financing ii: stockholders’ equity
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Financing II: Stockholders’ Equity. Chapter 18 Spiceland See example excel files examples Earnings per share, stock options, etc. Topics:. Types of stock Common Preferred treasury Issuance of stock Retained earnings Dividends Stock options. Common Stock:. Residual Owners’ equity - PowerPoint PPT PresentationTRANSCRIPT
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Financing II: Stockholders’ Equity
Chapter 18 SpicelandSee example excel files
examples Earnings per share, stock
options, etc.
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Topics: Types of stock
Common Preferred treasury
Issuance of stock Retained earnings Dividends Stock options
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Common Stock: Residual Owners’ equity Voting right (most important:
election of directors) May or may not receive dividends May or may not have par value or
stated value – depends on state corporate and tax law
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Common Stock Example: (Balance sheet presentation)
Common stock $1 par ($500,000
shares authorized, 100,000 issued, 95,000
outstanding) $100,000Additional paid in capital
$900,000
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Preferred Stock Characteristics High par value No voting rights Fixed dividends - Dividends
cumulative Liquidation preference over common
stock May be redeemable May be convertible
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Preferred Stock Example:
Balance sheet presentation:Preferred stock, $100 par, 8%
cumulative, convertible into 25 shares of common stock Issued and outstanding 2,000 shares
$200,000
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Treasury Stock:
Stock repurchased by the company with the intent to reissue it in the future
Reasons: Stock options Plan to acquire another company Buy out dissident stockholder Drive up stock price Prevent take over
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Treasury Stock:
Contra stockholders’ equity account (debit balance)
Usually carried at cost (may be at par value)
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Treasury Stock Example:
1. Company repurchases 1,000 shares @ $25/share
Dr. treasury stock 25,000
Cr. Cash 25,0002. 700 shares are sold @ 15/share (stock option
exercise)
Dr. Cash 10,500
Dr. Additional paid in capital 7,000
Cr. Treasury stock 17,500
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Treasury Stock Example:
Balance Sheet presentation:
Common stock $1 par, 100,000 shares issued,
95,000 shares outstanding$100,000
Additional paid in capital$900,000
Less treasury stock, 5,000 shares at an
average cost/share of $20 (100,000)
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Retained Earnings Ultimate residual owners’ equity
account (ultimate plug figure) Sum of the earnings since the
company started Minus the sum of dividends paid Plus/minus other adjustments
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Dividends Must be voted by the board of
directors Dividends on preferred stock first,
only then can common stock receive dividends!
Cash dividends Dividends in kind Stock dividends
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Dividends Result in reduction of retained
earnings Require expenditure of cash or
other assets unless: Stock dividends – also referred to
as “capitalization of earnings”
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Cash Dividends Journal Entry: 6/15 Dr. dividends$ 3,000 Cr. dividends payable $ 3,000 6/30 Dr. dividends payable $ 3,000 Cr. Cash $ 3,000 6/30 Dr. retained earnings $ 3,000 Cr. Dividends $ 3,000
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B.S. Before Small Stock Dividend:
Common stock $1 par ($500,000
shares authorized, 100,000 issued, 95,000
outstanding) $100,000Additional paid in capital $900,000Treasury stock 5,000 shares
(100,000)Retained Earnings 1,200,000Total Stockholders’ Equity 2,100,000
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Small Stock Dividend Journal Entry:
6/15 Dr. retained earnings $ 200,000 Cr. Common stock 10,000 Cr. Paid in capital 190,000
(issued a 10% stock dividend = 10,000 shares, market price/share: $20)
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B. S. After Small Stock Dividend:
Common stock $1 par ($500,000
shares authorized, 110,000 issued,
104,500 outstanding) $ 110,000Additional paid in capital
1,090,000Treasury stock 5,500 shares(100,000)Retained Earnings 1,000,000Total Stockholders’ Equity 2,100,000
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Large Stock Dividend Journal Entry: 6/15 Dr. retained earnings $
30,000 Cr. Common stock
30,000
(issued a 30% stock dividend = 30,000 shares, market price/share: $20)
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B. S. After Large Stock Dividend:
Common stock $1 par ($500,000
shares authorized, 130,000 issued,
123,500 outstanding) $ 130,000 Additional paid in capital 900,000Treasury stock 6,500 shares (100,000)Retained Earnings 1,170,000Total Stockholders’ Equity 2,100,000
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Stock Split Very large stock dividend No journal entry, memo entry only
to note new number of shares and new par value
2 for 1 stock split, new # of shares issued = 200,000, new par value: $ .50/share
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Balance Sheet After Stock Split:
Common stock $ .50 par (1,000,000
shares authorized, 200,000 issued,
190,000 outstanding) $ 100,000 Additional paid in capital 900,000Treasury stock 10,000 shares (100,000)Retained Earnings 1,200,000Total Stockholders’ Equity 2,100,000
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Reverse Stock Split Market price of stock falls “too
low” Companies sometimes try to
improve the appearance or prevent delisting from a stock exchange by issuing a reverse split: I.e., for every 5 old shares stockholders receive 1 new share.
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Comprehensive Income Items whose market value (MV) has
changed and that may affect equity but have not yet been realized
Realized: Cash received (promise recognized) or paid (liability recognized) i.e., earned.
Change in MV: E.g., MV of stock investments has in(de)creased
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Included in Comprehensive Income: Unrealized holding gains (losses)
from Stock investments Changes (amendments) of post
retirement benefit plans Foreign currency translation DerivativesNote: All items reported net of
related tax effect.
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Reporting of Comprehensive Income Two possibilities: Right after net income (Income
Statement) OR: Separate section in the footnotes.
Again it starts with Net Income Ends with Comprehensive income
for the period
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Accumulated Other Comprehensive Income (AOCI) Shown on the balance sheet
(component of owners’ equity) Consists of as the heading says, all
OCI (gains (losses) since company started to recognize it
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Quasi – Reorganization I A reorganization of the balance sheet
generally in conjunction with a court adjudicated bankruptcy (Chapter 11)
Objective: Fresh start for the company Revaluation (up or down) of assets
(maybe liabilities) to market value Elimination of retained earnings deficit
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Quasi – Reorganization II Revalued Assets and liabilities Zero Retained Earnings Contributed Capital adjusted to
balance This may require elimination of APIC
and Reduction of common stock par value
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Quasi – Reorganization III
Example:Before After
Assets 250 260Liabilities 220 220Common Stock 190 40R/E -160 0Total Equity 250 260