Hello and welcome everyone to our lesson today. In today's lesson, we will explore the expansion of corporate capital through the issuance of shares. More specifically, the process of issuing stock. We will focus on two main distinguishing designations often used, which are basically the common stock versus preferred stock. Let's start with the common shares or common stock, and then we'll move to the preferred stock, which has more rights, and variety of issues to talk about. Common shares, if a corporation has only one class of shares, no designation of the shares is necessary. But they typically are labeled common shares or shares of common stock, which give the those owners the rights, some main major rights. Number 1, the right to vote on matters that come before the shareholders, first right. Second right is to actually have the right to off sharing in the profits, when dividends are declared. The percentage of shares owned by a shareholder determines his or her share of the dividend distributed. Third right, the right of share and distribution of assets if the company is liquidated. The percentage of shares owned by a shareholder determines, again, his or her share of the assets after creditors and preferred shareholders are paid. Additional right that sometimes pop up, which give the shareholders the right to maintain one's percentage share of ownership when new shares are issued. This right is referred to as pre-emptive right. Where each shareholders is offered the opportunity to buy a percentage of any new shares issued equal to the percentage of shares he or she owns at the time. In most states, this right must be specified or especially granted. In others, it is presumed unless contractually exclude. Occasionally, a company might issue its shares for consideration other than cash. It is not uncommon for a new company yet to establish a reliable cash flow to pay for a promotional, and legal services with shares rather than cash. Similarly, shares might be given in payment for land, or for equipment, or for some other non-cash asset. Even without a receipt of cash to establish the fair value of the shares at the time of exchange, that transaction still should be recorded at the grant date, fair value of the shares to be issued. The typical journal entry to record the issuance of the common stock as you can see in front of you, a debit, whether to a cash or any other non-cash asset wherever the asset that is is received by the entity, and the credit goes to the common stock for the per value or stated value. Then the additional paid in capital in excess of per value will be credited for APIC account. Let's go to the preferred shares. Distinguishing designation of preferred stock is used to reflect this special rights of preferred shareholders, which usually include one or both of the following two rights that you have in front of you on the screen. Number 1, preferred shareholders typically have a preference to a specified amount of dividends, either stated in dollar amount par share or percentage of the per value per share. That is, if the board of directors declared dividends, preferred shareholders will receive the designated dividend before any dividends are paid to common shareholders. Second right, preferred shareholders typically have a preference over common shareholders as to the distribution of assets in the event the corporation is dissolved. I want to take this chance and talk about different rights that sometimes are given to the preferred shareholders, unique to the specific. It's not all of them are given all at once. It's either one, two, three combination, whatever they are. Preferred stockholders sometimes have the right of conversion. What do we mean by conversion? This right allows them to exchange shares of preferred stock for common stock at a specified conversion rate. Sometimes, there is what we call redemption privilege or redemption right. What does that mean? Redemption privilege might allow preferred shareholders the option under specified conditions to return their shares for a pre-determined redemption price. This ties with something good that we can remember, which is the feature of callable bonds and those are the redemption right for the issuing corporation but we call that callable feature. That's a different issue. Another right is, what we call cumulative right. What does that mean? Preferred shares may be cumulative, which means that if the specified dividend is not paid for a given year, the unpaid dividends, which is referred to as dividends in arrears, accumulate and must be made up in a later dividend year before any dividends are paid on common shares. One last feature that I want to present today about preferred shares, participating. What is that participating feature means? A participating feature allows preferred shareholders to receive additional dividends beyond the stated amount. If the preferred shares are fully participating, then the distribution of dividends to common and preferred shares is a pro rata allocation based on the relative pair amounts of common and preferred stock outstanding. Participating preferred stock previously quite common, is rare today. The typical journal entry to record the issuance of preferred stock, as you can see in the entry journal in front of you, debit to cash or any other asset, if it's a non-cash asset and the credit to the preferred stock for the stated value or the par value. Then whatever I issued the preferred stock in excess of the par value will be credited to the additional paid-in capital preferred stock. PS means, preferred stock, P slash S. Although uncommon, a company might sell more than one security, perhaps common shares and preferred shares in one transaction, one selling price. As you might expect, the cash received usually is the sum of the separate market values of those two securities. Of course, each is then recorded at its market value. However, if only one of those securities is known, the value of it is known, then the other will be inferred from the total selling price. You take the selling price, that total minus the on that you know, then the remaining will be for the other. In the unlikely event that the total selling price is not equal to the sum of the two market prices, the total selling price is allocated between the two securities in proportion to their relative market values. You should note that this is the same approach we use when more than one asset is purchased for a single purchase price to obligate the single price to various assets that are acquired in one transaction. In summary, when common or preferred shares are issued for cash, the capital stock, wherever it is designated common or preferred, is credited for the amount representing the stated capital or the par value and the remaining will be credit to additional paid income. When shares have a designated per value, that amount denotes the state capital and it's, as I said, credit to the common stock. Whatever exceeds it, again, is credited to a designated additional paid-in capital, whether it's common stock or preferred stock. Thank you very much.
