Chapter 11 Reporting and Interpreting Owners Equity ACCT 240 004 December 3rd Notes Understanding the business Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limited liability Because a corporation is a separate legal entity it can Own assets Incur liabilities Sue and be sued Enter into contracts Ownership Stockholders rights 1 Voting in person or by proxy 2 Proportionate distribution of profits dividends 3 Proportionate distributions of assets in liquidation Stockholders Board of directors President VPs Authorized issued and outstanding shares Authorized shares are the maximum number of shares of capital stock that can be sold to the public Issued shares are authorized shares of stock that have been sold Outstanding Shares are owned by stockholders Treasury shares are issued shares that have been bought back by the corporation Unissued shares are authorized shares of stock that have never been sold Earnings per share Net Income Average number of shares outstanding for the period EPS is the most widely watched financial ratio Common stock transactions Two primary sources of stockholder s equity Contributes capital Common stock par value Capital in excess of par value Retained earnings Common stock transactions Basic voting stock Ranks after preferred stock Dividend set by board of directors Common stock transactions Par Value Nominal Value Legal Capital Initial Sale of Stock Legal capital is the amount of capital required by the state that must remain invested in the business INITIAL SALE OF STOCK Initial public offering IPO First time a corporations sells to the public E11 5 Cash 112 000 Cash 25 000 Common stock 56 000 Capital in excess of par value 56 000 Common Stock 10 000 Capital in excess of par value 15 000 Contributed Capital Common stock par 10 authorized 11 500 shares outstanding 6600 shares 66 000 Contributed Capital in excess of par common 71 000 Total Contributed capital 137 000 Retained Earnings 6000 Total SE 131 000 Stock issued for employee compensation Employee compensation package includes salary and stock options Stock options allow employees to purchase stock from the corporation at a predetermined fixed price Repurchase Kroger buys its own stock in the secondary market Treasury stock Treasury stock is a contra equity account If Kroger requires 100 000 shares of its common stock at 20 share here s journal entry If they then reissued 10 000 shares of the treasury stock at 30 per shae Treasury stock 2 000 000 Cash 2 000 000 Journal entry is Cash 300 000 Treasury stock 200 000 Capital in excess of par value 100 000 E11 7 1a Cash 250 000 Common Stock 100 000 Capital in excess of par value 150 000 b Treasury stock 52 000 Cash 52 000 Balance Sheet Contributed Capital Common stock par 2 authorized 80 000 shares 100 000 Issued 50 000 outstanding 49 000 shares Capital In excess if par common 2 400 000 Total Contributes Capital 2 500 000 Treasury Stock 52 000 SE 2 448 000 If then resold 500 shares of a treasury stock for 54 share Cash 27 000 Treasury Stock 26 000 Capital in excess of par value 1000