What does Stockholder’s Equity represent in the Accounting Equation?
The Owners’ residual claims
Stockholder’s Equity-3 sections
1. Paid in Capital – amount owners have invested
2. Retained Earnings – amount of earnings the corporation as kept in the
company (retained). What accounts...
Chapter 10 – Stockholder’s Equity
What does Stockholder’s Equity represent in the Accounting Equation?
The Owners’ residual claims
Stockholder’s Equity-3 sections
1. Paid in Capital – amount owners have invested
2. Retained Earnings – amount of earnings the corporation as kept in the
company (retained). What accounts increase/decrease Retained Earnings?
3. Treasury Stock – Corporations stock that the company has repurchased on
the secondary market
Assets= Liabilities (creditors’ claim) + Stockholders Equity (owners’
To become corporation:
File articles of incorporation with the state that list nature of firms business, # of shares
of stock to be issued, list initial board of directors.
Can then sell stockor ownership in the corporation
1) Founder friends family
2) Outside angel investors/ venture capital firms
3) Go public: sell on a public market: NYSE or nasdaq or otc (seo is seasoned
equity offerings.) stockholders may have right to vote, right to dividends, right to
share in dividend of assets if corporation is dissolved, preemptive right (right to
keep your proportional share)
Stockholders may have the right to vote, the right to dividends, the right to share in
dividend of assets if corporation is dissolved, and the preemptive right.
Advantages and disadvantages of a corporation
disadvantages: government regulation is cumbersome and expensive; double taxation
advantages: stockholders have limited liability because corp is separate entity, can raise
more money, continuous life
What are authorized vs issued vs outstanding shares?
Stock - share of ownership in company, may have par value, stated value, or be no-par
stock. The par and stated values are for the most part meaningless these days,
however they change the journal entry when stock is sold to investors
Issuing stock - initial offer of stock is to either an underwriter (who sells to investors) or
directly to investor. This is called primary market, after issued its traded among
investors in secondary market. Once stock is traded in secondary market there is no
direct financial impact on corporation.
Issue price - amount stock is sold for
Authorized shares - # of sahres authorized by board of directors
,Issued shares - # of shares that have been sold/issued to investors
Outstanding shares - # of shares held by investors (only differes from outstanding
shares if share repurchases (treasury shares)).
What is the difference between Common Stock and Preferred Stock?
Common stock - represents ownership (class A comes with voting rights)
Preferred stock - receive dividends before common stockholdrs, dividends paid are
specified (for example 9 bucks a year) do not recieve anyting more. Similar to loan in
that payments are specified but no rights to ownershp. Dying breed.
Record the sale of Stock for stock with and without Par Value
Par value: par value is $3 and they issue 1000 shares
DR Cash $3000
CR Common Stock $3000
Above par: par is still $3 buts tock issued for $5 and 1000 sold
DR Cash $5000
CR Common stock $3000
CR paid in capital in excess of par $2000
No par stock: 1000 shares for $5
DR cash $5000
CR Common stock $5000
Issuing stock for assets instead of for cash: exchanged 500 shares of common
stock with par value of $3 for land with fair value of $2000
DR Land $2000
CR common stock 1500
CR paid in capital $500
Issuing preferred stock: corporation issues 500 shares of $2 par preffered shares for
$5 per share
DR $2500
CR preffered stock $1000
CR paid in capital - preferred $1500
Record the payment of cash Dividends (J/E at date of Declaration vs Date of
Record vs Date of Payment)
Cash dividends - distribution of cash to stockholders.common stock its declared as an
amount per share. Preferred stock declared as an amount per share or a % of par.
A specific dollar amount: preferred stock pays $3 a share and there are 1000
outstanding shares and board of directors declarea cash dividend for preferred stock.
Dividend paid is 1000*$3
, At declaration date:
DR Retained earnings $3000 (or dividends)
CR Dividends payable $3000
A percentage of par value: there are 1000 shares outstanding of 20% $5 par preferred
stock. Dividend paid = 1000*$5*20%
At declaration date:
DR reatined earnings $1000 (or dividends)
CR dividends payable $1000
On date of record no journal entry is recorded.
On payment date the dividends are paid:
DR Dividend payable $3000
CR cash $3000
Declaration date - date corporation board of directors declaresthey are paying a
dividend. The declaration crerates an obligation
Date of record - the stockholders holding the shares on the date of record are the
stockholders that will receive the dividend payment
Payment date - the date the dividend is paid
· Allocation when preferred shares are cumulative vs noncumulative
Cumulative = if company does not pay all the annual preferred dividends in a particular
year then in future years the company must pay all of these dividends that have not
been paid (dividends in arrears) before they pay any dividends to common stockholders
Noncumulative = the company is not required to pay any dividends in arrears from prior
years.
Dividends in arrears = leftover preferred stock from not paying it all out the year before ,
must be paid before they pay common stockholders. If non cumulative they dont have to
pay
Journal entry recorded on date of declaration
DR retained earnings $140000
CR Dividends payable -preferred $12000
CR Dividends payable - common $2000
Stock Split – What changes on the stockholder’s equity section of the balance
sheet when a 2 for 1 stock split is given? What if a 3 for 1 stock split is given?
Stock dividends - a distribution of the corps own stock to owners of the corporation
-affects only stockholders equity accounts
- the value of stockholders equity does not change
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