Chapter 18
SHAREHOLDERS’
EQUITY
© 2009 The McGraw-Hill Companies, Inc.
Slide 2
The Nature of Shareholders’ Equity
Assets – Liabilities = Shareholders’ Equity
Net Assets
Sources of
Shareholders’
Equity
Amounts earned
Amounts invested
by shareholders
Shareholders’ Equity
Paid-in Capital
Retained Earnings
Accumulated Other
Comprehensive Income
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by corporation
Other
gains and
losses not
included in
net income
Slide 3
The Corporate Organization
Advantages of a corporation
Continuous
Existence
Easy
ownership
transfer
Easy to
raise capital
Limited
liability
Disadvantages of a corporation
Double
taxation
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Government
regulation
Slide 4
The Model Business Corporation Act
• Nature and location of business activities.
• Number and classes of shares authorized.
• Number and classes of shares authorized.
Articles of incorporation
are filed with the state.
State issues a
corporate charter.
Shares of
stock issued.
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Board of directors
appoint officers.
Board of directors
elected by
shareholders.
Slide 5
Authorized, Issued, and Outstanding Shares
Outstanding shares are
issued shares that are
owned by stockholders.
Authorized
Shares
Issued
Shares
Retired shares
have the same
status as
authorized but
unissued
shares.
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Outstanding
Shares
Treasury
Shares
Retired
Shares
Unissued
Shares
Treasury shares are
issued shares that
have been reacquired
by the corporation.
Slide 6
Capital Stock
Common stock is the basic voting stock of the
corporation. It ranks after preferred stock for dividend
and liquidation distribution. Dividends are determined
by the board of directors.
Usually has a
par or stated value.
Generally does not
have voting rights.
Preferred
Stock
Dividend and liquidation
preference over
common stock.
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May be convertible,
callable, and/or
redeemable.
Slide 7
Preferred Stock Dividends
•
•
•
Are usually stated as a percentage of the par
or stated value.
May be cumulative or noncumulative.
May be partially participating, fully participating,
or nonparticipating.
Unpaid dividends must be paid in full before
any distributions to common stock.
Dividends in arrears are not liabilities, but the per
share and aggregate amounts must be disclosed.
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Slide 8
Comprehensive Income
Comprehensive income includes four types
of gains and losses that traditionally have
been excluded from net income.
Net holding
gains (losses)
on investments.
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Gains (losses)
from and
amendments to
post retirement
benefit plans.
Deferred gains
(losses) from
derivatives.
Gains (losses)
from foreign
currency
translations.
Slide 9
Share Buybacks
A corporation might reacquire shares of its stock to . . .
• support the market price.
• increase earnings per share.
• distribute in stock option plans.
• issue as a stock dividend.
• use in mergers and acquisitions.
• thwart takeover attempts.
I can account for the reacquired
shares by retiring them or by holding
them as treasury shares.
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Slide 10
Accounting for Treasury Stock
Treasury stock usually does not have:
•Voting rights.
•Dividend rights.
•Preemptive rights.
•Liquidation rights.
Treasury stock is reported as an unallocated reduction
of total Shareholders’ Equity.
Acquisition of Treasury Stock
•Recorded at cost to acquire.
Resale of Treasury Stock
•Treasury Stock credited for cost.
•Difference between cost and issuance price is (generally)
recorded in paid-in capital – share repurchase.
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Slide 11
Retained Earnings
Represents the undistributed earnings
of the company since its inception.
Balance January 1, 2009
Net income
Cash dividends
Balance December 31, 2009


$ 106,500
25,000
(10,000)
$ 121,500
The statement of retained earnings may also contain the
correction of an accounting error that occurred in the
financial statements of a prior period, called a prior
period adjustment.
Any restrictions on retained earnings must be disclosed
in the notes to the financial statements.
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Slide 12
Example: Shareholders’ Equity
Section of a Balance Sheet
Shareholders' Equity
Captial Stock:
Common Stock - $10 par value; 60,000 shares
authorized; 20,000 shares issued and
outstanding
$
Preferred Stock - $100 par value; 1,000 shares
authorized; 400 shares issued and
outstanding
Additional paid-in capital
From issuance of common stock
From issuance of preferred stock
Total paid-in capital
Retained earnings
Total stockholders' equity
$
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200,000
40,000
300,000
10,000
550,000
121,500
671,500
Slide 13
Accounting for Cash Dividends
Declared by board of
directors.
Not legally
required.
Creates liability at
declaration.
Requires sufficient
Retained Earnings and
Cash.
Declaration date
•
•
Board of directors declares the dividend.
Record a liability.
GENERAL JOURNAL
Date
Description
Retained Earnings
Dividends Payable
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Debit
Credit
XXX
XXX
Slide 14
Dividend Dates
Ex-dividend date
The first day the shares trade without the right to
receive the declared dividend. (No entry)
Date of Record
Stockholders holding shares on this date will receive
the dividend. (No entry)
Date of Payment
Record the dividend payment to stockholders.
GENERAL JOURNAL
Date
Description
Dividends Payable
Cash
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Debit
Credit
XXX
XXX
Slide 15
Accounting for Stock Dividends
Distribution of additional shares of stock to owners.
No change in total
stockholders’ equity.
No change in
par values.
All stockholders retain same
percentage ownership.
Small
Large
Stock dividend < 25%
Stock dividend > 25%
Record at current fair
value of stock.
Record at par
value of stock.
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Slide 16
Stock Splits
Stock splits change the par value per share and the
number of shares outstanding, but the total par value is
unchanged, and no journal entry is required.
Assume that a corporation had 3,000shares of
$2 par value common stock outstanding
before a 2–for–1 stock split.
Before
Split
Common Stock Shares
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After
Split
3,000
Par Value per Share
$
2.00
Total Par Value
$ 6,000
6,000
$
1.00
$ 6,000
Increase
Decrease
No
Change