Chapter
11
Corporations:
Organization, Stock
Transactions, Dividends, and
Retained Earnings
Financial Accounting,
Seventh Edition
Slide
13-1
CHAPTER 11 - Part 1
Major Characteristics of a corporation
Forming a corporation
Stockholders’ Rights
Slide
13-2
SO 1 Identify the major characteristics of a corporation.
Learning 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
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
 Hopelink
 Susan B Komen
 Bill & Melinda
Gates Foundation
Slide
13-4
and




Wendy’s
Ford Motor Company
Coke
Amazon
 Mars (the
Snickers Co.
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
13-5
SO 1 Identify the major characteristics of a corporation.
Separate Legal Existence - Adv
Stockholders are
separate from the
company. The
word
______________________________________________
“corporation”
comes from the
The Stockholders
root work
“corpus” or body.
A corporation is a
separate legal
entity.
Slide
13-6
Limited Liability of Stockholders - Adv
The Corporation
Stockholder are
at risk ONLY to
the extent of their
investment. In
other words, a
stockholder can
either make
money on his/her
______________________________________________
stock (if the price
The Stockholders –$$$$$$$$$$$$$$$$$$$ rises) or….worst
case scenario,
LOSE IT ALL.
But no more.
BUT: The stockholders’ personal assets are
NOT at risk.
Slide
13-7
Transferable Ownership Rights - Adv
Easy to buy/sell stock – the transactions are public, not
personal, and do not require the consensus of other owners.
Stockholder are
can sell their
stock without
consent of other
owners.
And…changing
owners does
NOT affect the
company’s dayto day
operations.
Slide
13-8
Ability to Acquire Capital - Adv
It is easy to obtain capital through the stock market and
investors can be BIG or small….
Investors can
buy stock… a lot
or a little with
ease.
Slide
13-9
Continuous Life–ADV
A corporation’s life is not limited by the lifetime of its owners
The corporate
charter (read ahead
for forming a
corporation and
writing a charter)
can limit its life,
but most
corporations live on
indefinitely, not
limited by its
owner’s lives.
Slide
13-10
Corporate Management - Adv
Having professional managers is an advantage.
Having professional managers who are not owners….might be a
disadvantage.
Stockholders elect the
Board of Directors, who
elect the CEO, who hires
the managers.
Question: Should the
managers own stock?
Would owning stock make
them more invested in the
company?
Slide
13-11
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
13-12
Vice President
Finance/Chief
Financial Officer
Vice President
Operations
Vice President
Human
Resources
Controller
SO 1 Identify the major characteristics of a corporation.
Government Regulations – DIS ADV
Many requirements: reports, federal laws, state laws, SEC
rules, stock exchange requirements (NYSE, NASDAC,
ASE…)
Slide
13-13
Additional Taxes– DIS ADV
Double Taxation. The stockholders are taxed on their dividend
earnings AND the corporation is taxed on its earnings.
AND, the corporation CANNOT deduct dividend payments!
Slide
13-14
Slide
13-15
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
13-16
SO 1 Identify the major characteristics of a corporation.
Stockholders’ Rights
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
13-17
SO 1 Identify the major characteristics of a corporation.
Stockholders’ Rights
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
13-18
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
13-19
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
Signature of
corporate official
Slide
13-20
Shares
Practice
Practice: Do Self Study Questions: 1,2,3
See solution at the end of the chapter
Slide
13-21
SO 1 Identify the major characteristics of a corporation.
CHAPTER 11 - Part 2
Common Stock
Treasury Stock
Preferred Stock
Slide
13-22
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.
Note: the number of authorized shares does NOT
mean there are the SAME number of investors in
the company. These are just the number of shares
the company would EVER be authorized to sell.
Slide
13-23
Stock Issue Considerations
Issuance of Stock
Corporation can issue common stock directly to
investors or indirectly through an investment banking
firm.
How does a company set the price for a new issue of
stock?
Note:
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
13-24
Ultimately,
it is the
market
demand that
will set the
current
selling
price.
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-to-day fluctuations in market
Slide
13-25
prices.
After the
Company has
sold a share of
stock, any
subsequent sale
(at profit or
loss), does NOT
impact the
company.
Stock Issue Considerations
For example…
The Chocolate Company sells 1
share of stock at $30 to Joseph Blow.
One year later, Joseph sells it for
$40.
There is a $10 profit.
Who receives it? The company or
Joseph?
Slide
13-26
Chocolate!
First, answer this on YOUR
OWN and then go to next
slide
Stock Issue Considerations
For example…
Joseph earns the $10
profit.
However… The Chocolate
Company gets the prestige
of its rising prices.
Slide
13-27
Slide
13-28
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
13-29
Capital
Remember the Accounting Equation?
Assets = Liabilities + Stockholders’ Equity
Assets = The Company’s Resources
Liabilities & Stockholders’ Equity = How the Company
financed these resources. The Choices are:
DEBT
EQUITY (owners)
Slide
13-30
Capital (EQUITY) HAS TWO SOURCES:
PAID IN CAPITAL
Common
Stock
Preferred
Stock
PIC, in
Excess of
Par Value,
Common
Stock
PIC, in
Excess of
Par Value,
Preferred
Stock
EARNED CAPITAL
Retained
Earnings
Slide
13-31
Paid in Capital is the total
amount of cash and other
assets paid into the corporation
by stockholders in exchange
for capital stock.
Retained Earnings – the
net income (less
dividends paid out) that
a corporation retains for
future use.
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
13-32
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.
b.
Slide
13-33
Stop: Try these
Journal Entries in
your Course Pack
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.
Note these Journal Entries in
your Course Pack
a.
Cash
1,000
Common stock (1,000 x $1)
b.
Slide
13-34
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
13-35
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:
Stop: Try these
Journal Entries in
your Course Pack
Prepare the entry assuming there is no stated value?
Slide
13-36
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
Note these Journal Entries in
share. The entry is:
your Course Pack
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
13-37
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
13-38
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.
Stop: Try these
Journal Entries in
your Course Pack
Slide
13-39
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
13-40
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.
Stop: Try these
Journal Entries in
your Course Pack
Slide
13-41
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
13-42
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 Common Stock Issues
Practice: Do Problem 11-1B
See solution at the end of the
Powerpoint slides
Slide
13-43
SO 2 Record the issuance of common stock.
TREASURY STOCK
PAID IN CAPITAL
Common
Stock
PIC, in
Excess of Par
Value,
Common
Stock
Preferred
Stock
Paid in Capital is the total amount of cash
and other assets paid into the corporation by
stockholders in exchange for capital stock.
PIC, in
Excess of Par
Value,
Preferred
Stock
EARNED CAPITAL
Retained
Earnings
LESS: Treasury Stock
Slide
13-44
Retained Earnings – the net
income (less dividends paid out)
that a corporation retains for
future use.
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
13-45
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.
* Debit T-Stock at Cost (note-there are alternative ways to record T-Stock, but
not learned until more advanced courses)
Slide
13-46
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
13-47
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
13-48
SO 3 Explain the accounting for treasury stock.
What is the relationship between…




Authorized
Issued
Outstanding
Treasury Stock
Assume: 1,000,000 shares are authorized.
400,000 shared issued and 15,000 shares in
treasury stock. How many are outstanding?
Slide
13-49
What is the relationship between…




Authorized = 1,000,000
Issued = 400,000
Outstanding = 385,000
Treasury Stock = 15,000
--Total Issued Shares = 400,000 --
15,000
385,000
-------------Total Authorized Shares = 1,000,000 -----------
Assume: 1,000,000 shares are authorized.
400,000 shared issued and 15,000 shares in treasury stock. How many are outstanding?
Slide
13-50
What about the unissued shares?




Authorized = 1,000,000
Issued = 400,000
Outstanding = 385,000
Treasury Stock = 15,000
--Total Issued Shares = 400,000 --
15,000
385,000
Unissued Shares = ????
-------------Total Authorized Shares = 1,000,000 -----------
Unissued shares have no value. They are just the maximum number of additional shares that
the company can issue (without revising the corporate charter).
Slide
13-51
What about the unissued shares?





Authorized = 1,000,000
Issued = 400,000
Outstanding = 385,000
Treasury Stock = 15,000
Unissued = 600,000
--Total Issued Shares = 400,000 --
15,000
385,000
Unissued Shares = 600,000
-------------Total Authorized Shares = 1,000,000 -----------
Unissued shares have no value. They are just the maximum number of additional shares that
the company can issue (without revising the corporate charter).
Slide
13-52
Slide
13-53
Accounting for Treasury Stock
Disposal of Treasury Stock
Above Cost
Below Cost
Both increase total assets (Cash) and
stockholders’ equity (reducing/eliminating the
contra account (T-Stock).
Slide
13-54
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
Note this Journal
Entries in your
Course Pack
8,000
2,000
A corporation does not realize a gain or suffer a loss from stock
transactions with its own stockholders.
Slide
13-55
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)
Note this Journal
Entries in your
Course Pack
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
13-56
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.
Note this Journal
Entries in your
Course Pack
Dec. 1
Cash
15,400
Paid-in capital treasury stock
1,200
Retained earnings
1,000
Treasury stock (2,200 x $8)
Slide
13-57
Limited
to
balance
on hand
17,600
SO 3 Explain the accounting for treasury stock.
Accounting for Treasury Stock
Practice: Do Problem 11-2B
See solution at the end of the
Powerpoint slides
Slide
13-58
SO 2 Record the issuance of common 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
13-59
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.
Note this Journal
Cash
Entries in your
Course Pack
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
13-60
SO 4 Differentiate preferred stock from common stock.
CHAPTER 11 - Part 3
Cash Dividends
Stock Dividends
Stock Splits
Retained Earnings
Slide
13-61
SO 1 Identify the major characteristics of a corporation.
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
13-62
SO 4 Differentiate preferred stock from common stock.
Preferred Stock Dividends - example
o Preferred Stock Dividends are usually
expressed as a % of par, for example:
o
10%, $100 par value Preferred Stock
o = $10.00 Preferred Dividend per share
Slide
13-63
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
13-64
SO 5 Prepare the entries for cash dividends and stock dividends.
Accounting for Dividends
Declaration Date - The
Board of directors
announces a dividend
Liability Recorded
Record Date -The date
ownership is determined.
No journal entry made
Payment Date The date
the dividend is paid to the
Liability paid
Current stockholder on this date
receives the dividend
stockholder of record on the Record
Date.
Slide
13-65
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
13-66
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)
Cash Dividends
Dividends payable
December 22 (Date of Record)
Note these Journal Entries in your
Course Pack
50,000
50,000
No entry
January 20 (Payment Date)
Dividends payable
Cash
Slide
13-67
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
13-68
SO 5 Prepare the entries for cash dividends and stock dividends.
Cash Dividends - Allocations
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.
Even though the
Preferred
Shareholders
have an 8%
dividend feature,
IBR can only pay
them $6,000
Slide
13-69
Stop: Try these
Journal Entries in
your Course Pack
SO 5 Prepare the entries for cash dividends and stock dividends.
Cash Dividends – Watch the Dates
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.
Note these Journal Entries in your
Course Pack
Cash Dividends
6,000
Dividends payable
6,000
Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000
Slide
13-70
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
13-71
SO 5 Prepare the entries for cash dividends and stock dividends.
Dividends in Arrears - Practice
PREFERRED STOCK, CUMULATIVE DIVIDENDS: Source: Rigos CPA review materials, 2002
At 12/31 19x2, and 19x3, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No
dividends were in arrears as of December 31, 19x1.
•Apex did NOT declare a dividend during 19x2.
•During 19x3, Apex paid a cash dividend of $10,000 on its preferred stock.
See solution at the end
of the Powerpoint
slides
Apex should report dividends in arrears in its 19x3 financial statements as a (an)
a. Accrued Liability of $15,000
b. Disclosure of $15,000
c. Accrued liability of $20,000
d. Disclosure of $20,000
Show your work:
Slide
13-72
YEAR
DIVIDENDs
PAID
19X1
19X2
19X3
15,000
15,000
BALANCE IN
ARREARS
0
Slide
13-73
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.
But no change in total Stockholders’ Equity
Slide
13-74
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
13-75
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
13-76
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
Stock Dividend
(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
13-77
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
13-78
$ 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
Note: total Stockholders’ Equity is the same
Slide
13-79
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
13-80
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
13-81
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
13-82
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
13-83
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
13-84
Stock Splits
Illustration: Assume Medland Corporation splits its
50,000 shares of common stock on a 2-for-1 basis.
Common Stock (50,000 shares outstanding, $10 par value)
Paid in capital in excess of par value
Total Paid in Capital
Before Split:
$500,000
0
$500,000
Retained Earnings
$300,000
Total Stockholders’ Equity
$800,000
Outstanding Shares
50,000
Results in a reduction of the par or stated value per share.
Slide
13-85
Stock Splits
Illustration: Assume Medland Corporation splits its
50,000 shares of common stock on a 2-for-1 basis.
Common Stock (100,000 shares outstanding, $5 par value)
Paid in capital in excess of par value
Total Paid in Capital
AFTER Split:
$500,000
0
$500,000
Retained Earnings
$300,000
Total Stockholders’ Equity
$800,000
Outstanding Shares
100,000
Results in a reduction of the par or stated value per share.
Slide
13-86
Stock Splits
So what is the value in a stock split???
When stock is split, the market responds. Let’s say the
Medland stock was trading at $80 in the market.
After the split, the market will adjust its price to match the split
and move to $40. (This will not affect the stockholder, who know owns 2
shares of stock with a total value of $80)
Often, lowering the price of a share of stock, will stimulate
trades.
More trades mean more demand, which often drives the stock
price UP.
Slide
13-87
Stock Splits – other types
Stock splits can be structure any way….
For example, they can be 3 shares issued for every 2 shares
owned:
Slide
13-88
Before:
Outstanding Shares of 10,000 at a $6 par value
$60,000
After:
Outstanding Shares of 15,000 at a $4 par value
$60,000
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
13-89
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
13-90
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
13-91
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
13-92
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
13-93
$
$
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
13-94
SO 6 Identify the items reported in a retained earnings statement.
Retained Earnings Statement
Illustration 11-25
Slide
13-95
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
13-96
SO 6 Identify the items reported in a retained earnings statement.
Statement Presentation and Analysis
Illustration 11-26
Slide
13-97
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
13-98
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
13-99
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
13-100
End of Chapter 11
Good Bye and Good Luck!
Solutions to problems next
Slide
13-101
Prob 11-1B
(a) Jan. 10
Mar. 1
Apr. 1
May 1
Aug. 1
Sept. 1
Slide
13-102
Cash (80,000 X $4)
Common Stock (80,000 X $3)
Paid-in Capital in Excess of
Stated Value—Common
Stock (80,000 X $1)
Cash (5,000 X $105)
Preferred Stock (5,000 X $100)
Paid-in Capital in Excess of
Par Value—Preferred Stock
(5,000 X $5)
Land
Common Stock (24,000 X $3)
Paid-in Capital in Excess of
Stated Value—Common
Stock ($85,000 – $72,000)
Cash (80,000 X $4.50)
Common Stock (80,000 X $3)
Paid-in Capital in Excess of
Stated Value—Common
Stock (80,000 X $1.50)
Organization Expense
Common Stock (10,000 X $3)
Paid-in Capital in Excess of
Stated Value—Common
Stock ($40,000 – $30,000)
Cash (10,000 X $5)
Common Stock (10,000 X $3)
Paid-in Capital in Excess of
Stated Value—Common
Stock (10,000 X $2)
320,000
240,000
80,000
525,000
500,000
25,000
85,000
72,000
13,000
360,000
240,000
120,000
40,000
30,000
10,000
50,000
30,000
20,000
Prob 11-1B
PROBLEM 11-1B (Continued)
(c) KEELER CORPORATION
Stockholders’ equity
Paid-in capital
Capital stock
8% Preferred stock, $100 par
value, 10,000 shares
authorized, 6,000 shares
issued
Common stock, no par, $3
stated value, 500,000 shares
authorized, 204,000 shares
issued
Total capital stock
Additional paid-in capital
In excess of par value—
preferred stock
In excess of stated value—
common stock
Total additional paid-in
capital
Total paid-in capital
Slide
13-103
$ 600,000
612,000
1,212,000
$ 34,000
243,000
277,000
$1,489,000
Prob 11-2B
(a) Mar. 1
June 1
Sept. 1
Dec. 1
31
Slide
13-104
Treasury Stock (5,000 X $8)
Cash
Cash (1,000 X $12)
Treasury Stock (1,000 X $8)
Paid-in Capital from Treasury
Stock (1,000 X $4)
Cash (2,000 X $10)
Treasury Stock (2,000 X $8)
Paid-in Capital from Treasury
Stock (2,000 X $2)
Cash (1,000 X $6)
Paid-in Capital from Treasury Stock
(1,000 X $2)
Treasury Stock (1,000 X $8)
Income Summary
Retained Earnings
40,000
40,000
12,000
8,000
4,000
20,000
16,000
4,000
6,000
2,000
8,000
40,000
40,000
Prob 11-2B
(c) GOLDBERG CORPORATION
Stockholders’ equity
Paid-in capital
Capital stock
Common stock, $5 par,
100,000 shares issued and
99,000 outstanding
Additional paid-in capital
In excess of par value
From treasury stock
Total additional paid-in
capital
Total paid-in capital
Retained earnings
Total paid-in capital and
retained earnings
Less: Treasury stock (1,000 common
shares, at cost)
Total stockholders’
equity
Slide
13-105
$500,000
$200,000
6,000
206,000
706,000
140,000
846,000
(8,000)
$838,000
Prob 11-3B
(a) Feb. 1
Apr. 14
Sept. 3
Nov. 10
Dec. 31
Slide
13-106
Cash
Common Stock (25,000 X $1)
Paid-in Capital in Excess of
Stated Value—Common
Stock ($100,000 – $25,000)
Cash
Treasury Stock—Common
(6,000 X $4)
Paid-in Capital from Treasury
Stock-Common
($33,000 – $24,000)
Patent
Common Stock (5,000 X $1)
Paid-in Capital in Excess of
Stated Value—Common
Stock ($30,000 – $5,000)
Treasury Stock—Common
Cash
Income Summary
Retained Earnings
100,000
25,000
75,000
33,000
24,000
9,000
30,000
5,000
25,000
6,000
6,000
452,000
452,000
Prob 11-3B
(c) PORT CORPORATION
Stockholders’ equity
Paid-in capital
Capital stock
8% Preferred stock, $50
par value, cumulative, 10,000 shares authorized,
8,000 shares issued and outstanding
$ 400,000
Common stock, no par, $1 stated value,
2,000,000 shares authorized, 1,030,000 shares issued
and 1,025,000 shares outstanding
Total capital stock
Additional paid-in capital
In excess of par value—
preferred stock
1,030,000
1,430,000
$ 100,000
In excess of stated value—
common stock
1,550,000
From common treasury
stock
Total additional paid-in capital
Total paid-in capital
Retained earnings (see Note X)
Total paid-in capital and retained earnings
9,000
1,659,000
3,089,000
2,268,000
5,357,000
Less: Treasury stock (5,000 common
shares)
Total stockholders’
equity
Note X: Dividends on preferred stock totaling $32,000 [8,000 X (8% X
$50)] are in arrears.
Slide
13-107
(22,000)
$5,335,000
Dividends in Arrears – Practice – Solution
PREFERRED STOCK, CUMULATIVE DIVIDENDS: Source: Rigos CPA review materials, 2002
At 12/31 19x2, and 19x3, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No
dividends were in arrears as of December 31, 19x1.
•Apex did NOT declare a dividend during 19x2.
•During 19x3, Apex paid a cash dividend of $10,000 on its preferred stock.
Apex should report dividends in arrears in its 19x3 financial statements as a (an)
a. Accrued Liability of $15,000
b. Disclosure of $15,000
c. Accrued liability of $20,000
d. Disclosure of $20,000
Show your work:
Slide
13-108
YEAR
DIVIDENDs
PAID
19X1
19X2
19X3
15,000
15,000
15,000
15,000
0
10,000
BALANCE IN
ARREARS
0
15,000
25,000