ACCT6331:FinancialAccounting

ChadLarson

StockholdersEquity
 IssuingStock
Whencompaniesissuessharestheydebitcash,creditcommonstockforits
parvalue,andcreditpaidincapitalforthedifferencebetweencashand
thecommonstockaccount

Whatisparvalueandwhyisitused?
Forinvestors,parvalueservedasaguaranteethatotherinvestorswouldnot
receivesharesonmorefavorableterms.
Itnowhaslittlemeaningandisoftensetatatrivialamount($1or$0.01)

Paidincapitalplusparvaluetellsusthetotalreceivedfromissuance

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TreasuryStock
Stockcanberepurchasedbyacompanyand
heldinTreasury
Thecompanywilldebittreasurystockandcredit
cash
Whatkindofaccountistreasurystock?
Acontraequityaccount
Manystateslimittheamountoftreasurystockacorporationcanown
becauseitmayjeopardizethelegalrightsofthecreditors

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 TreasuryStock
Howaregainsorlossesonreissuanceoftreasurystocktreated?
Theydonotgenerateanaccountinggainorloss
Transactionsbetweenownersandthecompanydonotgenerate
profit/loss
Paidincapitalisadjusteddirectlyforanydifferencebetweenoriginal
pricepaidtorepurchasesharesandtheproceedsfromreissuance

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StockRepurchases
Whydocompaniesbuyback Howdocompaniesbuyback
Stock? Stock?

EmployeeStockOptionPlans Openmarketpurchase

Meetdemandsofconvertible Fixedpricetenderoffer
securities
Dutchauctiontenderoffer
Stockisundervalued

Distributecashtoowners

ManipulateEPS

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ShareRetirementvs.TreasuryRepurchase
Retiredsharesaretreateddifferentlythantreasuryshares
Withrepurchasedandretiredshares,ifthepricepaidtorepurchaseshares
differsfromtheissuanceprice,theaccountingoptionsinclude
1)Usepaidincapitalastheplug
2)Useretainedearningsastheplug
3)Allocatebetweenthepaidincapitalandretainedearnings
Equityisreducedequallyunderanyalternative,itisaquestionof
allocationamongequityaccounts.

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Preferredstock:
Characteristics
Relativetocommonstock,itconfersoninvestorscertainpreferences to
dividendpaymentsandthedistributionofcorporateassets.

Preferredstockholdersmustbepaidtheirdividendsinfullbeforeanycash
distributioncanbemadetocommonshareholders.

Ifthecompanyisliquidated,preferredstockholdersmustreceivecashor
otherassetsatleastequaltothestated(par)valueoftheirsharesbefore
anyassetsaredistributedtocommonshareholders.

Preferreddividendsaredeclaredquarterlyandcanbeomitted.

$100statedvalue, Annualdividendof$8isnot
8%preferredstock taxdeductibletocompany

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Whycompaniesissuepreferredstock

1. Itslessrisky tothecorporationthandebt,whichmayappealto
financiallyweakcompanies.
MoreriskythanDebtforinvestorssincepayoffsareuncertain.

2. Preferredstockistreatedlikeequity ratherthandebtonthe
financialstatementstherebyavoidingissuesrelatedtodebt
covenants.

3. DividendspaiddonotservetoreduceNetIncomelikeinterest
expensewould.
Downsideisdividendspaidarenottaxdeductiblelikeintereston
debt.Thismaynotbeanissueifcompanyisinfinancialtrouble.

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DisclosuresrelatedtoEquity
BalanceSheetDisclosure

StatementofStockholdersEquity

EquityFootnoteDisclosures
EmployeeStockOptions
EarningsPerShare

OtherdiscussioninMD&A(management
discussionandanalysis)

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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)

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

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 IssuingStock
Companyissues10,000sharesof$1parcommonstockat$50pershare.
Thecompanyrecordsthestockissuanceas:

DRCash$500,000
CRCommonstock,$1parvalue$10,000
CRPaidincapitalinexcessofpar490,000

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

1 10,000 490,000 500,000

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TreasuryStock
Thecompanybuysback200sharesatacostof$48each.

DR Treasurystock$9,600
CRCash$9,600

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

1 10,000 490,000 500,000

2 9,600 9,600

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TreasuryStock
Thecompanydecidestoresell200treasurysharesat$53pershare:

DR Cash$10,600
CRTreasurystock $9,600
CRPaidincapitalinexcessofpar 1,000

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

1 10,000 490,000 500,000

2 9,600 9,600

3 1,000 9,600 10,600

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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

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

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

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RecordingNetincome
Weveseenthisentrybefore

DRCloseallrevenueandexpenseaccounts$700,000
CRRetainedEarnings$700,000

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

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

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ComprehensiveIncome
Representschangesinthenetequityposition
ofthefirmunrelatedtocontributionsbyand
distributionstoshareholders.
Includesgains/lossesthatarenotrecognized
intheincomestatement
Thesegains/lossesarenotclosedoutto
retainedearningseachperiodbutinsteadare
closedouttoAccumulatedOther
ComprehensiveIncome(AOCI)

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23
PayingDividends
Corporationsrecordaliabilitywhendividendsaredeclared

DRRetainedEarnings$1,000
CRDividendsPayable $1,000

Whendividendsarepaidtheliabilityisdebited

DRDividendsPayable$1,000
CRCash$1,000

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

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

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StockDividends
Whatistheeffectofgivingstockdividends?
Simplyincreasesthenumberofshares
outstandingandadjuststheshareholderequity
accounts.
SmallStockDividends(<20%),1000shares,MV$50,Par$1
DRRetainedEarnings$50,000
CRCommonStock,ParValue$1,000
CRPaidinCapital,CommonStock$49,000

LargeStockDividends(>20%),10,000shares,MV$50,Par
$1
DRRetainedEarnings$10,000
CRCommonStock,ParValue$10,000

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

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

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

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

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StockSplits
Onemotivationistogetsharesinthetradablerange

Optionsinclude:
Creditparvalue,commonstockbytheincreaseinnumber
ofshares
Debit
1)paidincapital,commonstock
OR
2)retainedearnings

OR

3)Noentry,justchangeparvalueandnumberofshares

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

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

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

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

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 StockholdersEquity CommonTransactions
ContributedCapital Contraequity

CommonStock Par APIC TreasuryStock RetainedEarnings Cash

Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.

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

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 CommonEquityTransactions
CommonStock Par APIC TreasuryStock RetainedEarnings Cash
Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal. Beg.Bal.
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
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Stockbasedcompensation

Companiesusestockoptions:

Tohelpalignemployees
interestswiththeinterestsof
owners.

Toattracttalentedemployees
whileconservingcash.

Totakeadvantageoftaxrules TheNumberofU.S.Employees
thatpostponeemployeetaxes. HoldingStockOptions

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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.

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Stockoptionsaccounting:
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.

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Stockoptionsaccounting:
FairValueMethod

TheFASBsinitialrecommendation:
Valuedatgrantdateusingacceptedoption
pricingmodel.
Stockoption
Chargetocompensationexpenseover
with$20 vestingperiod.
exerciseprice Subsequentchangestofairvalueare
ignored.

Oppositionsurfacedinthebusinesscommunity
(andinCongress)basedonargumentsabout:
FASBbackeddownandallowedtwooptions(FV
andIntrinsicMethod).
In2004,theFASBeliminatedtheintrinsic
method.

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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

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DuPont Practice

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StockholdersEquityQuestions
CompareDupontsNetIncomewithDividendsDeclaredin
Fiscal2016?
NetIncome$2,525million,$1,341million(Commonand
Preferred)

HowmuchdidDuPontspendrepurchasingsharesin2016?
$916million

Whatwastheaveragecostpershare?
$916million/13.152=$69.79pershare

Werethesesharesretired?
Yes

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StockholdersEquityQuestions
HowmanysharesofTreasuryStockdoes
DuPontholdattheendof2016?
87,041,000

Whatistheaveragecostpershare?
$6,727million/87.041millionshares=$77.285
pershare

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StockholdersEquityQuestions
WhatisthecurrentamountinDuPontsAccumulated
OtherComprehensiveIncome?
$9,911millionaccumulatedloss

HowdoesthiscomparetoDuPontsRetainedEarnings?
This is a very significantaccumulatedlossrelativeto
retainedearningswhichhasabalanceof$14,924million

WhatisthelargestcomponentofDuponts
AccumulatedOtherComprehensiveIncomeBalance?
A severelyunderfunded pension plan

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Summary
Summary
Equity

NextTime
EquityandDellComputer

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