Chapter 11

Capital Shares Authorized

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Main reasons that a company repurchases its own stock (treasury stock)

1. provide shares for bonuses 2. increase trading 3. acquire other companies (I'll give you stock to buy your coporation) 4. Increase earnings per share 5. Prevent hostile takeovers

Purposes of Stock Dividends

1. satisfy stockholders dividend expectations 2. to increase the marketability by increasing shares which will decrease the market price per share -> makes it easier for smaller investors to purchase the shares 3. emphasize the company permanently reinvesting in the business

Characteristics of a corporation

1. seperate legal existence 2. limited liability of stockholders 3. transferable ownership rights 4. ability to aquire capital ( issuing additional shares of stock ) 5. continuos life 6. corporation management 7. government regulations 8. additional taxes

Four basic rights of a common stockholder

1. to vote in your annual meetings 2. share the corporate earnings through receipt of dividends 3. keep the same percentage ownership when new shares of stock are issued (preemptive right) .. most don't include this right 4. residual claim (deals with liquidation. owners are paid with assets that remain after claims have been paid)

Legal Capital

Amount that must be retained in corporation and cannot be paid out in dividends

Par Value

Capital stock that has been assigned a value per share in the corporate charter. Place holder to show how many shares have been issued

No-Par Value

Capital stock that has not been assigned a value in the corporate charter. Everything would have gone to common stock in a journal entry.

Journal entry - Issuance of capital stock ABOVE PAR

Cash //Common Stock //Paid-In Capital in excess of par value- Common Stock

Journal entry - Issuance of capital stock AT PAR

Cash (# of shares of stock issued x issuance price per share) Common Stock (# of shares of stock issued x par value p.share)

Journal Entry - Declaration Date

Cash Dividends //Dividends Payable

Journal Entry - Payment Date

Dividends Payable // Cash

Stock Split

Issuance of additional shares of stock to stockholders according to their % ownership. Results in a reduction in the par or state value per share. No effect on paid-in capital, retained earnings and stockholders equity

Date of Record

No journal entry is made. Instead, this date is used to determine who owns the stock and will thus be entitled to the cash dividends

Preferred Stock vs. Common Stock

Preferred Stock - gives its holders preferences as far as payment of dividends before the payment of dividends to the common stockholders - gives preference of the distribution of assets over distributions to the common stockholders - doesn't have voting rights

Authorized Stock

The amount of stock that a corporation is authorized to sell as indicated in its charter. No formal accounting entry.

Stated Value

The amount per share assigned by the board of directors to no-par stock

Payment Date

The date cash dividend payments are made to stockholders

Capital Shares Issued

The number of shares sold/issued to individuals or companies outside the corporation

Capital Shares Oustanding

The shares issued - number of shares in the treasury stock

Journal entry - Record the purchase of treasury stock using the cost method

Treasury Stock //Cash

Treasury Shares

When a corporation buys back it's own stock

Cash Dividend

is a pro rata (proportional to ownership) distribution of cash to stockholders. For a corporation to pay a cash dividend, it must have 1. retained earnings 2. adequate cash 3. declared dividends

Stock Dividend

is a pro rata distribution of the corporations own stock to stockholders paid in stock rather than cash

Declaration Date

the board of directors formally authorizes the cash dividend and announces it to stockholders