Page 500 - Accounting Principles (A Business Perspective)

12. Stockholders' equity: Classes of capital stock

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

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