1Stockholders Equity I. Background Information A. Types of Corporations 1. Public Sector Owned by governmental unit Example: FDIC

2. Private Sector a. Nonstock -Nonprofit entities No stock issued Examples: Church, Charity b. Stock -For profit entities Stock is issued Examples: General Motors, IBM i.Private enterprise Stock not available for public purchase ii. Public enterprise Stock is available for public purchase 2II.B.Legal Basis for Operations 1. State law in state of incorporation 2. Articles of Incorporation approved by state

C.Usual Features Associated with Common Stock 1. Share proportionately in profits 2. Elect directors who select management 3. Share proportionately in corporate assets upon liquidation after all other claims on assets are satisfied 4. Share proportionately in new issues of same stock ( i.e., preemptive right ) Note: Legal documents set forth the rights of common shareholders for a particular issue of commonstock. Sometimes these documents omit one or more of the above rights.It is very common that when a corporation has multiple classes of common stock only one ofthe classes has voting privileges. 3I. D. Usual Features Associated with Preferred Stock 1. Preference as to dividends - Normally receives a fixed divided based on stock par value which must be paid before common shareholders can receive a dividend cumulativevs. non-cumulative participatingvs. non-participating 2. Preference as to assets in liquidation - Share in corporate assets before commonshareholders upon liquidation 3. Voting privileges - Normally no voting privileges 4. Callable - Normally callable at the discretion of the company The stock indenture agreement will specify if the stock can be called and the price the company must pay 5. Sometimes convertible into common stock Note:PS with a fixed redemption date or PS which isredeemable at the option of theholder is nottreated as equity. It is reported as debt per FAS # 150.4I. E.Some Benefits of Corporate Form 1. Limited liability of Stockholders - a. Loss limited to investment for stock purchased at par or above b. May be liable for losses beyond investment if stock purchased below par (discount) 2. Access to large amounts of capital via issuance of stock 3. Corporate form encourages risk taking which generally leads to higher wealth creation over longer time periods 5II. Nature of Capital (Stockholders Equity) A. Components 1. + Capital Stock Common and Preferred issued 2. + Paid-In Capital (PIC) Amounts received from various sources including the issuanceof options andwarrants 3. Retained Earnings Earnings less dividends 4. - Treasury Stock Own stock purchased 5. + Subscribed Stock Stock contracted to be issued but not yet issued 6. - Stock Subscriptions A type of account receivable representing money owed tocompany for subscribed stock 7. Other Comprehensive Income Accumulated gains and losses that GAAPrequires be booked directly toStockholders Equity Question:Why book gains/losses directly to SE? Answer:Political pressure from firms. 6II.B. Events Affecting Stockholders Equity 1. Stockholder investments Creates stock and PIC 2. Retirement of stock Reduces stock and PIC 3. Issuance of options and warrants Creates PIC 4. Net Income ( Loss ) Increases ( reduces ) retained earnings 5. Dividends Reduce retained earnings 6. Treasury stock transactions Buying (selling) own stock creates (reduces) TS bal. 7. Conversion of certain securities to stock Creates stock and PIC 8. Contracts to issue stock Gives rise to subscribedstock and stock subscriptions A/R 9. Error corrections and certain Prior Period Adj. 10. Recognition of Other Comprehensive Income Certain gains/losses are booked directly to Stockholders Equity rather than to income.

7III. Accounting for Original Issuance of Stock A. Par or Stated Value Stock 1. Issue at or above Par (or Stated Value)- CashXX (shares x sales price) Common StockXX(shares x par/SV) PIC XX(plug) 2. Issue below Par (or Stated Value) CashXX(shares x sales price) Common StockXX(shares x par/SV) PICXX(plug) or if insufficient PIC CashXX(shares x sales price) Common StockXX(shares x par/SV) Discount on CSXX(plug) Note: same basic entries for preferred stock (PS)8III. B. No Par Stock 1. Issue CashXX(shares x sales price) Common StockXX (shares x sales price)

Note: same basic entry for preferred stock. 9IV. Subscribed Stock A. Concept Individuals sign a contract in which they agree to purchase stock. The stock is issued once the stock has been paid for. B. Entries 1. At date contract is signed Subscriptions A/R XX (shares x price)Common Stk. Subscribed XX(shares x par) PIC CS XX(plug) 2. When cash is collected CashXX(cash collected) Subscriptions A/R XX 3. When final payment is received and stock is issued CashXX(cash collected) Subscriptions A/R XX Common Stk. Subscribed XX(shares x par) Common Stock XX (shares x par) 10IV.B. 4. If some individuals default (cannot complete contract) Accounting can vary depending on state law. If company is allowed to retain partial payment made by the defaulted subscriber the entry is: Recording strategy Remove existing balances from the Balance Sheet and record the net of the existing balances (this will be a cr. ) as PIC Common Stock Sub.XX (shares x par) PIC CSXX (prior PIC booked) Subscriptions A/R XX (unpaid A/R) PIC Defaulted Stk. Sub. XX (prior cash collected)

11V. Stock Issued with Other Securities A. Description Two or more securities are sold for one total lump sum price B. Problem How to allocate total sales price to each security C. Example Sell 2 shares of sec. A (par = $1) and5 shares of sec. B (par = $2)for a total price of $48 D. If market value of each security is known Use Proportional Method Calculate total market value of all securities Allocate lump sum sales price based on relative market values of each security Ifsec. A = $10 market value each(2x10=$20) sec. B = $8 market value each (5x8=$40)

Total market = $60 Allocate Total Unit Sales Price: sec. A = 20/60 x 48 =$16 sec. B = 40/60 x 48 =$32 Then use normal accounting rules to journalize.12V. D. (continued) Cash48 (total unit sales price) Sec. A.2(2 A-shares x $1 par)$16 PIC - A 14(plug) Sec. B10 (5 B-shares x $2 par)$32 PIC - B 22(plug) 13V. E. If market value is known for only one security Use Incremental Method Use known market for one security Use difference in lump sum sales price and known market for security to value the other security Ifsec. A = $10 market value each (2x10=$20) sec. B = market unknown Allocate: sec. A = $20 (known market) sec. B =$28 (lump sum price sec. A market) ($48- $20 ) Then use normal accounting rules to journalize. Cash48 (total unit sales price) Sec. A 2(2 A-shares x $1 par)$20 PIC- A 18(plug) Sec. B10 (5 B-shares x $2 par)$28 PIC - B 18(plug) 14VI. Stock Issued in a Noncash Transaction A. Description Sell stock and receive property (land, building, patent, inventory, etc.) B.Problem - How to value transaction? Property?? StockXXTotal = ?? PIC StockYY C. Answer Use the fair value of the stock or the property whichever is more clearlydeterminable VII. Cost of Issuing Stock A. Description When stock is issued the company normally incurs (pays) a variety of fees. Examples: Attorneys fees Accountants fees Underwriters fees SEC filing expenses Mailing costs B. Accounting Record as a reduction of PIC (not expense) 15VIII. Treasury Stock Transactions A. Description Company buys its own stock and holds for some future use. Note: Treasury Stock is a contra-equity account (not an asset) B. Two Accounting Methods 1. Cost method Vast majority of companies use Record TS at cost Record PIC TS when sell stock for a profit 2. Par value method Few companies use Record TS at par value Record PIC TS when TS is purchased for less than average amount received on original issue of stock Note:Given the heavy usage of the Cost Method this isthe method we will focus on.

16VIII. C.Cost Method Entries 1. Buy Treasury Stock (TS) TS XX (total price paid) Cash XX 2. Sell TS for more than originally paid CashXX (sales price) TS XX (cost of TS) PIC TS XX (gain booked as PIC) 17VIII.C. 3. Sell TS for less than originally paid CashXX (sales price) TS XX (cost of TS) PIC-TS XX (loss booked as PIC reduction but do not reduce PIC-TS below 0) If loss on sale exceeds preexisting PIC-TS Cash XX (sales price) TS XX (cost of TS) PIC-TSXX (reduce PIC-TS to 0) R.E.XX (record remainder of loss as reduction ofretained earnings) 18IX. Accounting for Stock Retirement

A. Description - Company stock is purchased in the open market and then retired Note: No gains or losses are recorded. B. Entry Depends On Two Factors 1. How purchased stock is reflected in G/L a. Stock held as treasury stock and later retired (entries made to treasury stock account) b. Stock purchased and immediately retired (no entries made to treasury stock account) 2. Comparison of price paid versus amountreceived when the stock was originally issued a. Paid more for stock than original issue pricei.Implies a type of loss ii.Will cause a reduction in PIC and/or RE b. Paid less for stock than original issue price i. Implies a type of gain ii.Will create additional PIC 19IX. C. Stock to be Retired is Held as Treasury Stock 1. Accounting Strategy - Remove Stock and PIC balances created when stock was originally issued Remove TS balances Then - Balancing cr. (gain) is additional PIC Balancing dr. (loss) reduces PIC and/or RE Note: See FASB Codification 505-30-30-8

2. If paid more for TS than average issue price oforiginal stock book loss as reduction of: 1st choice:PIC-TS and/or2nd choice: RE CS XX (shares x par) PIC-CS XX (shares x average PIC-CS) TSXX(cost of TS) PIC-TS XX (reduce PIC-TS if available) RE XX (reduce RE if needed) 20IX. C. 3. If paid less for TS than average issue price of original stock - book gain as additionalPIC - Retirement of TS CS XX (shares x par) PIC-CS XX (shares x avg PIC-CS) TSXX(cost of TS) PIC-Retirement of TSXX(gain on retirement booked as PIC) 21IX. D. Stock Purchased and Retired Immediately (Not Held as Treasury Stock) 1. Accounting Strategy - Remove Stock and PIC balances created when stock was originally issued Record cash paid out Then - Balancing cr. (gain) is additionalPIC -Share Repurchase (PIC-SR) Balancing dr. (loss) reduces PIC and/or RE

2. If paid more for stock than average issue price oforiginal stock book loss as reduction of: 1st choice:PIC-Share Repurchase and/or2nd choice: RE CS XX (shares x par) PIC-CS XX (shares x average PIC-CS) Cash XX(cost of stock) PIC-SR XX (reduce PIC-SR if available) RE XX (reduce RE if needed) 22IX. D. 3. If paid less for stock than average issue price of original stock - book gain as additionalPIC - Share Repurchase (PIC-SR) CS XX(shares x par) PIC-CS XX(shares x avg PIC-CS) CashXX(cost of stock) PIC-SR XX(gain on retirement booked as PIC arising from Share Repurchase) 23X. Accounting for Dividends A. Cash Dividends Paid on outstanding shares Not paid on treasury stock Date of Declaration: Retained Earnings XX(outstanding shares xdividend rate) Dividends PayableXX Note: Dividends Payable is normally a current liability Date of Record: No entry in general ledger Date of Payment: Dividends Payable XX Cash XX 24X.B. Property Dividends 1. Description Company distributes property instead of cash 2. Accounting First book entry to restate property to FMV at date of declaration and recognize gain or loss Then book normal entries withminor changes in account titles 3. Entries Date of Declaration: If property has appreciated in value Property account1XX Gain XX Retained EarningsXX Property Dividends PayableXX 1- the actual entry will use the title of the property to be distributed (i.e., inventory, securities, etc.) 25X.B.3. Entries Date of Record: No entry in general ledger Date of Distribution: Property Dividends Payable XX Property Account1XX 1- the actual entry will use the title of the property to be distributed (i.e., inventory, securities, etc.) 26X.C. Liquidating Dividends

1. Description - Some portion of dividend paid from contributed capital (PIC) rather than retained earnings. 2. Accounting - Recorded as a return of capital (reduction of PIC) 3. Entries Assume a cash dividend, a portion being return of capital (not paid from RE) Date of Declaration: Retained EarningsXX (amt. paid from RE) Paid In Capital XX (amt. paid from PIC) Dividends PayableXX(total dividend) Note: Dividends Payable is normally a current liability Date of Record:No entry in general ledger Date of Payment: Dividends PayableXX Cash XX27X.D. Stock Dividends 1. Description Company distributes additionalshares of stock rather than cash or property Depending on state law a stock dividend may or may not be paid on treasury stock. 2. Accounting Creation of additional stock balances results in a similar reduction in retained earnings. So no change in total SE Value small dividends at market price at date of declaration (small = less than 20-25% of outstanding stock at date of declaration) Value large dividends at par value (large = more than 20-25% ofoutstanding stock at date of declaration) 28X.D.3. Entries for Small Stock Dividend Date of Declaration: Retained EarningsXX (shares x mkt.) Common Stk. Div. Distributable XX (shares x par) Paid In Capital- CSXX (plug) Note: Common Stock Dividend Distributable is an equity account (part of contributed capital) Date of Record: No entry in general ledger Date of Distribution: Common Stk. Div. DistributableXX Common Stock XX 29X.D.4. Entries for Large Stock Dividend Date of Declaration: Retained Earnings XX (shares x par) Common Stk. Div. DistributableXX (shares x par)

Date of Record: No entry in general ledger Date of Distribution: Common Stk. Div. DistributableXX Common StockXX Note: A large stock dividend is often called Stock split-up effected in the form of a dividend 30XI. Stock Splits A. Description Often to manage the market price of its stock a company may split or reverse split its stock. This has the effect of changing the number of shares outstanding and the marketprice of those shares Examples: 2 for 1 split is where the company issues 2 new sharesfor each 1 (old) share surrendered. (Reduces stock price.) 1 for 2 split is where the company issues 1 new sharesfor each 2 (old) sharessurrendered. (Increases stock price.) B. Accounting No formal entries to general ledger but the par or stated value is altered to maintain the same total recorded valueof the stock. Example: In a 2 for 1 split the number of shares doubles and the par is reduced to its former value. 31XII. Presentation of Stockholders Equity A. Required by GAAP 1. Show components of SE in balance sheet 2. Disclose:Rights and privileges of various securities Dividend and liquidation preferences Call prices, dates, conversion privileges Contracts for additional shares Changes in each SE account B. Optional under GAAP Separate statement of changes in SE Separate statement of changes in RE 32XIII. Common Book Value Per Share A. Description Stockholders equity available tocommon in liquidation after claims ofother equity holders are satisfied. B. Computation CS book value = Common stockholders equity Outstanding common shares Common Stockholders equity = + Total SE - Claims of Preferred stock (if any) - Claims of other equity holders (if any) Common stockholders equity Note: Claims of Preferred stock (PS) include PS Dividends in arrears PS Current year dividend PS Dividend participation (if any) Liquidation value of PS (may be different than par value)