M3 - Stockholders' Equity: Part 1

Define common stock and list the basic properties.

Common stock: Residual ownership interest

Basic rights include:

• Voting rights

• Dividend rights

• Rights to share in distribution of assets if corporation is liquidated, after satisfaction of creditor and preferred stockholders’ claims

List some common properties of preferred stock.

• Convertible, callable

• Redeemable

• Dividends can be cumulative and/or participating

What are the two alternative methods of accounting for treasury stock?

Cost method: Treasury stock is debited at cost of shares repurchased.

Legal (par value method/stated value method): Treasury stock is debited at par value of shares repurchased. 

Remember, no gains/losses are recognized on the income statement; income and retained earnings may never increase by the transaction; Additional Paid-in Capital-Treasury Stock account used to record “gains” and absorb “losses.”

Treasury stock is not an asset; cash and property dividends are not paid on treasury stock; stock dividends may be paid on treasury stock.

Summarize the cost method of accounting for treasury stock.

• Recorded, carried, and reissued at reacquisition cost

• Any “gain" is credited to Paid-in Capital-Treasury Stock

• Any “loss” is charged against previous “gain,” then retained earnings

• Reported as a deduction from total stockholders’ equity

Summarize the par value method of account for treasury stock.

• Recorded at par value with cost of stock that is in excess of par value recorded as a deduction to Paid-in Capital-Treasury Stock and then from retained earnings after Paid-in Capital-Treasury Stock is depleted.

• Reported as a deduction from capital stock.