Chapter 13 Acquiring Additional Capital Stock
Lesson Plan for this Chapter
Terms:
Discount On Capital Stock: An amount less than par or stated value at which capital stock is sold.
Treasury Stock: A corporation's own stock that has been issued and reacquired.
Bond: A printed. long-term promise to pay a specified amount on a specified date, and to pay interest at stated intervals.
Bond Issue: All the bonds representing the total amount of a loan.
Trustee: A person or institution, usually a bank, who is given legal authorization to administer property for the benefit of property owners.
Bond Sinking Fund: An amount set aside to pay a bond issue when due.
Retiring a Bond Issue: Paying the amounts owed to bondholders for a bond issue.
Term Bonds: Bonds that all mature on the same date.
Serial Bonds: Portions of a bond issue that mature on different dates.
As a corporation gets larger it must find ways to finance growth. Retained Earnings may not be able to finance the growth. The corporation usually may either sell more stock which usually is stated in the articles of incorporation or it may take borrow money.
Options for raising capital are: 1. Sell more shares of stock, 2 Create a Bond issue, 3. Take out a loan from a bank.
Advantages: Selling stock it becomes part of a corporations' permanent capital and does not have to be returned in the near future. Dividends do not have to be paid unless warranted. Disadvantage: More owners and stock is spread over more shares. The same advantages here are disadvantages when borrowing and the disadvantages become advantages. So it really depends on the structure of the corporation on which option to pursue.
Option 1: Issue Stock
A. You may issue stock at par value, more than par value, or less than par value depending on the urgency or market value of stocks.
Issuing at par value results in a transaction in the Cash Receipts with a debit to Cash and credit to Capital Stock-Preferred or Capital Stock-Common.
Issuing at more than par value results in a transaction in the Cash Receipts Journal with a debit to Cash for the total amount and a credit to Capital Stock-Common or Preferred as well as a credit to Paid-in Capital in Excess of Par Value-Preferred or Common.
Issuing at less than par value results in a transaction in the Cash Receipts Journal with a debit to Cash for the amount of money actually received and Credits to Discount on Sale of Preferred or Common Stock the difference between the money received and the actual value of the stock and to Capital Stock-Preferred or Common.
You may also issue stock for other assets than cash such as equipment, land, building, etc. In this situation the entry would be recorded in the general journal if no cash is transacted. You would use the same accounts as above and same guidelines for par value and stated value stock. However, no par value stock only involves one debit or one credit as there is no discount or excess just the value decided upon.
B. Treasury Stock is issued stock reacquired by the corporation. It is still considered issued stock while held by the corporation. However, dividends and voting rights are not allowed while it is Treasury Stock. The purpose for this type of stock is that corporations give it to employees as bonuses. Once this stock is given or sold it is again capital stock outstanding.
The transaction for buying treasury stock by the corporation results in the Cash Payments Journal having a Cash Credit and a Treasury Stock Debit.
The corporation may resell this Treasury Stock for what it paid for it or for more or less value than it paid for it. The sale of even value results in a transaction in the Cash Receipts Journal with a Cash Debit and a Treasury Stock Credit. If it is sold for more than the purchase price Cash is debited for the total amount with Treasury Stock credited for the value the stock was originally purchased at with the difference between the Cash amount and the Treasury Stock amount resulting in a credit to Paid-In Capital from Sale of Treasury Stock. The same accounts are used if the Treasury Stock is sold for less value. It just results in a debit to Paid-In Capital from Sale of Treasury Stock.
Option 2:
Issuing Bonds is actually borrowing money. When a bond issue is actually transacted it results in an entry in the Cash Receipts Journal with a Cash Debit for the Total amount and a Bonds Payable Credit.
A Bond Sinking Fund is actually an account set up to deposit partial payments in over the life of the bonds to be able to pay the bond issue off when the time has elapsed. This fund draws interest on the money placed in it. So the amount of money actually deposited each time equals a set amount however, it does draw interest so you can reduce your actual amount by the interest received on money already deposited in the account
Example---Amount of Increase in Sinking Fund($50,000) - Interest Earned During the Year($2000) = Amount to be deposited($48000). The resulting transaction would be to record in the Cash Payments Journal and Bond Sinking Fund Debit of $50000 with Credits to Cash of $48000 and Interest Income $2000.
The trustee gives notice of the retiring of the bond issue(pay-off) to the corporation is a debit to Bonds Payable and a credit to Bond Sinking Fund in the General Journal.
Option 3:
Direct loan from a bank. This transaction is not discussed in this chapter as it was covered in Accounting I materials. This would be recorded as all other general loans.
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Comparison of Capital Stock and Bonds as a Source of Corporate Capital |
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Capital Stock |
Bonds |
| Stockholders are owners. | Bondholders are corporate creditors. |
| Capital Stock is a stockholders' equity account | Bonds Payable is a liability account. |
| Stockholders have a secondary claim against corporate assets. | Bondholders have a primary, or first claim, against corporate assets. |
| Dividends are paid to stockholders out of corporate net income. | Interest paid to bondholders is a corporate expense. |
| Dividends are not fixed costs; dividends do not have to be paid if net income is insufficient. | Interest on bonds is a fixed expense; the expense must be paid when due; payment does not depend on amount of net income. |
| Amount received from sale of stock is relatively permanent capital; amount invested by stockholders does not have to be returned to them in foreseeable future. | Amount received from sale of bonds is not permanent; amount invested by bondholders must be returned to them on bonds' maturity date. |
Joint Projects: Problems 13-1, 13-2, 13-3.
Individual Projects: Problems 13-M, 13-C. Questions for individual study.