StockholdersEquity.pptVIP

Chapter 12:Stockholders’ Equity Chapter 12: Stockholders’ Equity 1. Debt versus equity 2. Preferred stock 3. Common stock 4. Accounting for preferred and common 5. Treasury stock 6. Stock options 7. Retained earnings - dividends - appropriations - prior period adjustments 8. Comprehensive income 9. Statement of stockholders’ equity 1. Debt versus Equity Formal legal contract No legal contract Fixed maturity date No fixed maturity date Fixed periodic payments Discretionary dividends Security in case of default Residual asset interest No voice in management Voting rights - common Interest expense deductible Dividends not deductible Double taxation 2. Preferred Stock Advantages Preference over common in liquidation Stated dividend Variety of features regarding dividends Preference over common in dividend payout Disadvantages Subordinate to debt in liquidation Stated dividend can be skipped No voting rights (versus common) Debt or equity? components of both usually (but not always) classified with equity 3. Common Stock Advantages Voting rights: election of board of directors vote on significant activities of management Rights to residual profits (after preferred) Disadvantages Last in liquidation No guaranteed return 4. Accounting for Common Stock  (CS) and Preferred Stock (PS) Par value - initially established to create a “minimum legal capital”. Ex: Minimum legal capital in some states is $1,000 for new corporations, so issue: 1,000 shares at $1par, or 100 shares at $10 par, or other combination. . . Par value is not market value. Credit CS or PS for par value. Excess over par credited to “Paid in Capital in Excess of Par or Stated Value” or abbreviated: “Additional Paid-in Capital” (APIC). Some newer stock issues (for common stock) are “no par” stock. 4. Journal Entries Issue PS at greater than par value: Cash xx mkt. value Preferred Stock xx total par APIC - PS xx excess(plug) Issue CS at greater than p