Stockholders’ Equity
Chapter
15
Intermediate Accounting
12th Edition
Kieso, Weygandt, and Warfield
Chapter
15-1
Prepared by Coby Harmon, University of California, Santa Barbara
Corporate Capital
Common Stock
Contributed
Capital
Account
Preferred Stock
Additional Paidin Capital
Account
Account
Two Primary
Sources of
Equity
Retained Earnings
Account
Less:
Treasury Stock
Assets –
Liabilities =
Equity
Account
Chapter
15-2
LO 2 Identify the key components of stockholders’ equity.
The Corporate Form of Organization
State Corporate Law
Corporations must submit a Corporate Charter to
the desired State of incorporation.
A Corporate Charter includes 1) Articles of
Incorporation and 2) ByLaws
General Motors - incorporated in Delaware.
U.S. Steel - incorporated in New Jersey.
Chapter
15-3
LO 1 Discuss the characteristics of the corporate form of organization.
The Corporate Form of Organization
Common Stock - represent owners’ shares or interests
in the business. Shareholders bear ultimate risk of loss
& benefits. Common Stockholders’ rights include:
1. To share proportionately in profits and losses.
2. To share proportionately in management (the right
to vote on major issues).
3. To share proportionately in assets upon liquidation.
4. To share proportionately in any new issues of stock
of the same class—called the preemptive right.
Chapter
15-4
LO 1 Discuss the characteristics of the corporate form of organization.
The Corporate Form of Organization
Par Value - Nominal value per share of Common Stock
established in the Corporate Charter - *No relation to market
value
• The initial sale of stock cannot be below Par Value. The
secondary market, however, can sell for whatever the
market demands.
• Par value was originally established to protect creditors.
Owners could not withdraw ownership interests below Par
Value of stock “Legal Capital”.
• Today many states permit No-Par Stock. State law will
establish the requirements.
Chapter
15-5
LO 1 Discuss the characteristics of the corporate form of organization.
The Corporate Form of Organization
Ex) Assume a Corporation issues 100,000
shares of $10 par value Common Stock for $32
per share, prepare the necessary journal entry.
DR
3,200,000
Cash
Common Stock
Paid In Capital – CS
Chapter
15-6
CR
1,000,000
2,200,000
The Corporate Form of Organization
Ex) Assume a Corporation issues 100,000
shares of No Par value Common Stock for $32
per share, prepare the necessary journal entry.
Cash
Common Stock
Chapter
15-7
DR
3,200,000
CR
3,200,000
The Corporate Form of Organization
Authorized Shares – Maximum number of shares to be issued per the
charter. Selling more than Authorized amount requires a vote by the
Board of Directors.
Unissued Shares – Total number of shares that have never been
issued.
Issued Shares – Total number of shares that have been Issued
[Outstanding Shares and Treasury Shares].
Outstanding Shares – Total shares of stock owned by stockholders on
a given date.
Treasury Shares – Stock that has once been issued and since
purchased back by the company. Treasury stock is considered issued
stock that is currently inactive.
Chapter
15-8
LO 1 Discuss the characteristics of the corporate form of organization.
The Corporate Form of Organization
Authorized Shares = Issued Shares + Unissued Shares
Outstanding + Treasury Shares
Chapter
15-9
LO 1 Discuss the characteristics of the corporate form of organization.
Corporate Capital
Treasury Shares
Treasury stock is considered inactive Issued Stock
The Treasury stock account is a Contra Equity account
reducing the overall value of equity
Equity:
Common Stock
($1 Par 100,000 shares issued
98,000 shares OS)
Additional PIC
Retained Earnings
Treasury Stock (2,000 shares)
Total Equity:
Chapter
15-10
$100,000
264,000
411,000
(75,000)
$700,000
LO 4 Describe the accounting for treasury stock.
Corporate Capital
Treasury Shares (Reacquisition of Shares)
Corporations purchase their outstanding stock:
• To improve the EPS and ROE ratios
• To have shares available to distribute
through Employee Benefit Plans
• To maintain control of ownership in the
company [perhaps to prevent an unwanted
takeover]
• To make a market in their stock
Chapter
15-11
LO 4 Describe the accounting for treasury stock.
Corporate Capital
Common Stock
[$5 par value, 500,000 shares authorized]
[? shares issued, ? shares OS]
$100,000
Paid in Capital - Common Stock
$400,000
Retained Earnings
$500,000
Treasury Stock [2,000 shares]
($36,000)
Total Stockholders' Equity
$964,000
How many Common Stock shares are issued?
$100,000/$5 p/s = 20,000 shares issued
How many Common Stock shares are outstanding?
20,000 issued – 2,000 Treasury = 18,000 shares outstanding
Chapter
15-12
What is the average market price per share of Issued Common Stock?
($100,000 + $400,000)/20,000 = $25 p/s
Preferred Stock
Preferred Stock
A special class of stock with specific rights over
Common Stock
Preferred Stock has some characteristics of Debt
And some characteristics of Equity
Chapter
15-13
LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Preferred Stock
1. Has no voting Rights
2. Raises equity funds without diluting Common
stockholders’ voting control
3. Has a fixed dividend rate which takes
priority over Common stockholders when
dividends are declared
4. Has priority over Common stockholders in
case of asset liquidation.
Chapter
15-14
LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Example of Fixed Dividend Rate on Preferred
Stock:
If a company has $500,000 of 6% Preferred Stock
outstanding, the Fixed Dividend Rate is:
$500,000 * .06 = $30,000 per year
Chapter
15-15
Preferred Stock
Specific Features of Preferred Stock
 Cumulative
 Participating
 Convertible
 Callable
 Redeemable
A corporation may attach
whatever preferences or
restrictions, as long as it
does not violate its state
incorporation law.
Accounting for preferred stock at issuance is
similar to that for common stock.
Chapter
15-16
LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Cumulative Preferred Stock - requires that if a corporation
fails to pay a dividend in any year, it must make it up in a later
year before paying any dividends to common stockholders.
Participating Preferred Stock – shares ratably with the
common stockholders in any profit distribution beyond the
prescribed preferred stock rate. That is, 5 percent preferred
stock, if fully participating, will receive not only its 5 percent
return, but also dividends at the same rates as those paid to
common stockholders if paying amounts in excess of 5 percent of
par or stated value to common stockholders.
Chapter
15-17
LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Convertible Preferred Stock – allows stockholders, at their
option, to exchange preferred shares for common stock at a
predetermined ratio.
Callable Preferred Stock - permits the corporation at its
option to call or redeem the outstanding preferred shares at
specified future dates and at stipulated prices.
Redeemable Preferred Stock – has a mandatory redemption
period or a redemption feature that the issuer cannot control.
This type of Preferred Stock is more like debt than equity
because it is a legal obligation to pay by a deadline date. FASB
now requires this type of Preferred Stock to be reported as a
liability.
Chapter
15-18
LO 5 Explain the accounting for and reporting of preferred stock.
Types of Dividends
1. Cash dividends.
2. Property dividends.
3. Liquidating dividends.
4. Stock dividends.
Chapter
15-19
LO 7 Identify the various forms of dividend distributions.
Types of Dividends
Cash Dividends
Board of directors vote on the declaration
of cash dividends.
A declared cash dividend is a liability.
Companies do not declare or pay cash
dividends on Treasury Stock.
Chapter
15-20
LO 7 Identify the various forms of dividend distributions.
Types of Dividends
Property Dividends
Dividends payable in assets other than cash.
Before distribution, the company must
restate at fair value the property it will
distribute, recognizing any gain or loss.
Chapter
15-21
LO 7 Identify the various forms of dividend distributions.
Types of Dividends
Liquidating Dividends
Dividends that reduce stockholders’
Additional Paid In Capital
If a company distributes a dividend in
EXCESS of earnings, it will reduce
Contributed Capital of stockholders [PIC
account]
Chapter
15-22
LO 7 Identify the various forms of dividend distributions.
Types of Dividends
Stock Dividends
Issuance of own stock to stockholders on a pro rata
basis, without receiving any consideration.
Stock dividends are the redistribution of Equity
between Retained Earnings and Contributed Capital
When a stock dividend is less than 25 percent of
the common shares outstanding, a company
transfers the fair market value of the stock from
retained earnings (small stock dividend).
Chapter
15-23
LO 8 Explain the accounting for small and large
stock dividends, and for stock splits.
Types of Dividends
Stock Dividends
A stock dividend of more than 25 percent of the
number of shares previously outstanding is called
a large stock dividend.
With a large stock dividend, transfer from
retained earnings to capital stock the par value
of the stock issued.
Chapter
15-24
LO 8 Explain the accounting for small and large
stock dividends, and for stock splits.
Types of Dividends
Stock Splits
Reduces the market value of shares
proportionally.
No entry recorded for a stock split.
Decreases par value and increases number of
shares outstanding proportionally.
Chapter
15-25
LO 8 Explain the accounting for small and large
stock dividends, and for stock splits.
Terminology
US GAAP vs IFRS
US GAAP
IFRS
Common Stock
Share Capital
Paid-In-Capital In Excess of Par/
Additional Paid In Capital
Share Premium
Preferred Stock
Preference Shares
Retained Earnings/
Reinvested Earnings
Retained Earnings/ Retained Profits
Accumulated Profit and Loss
Accumulated Other Comprehensive
Income
General Reserve & Other Reserve
Accounts
Chapter
15-26