Download Corporation Equity Transactions

Corporation Equity Transactions
USING EXAMPLES,
WE WILL WALK THROUGH
VARIOUS EQUITY TRANSACTIONS
FOR A CORPORATION
Characteristics of Corporations
 A corporation is an entity created by law that is separate from its owners. It has most
of the rights and privileges granted to individuals. Owners of corporations are called
stockholders or shareholders.
 Advantages of Corporate Characteristics
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Separate legal entity: A corporation conducts its affairs with the same rights, duties, and responsibilities of
a person. It takes actions through its agents, who are its officers and managers.
Limited liability of stockholders: Stockholders are liable for neither corporate acts nor corporate debt.
Transferable ownership rights: The transfer of shares from one stockholder to another usually has no effect
on the corporation or its operations except when this causes a change in the directors who control or
manage the corporation.
Continuous life: A corporation’s life continues indefinitely because it is not tied to the physical lives of its
owners.
Lack of mutual agency for stockholders: A corporation acts through its agents, who are its officers and
managers. Stockholders, who are not its officers and managers, do not have the power to bind the
corporation to contracts—referred to as lack of mutual agency.
Ease of capital accumulation: Buying stock is attractive to investors because (1) stockholders are not liable
for the corporation’s acts and debts, (2) stocks usually are transferred easily, (3) the life of the corporation is
unlimited, and (4) stockholders are not corporate agents. These advantages enable corporations to
accumulate large amounts of capital from the combined investments of many stockholders.
Characteristics of Corporations
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Disadvantages of Corporate Characteristics
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Government regulation: A corporation must meet requirements of a state’s incorporation laws, which subject the corporation to state
regulation and control.
Corporate taxation: Corporations are subject to the same property and payroll taxes as proprietorships and partnerships plus additional
taxes. The most burdensome of these are federal and state income taxes that together can take 40% or more of corporate pretax
income. Moreover, corporate income is usually taxed a second time as part of stockholders’ personal income when they receive cash
distributed as dividends. This is called double taxation.
Corporate Organization and Management
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Incorporation A corporation is created by obtaining a charter from a state government.
Management of a Corporation The ultimate control of a corporation rests with stockholders who control a corporation by electing its
board of directors, or simply, directors. Each stockholder usually has one vote for each share of stock owned. Directors are responsible
for and have final authority for managing corporate activities. A board can act only as a collective body and usually limits its actions to
setting general policy.
A corporation usually holds a stockholder meeting at least once a year to elect directors and transact business as its bylaws require. A
group of stockholders owning or controlling votes of more than a 50% share of a corporation’s stock can elect the board and control the
corporation.
Day-to-day direction of corporate business is delegated to executive officers appointed by the board. A corporation’s chief executive
officer (CEO) is often its president. Several vice presidents, who report to the president, are commonly assigned specific areas of
management responsibility such as finance, production, and marketing. One person often has the dual role of chairperson of the board
of directors and CEO. In this case, the president is usually designated the chief operating officer (COO).
Characteristics of Corporations
 Rights of Stockholders
When investors buy stock, they acquire all specific rights the corporation’s charter grants to stockholders. They also acquire general rights
granted stockholders by the laws of the state in which the company is incorporated. When a corporation has only one class of stock, it is
identified as common. State laws vary, but common stockholders usually have the general right to
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Vote at stockholders’ meetings.
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Sell or otherwise dispose of their stock.
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Purchase their proportional share of any common stock later issued by the corporation. This preemptive right protects stockholders’
proportionate interest in the corporation. For example, a stockholder who owns 25% of a corporation’s common stock has the first
opportunity to buy 25% of any new common stock issued.
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Receive the same dividend, if any, on each common share of the corporation.
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Share in any assets remaining after creditors and preferred stockholders are paid when, and if, the corporation is liquidated. Each
common share receives the same amount.
Stock Terminology
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Authorized Stock
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Outstanding stock
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Par value stock is stock that is assigned a par value which is an amount assigned per share by the corporation in its charter. There is no
restriction on the assigned par value.
In many states, the par value of a stock establishes minimum legal, which refers to the least amount that the buyers of stock must
contribute to the corporation. For example, if a corporation issues 1,000 shares of $10 par value stock, the corporation’s minimum legal
capital in these states would be $10,000. Minimum legal capital is intended to protect a corporation’s creditors. Since creditors cannot
demand payment from stockholders’ personal assets, their claims are limited to the corporation’s assets and any minimum legal capital.
At liquidation, creditor claims are paid before any amounts are distributed to stockholders.
No-Par Value Stock
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When all authorized shares have the same rights and characteristics, the stock is called common stock. A corporation is sometimes
authorized to issue more than one class of stock, including preferred stock and different classes of common stock.
Par Value Stock
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Outstanding stock refers to issued stock held by stockholders. Dividends are paid based on shares outstanding not authorized shares.
Classes of Stock
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Authorized stock is the number of shares that a corporation’s charter allows it to sell. The number of authorized shares usually exceeds
the number of shares issued (and outstanding), often by a large amount. No formal journal entry is required for stock authorization
No-par value stock or simply no-par stock, is stock not assigned a value per share by the corporate charter. Its advantage is that it can be
issued at any price without the possibility of a minimum legal capital deficiency.
Stated Value Stock
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Stated value stock is no-par stock to which the directors assign a “stated” value per share. Stated value per share becomes the minimum
legal capital per share in this case.
Issuance of Stock
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Stock can be issued to corporate promoters in exchange for their organizing efforts, in exchange for
land or other property, or for cash.
Stock can be issued at par value, no par value or a stated value. If issued at par value or stated value,
the value recognized as common stock is limited to par or stated value. If there is no par or stated
value, the value of the exchange is recognized as common stock.
If the stock is issued above the par or stated value, the amount over par is recognized in an account
called “Paid In Capital in Excess of Par, Common Stock.
The same holds true for preferred stock
Organization Expenses/ Land or Equipment/Cash
Common Stock, no par value
5,000
Organization Expenses/ Land or Equipment/Cash
Common Stock, $10 par value or stated value
Paid in Capital in Excess of Par, Common Stock
5,000
Organization Expenses/ Land or Equipment/Cash
Preferred Stock, no par value
5,000
Organization Expenses/ Land or Equipment/Cash
Preferred Stock, $10 par value or stated value
Paid in Capital in Excess of Par, Preferred Stock
5,000
5,000
4,500
500
5,000
4,500
500
Repurchase of Stock – Treasury Stock
 Issued stock can be repurchased by a corporation. When it is repurchased, it is
shown as a contra-equity account (debit balance) in the Equity section of the
balance sheet. The per share price at which it is repurchased becomes the new
par value of the stock. If it is reissued again at a price higher than the new par
value, the difference is placed in an account entitled “Paid In Capital, Treasury
Stock.”
Treasury Stock (1,000 shares)
Cash
3,000
Cash
Treasury Stock
Paid in Capital, Treasury Stock
(1,000 shares sold at $3.25 per share)
3,250
3,000
3,000
250
Sales of Stock and Repurchase of Treasury Shares
Common Stock
Cash (2,000 shares x $15 market value)
30,000
Common Stock - $10 Par Value (2,000 shares x $10 Par)
Paid in Capital in Excess of Par - Common Stock (2,000 shrs x $5 over par)
20,000
10,000
Preferred Stock
Cash (3,000 shares x $20 market value)
60,000
Preferred Stock - $5 Par Value (3,000 shares x $5 Par)
Paid in Capital in Excess of Par - Preferred Stock (3,000 shrs x $15 over par)
15,000
45,000
Treasury Stock
Treasury Stock, Common (100 shares $12)
Cash
Reissue of Treasury Stock - Repurchase price resets par value
Cash (50 shares x $15)
Treasury Stock, Common (50 shares x $12)
Paid in Capital, Treasury Stock (50 shrs x $3 over repurchase price)
1,200
1,200
750
600
150
Cash Dividends
Dividends are not available unless declared by Board of Directors, and there are sufficient
retained earnings
Date of Declaration JE
Date of Record
No JE
Date of Payment
JE
Retained Earnings
Common Dividend Payable
50,000
Common Dividend Payable
Cash
50,000
50,000
This is a payable because it creates a liability on behalf of the corporation.
50,000
Capitalizing RE – Transfers amts from RE to Common Stock.
Brd of Directors declare small stock dvd (less than 25% of issued shrs)
How to calculate
Number of common shares issued/outstanding
Board of Directors declare a 10% stock dividend
Number of dividend shares
Market value as of the date of the declaration
Number of dividend shares
Value of distribution
Declaration Date
10,000
10%
1,000
$ 15.00
1,000
$ 15,000
Retained Earnings
15,000
Common Stock Dividend Distributable
10,000
Pd in K in Excess of Par - Common Stock
Payment Date
Common Stock Dividend Distributable
Common Stock, $10 Par Value
(1,000 shares x $15 market price on date of
declaration)
5,000
(1,000 shares x $10 par value) - Never a payable
since it is not a liability but a capitalization of RE
(1,000 shares x $5 over par)
10,000
10,000
(Notice JE does not include Pd in K general
ledger account)
Capitalizing RE – Transfers amts from RE to Common Stock.
Brd of Directors declare small stock dvd (less than 25% of issued shrs)
Note: The total amount of Stockholder's Equity does not change.
Amounts are transferred from retained earnings to
Common Stock and Paid-In Capital in Excess of Par, Common Stock
Before
Common Stock
PIK in excess, C Stock
Retained Earnings
Stockholders' Equity
45,000
22,000
110,000
177,000
After
10,000
5,000
(15,000)
55,000
27,000
95,000
177,000
Stock Splits
 A stock split is the distribution of additional shares to stockholders according to
their percent ownership.
 When a stock split occurs, the corporation “calls in” its outstanding shares and
issues more than one new share in exchange for each old share. Splits can be
done in any ratio, including 2-for-1, 3-for-1, or higher.
 Stock splits reduce the par or stated value per share. The reasons for stock splits
are similar to those for stock dividends.
 To illustrate, CompTec has 100,000 outstanding shares of $20 par value common
stock with a current market value of $88 per share.
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A 2-for-1 stock split cuts par value in half as it replaces 100,000 shares of $20 par value stock with
200,000 shares of $10 par value stock.
Market value is reduced from $88 per share to about $44 per share.
 The split does not affect any equity amounts reported on the balance sheet or any
individual stockholder's percent ownership. Both the Paid-In Capital and Retained
Earnings accounts are unchanged by a split, and no journal entry is made.
 The only effect on the accounts is a change in the stock account description.
Board of Director declare a cash dividend, and there are common and preferred
stockholders. The preferred stockholders have noncumulative preferred shares
Company has oustanding preferred stock of 70,000 shares of noncumulative 8%, $5 par preferred
stock. Common stock outstanding/issued common stock of 100,000 shares with a par value of $2
How to calculate amount due to preferred shareholders
Outstanding Preferred Shares
70,000
Par value of preferred shares $
5
Total par
$ 350,000
Dividend percentage
8%
Percentage due to PS
$ 28,000
Company declared dividends as follows:
2014 $ 15,000
Dividend
2015 $ 14,000
Dividend
2016 $ 55,000
Dividend
2017 $125,000
Dividend
Preferred Common
$ 15,000
$ 14,000
$ 28,000 $ 27,000
$ 28,000 $ 97,000
Total
$ 15,000
$ 14,000
$ 55,000
$ 125,000
(Under $28,000 threshold)
(Under $28,000 threshold)
(Over $28,000 threshold)
(Over $28,000 threshold)
Board of Director declare a cash dividend, and there are common and preferred
stockholders. The preferred stockholders have cumulative preferred shares.
Company has oustanding preferred stock of 70,000 shares of cumulative 8%, $5 par preferred
stock. Common stock outstanding/issued common stock of 100,000 shares with a par value of $2
How to calculate amount due to preferred shareholders
Outstanding Preferred Shares
70,000
Par value of preferred shares $
5
Total par
$ 350,000
Dividend percentage
8%
Percentage due to PS
$ 28,000
Company declared dividends as follows:
2014 $ 15,000
Dividend
Preferred Preferred
Arrears Current Yr
$ 15,000
2015 $ 14,000
Dividend
$ 13,000
2016 $ 55,000
2017 $125,000
Dividend
Dividend
$ 27,000
$ 28,000
Common
$ 1,000
$ 28,000
$ 97,000
Total
$ 15,000 (Under $28,000 threshold) Amount in arrears
28,000
(15,000) =
13,000
$ 14,000 (Under $28,000 threshold) Amount in arrears - prior yr
Amount in arrear - current yr
13,000
28,000
(1,000) =
27,000
$ 55,000 (Over $28,000 threshold)
27,000
28,000
(28,000) =
-
$ 125,000 (Over $28,000 threshold)
Amount in arrears - prior yr
Amount in arrear - current yr
Reporting Stockholders’ Equity on Balance Sheet
Stockholders' Equity Portion of Balance Sheet
Common Stock - $10 par; 10,00 shares issued
and outstanding; 1,000 Treasury Shares
Paid-In Capital in Excess of Par, Common Stock
Preferred Stock - $100 par; 900 shares issued
and outstanding
Paid-In Capital in Excess of Par, Preferred
Stock
100,000
(Should always be able to divide total dollar
value by par to determine number of shares)
25,000
90,000
36,000
Retained Earnings
115,891
Less: Cost of Treasury Shares
(11,500)
Total Stockholders' Equity
355,391
(Should always be able to divide total dollar
value by par to determine number of shares)