Corporate Capital
Common Stock
Contributed
Capital
Account
Preferred Stock
Additional Paidin Capital
Account
Account
Two Primary
Sources of
Equity
Retained Earnings
Account
Less:
Treasury Stock
Assets –
Liabilities =
Equity
Account
Chapter
15-1
LO 2 Identify the key components of stockholders’ equity.
The Corporate Form of Organization
Authorized Shares – Maximum number of shares to be issued per the
charter. Selling more than Authorized amount requires a vote by the
Board of Directors.
Unissued Shares – Total number of shares that have never been
issued.
Issued Shares – Total number of shares that have been Issued
[Outstanding Shares and Treasury Shares].
Outstanding Shares – Total shares of stock owned by stockholders on
a given date.
Treasury Shares – Stock that has once been issued and since
purchased back by the company. Treasury stock is considered issued
stock that is currently inactive.
Chapter
15-2
LO 1 Discuss the characteristics of the corporate form of organization.
The Corporate Form of Organization
Authorized Shares = Issued Shares + Unissued Shares
Outstanding + Treasury Shares
Chapter
15-3
LO 1 Discuss the characteristics of the corporate form of organization.
The Corporate Form of Organization
Assume XYZ Co. is authorized to sell 600,000
shares. At December 31, 2014, XYZ Co. had total
issued shares of 250,000. They are holding
30,000 shares in Treasury. How many shares are
Outstanding (in the hands of shareholders)?
Chapter
15-4
The Corporate Form of Organization
Issued Shares = Outstanding Shares + Treasury Shares
250,000 =
X
+
30,000
X =
Chapter
15-5
220,000 Outstanding Shares
Issuing Common Stock
Ex) Assume Busby Inc. issues 10,000 shares of
$10 par value Common Stock for $32 per share,
prepare the necessary journal entry.
DR
320,000
Cash
Common Stock
Paid In Capital – CS
Chapter
15-6
CR
100,000
220,000
Treasury Stock
Chapter
15-7
Treasury Stock
Treasury Shares
Treasury stock is considered inactive Issued Stock
The Treasury stock account is a Contra Equity account
reducing the overall value of equity
Equity:
Common Stock
($1 Par 100,000 shares issued
98,000 shares OS)
Additional PIC
Retained Earnings
Treasury Stock (2,000 shares)
Total Equity:
Chapter
15-8
$100,000
264,000
411,000
(75,000)
$700,000
LO 4 Describe the accounting for treasury stock.
Purchasing Treasury Stock
Assume Busby Inc. purchases 2,000 of its $10 par
value common stock outstanding, paying $15 per
share. Prepare the necessary journal entry.
Treasury Stock
Cash
Chapter
15-9
Dr
30,000
Cr
30,000
Busby Inc. Equity
Common Stock
[$10 par value, 500,000 shares authorized]
[? shares issued, ? shares OS]
$100,000
Paid in Capital - Common Stock
$220,000
Retained Earnings
$500,000
Treasury Stock [2,000 shares]
($30,000)
Total Stockholders' Equity
$790,000
How many Common Stock shares are issued?
$100,000/$10 p/s = 10,000 shares issued
How many Common Stock shares are outstanding?
10,000 issued – 2,000 Treasury = 8,000 shares outstanding
Chapter
15-10
What is the average market price per share of Issued Common Stock?
($100,000 + $220,000)/10,000 = $32 p/s
New Example
Common Stock
[$5 par value, 500,000 shares authorized]
[? shares issued, ? shares OS]
$100,000
Paid in Capital - Common Stock
$400,000
Retained Earnings
$500,000
Treasury Stock [2,000 shares]
($36,000)
Total Stockholders' Equity
$964,000
How many Common Stock shares are issued?
$100,000/$5 p/s = 20,000 shares issued
How many Common Stock shares are outstanding?
20,000 issued – 2,000 Treasury = 18,000 shares outstanding
Chapter
15-11
What is the average market price per share of Issued Common Stock?
($100,000 + $400,000)/20,000 = $25 p/s
Stock Dividends
Chapter
15-12
Cash Dividends
Dividends are direct withdrawals from earnings by
owners.
Example:
Nelson Inc.’s Board of Directors announced, on March 5, 2014, they
would pay $100,000 in dividends to stockholders. Prepare the journal
entry required on the Date of Declaration.
March 5, 2014
DR
Retained Earnings
Dividends Payable
Chapter
15-13
CR
100,000
100,000
Cash Dividends
Assume On April 10, 2014, Nelson Inc. Paid the Dividends. Prepare
a journal entry for the Date of Payment.
April 10, 2014
DR
Dividends Payable
Cash
Chapter
15-14
CR
100,000
100,000
Preferred Stock
Chapter
15-15
Preferred Stock
Preferred Stock is a special class of stock with features of both equity
and debt. Preferred Stock has a fixed dividend rate that must be
paid in any year dividends are declared. Preferred shareholders get
their fixed dividend distribution first, Common shareholders get the
remaining portion.
Example of Fixed Dividend Rate on Preferred Stock:
If a company has $500,000 of 6% Preferred Stock outstanding, the
Fixed Dividend Rate is:
$500,000 * .06 = $30,000 per year
Chapter
15-16
Preferred Stock
Cumulative preferred stock – requires that if a
corporation fails to pay dividends to stockholders in any
year, the fixed dividend obligation to cumulative preferred
shareholders will accumulate until paid in a following year.
Noncumulative preferred stock – if a corporation fails to
pay a dividend to shareholders in any year, dividend
obligations to preferred stockholders will not accumulate.
Noncumulative preferred stock rights to receive dividends
are forfeited in any year that dividends are not declared.
Chapter
15-17
Preferred Stock
Back to Nelson Inc.
Nelson Inc. distributed $100,000 of dividends on April 10, 2014.
Assume Nelson Inc. has $400,000 par, 6% shares of Cumulative
Preferred Stock outstanding on record. Assume Nelson Inc. did not
pay dividends in year 2013 (the prior year).
How will the dividends be distributed between Nelson’s Cumulative
Preferred Stockholders and its Common Stockholders?
Chapter
15-18
Dividend Distributions between Preferred
and Common Shares
Nelson’s Cumulative Preferred Stock Fixed Dividend Rate is
$400,000 * .06 = $24,000 per year
Nelson did not pay dividends in the prior year, so the dividend obligation from
last year has accumulated and rolled forward to this year. Nelson owes their
Cumulative Preferred Stockholder’s the fixed dividend for 2013 and 2014.
2014 Dividend allocation:
$24,000
$24,000
$52,000
$100,000
Chapter
15-19
2013 Fixed Dividend to Preferred
2014 Fixed Dividend to Preferred
2014 Dividends to Common Shareholders
Total Dividends