAL JOURNAL
Date
May
Description
1 Treasury stock (+XSE, -SE)
Cash (-A)
100,000 shares × $20 = $2,000,000
Debit
Credit
2,000,000
2,000,000
Treasury Stock
On December 3, Sonic reissued 10,000 shares of the treasury stock at
$30 per share.
The journal entry for December 3 is . . .
10,000 shares × $20 cost = $200,000
10,000 shares × $30 = $300,000
GENERAL JOURNAL
Date
Description
Dec. 3 Cash (+A)
Debit
Credit
300,000
Treasury stock (-XSE, +SE)
200,000
Capital in excess of par value (+SE)
100,000