ACCT 4A(13.1-13.3)
Paid-In Capital
(also called contributed capital) represents amounts received from the stockholders in exchange for stock. Common stock is the main source of paid-in capital. Paid-in capital is externally generated capital and results from transactions with outsiders.
What A Stock Certificate Has
- Company name - Stockholder name - Number of shares owned by the stockholder
Treasury Stock Basics
- The Treasury Stock account has a normal debit balance, which is the opposite of the other stockholders' equity accounts. Therefore, Treasury Stock is a contra equity account. - Treasury stock is recorded at cost (what the company paid to reacquire the shares), without reference to par value. (We illustrate the cost method of accounting for treasury stock because it is used most widely. Intermediate accounting courses also cover an alternative method.) - The Treasury Stock account is reported beneath Retained Earnings on the balance sheet as a reduction to total stockholders' equity. Treasury stock decreases the company's stock that is outstanding—held by outsiders (the stockholders). Therefore, outstanding stock is issued stock less treasury stock. Treasury stock does not carry a vote, and it receives no cash or stock dividends.
Stockholder's Rights
1. Vote. Stockholders participate in management indirectly by voting on corporate matters at stockholders' meetings (or sometimes through the mail or electronic voting). This is the only way in which a stockholder can help to manage the corporation. Normally, each share of basic ownership in the corporation carries one vote. 2. Dividends. Stockholders receive a proportionate part of any dividend that is declared and paid. A dividend is a distribution of a corporation's earnings to stockholders. Each share of stock receives an equal dividend so, for example, a shareholder who owns 1% of the total shares in the company receives 1% of any total dividend. 3. Liquidation. Stockholders receive their proportionate share of any assets remaining after the corporation pays its debts and liquidates (goes out of business). 4. Preemptive right. Stockholders have a preemptive right to maintain their proportionate ownership in the corporation. For example, suppose a stockholder owns 5% of a corporation's stock. If the corporation issues 100,000 new shares of stock, it must offer the stockholder the opportunity to buy 5% (5,000) of the new shares. This right, however, is usually withheld by contract for most corporations.
Issuing Stated Value Common Stock
Accounting for stated value common stock is almost identical to accounting for par value stock. The only difference is that stated value stock uses an account titled "Paid-In Capital in Excess of Stated" to record amounts received above the stated value. For example, assume that instead of issuing 3,000 shares of $1 par value stock for $5 per share, Smart Touch Learning issues 3,000 shares of $1 stated value stock for $5 per share. Smart Touch Learning would record the following journal entry:(image)
Notice The Reporting In The Balance Sheet
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Stockholder's Equity In The Balance Sheet
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Issuing Preferred Stock
Assume that Smart Touch Learning has authorization from the state to issue 2,000 shares of preferred stock. Smart Touch Learning decides to issue 1,000 shares of its $50 par, 6% preferred stock on January 3, 2019, at $55 per share. (The 6% in the description of the preferred stock refers to the stated dividend associated with the stock and is explained later in the chapter.) The issuance entry would be as follows:
Sale Of Treasury Stock At Cost
If treasury stock is sold for cost—the same price the corporation paid for it—there is no difference between the cost per share and the sale price per share to journalize. You just do the opposite of when you(the business) bought the stock back.
Sale Of Treasury Stock Above Cost
If treasury stock is sold for more than cost, the difference is credited to a new stockholders' equity account, "Paid-In Capital from Treasury Stock Transactions". This excess is additional paid-in capital because it came from the company's stockholders.
Look At The Hierarchy Of Stocks
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Issuing Common Stock for Assets Other Than Cash
Instead of DEBIT "Cash" you simply DEBIT the other asset which is being exchanged for common stock.
Using Retained Earnings Account
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Purchase Of Treasury Stock
Look at image to see how this recorded.
How These Accounts Show Up In The Balance Sheet
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Retirement Of Stock
Not all companies repurchase their previously issued stock to hold it in the treasury. A corporation may retire its stock by canceling the stock certificates. Retired stock cannot be reissued. Retirements of preferred stock are common as companies seek to avoid paying the preferred dividends.
Look At The Balance Sheet
Preferred Stock is included in the stockholders' equity section of the balance sheet and is often listed first. Any Paid-In Capital in Excess of Par—Preferred is listed next, followed by Common Stock and Paid-In Capital in Excess of Par—Common.
Characteristics Of A Corporation
Separate legal entity—A corporation is a separate legal entity. It is organized independently of its owners. Number of owners—Corporations have one or more owners (called stockholders). A public corporation is a corporation whose stock can be purchased on an organized stock exchange, such as the New York Stock Exchange (NYSE) or the NASDAQ Stock Market. Public corporations often have thousands of owners. Some corporations are privately held, which means that the stock cannot be purchased on a stock exchange. These corporations often have only a few stockholders. No personal liability of the owner(s) for business's debts—Stockholders are not personally liable for the debts of the corporation. Lack of mutual agency—Unlike owners of a sole proprietorship and partnership, stockholders of the corporation are not mutual agents of the business. Stockholders cannot bind the business to a contract. Indefinite life—Corporations have an indefinite life. They can exist until the business decides to terminate. Withdrawal or death of an owner does not cause termination of the business. Taxation—Corporations are separate taxable entities. The corporation pays the income tax on the business earnings and is also responsible for paying payroll taxes on employee salaries and wages. Corporations also experience double taxation. Double taxation occurs when corporations make cash payments (called dividends) to stockholders. These payments are taxed once as earnings of the corporation and then again when the stockholder receives the dividend. The tax is first paid by the corporation on its corporate income tax return, and then the dividends received by the stockholder are reported on the stockholder's personal income tax return. Capital accumulation—Corporations can raise more money than sole proprietorships and partnerships. This is completed through an initial public offering (IPO) and represents the initial offering of corporate shares of stock to the public.
Calculating Par Value Of A Stock
Simply divide the dollar amount of stocks issued and divide that number by the number of issued stocks, NOT authorized stocks!
Issuing Common Stock At A Premium
The amount above par value is called a premium. - Assume Smart Touch Learning issues an additional 3,000 shares for $5 per share. The $4 difference between the issue price ($5) and par value ($1) is a premium. - A premium on the issue of stock is not a gain, income, or profit for the corporation because the company is dealing with its own stock. This situation illustrates one of the fundamentals of accounting in that a company cannot report a profit or loss when buying or selling its own stock. The new account we use in this case is s Paid-In Capital in Excess of Par, which has a normal balance of CREDIT Notice how you still record the amount at par value & then make a separate entry which constitutes the difference($4)
Authorized Stock
The corporate charter of a corporation identifies the maximum number of shares of stock the corporation may issue, and the maximum number of stocks issued is called "authorized stock."
Sale Of Treasury Stock Below Cost
The sales price of treasury stock can be less than cost. The shortfall is debited first to "Paid-In Capital from Treasury Stock Transactions". However, this account can only be debited for an amount that brings it to $0 (it cannot have a debit balance). If this account's balance is too small, Retained Earnings is debited for the remaining amount
No-Par Stock
This does not have par value. No-par value stock has an advantage because there is no confusion between the par value and market value of the stock.
Treasury Stock
This is a company's own stock that it has previously issued and later reacquired. Reasons Why A Company Purchases Its Own Stock: - Management wants to increase net assets by buying low and selling high. - Management wants to support the company's stock price. - Management wants to avoid a takeover by an outside party by reducing the number of outstanding shares that have voting rights. - Management wants to reward valued employees with stock.
Par-Value
This is an amount assigned by a company to a share of its stock. Most companies set par value low to avoid issuing their stock below par. The par value of a stock has no relation to the market value, which is the price at which the stock is bought and sold.
Retained Earnings
This is equity earned by profitable operations that is not distributed to stockholders. Retained earnings is internally generated equity because it results from corporate decisions to retain net income to use in future operations or for expansion.
Corporation
This is is a business organized under state law that is a separate legal entity. Corporations dominate business activity in the United States.
Stated Value Stock
This is no-par stock that has been assigned an amount similar to par value. Stated value represents the minimum amount that the corporation can issue the stock for. Usually the state the company incorporates in will determine whether a stock may be par or stated value stock.
Outstanding Stock
This is stock that is held by the stockholders. The outstanding stock of a corporation represents 100% of its ownership. The numbers of shares of authorized stock, issued stock, and outstanding stock are most likely going to be different amounts.[look at image]
Preferred Stock
This kind of stock gives its owners certain advantages over common stock. Most notably, preferred stockholders receive a dividend preference over common stockholders. - Investors usually buy preferred stock to earn those fixed dividends. With these advantages, preferred stockholders take less investment risk than common stockholders. - Owners of preferred stock also have the four basic stockholder rights, unless a right is withheld. The right to vote, for example, is usually withheld from preferred stock.
Common Stock
This represents the basic ownership of the corporation. - Some companies issue Class A common stock, which carries the right to vote. They may also issue Class B common stock, which may be nonvoting.
Issued Stock
This stock has been issued by the corporation but may or may not be held by stockholders. A corporation issues stock certificates to the stockholders when they buy the stock. The stock certificate represents the individual's ownership of the corporation's capital, so it is called capital stock.
Issuing No-Par Common Stock
When a company issues no-par stock, it debits the asset received and credits the stock account. For no-par stock, there can be no Paid-In Capital in Excess of Par because there is no par to be in excess of. - Assume that, instead of $1 par value, Smart Touch Learning's common stock is no-par. How would that change the recording of the issuance of 15,000 shares for $1 and 3,000 shares for $5? The stock-issuance entries would be as follows:(image) We CREDIT "Common Stock-No Par Value"
Issuing Common Stock At Par Value
When you account issuing stocks, the dollar amount that you are recording is the par value. It was stated that the par value of the 15,000 stocks was $1.
