ACCT 6331: Financial Accounting: Stockholders' Equity

ACCT6331:FinancialAccounting
ChadLarson
StockholdersEquity
IssuingStock
Whencompaniesissuessharestheydebitcash,creditcommonstockforits
parvalue,andcreditpaidincapitalforthedifferencebetweencashand
thecommonstockaccount
Whatisparvalueandwhyisitused?
Forinvestors,parvalueservedasaguaranteethatotherinvestorswouldnot
receivesharesonmorefavorableterms.
Itnowhaslittlemeaningandisoftensetatatrivialamount($1or$0.01)
Paidincapitalplusparvaluetellsusthetotalreceivedfromissuance
2
TreasuryStock
Stockcanberepurchasedbyacompanyand
heldinTreasury
Thecompanywilldebittreasurystockandcredit
cash
Whatkindofaccountistreasurystock?
Acontraequityaccount
Manystateslimittheamountoftreasurystockacorporationcanown
becauseitmayjeopardizethelegalrightsofthecreditors
3
TreasuryStock
Howaregainsorlossesonreissuanceoftreasurystocktreated?
Theydonotgenerateanaccountinggainorloss
Transactionsbetweenownersandthecompanydonotgenerate
profit/loss
Paidincapitalisadjusteddirectlyforanydifferencebetweenoriginal
pricepaidtorepurchasesharesandtheproceedsfromreissuance
4
StockRepurchases
Whydocompaniesbuyback Howdocompaniesbuyback
Stock? Stock?
EmployeeStockOptionPlans Openmarketpurchase
Meetdemandsofconvertible Fixedpricetenderoffer
securities
Dutchauctiontenderoffer
Stockisundervalued
Distributecashtoowners
ManipulateEPS
5
ShareRetirementvs.TreasuryRepurchase
Retiredsharesaretreateddifferentlythantreasuryshares
Withrepurchasedandretiredshares,ifthepricepaidtorepurchaseshares
differsfromtheissuanceprice,theaccountingoptionsinclude
1)Usepaidincapitalastheplug
2)Useretainedearningsastheplug
3)Allocatebetweenthepaidincapitalandretainedearnings
Equityisreducedequallyunderanyalternative,itisaquestionof
allocationamongequityaccounts.
6
Preferredstock:
Characteristics
Relativetocommonstock,itconfersoninvestorscertainpreferences to
dividendpaymentsandthedistributionofcorporateassets.
Preferredstockholdersmustbepaidtheirdividendsinfullbeforeanycash
distributioncanbemadetocommonshareholders.
Ifthecompanyisliquidated,preferredstockholdersmustreceivecashor
otherassetsatleastequaltothestated(par)valueoftheirsharesbefore
anyassetsaredistributedtocommonshareholders.
Preferreddividendsaredeclaredquarterlyandcanbeomitted.
$100statedvalue, Annualdividendof$8isnot
8%preferredstock taxdeductibletocompany
7
Whycompaniesissuepreferredstock
1. Itslessrisky tothecorporationthandebt,whichmayappealto
financiallyweakcompanies.
MoreriskythanDebtforinvestorssincepayoffsareuncertain.
2. Preferredstockistreatedlikeequity ratherthandebtonthe
financialstatementstherebyavoidingissuesrelatedtodebt
covenants.
3. DividendspaiddonotservetoreduceNetIncomelikeinterest
expensewould.
Downsideisdividendspaidarenottaxdeductiblelikeintereston
debt.Thismaynotbeanissueifcompanyisinfinancialtrouble.
8
DisclosuresrelatedtoEquity
BalanceSheetDisclosure
StatementofStockholdersEquity
EquityFootnoteDisclosures
EmployeeStockOptions
EarningsPerShare
OtherdiscussioninMD&A(management
discussionandanalysis)
9
StockholdersEquity CommonTransactions
1.Issuesharesforcash 10,000Sharesfor$50each,$1par
2.Buybacksharesandholdthem 200Sharesat$48each
3.Reissuepreviouslyreacquiredshares 200Sharesat$53each
4.Reacquiresharesandretirethem 400Sharesat$55each
5.Recordnetincomefortheperiod $700,000
6.Declareandpaycashdividends $1,000oftotaldividends
7.Declareasmall(<20%)stockdividend 1,000Shares,MarketPrice$50,par$1
8.Declarealarge(>20%)stockdividend 10,000Shares,MarketPrice$50,par$1
9.Splitshares 2for1split(assumingoriginal10,000
shares)
10
ContributedCapital Contraequity
CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.
11
IssuingStock
Companyissues10,000sharesof$1parcommonstockat$50pershare.
Thecompanyrecordsthestockissuanceas:
DRCash$500,000
CRCommonstock,$1parvalue$10,000
CRPaidincapitalinexcessofpar490,000
12

1 10,000 490,000 500,000
13
TreasuryStock
Thecompanybuysback200sharesatacostof$48each.
DR Treasurystock$9,600
CRCash$9,600
14

1 10,000 490,000 500,000
2 9,600 9,600
15
TreasuryStock
Thecompanydecidestoresell200treasurysharesat$53pershare:
DR Cash$10,600
CRTreasurystock $9,600
CRPaidincapitalinexcessofpar 1,000
16

1 10,000 490,000 500,000
2 9,600 9,600
3 1,000 9,600 10,600
17
ShareRetirementvs.TreasuryRepurchase
Retiredsharesaretreateddifferentlythantreasuryshares
Withrepurchasedandretiredshares,ifthepricepaidto
repurchasesharesdiffersfromtheissuanceprice,the
accountingoptionsinclude
1)Usepaidincapitalastheplug
2)Useretainedearningsastheplug
3)Allocatebetweenthepaidincapitalandretainedearnings
Equityisreducedequallyunderanyalternative,itisaquestionof
allocationamongequityaccounts.
Reacquire400sharesat$55andretirethemusingoption
2fromabove.
DRParValue$400
DRPaidincapitalinexcessofpar19,600
DRRetainedEarnings 2,000
CRCash $22,000
18

1 10,000 490,000 500,000
2 9,600 9,600
3 1,000 9,600 10,600
4400 19,600 2,000 22,000
19
RecordingNetincome
Weveseenthisentrybefore
DRCloseallrevenueandexpenseaccounts$700,000
CRRetainedEarnings$700,000
20

1 10,000 490,000 500,000
2 9,600 9,600
3 1,000 9,600 10,600
4400 19,600 2,000 22,000

5 700,000
21
ComprehensiveIncome
Representschangesinthenetequityposition
ofthefirmunrelatedtocontributionsbyand
distributionstoshareholders.
Includesgains/lossesthatarenotrecognized
intheincomestatement
Thesegains/lossesarenotclosedoutto
retainedearningseachperiodbutinsteadare
closedouttoAccumulatedOther
ComprehensiveIncome(AOCI)
22
23
PayingDividends
Corporationsrecordaliabilitywhendividendsaredeclared
DRRetainedEarnings$1,000
CRDividendsPayable $1,000
Whendividendsarepaidtheliabilityisdebited
DRDividendsPayable$1,000
CRCash$1,000
24

1 10,000 490,000 500,000
2 9,600 9,600
3 1,000 9,600 10,600
4400 19,600 2,000 22,000

5 700,000
6 1,000 1,000
25
StockDividends
Whatistheeffectofgivingstockdividends?
Simplyincreasesthenumberofshares
outstandingandadjuststheshareholderequity
accounts.
SmallStockDividends(<20%),1000shares,MV$50,Par$1
CRCommonStock,ParValue$1,000
CRPaidinCapital,CommonStock$49,000
LargeStockDividends(>20%),10,000shares,MV$50,Par
$1
CRCommonStock,ParValue$10,000
26

1 10,000 490,000 500,000
2 9,600 9,600
3 1,000 9,600 10,600
4400 19,600 2,000 22,000

5 700,000
6 1,000 1,000
7 1,000 49,000 50,000
27

1 10,000 490,000 500,000
2 9,600 9,600
3 1,000 9,600 10,600
4400 19,600 2,000 22,000

5 700,000
6 1,000 1,000
7 1,000 49,000 50,000
8 10,000 10,000
28
StockSplits
Onemotivationistogetsharesinthetradablerange
Optionsinclude:
Creditparvalue,commonstockbytheincreaseinnumber
ofshares
Debit
1)paidincapital,commonstock
OR
2)retainedearnings
OR
3)Noentry,justchangeparvalueandnumberofshares
29

1 10,000 490,000 500,000
2 9,600 9,600
3 1,000 9,600 10,600
4400 19,600 2,000 22,000

5 700,000
6 1,000 1,000
7 1,000 49,000 50,000
8 10,000 10,000
9Option1 10,000 10,000
30

1 10,000 490,000 500,000
2 9,600 9,600
3 1,000 9,600 10,600
4400 19,600 2,000 22,000

5 700,000
6 1,000 1,000
7 1,000 49,000 50,000
8 10,000 10,000
9Option1 10,000 10,000
Option2 10,000 10,000
31

1 10,000 490,000 500,000
2 9,600 9,600
3 1,000 9,600 10,600
4400 19,600 2,000 22,000

5 700,000
6 1,000 1,000
7 1,000 49,000 50,000
8 10,000 10,000
9Option1 10,000 10,000
Option2 10,000 10,000
Option3 changenumberofshares(20,000)andparvaluepershare($0.50) nojournalentrynecessary
32
CommonEquityTransactions
Proceeds
1 Par minus Proceeds
par
Costto Costto
2
acquire acquire
Costwhen
3 Plug Plug Proceeds
acquired
APICat Costto
4Par Plug Plug
issue acquire
5 NI
6 Cashpaid Cashpaid
Market
7 Par minus Market
par
8 Par Par
9Option1 Par Par
Option2 Par Par
Option3 memoentrynotingincreaseinnumberofsharesanddecreaseinparvaluepershare
33
Stockbasedcompensation
Companiesusestockoptions:
Tohelpalignemployees
interestswiththeinterestsof
owners.
Toattracttalentedemployees
whileconservingcash.
Totakeadvantageoftaxrules TheNumberofU.S.Employees
thatpostponeemployeetaxes. HoldingStockOptions
34
Stockoptionsaccounting:
IntrinsicValueMethod
APBOpinionNo.25 wasissuedin Case1:Noexpenserecorded
1972,beforeoptionvaluation
methodsweredeveloped. Shareprice
Optionwith is$19.99at
$20exercise grantdate.
price
Optionsissuedwithanexercise
priceequaltoorabovethestock
marketpricewereassumedto Case2:Expenseisrecorded
havenovalue.
Optionwith Shareprice
$20exercise is$20.01at
price grantdate.
35
IntrinsicValueMethod
Sofirmsusuallygrantedatthe Case1:Noexpenserecorded
moneyoptions,resultinginno
compensationexpense. Optionwith Sharepriceis
$20exercise $20.00at
price
grantdate.
Asoptionuseincreased,auditors
andothersincreasinglythought
Case2:Expenseisrecorded
thatAPBNo.25 wasincorrect.
Optionwith Sharepriceis
TheFASBbegantoreconsiderthe $20exercise $20.01at
price
approachin1984. grantdate.
36
FairValueMethod
TheFASBsinitialrecommendation:
Valuedatgrantdateusingacceptedoption
pricingmodel.
Stockoption
Chargetocompensationexpenseover
with$20 vestingperiod.
exerciseprice Subsequentchangestofairvalueare
ignored.
Oppositionsurfacedinthebusinesscommunity
(andinCongress)basedonargumentsabout:
FASBbackeddownandallowedtwooptions(FV
andIntrinsicMethod).
In2004,theFASBeliminatedtheintrinsic
method.
37
Stockoptionsaccounting
Theoptionshaveavestingperiodofthreeyears.
Theentrytorecordcompensationexpenseeachyearofthe3yearvestingperiod:
DR Compensationexpense(1/3*30,000*$10.05)$100,500
CR Paidincapital stockoptions$100,500
Theentrytorecordtheexerciseofemployeestockoptions:
DR Cash(30,000x$30) $900,000
DR Paidincapital stockoptions($100,500x3years)301,500
CR Commonstock (splitoutbetweenparandAPIC) $1,201,500
38
DuPont Practice
39
StockholdersEquityQuestions
CompareDupontsNetIncomewithDividendsDeclaredin
Fiscal2016?
NetIncome$2,525million,$1,341million(Commonand
Preferred)
HowmuchdidDuPontspendrepurchasingsharesin2016?
$916million
Whatwastheaveragecostpershare?
$916million/13.152=$69.79pershare
Werethesesharesretired?
Yes
40
HowmanysharesofTreasuryStockdoes
DuPontholdattheendof2016?
87,041,000
Whatistheaveragecostpershare?
$6,727million/87.041millionshares=$77.285
pershare
41
WhatisthecurrentamountinDuPontsAccumulated
OtherComprehensiveIncome?
$9,911millionaccumulatedloss
HowdoesthiscomparetoDuPontsRetainedEarnings?
This is a very significantaccumulatedlossrelativeto
retainedearningswhichhasabalanceof$14,924million
WhatisthelargestcomponentofDuponts
AccumulatedOtherComprehensiveIncomeBalance?
A severelyunderfunded pension plan
42
Summary
Summary
Equity
NextTime
EquityandDellComputer
43

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ACCT6331:FinancialAccounting

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

3 1,000 9,600 10,600

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

3 1,000 9,600 10,600

4400 19,600 2,000 22,000

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

3 1,000 9,600 10,600

4400 19,600 2,000 22,000

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

3 1,000 9,600 10,600

4400 19,600 2,000 22,000

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

3 1,000 9,600 10,600

4400 19,600 2,000 22,000

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

3 1,000 9,600 10,600

4400 19,600 2,000 22,000

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

3 1,000 9,600 10,600

4400 19,600 2,000 22,000

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

3 1,000 9,600 10,600

4400 19,600 2,000 22,000

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

1 10,000 490,000 500,000

3 1,000 9,600 10,600

4400 19,600 2,000 22,000

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