## Stockholders' Equity: Classes of Capital Stock

Read this chapter, which details stockholders' equity, specifically capital stock. You learn about the different classes of stock, their characteristics, how capital appears on the Statement of Stockholders' Equity, and the steps for issuing stock to the public.

### The corporation

#### Balance sheet presentation of paid-in capital in excess of par (or stated) value – Common or preferred

Accountants credit amounts received in excess of the par or stated value of shares to a Paid-In Capital in Excess of Par (or Stated) Value – Common (or Preferred) account. They carry the amounts received in excess of par or stated value in separate accounts for each class of stock issued. Using the following assumed data, the stockholders' equity section of the balance sheet of a company with both preferred and common stock outstanding would appear as follows:

 Stockholders' equity: Paid-in capital: Preferred stock – $100 par value, 6% cumulative; 1,000 shares authorized, issued, and outstanding$100,000 Common stock – without par value, stated value, $5; 100,000 shares authorized, 80,000 shares; issued and outstanding 400,000$ 500,000 Paid-in capital in excess of par (or stated) value: From preferred stock issuances $5,000 From common stock issuances 20,000 25,000 Total paid-in capital$ 525,000 Retained earnings 200,000 Total stockholders' equity $725,000 The total book value of a corporation's outstanding shares is equal to its recorded net asset value – that is, assets minus liabilities. Quite simply, the amount of net assets is equal to stockholders' equity. When only common stock is outstanding, companies compute the book value per share by dividing total stockholders' equity by the number of common shares outstanding. In calculating book value, they assume that (1) the corporation could be liquidated without incurring any further expenses, (2) the assets could be sold at their recorded amounts, and (3) the liabilities could be satisfied at their recorded amounts. Assume the stockholders' equity of a corporation is as follows:  Stockholders' equity: Paid-in capital: Common stock – without par value, stated value,$10; authorized, 20,000 shares; issued and outstanding, 15,000 shares $150,000 Paid-in capital in excess of stated value 10,000 Total paid-in capital$ 160,000 Retained earnings 50,000 Total stockholders' equity $210,000 To determine the book value per share of the stock: Total stockholders' equity$210,000 Total shares outstanding ÷15,000 Book value per share $14 When two or more classes of capital stock are outstanding, the computation of book value per share is more complex. The book value for each share of stock depends on the rights of the preferred stockholders. Preferred stockholders typically are entitled to a specified liquidation value per share, plus cumulative dividends in arrears, since most preferred stocks are preferred as to assets and are cumulative. In each case, the specific provisions in the preferred stock contract govern. To illustrate, assume the Celoron Corporation's stockholders' equity is as follows:  Stockholders' equity: Paid-in capital: Preferred stock –$100 par value, 6% cumulative; 5,000 shares authorized, issued, and outstanding $500,000 Common stock –$10 par value, 200,000 shares authorized, issued and outstanding 2,000,000 Paid-in capital in excess of par value – preferred 200,000 Total paid-in capital $2,700,000 Retained earnings 400,000 Total stockholders' equity$3,100,000

The preferred stock is 6 percent, cumulative. It is preferred as to dividends and as to assets in liquidation to the extent of the liquidation value of USD 100 per share, plus any cumulative dividends on the preferred stock. Dividends for four years (including the current year) are unpaid. You would calculate the book values of each class of stock as follows:

 Total stockholders' equity Total Per Share $3,100,000 Book value of preferred stock (5,000 shares) Liquidation value (5,000 shares X$100) $500,000 620,000$124.00* Dividends (4 years at $30,000) 120,000$2,480,000 12.40T Book value of common stock (200,000 shares) * $620,000 ÷ 5,000 shares. T$2,480,000 ÷ 200,000 shares.

Notice that Celoron did not assign the paid-in capital in excess of par value – preferred to the preferred stock in determining the book values. Celoron assigned only the liquidation value and cumulative dividends on the preferred stock to the preferred stock.

Assume now that the features attached to the preferred stock are the same except that the preferred stockholders have the right to receive USD 103 per share in liquidation. The book values of each class of stock would be:

 Total stockholders' equity Total Per Share $3,100,000 Book value of preferred stock (5,000 shares)$ 515,000 Liquidation value (5,000 shares X $103) 120,000 Dividends (4 years at$30,000) 635,000 $127.00 Book value of common stock (200,000 shares)$2,465,000 12.33

Book value rarely equals market value of a stock because many of the assets have changed in value due to inflation. Thus, the market prices of the shares of many corporations traded regularly are different from their book values.