acctg 121

Authorized Shares

  • Request for 1,000,000 authorized shares of stock.

  • Initial issuance of 50,000 shares.

  • Unissued Shares: 1,000,000 - 50,000 = 950,000.

Issued vs. Outstanding Shares

  • Issued Shares: Those that are sold and held by shareholders.

  • Outstanding Shares: Shares that are issued and held by users outside of the company.

  • Founders acting as shareholders still classify as outsiders when holding shares (a dual role).

  • Separate recognition as employee and shareholder—each role is distinct.

Journal Entries for Issuance of Stock

  • Journalizing stock issuance has been discussed in prior lessons.

  • On formation and initial issuance of 15,000 shares with par value of $1:

    • Debit: Cash for $15,000 (15,000 shares * $1)

    • Credit: Common Stock for $15,000.

Par Value vs. Market Value

  • Par Value: Set during formation, generally arbitrary; does not change.

  • Market Value: Fluctuates based on market conditions.

    • Example: Google’s current market price is $311.03; par value is $0.001.

  • Distinction: Market value represents actual trading price, while par value is fixed.

Selling Stock Above Par Value

  • If shares sold above par value, termed as sold at a premium.

  • Scenario:

    • Par value = $1, market price sold = $5.

    • Premium: $5 - $1 = $4.

  • Paid-in capital excess of par accounts for the premium:

    • Receives cash = $5 * 3,000 shares = $15,000.

    • Common stock recorded = $1 * 3,000 = $3,000.

    • Additional paid-in capital = $4 * 3,000 = $12,000.

No Par Value vs. Par Value

  • No Par Value Stock: Does not have par value. No paid-in capital in excess of par account.

    • Journal entry resembles par value stock but without additional lines for excess.

    • For example, if 15,000 shares sold at $1:

    • Debit: Cash for $15,000.

    • Credit: Common Stock for $15,000.

  • Stated Value Stock: Similar accounting process, different terminology. Just replace the term "par value" with "stated value".

Property Exchange for Stock Issuance

  • Another method of issuance is trading stock for property, as seen with companies receiving property for shares issued.

  • Equity of equipment example:

    • Equipment valued at $78,000 for 3,000 shares with $1 par value.

    • Cash would be credited with 3,000 shares worth $3,000 (accounting for par).

  • Remaining $75,000 recognized as paid-in capital in excess of par.

Accounting for Preferred Stock

  • Similar structure as common stock but labeled as preferred stock.

  • Accounting procedure mirrors that of common stock, just replacing terms accordingly.

Treasury Stock

  • Companies may buyback their own shares to:

    • Adjust stock price (believing it’s undervalued).

    • Avoid takeovers by limiting available shares.

    • Utilize shares for employee incentives without issuing new stock.

  • Treasury Stock: Shares bought back held in treasury, leading to reduced outstanding shares.

Outstanding vs. Treasury Shares

  • Example of treasury stock buying back 1,000 shares.

    • Originally 50,000 issued, now 49,000 outstanding after treasury purchase.

  • Distinction made: treasury shares do not confer voting rights or dividends; only outstanding shares do.

Cost Method for Treasury Stock Accounting

  • Treasuries recorded at cost of acquisition, not par value.

  • Example of shares:

    • Company buys back 1,000 shares at $5 each | Total = $5,000.

    • If subsequently sold for $6, the cash received would exceed the cost, recognizing additional paid-in capital.

  • Below cost sales would draw from retained earnings if treasury stock funds are insufficient to cover the loss.

Retirement of Stock

  • Closing out shares by retiring them means they cannot be reissued.

Dividends Overview

  • Cash dividends are drawn from retained earnings (past profits).

  • Legal capital (paid-in capital) is never distributed as dividends. Only earnings support these disbursements; losses prevent dividends.

  • Different treatments exist for preferred vs. common stock dividends, with preferred being paid first.

Exam Preparation

  • Students reminded to arrive early, completing preliminary activities for exams. Bonus questions will not require explanation and should be submitted after the main test completion.

Reconciliations and Journalizing

  • Various examples of journalizing entries based on transactions in assets and payments as reflective of financial activity tracked during accounting cycles, ensuring all transactions are categorized and recorded correctly by accounts.