11-1
Chapter 11
Corporations: Organization, Stock
Transactions, Dividends, and
Retained Earnings
Learning Objectives
After studying this chapter, you should be able to:
11-2
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 reported in a retained earnings statement.
7.
Prepare and analyze a comprehensive stockholders’ equity section.
Preview of Chapter 11
Financial Accounting
Eighth Edition
Weygandt Kieso Kimmel
11-3
The Corporate Form of Organization
An entity separate and distinct from its owners.
Classified by Purpose
Classified by Ownership
Not-for-Profit
Publicly held
For Profit
Privately held
►
Salvation Army
►
McDonald’s
►
American Cancer
Society
►
Nike
►
PepsiCo
►
Google
11-4
►
Cargill Inc.
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-5
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Advantages
Disadvantages
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-6
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Corporation acts
under its own name
rather than in the
name of its
stockholders.
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-7
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Limited to their
investment.
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-8
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Shareholders may
sell their stock.
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-9
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Corporation can
obtain capital
through the issuance
of stock.
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-10
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
stockholder,
employee, or officer.
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-11
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-12
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Corporations pay
income taxes as a
separate legal entity
and in addition,
stockholders pay
taxes on cash
dividends.
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Organization
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-13
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Separation of
ownership and
management
prevents owners
from having an
active role in
managing the
company.
LO 1 Identify the major characteristics of a corporation.
Characteristics of a Organization
Stockholders
Illustration 11-1
Corporation
organization chart
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General
Counsel and
Secretary
Vice President
Finance/Chief
Financial Officer
Vice President
Marketing
Treasurer
11-14
Vice President
Operations
Vice President
Human
Resources
Controller
LO 1 Identify the major characteristics of a corporation.
Forming a Corporation
Initial Steps:
Formed by grant of a state 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.
11-15
LO 1 Identify the major characteristics of a corporation.
11-16
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.
11-17
LO 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.
11-18
LO 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.
11-19
LO 1 Identify the major characteristics of a corporation.
Ownership Rights of Stockholders
Illustration 11-4
Class
Prenumbered
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
11-20
LO 1
Stock Issue Considerations
Authorized Stock
11-21
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.
LO 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. Company’s anticipated future earnings.
2. Expected dividend rate per share.
3. Current financial position.
4. Current state of the economy.
5. Current state of the securities market.
11-22
LO 1 Identify the major characteristics of a corporation.
Stock Issue Considerations
Market Value of Stock
11-23
Stock of publicly held companies is traded on organized
exchanges.
Interaction between buyers and sellers determines the
prices per share.
Prices 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.
LO 1 Identify the major characteristics of a corporation.
11-24
Stock Issue Considerations
Par and No-Par Value Stock
11-25
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.
LO 1 Identify the major characteristics of a corporation.
Corporate Capital
Common Stock
Account
Paid-in Capital
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.
11-26
LO 1 Identify the major characteristics of a corporation.
Corporate Capital
Common Stock
Account
Paid-in Capital
Preferred Stock
Paid-in Capital in
Excess of Par
Account
Account
Two Primary
Sources of
Equity
Retained Earnings
Account
Retained earnings is net income that a corporation retains for
future use.
11-27
LO 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
11-28
LO 1 Identify the major characteristics of a corporation.
11-29
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.
11-30
LO 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)
11-31
Cash
1,000
5,000
Common stock (1,000 x $1)
1,000
Paid-in capital in excess of par value
4,000
LO 2 Record the issuance of common stock.
Accounting for Common Stock Issues
Illustration 11-7
11-32
LO 2 Record the issuance of common stock.
Accounting for Common Stock Issues
Issuing No-Par Common Stock for Cash
Illustration: Assume that instead of $1 par value stock, HydroSlide, Inc. has $5 stated value no-par stock and the company
issues 5,000 shares at $8 per share for cash.
Cash
11-33
40,000
Common stock
25,000
Paid-in capital in excess of stated value
15,000
LO 2 Record the issuance of common stock.
Accounting for Common Stock Issues
Issuing No-Par Common Stock for Cash
Illustration: What happens when no-par stock does not have a
stated value?
Cash
Common stock
11-34
40,000
40,000
LO 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.
11-35
LO 2 Record the issuance of common stock.
Accounting for Common Stock Issues
Illustration: 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
11-36
5,000
Common stock (4,000 x $1)
4,000
Paid-in capital in excess of par
1,000
LO 2 Record the issuance of common stock.
Accounting for Common Stock Issues
Illustration: 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)
11-37
80,000
Common stock (10,000 x $5)
50,000
Paid-in capital in excess of par
30,000
LO 2 Record the issuance of common stock.
ANATOMY OF A FRAUD
The president, chief operating officer, and chief financial officer of SafeNet, a software
encryption company, were each awarded employee stock options by the company’s board
of directors as part of their compensation package. Stock options enable an employee to
buy a company’s stock sometime in the future at the price that existed when the stock
option was awarded. For example, suppose that you received stock options today, when
the stock price of your company was $30. Three years later, if the stock price rose to $100,
you could “exercise” your options and buy the stock for $30 per share, thereby making $70
per share. After being awarded their stock options, the three employees changed the
award dates in the company’s records to dates in the past, when the company’s stock was
trading at historical lows. For example, using the previous example, they would choose a
past date when the stock was selling for $10 per share, rather than the $30 price on the
actual award date. In our example, this would increase the profit from exercising the
options to $90 per share.
Total take: $1.7 million
The Missing Control
Independent internal verification. The company’s board of directors should have ensured
that the awards were properly administered. For example, the date on the minutes from the
board meeting could be compared to the dates that were recorded for the awards. In addition,
the dates should again be confirmed upon exercise.
11-38
Accounting for Treasury Stock
Common Stock
Account
Paid-in Capital
Preferred Stock
Paid-in Capital in
Excess of Par
Account
Account
Two Primary
Sources of
Equity
Retained Earnings
Account
Less:
Treasury Stock
Account
11-39
LO 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.
11-40
LO 3 Explain the accounting for treasury stock.
Accounting for Treasury Stock
Purchase of Treasury Stock
11-41
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.
LO 3 Explain the accounting for treasury stock.
Accounting for Treasury Stock
Illustration 11-8
Illustration: On February 1, 2014, Mead acquires 4,000 shares of
its stock at $8 per share.
Treasury stock (4,000 x $8)
Cash
11-42
32,000
32,000
LO 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.
11-43
LO 3 Explain the accounting for treasury stock.
11-44
Accounting for Treasury Stock
Disposal of Treasury Stock
Sale of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders’ equity.
11-45
LO 3 Explain the accounting for treasury stock.
Accounting for Treasury Stock
Above
Cost
Illustration: 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
8,000
Paid-in capital treasury stock
2,000
A corporation does not realize a gain or suffer a loss from stock
transactions with its own stockholders.
11-46
LO 3 Explain the accounting for treasury stock.
Below
Cost
Accounting for Treasury Stock
Illustration: 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
6,400
Illustration 11-10
11-47
LO 3 Explain the accounting for treasury stock.
Below
Cost
Accounting for Treasury Stock
Illustration: On Dec. 1, assume that Mead, Inc. sells its
remaining 2,200 shares at $7 per share.
Dec. 1 Cash
Paid-in capital treasury stock
1,200
Retained earnings
1,000
Treasury stock
11-48
15,400
Limited
to
balance
on hand
17,600
LO 3 Explain the accounting for treasury stock.
Accounting for 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.
11-49
LO 4 Differentiate preferred stock from common stock.
Accounting for 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)
Paid-in capital in excess of par –
Preferred stock
100,000
20,000
Preferred stock may have a par value or no-par value.
11-50
LO 4 Differentiate preferred stock from common stock.
Accounting for 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.
11-51
LO 4 Differentiate preferred stock from common stock.
Accounting for Preferred Stock
Cumulative Dividend
Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par
value, cumulative preferred stock outstanding. Each $100 share
pays a $7 dividend (.07 x $100). The annual dividend is $35,000
(5,000 x $7 per share). If dividends are two years in arrears,
preferred stockholders are entitled to receive the following
dividends in the current year.
11-52
LO 4 Differentiate preferred stock from common stock.
Accounting for Preferred Stock
Liquidation Preferences
Most preferred stocks have a preference on corporate
assets if the corporation fails.
Provides security for the preferred stockholder.
Preference to assets may be for the par value of the
shares or for a specified liquidating value.
11-53
LO 4 Differentiate preferred stock from common stock.
Dividends
Distribution of cash or stock to stockholders on a pro rata
(proportional) basis.
Types of Dividends:
1. Cash dividends.
3. Stock dividends.
2. Property dividends.
4. Scrip.
Dividends expressed: (1) as a percentage of the par or stated
value, or (2) as a dollar amount per share.
11-54
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Three dates:
11-55
Illustration 11-12
LO 5 Prepare the entries for cash dividends and stock dividends.
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.
11-56
LO 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)
Cash dividends
Dividends payable
December 22 (Date of Record)
50,000
50,000
No entry
January 20 (Payment Date)
Dividends payable
Cash
11-57
50,000
50,000
LO 5 Prepare the entries for cash dividends and stock dividends.
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.
11-58
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Illustration: On December 31, 2014, 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, 2014, the directors declare a $6,000 cash dividend.
Prepare the entry to record the declaration of the dividend.
Cash dividends
6,000
Dividends payable
6,000
Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000
11-59
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Illustration: At December 31, 2015, IBR declares a $50,000
cash dividend. Show the allocation of dividends to each class of
stock.
2012
Dividends declared
$
2013
6,000
Dividends in arrears
Allocation to preferred
Remainder to common
6,000
$
-
$ 50,000
2,000 **
8,000 *
$ 40,000
* 1,000 shares x $100 par x 8% = $8,000
** 2012 Pfd. dividends $8,000 – declared $6,000 = $2,000
11-60
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Illustration: At December 31, 2015, IBR declares a $50,000 cash
dividend. Prepare the entry to record the declaration of the
dividend.
Cash dividends
Dividends payable
11-61
50,000
50,000
LO 5 Prepare the entries for cash dividends and stock dividends.
11-62
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.
11-63
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Stock Dividends
Reasons why corporations issue stock dividends:
1. Satisfy stockholders’ dividend expectations without
spending cash.
2. Increase marketability of the corporation’s stock.
3. Emphasize a portion of stockholders’ equity has been
permanently reinvested in the business.
11-64
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
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)
* Accounting based on the assumption that a small stock dividend will
have little effect on the market price of the outstanding shares.
11-65
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Illustration: Medland Corporation has a balance of $300,000 in
retained earnings. It declares a 10% stock dividend on its 50,000
shares of $10 par value common stock. The current fair market
value of its stock is $15 per share.
10% stock dividend is declared
Stock dividends (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 (50,000 x 10% x $1)
11-66
50,000
50,000
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Stockholders’ Equity with Dividends Distributable
Illustration 11-15
Statement presentation
of common stock
dividends distributable
11-67
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Effects of Stock Dividends
Illustration 11-16
Medland Corporation
Before
Dividend
After
Dividend
Net
Change
Stockholders' equity
Paid-in capital
Common stock, $10 par
Paid-in capital in excess of par
Retained earnings
Total stockholders' equity
$ 500,000
300,000
$ 800,000
$ 550,000
25,000
225,000
$ 800,000
$ 50,000
25,000
(75,000)
$
-
Outstanding shares
Par value per share
50,000
$
10
55,000
$
10
11-68
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Question
Which of the following statements about small stock dividends is
true?
a. A debit to Stock Dividends 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.
11-69
LO 5 Prepare the entries for cash dividends and stock dividends.
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.
11-70
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Stock Split
11-71
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of shares.
LO 5 Prepare the entries for cash dividends and stock dividends.
Dividends
Effects of Stock Splits
Illustration 11-17
Medland Corporation
Before
Split
After
Split
Stockholders' equity
Paid-in capital
Common stock
Paid-in capital in excess of par
Retained earnings
Total stockholders' equity
$ 500,000
300,000
$ 800,000
$ 500,000
300,000
$ 800,000
Outstanding shares
Par value per share
50,000
$
10
100,000
$
5
11-72
Net
Change
$
$
-
LO 5 Prepare the entries for cash dividends and stock dividends.
11-73
Retained Earnings
Net income increases Retained Earnings and a net loss
decreases Retained Earnings.
Part of the stockholders’ claim on the total assets of the
corporation.
Debit balance in Retained Earnings is identified as a
deficit.
Illustration 11-20
11-74
LO 6 Identify the items reported in a retained earnings statement.
Retained Earnings
Retained Earnings Restrictions
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Companies generally disclose retained earnings restrictions in
the notes to the financial statements.
11-75
LO 6 Identify the items reported in a retained earnings statement.
Retained Earnings
Prior Period Adjustments
Correction of an error in previously issued financial
statements.
Result from:
11-76
►
mathematical mistakes.
►
mistakes in application of accounting principles.
►
oversight or misuse of facts.
Adjustment made to the beginning balance of retained
earnings.
LO 6 Identify the items reported in a retained earnings statement.
Retained Earnings Statement
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2014
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, 2014, you discover a
$50,000 error (net of tax) that caused the 2013 inventory to be overstated
(overstated inventory caused COGS to be lower and thus net income to be higher in
2013. Would this discovery have any impact on the reporting of the Statement of
Retained Earnings for 2014?
11-77
LO 6 Identify the items reported in a retained earnings statement.
Retained Earnings Statement
Woods, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2014
Balance, January 1, as previously reported
Prior period adjustment - error correction
Balance, January 1, as restated
Net income
Dividends
Balance, December 31
11-78
$
$
1,050,000
(50,000)
1,000,000
360,000
(300,000)
1,060,000
LO 6 Identify the items reported in a retained earnings statement.
Retained Earnings Statement
Debits and Credits to Retained Earnings
Illustration 11-24
11-79
LO 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.
11-80
LO 6 Identify the items reported in a retained earnings statement.
Statement Presentation and Analysis
Presentation
Illustration 11-26
11-81
Note R: Retained earnings is restricted for the cost of treasury stock, $80,000.
LO 7
Statement Presentation and Analysis
Analysis
Return on
Common
Stockholders’
Equity
Net Income Available to
Common Stockholders
=
Average Common
Stockholders’ Equity
Ratio shows how many dollars of net income the company
earned for each dollar invested by the stockholders.
11-82
LO 7 Prepare and analyze a comprehensive stockholders’ equity section.
APPENDIX 11A
STOCKHOLDERS’ EQUITY STATEMENT
Illustration 11A-1
When a stockholders’ equity statement is presented, a retained earnings
statement is not necessary.
11-83
LO 8 Describe the use and content of the stockholders’ equity statement.
APPENDIX 11B
BOOK VALUE-ANOTHER PER SHARE AMOUNT
Book Value per Share
The equity a common stockholder has in the net assets of the
corporation.
Illustration 11B-1
11-84
SO 9 Compute book value per share.
APPENDIX 11B
BOOK VALUE-ANOTHER PER SHARE AMOUNT
Book Value per Share
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.
11-85
SO 9 Compute book value per share.
APPENDIX 11B
BOOK VALUE-ANOTHER PER SHARE AMOUNT
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
11-86
SO 9 Compute book value per share.
APPENDIX 11B
BOOK VALUE-ANOTHER PER SHARE AMOUNT
Illustration 11B-2
Computation of book value:
11-87
Illustration 11B-3
SO 9 Compute book value per share.
APPENDIX 11B
BOOK VALUE-ANOTHER PER SHARE AMOUNT
Book Value versus Market Value
The correlation between book value and the annual range of a
company’s market value per share is often remote.
Illustration 11B-4
11-88
SO 9 Compute book value per share.
Key Points
11-89
Under IFRS, the term reserves is used to describe all equity
accounts other than those arising from contributed (paid-in) capital.
This would include, for example, reserves related to retained
earnings, asset revaluations, and fair value differences.
Many countries have a different mix of investor groups than in the
United States. For example, in Germany, financial institutions like
banks are not only major creditors of corporations but often are the
largest corporate stockholders as well. In the United States, Asia,
and the United Kingdom, many companies rely on substantial
investment from private investors.
Key Points
11-90
There are often terminology differences for equity accounts. The
following summarizes some of the common differences in
terminology.
Key Points
11-91
The accounting for treasury stock differs somewhat between IFRS
and GAAP. (However, many of the differences are beyond the scope
of this course.) Like GAAP, IFRS does not allow a company to
record gains or losses on purchases of its own shares. One
difference worth noting is that, when a company purchases its own
shares, IFRS treats it as a reduction of stockholders’ equity, but it
does not specify which particular stockholders’ equity accounts are
to be affected. Therefore, it could be shown as an increase to a
contra equity account (Treasury Stock) or a decrease to retained
earnings or share capital.
Key Points
11-92
A major difference between IFRS and GAAP relates to the account
Revaluation Surplus. Revaluation surplus arises under IFRS
because companies are permitted to revalue their property, plant,
and equipment to fair value under certain circumstances. This
account is part of general reserves under IFRS and is not
considered contributed capital.
IFRS often uses terms such as retained profits or accumulated profit
or loss to describe retained earnings. The term retained earnings is
also often used.
Key Points
11-93
The accounting related to prior period adjustments is essentially the
same under IFRS and GAAP. One area where IFRS and GAAP differ
in reporting relates to error corrections in previously issued financial
statements. While IFRS requires restatement with some exceptions,
GAAP does not permit any exceptions.
Equity is given various descriptions under IFRS, such as
shareholders’ equity, owners’ equity, capital and reserves, and
shareholders’ funds.
Key Points
11-94
The income statement using IFRS is called the statement of
comprehensive income. A statement of comprehensive income is
presented in a one- or two-statement format. The single-statement
approach includes all items of income and expense, as well as each
component of other comprehensive income or loss by its individual
characteristic. In the two-statement approach, a traditional income
statement is prepared. It is then followed by a statement of
comprehensive income, which starts with net income or loss and
then adds other comprehensive income or loss items. Regardless of
which approach is reported, income tax expense is required to be
reported.
The computations related to earnings per share are essentially the
same under IFRS and GAAP.
Looking to the Future
The IASB and the FASB are currently working on a project related to
financial statement presentation. An important part of this study is to
determine whether certain line items, subtotals, and totals should be
clearly defined and required to be displayed in the financial statements.
For example, it is likely that the statement of stockholders’ equity and its
presentation will be examined closely. Both the IASB and FASB are
working toward a convergence of any remaining differences related to
earnings per share computations. This convergence will deal with highly
technical changes beyond the scope of this textbook.
11-95
IFRS Self-Test Questions
Under IFRS, a purchase by a company of its own shares is
recorded by:
a) an increase in Treasury Stock.
b) a decrease in contributed capital.
c) a decrease in share capital.
d) All of these are acceptable treatments
11-96
IFRS Self-Test Questions
Which of the following is true?
a) In the United States, the primary corporate stockholders
are financial institutions.
b) Share capital means total assets under IFRS.
c) The IASB and FASB are presently studying how financial
statement information should be presented.
d) The amount to treasury stock is very different between
U.S. GAAP and IFRS.
11-97
IFRS Self-Test Questions
Under IFRS, the amount of capital received in excess of par
value would be credited to:
a) Retained Earnings.
b) Contributed Capital.
c) Share Premium.
d) Par value is not used under IFRS.
11-98
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11-99
