Chapter 18
SHAREHOLDERS’
EQUITY
McGraw-Hill /Irwin
© 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
by corporation
Other
gains and
losses not
included in
net income
18-2
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
Government
regulation
18-3
Slide 4
Types of Corporations
Not-for-profit corporations include
hospitals, charities, and government
agencies such as FDIC.
Publicly-held corporations
whose shares are widely
owned by the general public.
Privately-held corporations
whose shares are owned by
only a few individuals.
18-4
Slide 5
Hybrid Organizations
S Corporation
Double
taxation
avoided.
• Limited liability protection of a corporation.
• Maximum number of owners.
Limited liability company
• Limited liability protection of a corporation.
• All owners may be involved in management
•
without losing limited liability protection.
No limit on number of owners.
Limited liability partnership
• Owners are liable for their own actions but not
entirely liable for actions of other partners.
18-5
Slide 6
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.
Board of directors
appoint officers.
Board of directors
elected by
shareholders.
18-6
Slide 7
Fundamental Share Rights
Right
to vote.
Right to share
in profits when
dividends are
declared.
Preemptive
right to maintain
percentage
ownership.
Right to share
in distribution of
assets if company
is liquidated.
18-7
Slide 8
Authorized, Issued, and Outstanding Shares
Authorized shares are the maximum
number of shares of capital stock that
can be sold to the public.
Issued
shares are
authorized
shares of
stock that
have been
sold.
Unissued
shares are
authorized
shares of
stock that
never have
been sold.
18-8
Slide 9
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.
Outstanding
Shares
Treasury
Shares
Retired
Shares
Unissued
Shares
Treasury shares are
issued shares that
have been reacquired
by the corporation.
18-9
Slide 10
Capital Stock
Par value stock
 Dollar amount per share
is stated in the corporate
charter.
 Par value has no
relationship to market
value.
No-par stock
 Dollar amount per share
is not designated in
corporate charter.
 Corporations can assign
a stated value per share
(treated as if par value).
Legal capital is . . .
 The portion of shareholders’ equity that must be
contributed to the firm when stock is issued.
 The amount of capital, required by state law, that must
remain invested in the business.
 Refers to par value, stated value, or full amount paid for
no-par stock.
18-10
Slide 11
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.
May be convertible,
callable, and/or
redeemable.
18-11
Slide 12
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.
18-12
Slide 13
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.
Gains (losses)
from and
amendments to
post retirement
benefit plans.
Deferred gains
(losses) from
derivatives.
Gains (losses)
from foreign
currency
translations.
18-13
Slide 14
Comprehensive Income
Comprehensive income is reported periodically as it is
created and also is reported as a cumulative amount.
There are 3 options for
reporting comprehensive
income created during the
reporting period.
As an additional
section of the
income
statement.
The accumulated amount
of comprehensive income
is reported as a separate
item of shareholders’
equity in the balance sheet.
As part of the
statement of
shareholders’
equity.
As a separate
statement.
18-14
Slide 15
Shares Issued for Cash
10,000 shares of stock are issued for $100,000 cash.
GENERAL JOURNAL
Date
$1 Par
Value
Description
PR
Cash
Common Stock, par value
Paid-in Capital in Excess
of Par, Common Stock
Page 1
Debit
100,000
10,000
90,000
GENERAL JOURNAL
Date
No Par
Value
Description
PR
Cash
Common Stock
Page 1
Debit
Date
Description
Cash
Common Stock, stated value
Paid-in Capital in Excess
of Stated Value
Common Stock
Credit
100,000
100,000
GENERAL JOURNAL
No Par,
$1 Stated
Value
Credit
PR
Page 1
Debit
Credit
100,000
10,000
90,000
18-15
Slide 16
Issuing Stock for Noncash Assets
Apply the general valuation principle by using
fair value of stock given up or fair value of
asset received, whichever is more clearly
evident.
If market values cannot be determined, use
appraised values.
18-16
Slide 17
More Than One Security Issued
for a Single Price


Allocate the lump-sum received based on the relative fair
values of the two securities.
If only one fair value is known, allocate a portion of the
lump-sum received based on that fair value and allocate
the remainder to the other security.
Toys, Inc. issued 5,000 shares of common stock, $10 par
value and 3,000 shares of preferred stock, $5 par value
for $450,000. The market values of the common stock
and preferred stock were $55 and $75, respectively.
Calculate the additional paid-in
capital for each class of stock.
18-17
Slide 18
More Than One Security Issued
for a Single Price
Common Stock
Preferred Stock
Total
Market*
$275,000
225,000
$500,000
%
Allocation** Par^
Excess^^
55% $ 247,500 $ 50,000 $ 197,500
45%
202,500
15,000
187,500
100% $ 450,000 $ 65,000 $ 385,000
* Market Value:
Common: $55 × 5,000 shares
Preferred: $75 × 3,000 shares
^ Par Value:
Common: $10 × 5,000 shares
Preferred: $5 × 3,000 shares
**Allocation:
Common: $450,000 × 55%
Preferred: $450,000 × 45%
^^Excess:
Common: $247,500 - $50,000 par
Preferred: $202,500 - $15,000 par
GENERAL JOURNAL
Date
Description
Cash
Common Stock, par $10
Preferred Stock, par $5
Additional paid-in capital,
Common Stock
Additional paid-in capital
Preferred Stock
Page 1
PR
Debit
Credit
450,000
50,000
15,000
197,500
187,500
18-18
Slide 19
Share Issue Costs
• Registration fees
• Underwriter commissions
• Printing and clerical costs
• Legal and accounting fees
• Promotional costs
Share issue costs reduce net proceeds
from selling shares, resulting in a lower
amount of additional paid-in capital.
18-19
Slide 20
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.
18-20
Slide 21
Accounting for Retired Shares
When shares are formally retired, we reduce the same capital
accounts that were increased when the shares were issued –
common or preferred stock, and additional paid-in capital.
Price paid is less than issue price.
5,000 shares of $2 par value stock that were issued
for $20 per share are reacquired for $17 per share.
GENERAL JOURNAL
Date
Description
Page 1
PR
Common Stock
Paid-in Capital in Excess of Par
Paid-in Capital - Share Repurchase
Cash
Debit
Credit
10,000
90,000
15,000
85,000
18-21
Slide 22
Accounting for Retired Shares
Price paid is more than issue price.
5,000 shares of $2 par value stock that were issued
for $20 per share are reacquired for $25 per share.
GENERAL JOURNAL
Date
Description
Common Stock
Paid-in Capital in Excess of Par
Paid-in Capital - Share Repurchase
Cash
Page 1
PR
Debit
Credit
10,000
90,000
25,000
125,000
Reduce Retained Earnings if the Paid-in Capital – Share
Repurchase account balance is insufficient.
18-22
Slide 23
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.
18-23
Slide 24
Accounting for Treasury Stock
On 5/1/08, Photos-in-a-Second reacquired 3,000 shares of its
common stock at $55 per share. On 12/3/09, Photos-in-aSecond reissued 1,000 shares of the stock at $75 per share.
Which of the following would be included in the 12/3/09 entry?
a. Credit Cash for $165,000.
b. Debit Treasury Stock for $75,000.
c. Credit Treasury Stock for $55,000.
d. Credit Cash for $75,000.
GENERAL JOURNAL
Date
May 1, 2008
Dec. 3, 2009
Description
PR
Debit
Treasury Stock
Cash
To record purchase of treasury stock.
165,000
Cash
Treasury Stock
Paid-in Capital-Share Repurchase
75,000
Page 1
Credit
165,000
55,000
20,000
18-24
Slide 25
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.
18-25
Slide 26
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
$
200,000
40,000
300,000
10,000
550,000
121,500
671,500
18-26
Slide 27
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
Debit
Credit
XXX
XXX
18-27
Slide 28
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
Debit
Credit
XXX
XXX
18-28
Slide 29
Property Dividends
Distributions of noncash assets.
 Record at fair value of
non-cash asset.
 Recognize gain or
loss for difference
between book value
and fair value.

18-29
Slide 30
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.
18-30
Slide 31
Accounting for Stock Dividends
CarCo declares and distributes a 20%
stock dividend on 5 million common
shares. Par value is $1 and market value
is $20. Prepare the required journal entry.
GENERAL JOURNAL
Date
Description
Retained Earnings
Common Stock
Post.
Ref.
Page 21
Debit
Credit
20,000,000
1,000,000
Paid-in Capital in
Excess of Par
19,000,000
18-31
Slide 32
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
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
18-32
Slide 33
Stock Splits Effected in the
Form of Large Stock Dividends
Matrix, Inc. declares and distributes a 2-for-1 stock
split effected in the form of a 100% stock dividend.
The company has 1,000,000, $1 par value common
stock outstanding. The stock is trading in the open
market for $14 per share. The per share par value of
the shares is not to be changed.
GENERAL JOURNAL
Date
Description
Paid-in Capital in Excess of Par
Common Stock
Post.
Ref.
Page 21
Debit
Credit
1,000,000
1,000,000
18-33
Slide 34
Appendix 18 ─ Quasi Reorganizations
Purpose
To allow a company undergoing financial difficulty, but with
favorable future prospects, to get a fresh start by writing
down inflated assets and eliminating an accumulated
balance in retained earnings.
Procedures
• Assets and liabilities are revalued to reflect market
values, with corresponding debits and credits to retained
earnings.
• The debit balance in retained earnings is eliminated first
against additional paid in capital, and then, if necessary,
against common stock.
• Retained earnings is dated to indicate when the new
accumulation of earnings began.
18-34
Slide 35
Quasi Reorganizations
Emerson-Walsch Corporation has incurred losses for
several years. The board of directors voted to implement a
quasi reorganization, subject to shareholder approval.
The balance sheet prior to restatement, in millions, follows :
Cash
Receivables
Inventory
Property, plant, and equipment (net)
Total assets
Liabilities
Common stock (800 million shares @$1)
Additional paid-in capital
Retained earnings (deficit)
Total liabilities and equity
(millions)
$
75
200
375
400
$
1,050
$
$
400
800
150
(300)
1,050
Fair values:
Inventory =
$300,000,000
and Property,
plant, and
equipment =
$225,000,000.
Let’s prepare the journal entries necessary for the quasi reorganization.
18-35
Slide 36
Quasi Reorganizations
To revalue assets
GENERAL JOURNAL
Date
Description
Page 43
Post.
Ref.
Retained Earnings
Debit
Credit
250
Inventory
75
Property, plant, & equipment
175
To eliminate the deficit in retained earnings
GENERAL JOURNAL
Date
Description
Page 43
Post.
Ref.
Debit
Additional paid-in capital
150
Common stock
400
Retained earnings
Credit
550
$300 + $250
18-36
Slide 37
Quasi Reorganizations
Balance sheet immediately after restatement.
Cash
Receivables
Inventory
Property, plant, and equipment (net)
Total assets
$
Liabilities
Common stock (800 million shares @$.50)
Additional paid-in capital
Retained earnings
Total liabilities and equity
$
$
$
75
200
300
225
800
400
400
0
0
800
18-37
End of Chapter 18
McGraw-Hill /Irwin
© 2009 The McGraw-Hill Companies, Inc.