Kế toán tài chính 2 - Chapter 14: Contributed capital

Contributed CapitalMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 14Learning ObjectivesIdentify and explain the management issues related to contributed capital.Identify the components of stockholders’ equity.Account for cash dividends.Identify the characteristics of preferred stock, including the effect on distribution of dividends.2Copyright © Houghton Mifflin Company. All rights reserved.Learning Objectives (cont’d)Account for the issuance of stock for cash and other assets.Account for treasury stock.3Copyright © Houghton Mifflin Company. All rights reserved.Management Issues Related to Contributed CapitalObjective 1Identify and explain the management issues related to contributed capital4Copyright © Houghton Mifflin Company. All rights reserved.A Corporation is defined as a body of persons granted a charter recognizing them as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its membersIn other words, a corporation is a legal entity separate and distinct from its ownersManagement of contributed capital is a critical component in financing the corporation 5Copyright © Houghton Mifflin Company. All rights reserved.Management Issues Related to Contributed CapitalManaging under the corporate form of businessUsing equity financingDetermining dividend policiesEvaluating performance using return on equityUsing stock options as compensation6Copyright © Houghton Mifflin Company. All rights reserved.Managing under the Corporate Form of BusinessCorporations dominate the economy in total dollars of assets and output of goods and servicesEven though sole proprietorships and partnerships outnumber corporations in the U.S.Contributed capitalNew funds are raised by issuing bonds, new common stock, and preferred stock7Copyright © Houghton Mifflin Company. All rights reserved.Sources of Capital Raised by Corporations in the United StatesAdvantages of the Corporate Form of BusinessSeparate legal entityLimited liabilityEase of capital generationEase of transfer of ownershipLack of mutual agencyContinuous existenceCentralized authority and responsibilityProfessional management9Copyright © Houghton Mifflin Company. All rights reserved.Disadvantages of the Corporate Form of BusinessGovernment regulationTaxationLimited liabilitySeparation of ownership and control10Copyright © Houghton Mifflin Company. All rights reserved.Using Equity FinancingA share of stock is a unit of ownership in a corporationA stock certificate is issued to the ownerStockholders can transfer their ownership at willIndependent registrars and transfer agents are often used to keep track of stockholders’ recordsAuthorized stockThe maximum number of shares a corporation is allowed to issue11Copyright © Houghton Mifflin Company. All rights reserved.Par Value is an arbitrary amount assigned to each share of stockUsually bears little or no relationship to the market value or book value of sharesConstitutes the legal capital of the corporationLegal capitalThe number of shares issued times the par valueIs the minimum amount that can be reported as contributed capital12Copyright © Houghton Mifflin Company. All rights reserved.Initial Public Offering (IPO) is the initial offering of capital stockOften, an underwriter is used for an IPOIntermediary between the corporation and the investing publicGuarantees the sale of the stock for a feeUsually less than one percent of the selling priceThe corporation records the net proceeds of the offeringAmount paid by public less underwriter fees and any other direct costs of the offering13Copyright © Houghton Mifflin Company. All rights reserved.Start-Up and Organization Costs are the costs of forming a corporationAre incurred before the corporation begins operationsIncludeState incorporation feesAttorneys’ feesCost of printing stock certificatesAccountant fees related to registering the firm’s stockAre expensed because the life of the corporation is unknown14Copyright © Houghton Mifflin Company. All rights reserved.Dividends are distributions of a corporation’s assets to its stockholdersStockholders receive assets in proportion to their ownership15Copyright © Houghton Mifflin Company. All rights reserved.Determining Dividend PoliciesThe board of directors has sole authority to declare dividendsBut is influenced by senior managers, usually board membersFactors other than earnings that affect the decision to pay dividendsExpected volatility of earningsLevel of dividends affects cash flows16Copyright © Houghton Mifflin Company. All rights reserved.Determining Dividend PoliciesStockholders earn a return on their investment byReceiving dividendsBy selling shares of stock for more than they paid for themInvestors may prefer companies that reinvest their profits rather than pay high dividends if this leads to an increase in share pricesBecause investors pay less tax on capital gains than dividend income17Copyright © Houghton Mifflin Company. All rights reserved.Ratio AnalysisDividends yieldUsed by investors to evaluate the amount of dividends receivedPrice/earnings (P/E) ratioA measure of investors’ confidence in a company’s future18Copyright © Houghton Mifflin Company. All rights reserved.Return on equityMost important ratio associated with stockholders’ equityIt is a common measure of management’s performanceCompensation of top executives is often tied to this measureAffected byNet incomeThe level of stockholders’ equity, which can be affected by management decisions, such as repurchasing shares (treasury stock)Purchase of treasury stock can improve ROE, increase earnings per share, and lower the P/E ratioEvaluating Performance Using Return on Equity (ROE)19Copyright © Houghton Mifflin Company. All rights reserved.Using Stock Options as CompensationStock option planAn agreement to issue stock to employees according to specified termsUsually offered only to management personnelCompensates and motivates management because market value of the stock is tied to the company’s performanceAs market value increases, difference between option price and market price grows, which increases management’s compensation20Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Stock OptionsOn date grantedEstimate fair valueAmount in excess of fair value must be eitherRecorded as compensation expense over the grant periodAdditional paid-in capital will increase as a resultOr reported in notes to financial statementsMost commonly used method When option is exercised and stock is issued, the entry is the same as issuance for any outsider21Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Stock OptionsJuly 1, 20x4: A company grants options to purchase 50,000 shares of $10 par value common stock at current market value of $15 per shareDetermine the gain on stock optionsThe company will report stock options in the notes to the financial statementsMarch 30, 20x7: An employee exercises the option to purchase 2,000 shares. The market price is $25 per share22Copyright © Houghton Mifflin Company. All rights reserved.Ease of transfer of ownershipTaxationSeparate legal entityLack of mutual agencyGovernment regulationContinuous existenceAdvantageDisadvantageAdvantageAdvantageDisadvantageAdvantageDiscussionIdentify whether each of the following characteristics is an advantage or a disadvantage of the corporate form of business23Copyright © Houghton Mifflin Company. All rights reserved.Components of Contributed CapitalObjective 2Identify the components of stockholders’ equity24Copyright © Houghton Mifflin Company. All rights reserved.Stockholders’ Equity represents owners’ claims to a businessOn the balance sheet, the equity section is divided into two partsContributed CapitalInvestments made by stockholdersProvides information about the corporation’s stockTypes; par value; number of shares authorized, issued, and outstandingRetained EarningsEarnings since inception, less any losses, dividends, or transfers to contributed capitalEarnings reinvested in the corporationRepresent stockholders’ claims to the assets from earnings reinvested in the company25Copyright © Houghton Mifflin Company. All rights reserved.Contributed CapitalCommon stockThe company’s residual equityIn case of liquidation, all creditors and usually preferred stockholders’ claims to the company’s assets rank ahead of common stockholders’ claimsCarries voting rightsA means of controlling the corporationPreferred stockHas preference over common stock in one or more ways26Copyright © Houghton Mifflin Company. All rights reserved.Status of Shares of StockIssued stockShares sold or otherwise transferred to stockholdersOnce stock has been authorized, the company decides how many shares to issue and whenUnissued stock has no rights or privileges associated with it until it is issuedOutstanding stockStock that has been issued and is still in circulationStock that is not outstanding is eitherStock given back to the companyTreasury stockRepurchased and held by the company27Copyright © Houghton Mifflin Company. All rights reserved.Relationship of Authorized, Unissued, Issued, Outstanding, and Treasury Shares28Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat kind of information does the contributed capital section of stockholders’ equity provide?The contributed capital section provides information about the corporation’s stockTypes of stockTheir par valueThe number of shares authorized, issued, and outstanding29Copyright © Houghton Mifflin Company. All rights reserved.DividendsObjective 3Account for cash dividends30Copyright © Houghton Mifflin Company. All rights reserved.DividendsCan be paid at any time decided by the board of directorsThe board usually cannot pay a liquidating dividendDividend that exceeds retained earningsIs normally paid when a company is going out of businessSufficient cash must be available to pay a dividendBoard members want to avoid borrowing to pay dividends31Copyright © Houghton Mifflin Company. All rights reserved.Dividends (cont’d)Three important dates associated with dividendsDate of declarationDate board of directors formally declares a dividend will be paidDate of RecordDate on which ownership and right to receive dividend is determinedBetween the date of record and the payment date the stock is said to be ex-dividendDate of paymentDate on which dividend is paid to stockholders of record32Copyright © Houghton Mifflin Company. All rights reserved.A cash dividend of $56,000 is declared on February 21, 20xx, for stockholders of record on March 1, 20xx, to be paid on March 11, 20xxDate of DeclarationThe Cash Dividends Declared account is a temporary stockholders’ equity account that is closed to Retained Earnings at the end of the accounting periodExample of Dividends33Copyright © Houghton Mifflin Company. All rights reserved.A cash dividend of $56,000 is declared on February 21, 20xx, for stockholders of record on March 1, 20xx, to be paid on March 11, 20xx.Date of PaymentNo entry is required This date is used to determine the owners of stock who will receive dividendsDate of RecordAfter this date, until dividend payment, shares are ex-dividendExample of Dividends34Copyright © Houghton Mifflin Company. All rights reserved.DiscussionExplain the accounting treatment of cash dividendsDate of declarationThe total amount of the cash dividend is recorded by a debit to Cash Dividends Declared and a credit to Cash Dividends Payable Date of paymentA debit is made to Cash Dividends Payable and a credit is made to Cash At the end of the accounting periodThe Cash Dividends Declared account is closed to Retained Earnings with a debit to Retained Earnings and a credit to Cash Dividends DeclaredThe Characteristics of Preferred StockObjective 4Identify the characteristics of preferred stock, including the effect on distribution of dividends36Copyright © Houghton Mifflin Company. All rights reserved.Preferred StockHas one or more of the following characteristicsPreference as to dividendsPreference as to assets of the business in liquidationConvertibilityCallable option37Copyright © Houghton Mifflin Company. All rights reserved.Preference as to Dividends means that holders of preferred shares receive dividends before common stockholdersPreferred stockholders are not guaranteed dividendsCompany must declare dividends on preferred stock for liability to existIf dividends not declared to preferred shareholders, consequences depend on terms under which shares were issuedNoncumulative preferred stockCumulative preferred stock38Copyright © Houghton Mifflin Company. All rights reserved.Preference as to Dividends (cont’d)Noncumulative preferred stockReceives no dividend if none is declaredCumulative preferred stockHas a fixed dividend that accumulates from year to yearMust be paid before common stockholders can be paidDividends not paid in the year they are due are called dividends in arrearsAre not a considered a liability because no liability exists until a dividend is declaredAre disclosed in notes to the financial statements39Copyright © Houghton Mifflin Company. All rights reserved.January 1, 20x4: Issued 10,000 shares of $10 par, 6 percent cumulative preferred stock and 50,000 shares common stock. The board of directors declared a $3,000 dividend to preferred stockholders after the first year of operationsExample of Dividends in Arrears40Copyright © Houghton Mifflin Company. All rights reserved.In 20x5, the board of directors declared a $12,000 dividend to be distributed to preferred and common stockholdersRecord the journal entry for the declaration of the dividendExample of Dividends in Arrears41Copyright © Houghton Mifflin Company. All rights reserved.Preference as to Assets means that preferred stockholders have a right to receive the par value of their stock or a larger stated liquidation value per share before the common stockholders receive any share of the company’s assetsThey may also be entitled to any dividends in arrears42Copyright © Houghton Mifflin Company. All rights reserved.Convertible Preferred Stock is preferred stock that can be exchanged for shares of common stock at a ratio stated in the preferred stock contractAppeals to investors becauseOwners are more likely to receive dividends than common stockholdersIf value of common stock rises, preferred stockholders share in the increaseValue of preferred shares increases by converting to common shares43Copyright © Houghton Mifflin Company. All rights reserved.Example of Convertible Preferred StockA company issued 1,000 shares of 8 percent, $100 par value convertible preferred stock for $100 per share. Each share can be converted into 5 shares of the company’s common stock at any time44Copyright © Houghton Mifflin Company. All rights reserved.Example of Convertible Preferred StockAt this point, the preferred stockholder receives more in dividends by keeping the preferred shares and is more likely to receive dividends than the common stockholdersThe market value of the common stock is now $15 per share and, in the past, the owner of common stock could expect dividends of $1 per share per year45Copyright © Houghton Mifflin Company. All rights reserved.Example of Convertible Preferred StockAt this point, the market value of each share of convertible preferred stock is equivalent to $150 and converting to common stock would increase dividend payments from $8 per share to the equivalent of $15 per shareA few years later, the dividends paid to common stockholders increase to $3 per share and market value is $30 per share46Copyright © Houghton Mifflin Company. All rights reserved.Callable Preferred Stock... can be redeemed or retired at the option of the issuing corporation at a price stated in the preferred stock contractThe call price is usually higher than the par value of the stockReasons to call stockA desire to pay lower dividendsBecause the corporation has enough profits to retire preferred stock47Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy is it necessary to disclose dividends in arrears? Disclosure serves to alert potential investors in common stock that those dividends must be paid before common stockholders receive any dividends48Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Stock IssuanceObjective 5Account for the issuance of stock for cash and other assets49Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Stock IssuancePar valueThe amount per share that is entered into the corporation’s capital stock accountsMakes up the legal capital of the corporationAny amount in excess of par value received from the issuance of stock is recorded in the Paid-in Capital in Excess of Par Value account50Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Stock Issuance (cont’d)No-par stock Capital stock that has no par valueIf issued with a stated valueShares are recorded in the Capital Stock account at the stated valueAny amount in excess of par value received from the issuance of stock is recorded in the Paid-in Capital in Excess of Stated Value account If issued without a stated valueAll proceeds are recorded in the Capital Stock account51Copyright © Houghton Mifflin Company. All rights reserved.Bradley Corporation issues 10,000 shares at $10 per share on January 1, 20xxPar Value StockBradley Corporation is authorized to issue 20,000 shares of $10 par value common stockBradley Corporation issues 10,000 shares at $12 per share on January 1, 20xx52Copyright © Houghton Mifflin Company. All rights reserved. Par Value Stock (cont’d)Balance Sheet PresentationStockholders’ Equity Section53Copyright © Houghton Mifflin Company. All rights reserved.Bradley Corporation issues 10,000 shares at $15 per share on January 1, 20xxNo-Par StockBradley Corporation is authorized to issue 20,000 shares of no-par common stockBradley’s board puts a $10 stated value on its no-par stock. It issues 10,000 shares at $15 per share on January 1, 20xx54Copyright © Houghton Mifflin Company. All rights reserved.Issuance of Stock for Noncash AssetsGenerally preferred ruleRecord the transaction at the fair market value of what the corporation is giving up (stock)If fair market value of the stock cannot be determined, use the fair market value of the assets or services receivedBoard of directors has the right to determine the fair value of the property55Copyright © Houghton Mifflin Company. All rights reserved.When Bradley Corporation was formed on January 1, 20xx, its attorney agreed to accept 100 shares of its $10 par value common stock for services renderedAt the time the stock was issued, its market value could not be determined. For similar services, the attorney would have billed $1,500Issuance of Stock for Noncash Assets56Copyright © Houghton Mifflin Company. All rights reserved.Two years later, Bradley Corporation exchanged 1,000 shares of $10 par value common stock for a piece of landAt the time of the exchange, the stock was selling on the market for $16 per shareIssuance of Stock for Noncash Assets57Copyright © Houghton Mifflin Company. All rights reserved.DiscussionHow is the value of stock determined when stock is issued for noncash assets?The general rule is to record the transaction at the fair market value of the stock. If the fair market value of the stock cannot be determined, then the fair market value of the assets or services received is used to record the transaction58Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Treasury StockObjective 6Account for treasury stock59Copyright © Houghton Mifflin Company. All rights reserved.Treasury Stock is capital stock, either common or preferred, that has been issued and later reacquired by the issuing company and has not subsequently been resold or retiredShares are normally purchased on the marketA purchase of treasury stock Reduces assets and stockholders’ equityIs not a purchase of assetsTreasury stock has no rights until it is reissued60Copyright © Houghton Mifflin Company. All rights reserved.Reasons to Purchase Treasury StockHave stock available to distribute to employees through stock option plansMaintain a favorable market for its stockIncrease earnings per shareMaintain additional shares available for such activities as purchasing other companiesPrevent a hostile takeover61Copyright © Houghton Mifflin Company. All rights reserved.Sept. 15: Caprock Corporation purchases 1,000 shares of its common stock on the market for $50 per shareWhen treasury stock is purchased, it is usually recorded at costPurchase of Treasury Stock62Copyright © Houghton Mifflin Company. All rights reserved. Balance Sheet PresentationStockholders’ Equity SectionNotice that the number of shares issued, and therefore legal capital, has not changed even though the number of shares outstanding has decreasedPurchase of Treasury Stock (cont’d)63Copyright © Houghton Mifflin Company. All rights reserved.Nov. 15: Caprock Corporation sells 1,000 shares of its treasury stock for $50 per shareSale of Treasury Stock At CostTreasury Stock, CommonPaid-in Capital,Treasury Stock50,00050,000–0–64Copyright © Houghton Mifflin Company. All rights reserved.Sale of Treasury Stock Above CostWhen treasury shares are sold for an amount greater than their cost, the excess of the sales price over cost should be credited to Paid-in Capital, Treasury StockNo gain should be recorded65Copyright © Houghton Mifflin Company. All rights reserved.Nov. 15: Caprock Corporation sells 1,000 shares of its treasury stock for $60 per shareSale of Treasury Stock Above Cost (cont’d)Treasury Stock, CommonPaid-in Capital,Treasury Stock50,00050,00010,000–0–66Copyright © Houghton Mifflin Company. All rights reserved.Sale of Treasury Stock Below CostIf treasury shares are sold below cost, the difference is deducted from Paid-in Capital, Treasury StockIf this accent does not exist or is insufficient to cover the excess of cost over reissue price, Retained Earnings absorbs the excessNo loss is recorded67Copyright © Houghton Mifflin Company. All rights reserved.Sept. 15: Caprock Corporation purchases 1,000 shares of its common stock on the market for $50 per shareSale of Treasury Stock Below Cost (cont’d)Treasury Stock, CommonPaid-in Capital,Treasury StockRetained Earnings50,000Copyright © Houghton Mifflin Company. All rights reserved.Oct. 15: Caprock Corporation sells 400 shares of its treasury stock for $60 per shareSale of Treasury Stock Below Cost (cont’d)Treasury Stock, CommonPaid-in Capital,Treasury StockRetained Earnings50,00020,0004,000Copyright © Houghton Mifflin Company. All rights reserved.Dec. 15: Caprock Corporation sells 600 shares of its treasury stock for $42 per shareWhen treasury shares are sold below cost, the difference is deducted from Paid-in Capital, Treasury StockSale of Treasury Stock Below Cost (cont’d)Treasury Stock, CommonPaid-in Capital,Treasury StockRetained Earnings50,00020,0004,00030,0004,000In this case, the difference exceeds the balance in the Paid-in Capital, Treasury Stock account by $800–0––0–Copyright © Houghton Mifflin Company. All rights reserved.Dec. 15: Caprock Corporation sells 600 shares of its treasury stock for $42 per shareThe excess is absorbed by the Retained Earnings accountSale of Treasury Stock Below Cost (cont’d)Treasury Stock, CommonPaid-in Capital,Treasury StockRetained Earnings50,00020,0004,00030,0004,000–0––0–800Copyright © Houghton Mifflin Company. All rights reserved.Retirement of Treasury StockTreasury stock is retired when the company determines that it will not reissue stock it has purchasedIf acquisition price original contributed capitalDebit Paid-In Capital, Retirement of StockCopyright © Houghton Mifflin Company. All rights reserved.Nov. 15: Caprock Corporation retires the 1,000 shares of its treasury stock that was acquired for $50,000 on November 15. The $5 par value common stock was originally issued at $6 per shareWhen shares of stock are retired, all items related to those shares are removed from the related capital accountsRetirement of Treasury Stock73Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat effect does the purchase of treasury stock have on return on equity?Since treasury stock reduces equity, the return on equity will increase74Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewIdentify and explain the management issues related to contributed capitalIdentify the components of stockholders’ equityAccount for cash dividendsIdentify the characteristics of preferred stock, including the effect on distribution of dividends75Copyright © Houghton Mifflin Company. All rights reserved. And FinallyAccount for the issuance of stock for cash and other assetsAccount for treasury stock76Copyright © Houghton Mifflin Company. All rights reserved.