Slide 13-1 Chapter 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings Financial Accounting, Seventh Edition Slide 13-2 Study Objectives 1. Identify the major characteristics of a corporation. 2. Record the issuance of common stock. 3. Explain the accounting for treasury stock. 4. Differentiate preferred stock from common stock. 5. Prepare the entries for cash dividends and stock dividends. 6. Identify the items that are reported in a retained earnings statement. 7. Prepare and analyze a comprehensive stockholders’ equity section. Slide 13-3 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings Corporate Organization and Stock Transactions Dividends Corporate form of organization Cash dividends Common stock issues Stock splits Treasury stock Preferred stock Slide 13-4 Stock dividends Retained Earnings Retained earnings restrictions Prior period adjustments Retained earnings statement Statement Presentation and Analysis Presentation Analysis The Corporate Form of Organization An entity separate and distinct from its owners. Classified by Purpose Not-for-Profit Publicly held For Profit Privately held Salvation Army American Cancer Society Gates Foundation Slide 13-5 Classified by Ownership McDonald’s Ford Motor Company PepsiCo Google Cargill Inc. The Corporate Form of Organization Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Advantages Continuous Life Corporate Management Government Regulations Disadvantages Additional Taxes Slide 13-6 SO 1 Identify the major characteristics of a corporation. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Corporation acts under its own name rather than in the name of its stockholders. Continuous Life Corporate Management Government Regulations Additional Taxes Slide 13-7 SO 1 Identify the major characteristics of a corporation. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Limited to their investment. Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes Slide 13-8 SO 1 Identify the major characteristics of a corporation. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Shareholders may sell their stock. Continuous Life Corporate Management Government Regulations Additional Taxes Slide 13-9 SO 1 Identify the major characteristics of a corporation. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporate Management Corporation can obtain capital through the issuance of stock. Government Regulations Additional Taxes Slide 13-10 SO 1 Identify the major characteristics of a corporation. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes Slide 13-11 Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer. SO 1 Identify the major characteristics of a corporation. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes Slide 13-12 Separation of ownership and management prevents owners from having an active role in managing the company. SO 1 Identify the major characteristics of a corporation. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes Slide 13-13 SO 1 Identify the major characteristics of a corporation. Characteristics of a Corporation Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes Slide 13-14 Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends. SO 1 Identify the major characteristics of a corporation. Characteristics of a Corporation Stockholders Illustration 11-1 Corporation organization chart Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Treasurer Slide 13-15 Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources Controller SO 1 Identify the major characteristics of a corporation. Slide 13-16 Forming a Corporation Initial Steps: File application with the Secretary of State. State grants charter. Corporation develops by-laws. Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey). Corporations expense organization costs as incurred. Slide 13-17 SO 1 Identify the major characteristics of a corporation. Ownership Rights of Stockholders Stockholders have the right to: Illustration 11-3 1. Vote in election of board of directors and on actions that require stockholder approval. 2. Share the corporate earnings through receipt of dividends. Slide 13-18 SO 1 Identify the major characteristics of a corporation. Ownership Rights of Stockholders Stockholders have the right to: Illustration 11-3 3. Keep the same percentage ownership when new shares of stock are issued (preemptive right*). * A number of companies have eliminated the preemptive right. Slide 13-19 SO 1 Identify the major characteristics of a corporation. Ownership Rights of Stockholders Stockholders have the right to: Illustration 11-3 4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim. Slide 13-20 SO 1 Identify the major characteristics of a corporation. Ownership Rights of Stockholders Prenumbered Illustration 11-4 Class Class A Class A COMMON STOCK COMMON STOCK PAR VALUE $1 PER SHARE PAR VALUE $1 PER SHARE Name of corporation Stockholder’s name Stock Certificate Shares Signature of corporate official Slide 13-21 SO 1 Identify the major characteristics of a corporation. Stock Issue Considerations Authorized Stock Charter indicates the amount of stock that a corporation is authorized to sell. Number of authorized shares is often reported in the stockholders’ equity section. Slide 13-22 SO 1 Identify the major characteristics of a corporation. Stock Issue Considerations Issuance of Stock Corporation can issue common stock directly to investors or indirectly through an investment banking firm. Factors in setting price for a new issue of stock: 1. the company’s anticipated future earnings 2. its expected dividend rate per share 3. its current financial position 4. the current state of the economy 5. the current state of the securities market Slide 13-23 SO 1 Identify the major characteristics of a corporation. Stock Issue Considerations Market Value of Stock Stock of publicly held companies is traded on organized exchanges. Interaction between buyers and sellers determines the prices per share. Prices set by the marketplace tend to follow the trend of a company’s earnings and dividends. Factors beyond a company’s control, may cause day-today fluctuations in market prices. Slide 13-24 SO 1 Identify the major characteristics of a corporation. Slide 13-25 Stock Issue Considerations Par and No-Par Value Stock Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors. Today many states do not require a par value. No-par value stock is quite common today. In many states the board of directors assigns a stated value to no-par shares. Slide 13-26 SO 1 Identify the major characteristics of a corporation. Corporate Capital Common Stock Paid-in Capital Account Preferred Stock Paid-in Capital in Excess of Par Account Account Two Primary Sources of Equity Retained Earnings Account Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock. Slide 13-27 SO 1 Identify the major characteristics of a corporation. Corporate Capital Common Stock Paid-in Capital Account Preferred Stock Additional Paidin Capital Account Account Two Primary Sources of Equity Retained Earnings Account Retained earnings is net income that a corporation retains for future use. Slide 13-28 SO 1 Identify the major characteristics of a corporation. Corporate Capital Comparison of the owners’ equity (stockholders’ equity) accounts reported on a balance sheet for a proprietorship and a corporation. Illustration 11-6 Slide 13-29 SO 1 Identify the major characteristics of a corporation. Corporate Capital At the end of its first year of operation, Doral Corporation has $750,000 of common stock and net income of $122,000. Prepare (a) the closing entry for net income and (b) the stockholders’ equity section at year-end. Slide 13-30 Solution on notes page SO 1 Identify the major characteristics of a corporation. Accounting for Common Stock Issues Primary objectives: 1) Identify the specific sources of paid-in capital. 2) Maintain the distinction between paid-in capital and retained earnings. Other than consideration received, the issuance of common stock affects only paid-in capital accounts. Slide 13-31 SO 2 Record the issuance of common stock. Accounting for Common Stock Issues Issuing Par Value Common Stock for Cash Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share. a. Cash 1,000 Common stock (1,000 x $1) b. Slide 13-32 Cash 1,000 5,000 Common stock (1,000 x $1) 1,000 Paid-in capital in excess of par value 4,000 SO 2 Record the issuance of common stock. Accounting for Common Stock Issues Illustration 11-7 Slide 13-33 SO 2 Record the issuance of common stock. Accounting for Common Stock Issues Issuing No-Par Common Stock for Cash Illustration: Assume that Hydro-Slide, Inc. issues 5,000 shares of $5 stated value no-par common stock for $8 per share. The entry is: Cash 40,000 Common stock (5,000 x $5) 25,000 Paid-in capital in excess of stated value 15,000 Prepare the entry assuming there is no stated value? Cash Common stock Slide 13-34 40,000 40,000 SO 2 Record the issuance of common stock. Accounting for Common Stock Issues Issuing Common Stock for Services or Noncash Assets Corporations also may issue stock for: Services (attorneys or consultants). Noncash assets (land, buildings, and equipment). Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable. Slide 13-35 SO 2 Record the issuance of common stock. Accounting for Common Stock Issues Illustration: Assume that attorneys have helped Jordan Company incorporate. They have billed the company $5,000 for their services. They agree to accept 4,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction. Organizational expense Slide 13-36 5,000 Common stock (4,000 x $1) 4,000 Paid-in capital in excess of par 1,000 SO 2 Record the issuance of common stock. Accounting for Common Stock Issues Illustration: Assume that Athletic Research Inc. is an existing publicly held corporation. Its $5 par value stock is actively traded at $8 per share. The company issues 10,000 shares of stock to acquire land recently advertised for sale at $90,000. Prepare the journal entry for this transaction. Land (10,000 x $8) Slide 13-37 80,000 Common stock (10,000 x $5) 50,000 Paid-in capital in excess of par 30,000 SO 2 Record the issuance of common stock. Accounting for Treasury Stock Common Stock Paid-in Capital Account Preferred Stock Paid-in Capital in Excess of Par Account Account Two Primary Sources of Equity Retained Earnings Account Less: Treasury Stock Account Slide 13-38 SO 3 Explain the accounting for treasury stock. Accounting for Treasury Stock Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired. Corporations purchase their outstanding stock: 1. To reissue the shares to officers and employees under bonus and stock compensation plans. 2. To enhance the stock’s market value. 3. To have additional shares available for use in the acquisition of other companies. 4. To increase earnings per share. 5. To rid the company of disgruntled investors, perhaps to avoid a takeover. Slide 13-39 SO 3 Explain the accounting for treasury stock. Accounting for Treasury Stock Purchase of Treasury Stock Debit Treasury Stock for the price paid to reacquire the shares. Treasury stock is a contra stockholders’ equity account, not an asset. Purchase of treasury stock reduces stockholders’ equity. Slide 13-40 SO 3 Explain the accounting for treasury stock. Accounting for Treasury Stock Illustration 11-8 Illustration: On February 1, 2011, Mead acquires 4,000 shares of its stock at $8 per share. Treasury stock (4,000 x $8) Cash Slide 13-41 32,000 32,000 SO 3 Explain the accounting for treasury stock. Accounting for Treasury Stock Stockholders’ Equity with Treasury stock Illustration 11-9 Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed. Slide 13-42 SO 3 Explain the accounting for treasury stock. Slide 13-43 Accounting for Treasury Stock Disposal of Treasury Stock Above Cost Below Cost Both increase total assets and stockholders’ equity. Slide 13-44 SO 3 Explain the accounting for treasury stock. Above Cost Accounting for Treasury Stock Illustration: On February 1, 2011, Mead acquired 4,000 shares of its stock at $8 per share. On July 1, Mead sells for $10 per share 1,000 shares of its treasury stock, previously acquired at $8 per share. July 1 Cash 10,000 Treasury stock (1,000 x $8) Paid-in capital treasury stock 8,000 2,000 A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders. Slide 13-45 SO 3 Explain the accounting for treasury stock. Below Cost Accounting for Treasury Stock Illustration: On February 1, 2011, Mead acquired 4,000 shares of its stock at $8 per share. On Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share. Oct. 1 Cash 5,600 Paid-in capital treasury stock Treasury stock (800 x $8) 800 6,400 Mead uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares. Slide 13-46 SO 3 Explain the accounting for treasury stock. Below Cost Accounting for Treasury Stock Illustration: On February 1, 2011, Mead acquired 4,000 shares of its stock at $8 per share. On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share. Dec. 1 Cash 15,400 Paid-in capital treasury stock 1,200 Retained earnings 1,000 Treasury stock (2,200 x $8) Slide 13-47 Limited to balance on hand 17,600 SO 3 Explain the accounting for treasury stock. Preferred Stock Features often associated with preferred stock. 1. Preference as to dividends. 2. Preference as to assets in liquidation. 3. Nonvoting. Accounting for preferred stock at issuance is similar to that for common stock. Slide 13-48 SO 4 Differentiate preferred stock from common stock. Preferred Stock Illustration: Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Journalize the issuance of the preferred stock. Cash 120,000 Preferred stock (10,000 x $10) 100,000 Paid-in capital in excess of par – Preferred stock 20,000 Preferred stock may have a par value or no-par value. Slide 13-49 SO 4 Differentiate preferred stock from common stock. Preferred Stock Dividend Preferences Right to receive dividends before common stockholders. Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount. Cumulative dividend – holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends. Slide 13-50 SO 4 Differentiate preferred stock from common stock. Dividends A distribution of cash or stock to stockholders on a pro rata (proportional) basis. Types of Dividends: 1. Cash dividends. 2. Property dividends. 3. Scrip (note) 4. Stock dividends. Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share. Slide 13-51 SO 5 Prepare the entries for cash dividends and stock dividends. Dividends Dividends require information concerning three dates: Illustration 11-12 Slide 13-52 SO 5 Prepare the entries for cash dividends and stock dividends. Cash Dividends Cash Dividends For a corporation to pay a cash dividend, it must have: 1. Retained earnings - Payment of cash dividends from retained earnings is legal in all states. 2. Adequate cash. 3. A declaration of dividends by the Board of Directors. Slide 13-53 SO 5 Prepare the entries for cash dividends and stock dividends. Cash Dividends Illustration: On Dec. 1, the directors of Media General declare a 50¢ per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on Jan. 20 to shareholders of record on Dec. 22? December 1 (Declaration Date) Retained earnings Dividends payable December 22 (Date of Record) 50,000 50,000 No entry January 20 (Payment Date) Dividends payable Cash Slide 13-54 50,000 50,000 SO 5 Prepare the entries for cash dividends and stock dividends. Cash Dividends Allocating Cash Dividends Between Preferred and Common Stock Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends. Slide 13-55 SO 5 Prepare the entries for cash dividends and stock dividends. Cash Dividends Illustration: On December 31, 2011, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock. It also has 50,000 shares of $10 par value common stock outstanding. At December 31, 2011, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend. Retained earnings 6,000 Dividends payable 6,000 Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000 Slide 13-56 SO 5 Prepare the entries for cash dividends and stock dividends. Cash Dividends Illustration: At December 31, 2012, IBR declares a $50,000 cash dividend. Show the allocation of dividends to each class of stock. 2011 Dividends declared $ 6,000 Dividends in arrears Allocation to preferred Remainder to common 6,000 $ - 2012 $ 50,000 2,000 ** 8,000 * $ 40,000 * 1,000 shares x $100 par x 8% = $8,000 ** 2010 Pfd. dividends $8,000 – declared $6,000 = $2,000 Slide 13-57 SO 5 Prepare the entries for cash dividends and stock dividends. Cash Dividends Illustration: At December 31, 2012, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend. Retained earnings Dividends payable Slide 13-58 50,000 50,000 SO 5 Prepare the entries for cash dividends and stock dividends. Slide 13-59 Stock Dividends Stock Dividends Illustration 11-14 Pro rata distribution of the corporation’s own stock. Results in decrease in retained earnings and increase in paid-in capital. Slide 13-60 SO 5 Prepare the entries for cash dividends and stock dividends. Stock Dividends Stock Dividends Reasons why corporations issue stock dividends: 1. To satisfy stockholders’ dividend expectations without spending cash. 2. To increase the marketability of the corporation’s stock. 3. To emphasize that a portion of stockholders’ equity has been permanently reinvested in the business. Slide 13-61 SO 5 Prepare the entries for cash dividends and stock dividends. Stock Dividends Size of Stock Dividends Small stock dividend (less than 20–25% of the corporation’s issued stock, recorded at fair market value) * Large stock dividend (greater than 20–25% of issued stock, recorded at par value) * This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares. Slide 13-62 SO 5 Prepare the entries for cash dividends and stock dividends. Stock Dividends Illustration: Medland Corp. has 50,000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share. 10% stock dividend is declared Retained earnings (50,000 x 10% x $15) Common stock dividends distributable Paid-in capital in excess of par value 75,000 50,000 25,000 Stock issued Common stock dividends distributable Common stock Slide 13-63 50,000 50,000 SO 5 Prepare the entries for cash dividends and stock dividends. Stock Dividends Stockholders’ Equity with Dividends Distributable Illustration 11-15 Medland Corporation Balance Sheet (partial) Stockholders' equity Paid-in capital Common stock Common stock dividends distributable Total stockholders' equity Slide 13-64 $ 500,000 50,000 $ 550,000 SO 5 Prepare the entries for cash dividends and stock dividends. Stock Dividends Effects of Stock Dividends Illustration 11-16 Slide 13-65 SO 5 Prepare the entries for cash dividends and stock dividends. Stock Dividends Question Which of the following statements about small stock dividends is true? a. A debit to Retained Earnings for the par value of the shares issued should be made. b. A small stock dividend decreases total stockholders’ equity. c. Market value per share should be assigned to the dividend shares. d. A small stock dividend ordinarily will have no effect on book value per share of stock. Slide 13-66 SO 5 Prepare the entries for cash dividends and stock dividends. Stock Dividends Question In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n): a. deduction from total paid-in capital and retained earnings. b. current liability. c. deduction from retained earnings. d. addition to capital stock. Slide 13-67 SO 5 Prepare the entries for cash dividends and stock dividends. Stock Splits Stock Split Reduces the market value of shares. No entry recorded for a stock split. Decrease par value and increase number of shares. Slide 13-68 SO 5 Prepare the entries for cash dividends and stock dividends. Stock Splits Illustration: Assume Medland Corporation splits its 50,000 shares of common stock on a 2-for-1 basis. Illustration 11-17 Results in a reduction of the par or stated value per share. Slide 13-69 SO 5 Prepare the entries for cash dividends and stock dividends. Retained Earnings Retained earnings is net income that a company retains for use in the business. Net income increases Retained Earnings and a net loss decreases Retained Earnings. Retained earnings is part of the stockholders’ claim on the total assets of the corporation. A debit balance in Retained Earnings is identified as a deficit. Slide 13-70 SO 6 Identify the items reported in a retained earnings statement. Retained Earnings Restrictions Restrictions can result from: 1. Legal restrictions. 2. Contractual restrictions. 3. Voluntary restrictions. Illustration 11-22 Slide 13-71 SO 6 Identify the items reported in a retained earnings statement. Prior Period Adjustments Corrections of Errors Result from: mathematical mistakes mistakes in application of accounting principles oversight or misuse of facts Corrections treated as prior period adjustments Adjustment made to the beginning balance of retained earnings Slide 13-72 SO 6 Identify the items reported in a retained earnings statement. Prior Period Adjustments Woods, Inc. Statement of Retained Earnings For the Year Ended December 31, 2011 Balance, January 1 Net income Dividends Balance, December 31 $ $ 1,050,000 360,000 (300,000) 1,110,000 Before issuing the report for the year ended December 31, 2011, you discover a $50,000 error (net of tax) that caused the 2010 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2010. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2011? Slide 13-73 SO 6 Identify the items reported in a retained earnings statement. Prior Period Adjustments Woods, Inc. Statement of Retained Earnings For the Year Ended December 31, 2011 Balance, January 1, as previously reported Prior period adjustment - error correction Balance, January 1, as restated Net income Dividends Balance, December 31 Slide 13-74 $ $ 1,050,000 (50,000) 1,000,000 360,000 (300,000) 1,060,000 SO 6 Identify the items reported in a retained earnings statement. Retained Earnings Statement The company prepares the statement from the Retained Earnings account. Illustration 11-24 Slide 13-75 SO 6 Identify the items reported in a retained earnings statement. Retained Earnings Statement Illustration 11-25 Slide 13-76 SO 6 Identify the items reported in a retained earnings statement. Retained Earnings Statement Question All but one of the following is reported in a retained earnings statement. The exception is: a. cash and stock dividends. b. net income and net loss. c. some disposals of treasury stock below cost. d. sales of treasury stock above cost. Slide 13-77 SO 6 Identify the items reported in a retained earnings statement. Statement Presentation and Analysis Illustration 11-26 Slide 13-78 SO 7 Statement Analysis and Presentation Analysis Return on Common Stockholders’ Equity = Net Income Available to Common Stockholders Average Common Stockholders’ Equity This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders. Slide 13-79 SO 7 Prepare and analyze a comprehensive stockholders’ equity section. Statement Analysis and Presentation Analysis Illustration: Kellogg Company’s beginning-of-the-year and end-of-the-year common stockholders’ equity were $2,526 and $1,448 million, respectively. Its net income was $1,148 million, and no preferred stock was outstanding. The return on common stockholders’ equity ratio is computed as follows. Illustration 11-28 Slide 13-80 Solution on notes page SO 7 Prepare and analyze a comprehensive stockholders’ equity section. Home-Equity Loans Home-equity loans are now difficult to get. The reasons are that banks are not making the loans, and sinking home prices give homeowners less equity to borrow against. Four major reasons why many individuals employ home-equity loans are: (1) to invest, (2) to get a tax deduction, (3) to defer other debt, or (4) to buy from a wish list. Slide 13-81 While home-equity loans tend to have fixed rates, home-equity lines of credit, which allow the homeowner to borrow up to a certain amount whenever they want to, have variable rates. Rates on home-equity lines of credit averaged 8.33% in April 2006, versus about 14% for credit card debt. Home-equity loan interest is tax-deductible (like home mortgage interest). Interest on car loans, most student loans, and credit cards is not. Slide 13-82 Home-equity loans can be very tempting. Suppose that you wanted to borrow $5,000 to take a vacation. You could spread your payments over 15 years and you would have to pay only about $50 per month. But look what your total payments would be over the life of the 15-year loan. Some vacation! Slide 13-83 Your home has increased in value by $50,000 during the last five years. You have very little savings outside of the equity in your home. You desperately need a vacation, and you are considering taking out a $5,000 home-equity loan to finance a two-week dream vacation in Europe. Is this is a bad idea? YES: This represents a significant portion of your savings. Home-equity loans should be used to finance investments of a lasting nature, not items of a fleeting nature like vacations. NO: You need a vacation. If you use a little of the equity in your home now, you can make it up when your house increases in value in the future. Slide 13-84 Stockholders’ Equity Statement Appendix 11A Illustration 11A-1 When a stockholders’ equity statement is presented, a retained earnings statement is not necessary. Slide 13-85 SO 8 Describe the use and content of the stockholders’’ statement. Book Value—Another Per-Share Amount Book Value per Share Appendix 11B The equity a common stockholder has in the net assets of the corporation. Illustration 11B-1 Slide 13-86 SO 9 Compute book value per share. Book Value—Another Per-Share Amount Book Value per Share Appendix 11B The computation of book value per share involves the following steps. 1. Compute the preferred stock equity. This equity is equal to the sum of the call price of preferred stock plus any cumulative dividends in arrears. If the preferred stock does not have a call price, the par value of the stock is used. 2. Determine the common stock equity. Subtract the preferred stock equity from total stockholders’ equity. 3. Determine book value per share. Divide common stock equity by shares of common stock outstanding. Slide 13-87 SO 9 Compute book value per share. Book Value—Another Per-Share Amount Appendix 11B Illustration: using the stockholders’ equity section of Graber Inc. shown in Illustration 11-26. Graber’s preferred stock is callable at $120 per share and is cumulative. Assume that dividends on Graber’s preferred stock were in arrears for one year, $54,000 (6,000 $9). The computation of preferred stock equity (Step 1 in the preceding list) is: Illustration 11B-2 Slide 13-88 SO 9 Compute book value per share. Book Value—Another Per-Share Amount Illustration 11B-2 Computation of book value: Slide 13-89 Illustration 11B-3 SO 9 Compute book value per share. Book Value—Another Per-Share Amount Book Value versus Market Value Appendix 11B The correlation between book value and the annual range of a company’s market value per share is often remote. Illustration 11B-4 Slide 13-90 SO 9 Compute book value per share. 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