Stockholders' Equity (2)

Common and Preferred Stock

All corporations must have one class of voting common stock. Owners of the voting common stock have the right to elect the board of directors and vote on important matters that affect stockholders. They also have the right to receive unlimited dividends and benefit from unlimited capital growth.

Preferred stock is optional. Preferred stock usually carries certain benefits not available to common stockholders. Preferred stockholders generally receive dividends before common stockholders. In the event the corporation is liquidated, the Preferred stockholders are in line ahead of Common stockholders. Despite the benefits of Preferred stock, there are also limits on dividends and there is little or no capital growth potential for Preferred stock.

We follow the same basic rules to record both Common and Preferred Stock transactions.

Par and No-par stock

Par refers to a set amount of money, which is the underlying amount of Capital attributed to each share of stock. It can be any dollar amount the Corporation chooses. Par and No-Par stock rules vary from state to state. The use of these terms is a matter of law. Some states don't allow No-Par stock.

Par value is often used to assess annual corporate franchise fees. The francise fees allow a corporation to be in good standing and continue to operate legally.

Corporations often distribute money to Stockholders, in the form of Dividends and other payments. In some states the Par value limits the amount that can be paid out to Stockholders. Those laws ensure that the Corporation does not deplete all it's capital resources. Not all states allow No-Par stock to prevent corporations for depleting their capital by paying excess Dividends. You need to check the laws in your state to know how corporations are organized where you live.

Selling Par Stock

A corporation raises money by selling stock. Corporations must sell at least one class of
Common stock at the initial capitalization. This creates a group of owners who vote to elect a Board of Directors. The Board then hires a President or CEO, who heads the company and authorizes all further activities of the corporation.

Par stock is recorded at its par value in the stock account.

Record the Sale of 100 shares of $1 par common stock, at par ($1 per share). Selling price is $1 per share

General Journal

Date	Account	Debit	Credit
	Cash	100
	Common Stock		100
	To record the sale of 100 shares of $1 par common stock at par.

Record the Sale of 100 shares of $1 par common stock, at a premium. Selling price is $5 per share.

General Journal

Date	Account	Debit	Credit
	Cash	500
	Common Stock		100
	Additional Paid-in Capital		400
	To record the sale of 100 shares of $1 par common stock at $5 per share

The Stock account (Common Stock in this case) is always credited for the amount of Par only.Any premium above par is credited to a different account. In this case I used the title Additional Paid-in Capital, but some companies and textbooks use other terms to mean the same thing.

[Quick check -- what term does your textbook use for Additional Paid-in Capital?]

Selling No-Par Stock

When a company uses No-Par stock, they omit the Additional Paid-in Capital account entirely.

Record the Sale of 100 shares of No-Par common stock for $5 per share.

General Journal

Date	Account	Debit	Credit
	Cash	500
	Common Stock		500
	To record the sale of 100 shares of no-par common stock at $5 per share.

Although No-Par stock is easier to record, not all states permit this type of stock. All stock transactions should follow one of the formats above, which much match the type of stock being sold.

In some states a corporation may have par, no-par and preferred stock all at the same time. You need to check with state laws to see what is permitted where you live.

Record the Sale of 10 shares of $100 par, 8% cumulative preferred stock for $105 per share.

General Journal

Date	Account	Debit	Credit
	Cash	1050
	Preferred Stock, $100 par, 8% cumulative		1000
	Additional Paid-in Capital - Preferred		50
	To record the sale of 100 shares of $1 par common stock at $5 per share

Using the Additional Paid-in Capital (APIC) accounts

Some corporations set up a different APIC for each class of stock. Other corporations use only one APIC account for all classes of stock. Which way is correct?

Answer: Both are correct. It's up to the corporation to decide how it wants to recorde these transactions.

Ultimately, all APIC belongs to the Common stockholders. Preferred stockholders are entitled to either the Par value or Call value of their stock, and are not entitled to a return of APIC.

Call value of Preferred Stock

Some Preferred stock has a Call value. This means the corporation can Call, or buy back, the stock from the Preferred stockholders, at the option of the corporation. The stockholders have no say in this matter. Because they are losing their investment the Call value is usually higher than the Par value, at least by a couple of dollars.

There is usally an Exercise Date on a Preferred stock Call. That date is usually many years in the future, and prevents the corporation from calling the stock before this date. The Exercise Date benefits stockholders -- the corporation must wait until some time after this date before it can call the preferred stock.

When Preferred stock is called, it is usually Retired. Retired stock is no longer available for sale, no dividends will be paid on retired stock, and it has no future effect on stockholders equity.