Chp. 18 - Shareholder's Equity
Shareholders' investment in a corporation ordinarily is referred to as:
Paid-In Capital
Transactions that affect shareholder's equity denote?
Those accounts represent the ownership interests of shareholders.
A participating feature:
allows preferred shareholders to receive additional dividends beyond the stated amount.
Shares issued for Noncash Consideration should....
be issued at fair value.
The primary source of paid-in capital is:
the investment made by shareholders when buying preferred & common stock
Preferred Shareholders likely characteristics:
-May have the "right of conversion" : which allows them to exchange shares of P/S for C/S at a specified conversion ratio -May have a "redemption privilege" : might allows them the option, to return their shares for at an agreed price
What does the journal entry look like when shares are issued for cash?
-The capital stock account (usually common or preferred) is credited for the amount representing the stated capital. -When shares have a designated par value, the amount denotes stated capital & gets credited to the stock account. **Proceeds in Excess of this amount are credited to "Paid-in Capital----Excess of Par" aka additional paid-in capital. Cash xxxxx Common Stock (par value) xxxxx PIC--Excess of Par Value xxxxx
The two basic sources of SE are REPORTED as:
1) Paid-in capital 2) Retained Earnings
List the 4 classifications within shareholder's equity:
1) paid-in capital 2) retained earnings 3) accumulated other comprehensive income 4) treasury stock (at stock)
Other Comprehensive Income includes: (OCI) (these ALL are items which are not included in net income)
1. Net holding gains (losses) on investments 2. Gains (losses) from & amendments to post-retirement benefit plans 3. Deferred gains (losses) on derivatives 4. Adjustments from foreign currency translation.
A company has a choice of how to account for the buyback:
1. Shares can be formally retired 2. Shares can be called treasury stock
A company may be organized in any of 3 ways:
1. a sole proprietorship 2. a partnership 3. a corporation (our focus)
Resale of Shares
After shares are formally retired, any subsequent sale of shares is simply the sale of new, unissued shares and is accounted for accordingly.
A share buyback can be viewed as a way to "distribute" company profits without paying dividends.
Capital gains from any stock price increase are taxed at lower capital gains tax rates than ordinary income tax rates on dividends.
What do amounts representing liabilities denote?
Creditor's interest in the company's assets
A corporation raises money to fund its business operations through some form of?
Debt & equity financing.
Noncumulative preferred shares :
If noncumulative, dividends not declared in any given year, need never be paid.
Hybrid Organizations:
S corporation limited liability company limited liability parntership
Net assets equal?
Shareholder equity: Assets - Liabilities = Shareholder's Equity
The Model Business Corporation Act
This act is designed to serve as a guide to states in the development of their corporation issues.
Cumulative preferred shares :
Typically P/S are cumulative, which means that if the specified dividend is not paid for a given year, the unpaid dividends ("dividends in arrears") accumulate & must be made up in a later dividend year before any dividends are paid on C/S
Decreasing the supply of shares in the marketplace supports the price of remaining shares.
Unlike an investment in another firm's shares, the acquisition of a company's own shares does note create an asset. Companies buy back shares to offset the increase in shares issued to employees.
Ownership rights held by common shareholders are:
a.) The right to vote on matters that come before the shareholders, including the election of corporate directors. Each share = one vote b.) The right to share in profits when dividends are declared. The percentage of shares owned by a shareholder determines his/her share of dividends distributed. c.) The right to share in the distribution of assets if the company is liquidated. The percentage of shares owned by a shareholder determines his/her share of assets AFTER creditors & preferred shareholders are paid. **another right sometimes given is a "preemptive right" : the right to maintain one's % share of ownership when new shares are issued.
Two basic sources of Shareholder's Equity:
invested capital (by shareholders in corporation) earned capital ( by the corporation on behalf of its shareholders)
Mandatorily redeemable shares are classified as :
liabilities.
Preferred Shares may be:
participating or nonparticipating.
Legal requirements & disclosure objectives make it preferable to separate a corporation's capital into several :
separate shareholders' equity accounts.
Treasury Stock
shares repurchased and not retired. -they have no voting rights nor do they receive cash dividends.
Treasury Stock
some of the shares previously sold were bought back by the corporation from shareholders.
OCI is reported periodically in the :
statement of comprehensive income & also as accumulated other comprehensive (AOCI) in the balance sheet along w/ retained earnings.
What happens when cash is paid to Retired Stock?
the effect is to decrease both cash and shareholder's equity, the size of the company is literally reduced.
The stock of publicly held corporations is available for purchase by :
the general public
The only exception in accounting for a corporation is the method of accounting for capital:
Rather than recording all changes in ownership interests in a single capital account for each owner (sole proprietorship & partnerships), -we use the several capital accounts over-viewed in the previous section to record those changes for a corporation
When shares are repurchased as Treasury Stock:
we reduce shareholder's equity with: a debit to a negative (or contra) shareholder's equity account labeled "Treasury Stock" Dr: Treasury Stock Cr: Cash This entry is later reversed with a credit to "Treasury Stock" when the stock is resold. **Reported on Balance Sheet.
Shareholders equity is a "residual amount", meaning....
what's left over after creditor claims have been subtracted from assets (net assets)
Share buybacks
when companies reacquire shares previously sold. Most medium & large-size companies buy back their own shares. Many have formal share repurchase plans to buy back stock over a series of years.
Unique Characteristics of a corporation: Read pg.1074
-**Limited Liability : the owners are not personally liable for debts of a corporation (separate legal entity), shareholder's liability is limited to the amounts they invest in the company when they purchase shares -Ease of Raising Capital : attracting equity capital is easier,an investor can sell his/her ownership interest at any time & without affecting the corporation or its operations. - *Mutual Agency -Double Taxation -Expensive Governmental Regulation
Par value: pg.1079 **Most of our discussion centers on par value shares. Largely, this means only that proceeds from shareholders' investment is allocated between Stated Capital & Additional Paid-In Capital. *Be aware though, that in the absence of archaic laws that prompted the creation of par value shares, there is no theoretical reason to do so.
-originally indicated the real value of shares. All shares used to be issued at a set "par value" price. -shares with nominal par value became common to dodge elaborate statutory rules pertaining to par value shares. -the concepts of par value & legal capital have been eliminated entirely from the Model Business Corporation Act. -Most shares continue to bear arbitrarily designated par values.
In other words, we report 2 attributes of OCI:
1) components of comprehensive income created DURING the reporting period. 2) the comprehensive income ACCUMULATED over the current & prior periods.
The entire proceeds from the sale of no-par stock are deemed stated capital & recorded in the stock account. If the shares are no-par, the entry is as follows;
Cash xxxxx Common Stock xxxxx