CHAPTER

Financing: Equity
12
LO1 LO2 LO3
Raising Equity Corporations and Accounting for
Financing Corporate Stock Stock

LO4 LO5
Retained Earnings Other Equity
Items
LO1 Raising Equity Financing

Raising Equity Financing

Timeline of Business Issues Involved with Investor
Financing

Exhibit 12.4

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LO1
Raising Equity Financing

Difference between a Loan and an Investment

Loan Investment
Company is obligated to Company is not obligated to
repay the principal amount, repay the principal amount
even during bad times. (investors can lose all of
their investment).
Lender does not share in the Investor shares in the
success of the company. success of the company.

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LO1
Proprietorships and Partnerships
Proprietorship

► A business owned by one person.

Partnership

► By the contract of partnership two or more persons bind themselves to

contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.

► Two or more persons may also form a partnership for the exercise of a
profession.

Characteristics

► Ease of formation

► Limited life

► Unlimited liability

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LO2 Corporations and Corporate Stock

Corporations

Corporation
► A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes, and
properties expressly authorized by law or incidental to its existence.
Characteristics
► Limited liability.
► Easy transferability of ownership.
► Ability to raise large amounts of capital.
► Double taxation.
► Close government regulation.

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LO2
Starting a Corporation

Prospectus
► A report provided to potential investors that represents a
company’s financial statements and explains its business
plan, sources of financing, and significant risks.
Stockholders (Shareholders)
► Individuals or organizations that own a portion (shares of
stock) of a corporation.
Board of Directors
► Individuals elected by the stockholders to govern a
corporation.

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LO2
Common Stock

Rights of the Common Stockholder

► Voting rights.
► Preemptive right.
► Dividend rights.
► Corporate asset rights.

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LO2
Preferred Stock

Rights of the Preferred Stockholder

► Usually no voting rights.
► Limited to a fixed cash dividend.
► In the event the corporation is liquidated, preferred
stockholders are entitled to have their claims repaid fully
before any cash is paid to common stockholders.
► Many times includes a conversion option.

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LO2
Preferred Stock

Other types of privileges – convertibility

Convertible preferred stock
► converted to common stock at a specified conversion rate
► enjoy the dividend privileges of the preferred stock while
having the option to convert to common stock if the
market value of the common stock increases significantly

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LO3 Accounting for Stock

Issuance of Stock

Par Value
► A nominal value assigned to and printed on the face of
each share of a corporation’s stock.
► When par-value stock sells for a price above par, it is
said to sell at a premium.

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LO3
Issuing Par-Value Common Stock at a Premium

Illustration
► Assume that the UBM Company issued 1,000 shares of
$1 par-value common stock for $50 per share.
► The entry to record the stock issuance is:
Cash (1,000 shares ⨉ $50) 50,000
Common Stock (1,000 shares ⨉ $1 par value) 1,000
Paid-in Capital in Excess of Par, Common Stock
(1,000 shares ⨉ $49) 49,000
Issued 1,000 shares of $1 par-value common stock at
$50 per share.

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LO3
Issuing Par-Value Common Stock at a Premium

Contributed Capital
► The total par value of the common and preferred stock,
along with the associated amounts of paid-in capital in
excess of par, constitutes a corporation’s contributed
capital.
Legal Capital
► The total par value of the common and preferred stock,
the subscribed stock, and the stock dividends
distributable.

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LO3
Issuing No Par-Value Shares

Illustration
► Assume that the UBM stock does not have a par value
and that the corporation issued 1,000 shares for $50 per
share.
► The entry to record this stock issuance would be:
Cash 50,000
Common Stock 50,000
Issued 1,000 shares of no-par stock at $50 per share.

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LO3
Issuing Par-Value Preferred Stock at a Premium

Illustration

► UBM issued 1,000 shares of $40 par value preferred stock

for cash at $45 per share.

Cash 45,000
Preferred Stock 40,000
Paid-in Capital in Excess of Par, Preferred Stock 5,000
Issued 1,000 shares of $40 par-value preferred stock at $45 per share.

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LO3
Issuing Shares for Noncash Assets

◆ The assets or services received should be recorded at

the current market value of the stock issued.
◆ If the market value of the stock cannot be determined, the
market value of the assets or services received should
be used as the basis for recording the transaction.

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LO3
Issuance of Stocks for Non-Cash Assets

Illustration
► Assume that a prospective stockholder exchanged a
piece of land for 5,000 shares of the UBM $1 par-value
common stock.

► Assuming the market value of the stock at the date of

the exchange was $40 per share, the entry is:
Land (5,000 shares ⨉ $40) 200,000
Common Stock (5,000 shares ⨉ $1) 5,000
Paid-in Capital in Excess of Par, Common Stock
(5,000 shares ⨉ $39) 195,000
Issued 5,000 shares of $1 par-value common stock for land
(5,000 shares x $40 per share = $200,000).

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LO3
Issuance of Shares (Subscription)

Subscription
► The purchase of stocks without actually paying for the
full price.
Subscribed Shares
► Shares that investors have promised to buy.

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LO3
Issuance of Shares (Subscription)

Subscribed Capital
► The amount of the par value of the shares that investors
have promised to buy.
Subscription Receivable
► The amounts due from investors who have committed to
purchasing shares but have not yet paid fully.

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LO3
Issuance of Shares (Subscription)

Illustration
► Assume that the investors of UBM Company subscribed
to 1,000 shares of $1 par-value common stock for $50
per share.
► The entry to record the stock subscription is:
Subscribed Capital – Common Stock 50,000
Common Stock 50,000
Subscription of 1,000 shares of $1 par-value common stock at $50 per
share.

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LO3
Issuance of Shares (Subscription)

Illustration
► Assume that the investors paid the minimum
subscription.
► The entry to record the receipt of payment would be:

Cash 12,500
Subscription Receivable 12,500
Receipt of the 25% downpayment for the subscribed shares.

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LO3
Issuance of Shares (Subscription)

Illustration
► Assume that the investors paid the remaining balance of
the subscription.
► The entry to record the receipt of payment would be:

Cash 37,500
Subscription Receivable 37,500
Receipt of the remaining outstanding subscription receivable.

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LO3
Issuance of Shares (Subscription)

Illustration
► The entry to record the stock issuance would be:
Subscribed Capital – Common Stock 50,000
Common Stock (1,000 shares ⨉ $1 par value) 1,000
Paid-in Capital in Excess of Par, Common Stock
(1,000 shares ⨉ $49) 49,000
Issuance of the common stock after receipt of full payment.

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