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” m larry. Walther this is nprinciplesofaccountingcom. Chapter. 14.
And in this module. We are going going to very nsimply. Look. At features of common and preferred stock now companies may ndifferent types of stock.
For example. A family business may ncreate. A class. A and a class b.
Stock. They may retain the class. A stock nwhich has voting rights and sell to the public. The class b.
Stock nwhich does not have voting rights. They re able to share nthe ownership of the business. But retain control of the business different classes of nstock have advantages and disadvantages that can be modified non a company by company basis. Oftentimes tax and financing.
Nconsiderations drive. This process now in addition to multiple nclasses of common stock. A company may issue preferred stock. It s called preferred because nit is a preference in dividends its dividends are paid before the common nshareholders.
Get their distributions. Dividends are more or nless expected. Each period. Preferred stock usually has na par value.
That s significant and the dividend. Right is nstated as a percentage of par for example nit may be 10. Preferred stock so 10 of par value would be the dividend. Some preferred stocks are cumulative this means that if a company fails to pay na dividend in a particular period.
That that dividend has to be paid at some point nin. The future before the common can ever collect those dividends dividends that have been missed on ncumulative preferred stock are called dividends in arrears. They have to be brought current. Before nother distributions can be made to other classes or shareholders non cumulative.
If a dividend is nmissed. It s just lost to history preferred stock usually does not vote nnot always. But typically it s not voting it does maintain its nliquidation preference. It s usually paid off after creditors.
But nbefore common stock preferred stock may be callable that is the company may reserve. The right nto repurchase. It at a prearranged price within some particular time window for example callable. At 105 means.
The ncompany could buy back its preferred stock at 105 of its par value. Preferred stock may also be convertible. This is a nice feature because it enables nthe holder of those shares to exchange them for common shares for example there may be na three to one exchange ratio f40 shares of common might be issued for n1 share of preferred this is great from an investor point nof view because they get their preferred dividend and if the common stock. Appreciates nsignificantly in value they may be able to enjoy that ride by exchanging those npreferred shares for the common some preferred stock may nhave a fixed maturity date.
That allows the company nto buy back the stock or may even require the company to nbuy back the preferred stock at some future date. Now looking at common stock. More closely typical features some common sometimes npays dividends. Sometimes it doesn t some common sometimes has pre emptive nrights.
Sometimes it doesn t the pre emptive right something that d ntypically be specified in the articles of incorporation says that if nyou own 10 of a company and the company wants to issue additional nshares. You have a right of first refusal you re able to buy or maintain your 10 nownership by buying in the new share issuance. Before those shares nare offered to other parties. It s intended to prevent a particular nshareholder s interest from being diluted oftentimes that feature nis not present.
However voting normally the common nstock has a voting right it enables that group of shareholders to ncontrol the company elect the board of directors select the auditor nbasic matters of corporate governance in event of liquidation of a business ncommon shareholders come last in line that s a bad thing. But the good thing is that nit s their surpluses. They get all of the residual that doesn t ngo to creditors and preferred stock. All the residual interest nflows to the common stock.
Common shareholders are entitled to nreceive reports on financial performance about a business that they own par value a par value represents nthe legal capital of the firm. There is some historic precedent for this nalthough. It is long since lost in history original purchasers of stock nare contingently liable to the company if they buy stock below par value that is the company can later call for nadditional capital contributions as a result. Most companies nwhen they issue stock will issue it at a price nfar above par value that negates any concern about nan additional call on shareholders for additional capital contributions.
It s usually stated as a nominal price you might see a 1 or neven a 001. Par. Value as a practical matter then par value is not just real important but nit does trigger accounting significance. We record common stock at its par value and any purchase price or issue price in nexcess of par value is recorded to have paid in capital in excess of par value.
Naccount as shown in this journal entry. Here the company issued. 100000. Shares.
Nof 1 par value stock or 1 million. So they issued it at 10 a share there s the debit to cash. 1 million the credit to common nstock is. The 100000 that s.
100000. Shares at 1. Par per. Share and the 900000.
Difference goes to npaid in capital in excess of par. Some companies. May issue nstock without par value in which case cash is debited and common nstock. Is credited for the issue price.
There would be no need to maintain na separate paid in capital account. A stock can be issued for other than cash. Nfor land or other assets. The specific asset account would nbe debited instead of cash and common stock would be credited for nthe fair value of the asset or the fair value of the stock nwhichever is more clearly determinable cash.
Dividends. Dividends are a matter nof board discretion at least and certainly insofar as ncommon stock is concerned many companies. However pride themselves nin. A long history of regular dividends and even.
In increasing dividends non. A regular basis. Other companies prefer to reinvest naccumulated earnings in new ventures of the business. A dividend declaration is a formal action nby.
The board of directors to indicate that a divided will be paid. It establishes a legal nliability to the company dividends account is direct nreduction of retained earnings so let s see what happens on the date of declaration we debit ndividends and credit dividends payable when the payment occurs nwe ll turn around and debit dividends payable and credit cash notice in this case i ve got a two month nlag between the date of declaration and the date of payment so let s think about those dates for na minute. The date of declaration s the day nthe board acts to declare a dividend. The date of payment is the day nthey disperse the funds there s usually about a month.
Nafter the date of declaration up until an ex dividend date. The ex dividend date determines. When nthe right to receive the dividend shifts. So if you own stock on nthe date of declaration.
But sell it before the ex dividend date. You nlose the right to receive that dividend. If you own the stock on nthe date of declaration and continue to hold it beyond. The ex dividend ndate.
Then when you sell the stock you will have retained the right nto receive the dividend. So an ex dividend date. Usually nprecedes the date of record date of record is the formal date. When na company would look at its shareholder records to determine who to distribute ndividends to on the date of payment.
The ex dividend date for a practical nmatter for record keeping purposes exceeds. The stipulated date of record nby two or three days typically finally let s look at nthe stockholders equity section. It should include detailed descriptions of nthe type of stock. And its basic features.
The number of shares authorized nthe. Number issued. The number outstanding legal capital is a term used nto mean total par value total paid in capital is the legal ncapital plus paid in capital in excess of par value and here s an illustration of na stockholders equity section. It s fairly complex.
I ve got preferred stock and common nstock with very detailed disclosures. Additional paid in capital on nboth classes of stock. And then additional retained earnings to come nup with the total stockholders equity to close this module. Let s consider nthe presence of preferred stock just a bit more in the illustration.
We showed that there nwas 100 par value. 8. Preferred stock this means that it pays 8 in ndividends per year for each share and furthermore. It was cumulative any dividends that are missed nwill become dividends in arrears now if the notes to the financial nstatements.
Indicate that the company has not paid dividends for the last two years and n 5. Million of dividends are paid in total. The question is how much is npaid to the preferred and how much is paid to the common the mathematics here n48 million will go. To the preferred then it s 8.
A share. Times n200000 shares is. 1600000. They would need to pay the two years in narrears plus the current.
Year or three. Years. At. 1600000.
Each. So. 4800000. Nwould go to the preferred.
Shareholders. Only. 200000. Of.
That dividend. Ndeclaration. Would be available to the common shareholders. This indicates and emphasizes and nunderscores the importance of paying very close attention to the disclosures nof.
The classes of stock and reviewing the footnotes to determine nfor example. Whether the preferred stock is cumulative or not and whether there nare dividends in arrears or not again the dividends do not appear as a nliability until they re actually declared. ” ..
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