Financial
Accounting,
Seventh Edition
Chapter
11
Corporations:
Organization,
Stock
Transactions,
Dividends,and
Retained Earnings
Slide
13-1
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
Additional Taxes
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13-2
Disadvantages
Consolidated Statement of Retained Earnings
2012
2011
2010
$114,269
$135,866
$147,687
52,004
43,938
53,063
Cash
Dividends
(47,729)
(18,360)
(18,078)
Stock
Dividends
(38,334)
(47,175)
(46,806)
$80,210
$114,269
$135,866
Retained
Earnings, at
the beginning
of year
Net Earnings
Retained
Earnings at the
end of the year
Slide
13-3
3
Components of Stockholders’ Equity
Authorized Shares: Total amount of stock that a corporation’s
charter authorized it to sell.
SHAREHOLDERS’ EQUITY:
(in thousands of dollars)
Dec 31, 2012
Dec 31, 2011
$ 25,450
$ 25,333
Class B common stock, $.69-4/9 par value— 40,000,000 shares
authorized— 21,627,000 and 21,025,000 respectively, issued
15,018
14,601
Capital in excess of par value
547,576
533,677
Retained earnings, per accompanying statement
80,210
114,269
Accumulated other comprehensive loss
(16,447)
(19,953)
Treasury stock (at cost) – 73,000 shares and 71,000 shares respectively
(1,992)
(1,992)
$ 649,815
$ 665,935
Common Stock, $0.69-4/9 par value— 120,000,000 shares authorized—
36,649,000 and 36,479,000 respectively, issued
Total shareholders’ equity
Issued Shares: TOTAL shares that have been issued to stockholders.
Treasury Stock: Shares which were purchased and are currently held
by the company
Slide
13-4
OUTSTANDING Shares = Issued Shares – Treasury Shares
(NOTE: Dividends are ONLY paid on outstanding shares)
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.
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13-5
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
An investment in
GROUPON of $1,000 on
Slide November 4, 2011 (Price
13-6
per share = $26.11)
Is worth $235.54 on April 10, 2013
(Price per share = $6.15)
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
13-7
Par Value and Market Value
Par value is an
arbitrary amount
assigned to each
share of stock
when it is
authorized.

Market value is the
amount that each
share of stock will
sell for in the
market.
Par Value = $0.001
Market Price (on April 10, 2, 2013) : $791.00
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13-8
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
13-9
Retained earnings is net income that a corporation retains
for future use.
Accounting for Common Stock Issuance
Issuing Par Value Common Stock for Cash
Rose Company issued 1,000 shares of common stock of
$1 par value at par. Record the transaction.
Rose Company issued 1,000 shares of $1 par value common
stock for $70 per share. Record the transaction.
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13-10
Accounting for Common Stock Issuance
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
13-11
Accounting for Common Stock Issuance
Illustration: Assume that attorneys have helped Tulips
Company incorporate. They have billed the company $50,000
for their services, and agree to accept 5,000 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.
Slide
13-12
Accounting for Common Stock Issues
Daffodils Company exchanged 4,000 shares of $4
par common stock for a building. Market value of
the building is $80,000. Record the transaction.
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13-13
Accounting for Common Stock Issuance
Issuing No-Par Common Stock for Cash
Assume that Jasmine Company issues 10,000 shares of $5 stated
value no-par common stock for $18 per share. Record the journal
entry.
Prepare the entry assuming there is no stated value:
Slide
13-14
Knowledge Check Question 1:
Northern Company purchased a building in exchange for
20,000 shares of common stock with a par value of $1 per
share. The building has a market value of $350,000, but has
an outstanding mortgage balance of $250,000 (which is now
being taken over by Northern). As result of this transaction,
Northern Company’s accounting equation will NOT
1.
2.
3.
4.
Slide
13-15
Show an increase in
Show an increase in
Show an increase in
Show an increase in
Assets of $350,000
Contributed Capital of $20,000
Stockholders’ Equity of $100,000
Liabilities of $250,000
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
13-16
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
13-17
Accounting for Treasury Stock
Magnolia Company
Stockholders' Equity
31-Dec-11
Common stock - $1 par value,
250,000 shares authorized,
100,000 shares issued and outstanding
Paid-in capital in excess of par value
Total paid-in capital
Retained earnings
Total stockholders' equity
$
$
$
100,000
400,000
500,000
35,000
535,000
On January 1, 2012, Magnolia Company purchased
1,000 shares of its own $1 par common stock for
$8 per share. Record the transaction.
Slide
13-18
Accounting for Treasury Stock
Magnolia Company
Stockholders' Equity
2-Jan-12
Common stock - $1 par value,
250,000 shares authorized, 100,000 shares
issued and 99,000 shares outstanding
Paid-in capital in excess of par value
Total paid-in capital
Retained earnings
Total Paid in Capital and Retained Earnings
Less: Treasury Stock (1,000 shares)
Total Stockholders' Equity
Slide
13-19
$
$
100,000
400,000
500,000
35,000
$535,000
(8,000)
$527,000
Treasury Stock is shown as a reduction in
Stockholders’ Equity on the balance sheet.
The number of shares issued (100,000), number of
shares outstanding (99,000), and
the number of shares held as treasury (1,000)
are disclosed in the Stockholder’s Equity section.
Accounting for Treasury Stock
Disposal of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders’
equity.
Slide
13-20
Selling Treasury Stock Above Cost
On March 1, 2012, Magnolia Company reissued
500 shares of treasury stock (originally
purchased for $8 a share) for $12 per share.
Record the transaction.
Slide
13-21
A corporation does not realize a gain or suffer a loss from stock
transactions with its own stockholders.
Selling Treasury Stock Below Cost
On April 1, 2012, Magnolia Company reissued 300
shares of treasury stock (originally purchased for
$8 per share) for $3 per share. Record the
transaction.
Slide
13-22
Magnolia uses Paid-in Capital from Treasury Stock, if available, for
the difference between cost and resale price of the shares.
Selling Treasury Stock Below Cost
On May 1, 2012, Magnolia Company reissued the
remaining 200 shares of treasury stock
(originally purchased for $8 per share) for $1
per share. Record the transaction.
Slide
13-23
Knowledge Check Question 2:
Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31, 2012
showed the following:
Common Stock, $1 par value, 20,000 shares authorized and issued
$20,000
Paid-in-Capital in excess of par – Common Stock
80,000
Treasury Stock, common, 2,000 shares (at cost)
(40,000)
Paid-in-Capital, Treasury Stock
Retained Earnings
Total Stockholders’ Equity
10,000
130,000
$200,000
On January 1, 2013, Northern Company reissued 2,000 shares of Treasury stock at a market
price of $12 per share. The resulting journal entry will:
1.
2.
3.
4.
Slide
13-24
Debit
Debit
Debit
Debit
Cash by $40,000
Treasury Stock by $24,000
Paid-in-Capital, Treasury Stock by $20,000
Retained Earnings by $6,000
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
13-25
Preferred Stock
Illustration: Dahlia Corporation issues 10,000 shares of
$10 par value preferred stock for $25 cash per share.
Journalize the issuance of the preferred stock.
Preferred stock may have a par value or no-par value.
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13-26
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
13-27
Dividends
A distribution of cash or stock to stockholders on a
pro rata (proportional) basis.
Common types of Dividends :
1.
Cash dividends.
2. Stock dividends.
Cash Dividends may be expressed as:
Slide
13-28
(1)
as a percentage of the par or stated value, or
(2)
as a dollar amount per share.
A Dividend Announcement Example
(Source: investor.apple.com)
On October 25, 2012, Apple’s Board of
Directors declared a cash dividend of $2.65
per share of the Company’s common stock.
The dividend is payable on November 15,
2012, to shareholders of record as of the
close of business on November 12, 2012.
Excerpted from APPLE INC’s 10K Statement dated September 29, 2012:
Shareholders’ Equity:
Sep 29, 2012
Common stock, no par value; 1,800,000,000 shares
authorized; 939,208,000 shares issued and outstanding
16,422 million
Slide
13-29
APPLE, Inc’s Dividend Entries:
Oct 25, 2012 (Date of Declaration):
November 12, 2012 (Date of Record):
November 15 , 2012 (Date of Payment):
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13-30
Dividends for Mr. Bill Gates?
(Source: http://www.microsoft.com/investor/proxy)
Microsoft Press Release:
REDMOND, Wash. — Mar. 11, 2013 — Microsoft Corp. today
announced that its board of directors declared a quarterly dividend
of $0.23 per share. The dividend is payable June 13, 2013 to
shareholders of record on May 16, 2013.
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF
PRINCIPAL SHAREHOLDERS
William H. Gates III, (Chairman): 460,984,209 (5.47%)
So, Cash Dividends to be paid to Mr. Gates on June 13, 2013
(for one quarter only):
460,984,209 shares * $0.23 per share ~ $106 million
Slide
13-31
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
13-32
Cumulative vs Noncumulative Dividends
Cumulative
Dividends in arrears
must be paid before
dividends may be
paid on common
stock.
Most preferred
stock is cumulative.
Slide
13-33
Vs.
Noncumulative
Undeclared dividends
from current and
prior years do not
have to be paid in
future years.
Cumulative vs Noncumulative Dividends
Example: Consider the following partial
Statement of Stockholders’ Equity
Common stock, $5 par value; 40,000 shares
authorized, issued and outstanding
Preferred stock, 9%, $100 par value; 1,000
shares authorized, issued and outstanding
Total contributed capital
$ 200,000
100,000
$ 300,000
The Board of Directors did not declare or pay
dividends in 2011. In 2012, the Board of
Directors declare and pay total cash dividends of
$30,000
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13-34
Cumulative vs Noncumulative Dividends
If Preferred Stock is NonCumulative:
Preferred Dividends Common Dividend
Year 2011:
Year 2012:
If Preferred Stock is Cumulative:
Preferred Dividends
Year 2011:
Year 2012:
Slide
13-35
Common Dividends
Knowledge Check Question 3
Jordan Company has 1,000 shares of $50 par
value, 4.5% cumulative and nonparticipating
preferred stock and 10,000 shares of $10 par
value common stock outstanding. The company paid
total cash dividends of $1,000 in its first year of
operation, and declared total cash dividends of
$5,000 in its second year of operation. The cash
dividend paid to common stockholders in the second
year will be:
1.
2.
3.
4.
Slide
13-36
$1,500.
$3,500.
$2,250.
$2,750.
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.
Results in decrease in retained earnings and increase in paid-in capital.
Slide
13-37
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.
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13-38
Stock Dividends
Illustration: Lily Corp. has 50,000 shares issued and
outstanding. The par value is $10 per share and market
value is $15 per share. Record the relevant journal entries.
Journal entry to declare a 10% stock dividend:
Journal entry when the stocks are issued:
Slide
13-39
Stock Dividends
Illustration: Violet Corp. has 50,000 shares issued and
outstanding. The par value is $10 per share and market
value is $15 per share. Record the relevant journal entries.
Journal entry to declare a 50% stock dividend:
Journal entry when the stocks are issued:
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13-40
Stock Dividends
Stockholders’ Equity with Dividends Distributable
Lily Corporation
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Common stock
Common stock dividends distributable
Total stockholders' equity
Slide
13-41
$
$
50,000
5,000
55,000
Stock Dividends
Effects of Stock Dividends on Stockholders’ Equity:
Slide
13-42
Knowledge Check Question 4:
Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31,
2012 showed the following:
Common Stock, $1 par value, 20,000 shares authorized and issued
$20,000
Paid-in-Capital in excess of par – Common Stock
80,000
Treasury Stock, common, 2,000 shares (at cost)
(40,000)
Paid-in-Capital, Treasury Stock
Retained Earnings
Total Stockholders’ Equity
10,000
130,000
$200,000
On January 1, 2013, Northern Company declared a 10% stock dividend, when the market
price per share was $30 per share. The resulting journal entry will:
1.
2.
3.
4.
Slide
13-43
Debit Stock Dividends by $60,000
Credit Common Stock Dividends Distributable by $20,000
Credit Paid-in-Capital, Common Stock by $52,200
Credit Common Stock by $2,000
Knowledge Check Question 5:
Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31,
2012 showed the following:
Common Stock, $1 par value, 20,000 shares authorized and issued
$20,000
Paid-in-Capital in excess of par – Common Stock
80,000
Treasury Stock, common, 2,000 shares (at cost)
(40,000)
Paid-in-Capital, Treasury Stock
Retained Earnings
Total Stockholders’ Equity
10,000
130,000
$200,000
On January 1, 2013, Northern Company declared a 30% stock dividend, when the market
price per share was $30 per share. The resulting journal entry will:
1.
2.
3.
4.
Slide
13-44
Debit Stock Dividends by $162,000
Credit Common Stock Dividends Distributable by $5,400
Credit Paid-in-Capital, Common Stock by $156,600
Credit Common Stock by $6,000
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
13-45
Stock Splits
Illustration: Assume Daisy Corporation splits its 50,000
shares of common stock on a 2-for-1 basis.
Results in a reduction of the par or stated value per share.
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13-46
The Implication of Stock Splits
Price of 1 share of Microsoft common stock on March 13, 1986 = $28.00
Price of 1 share of Microsoft common stock on April 10, 2013 = $30.12
Microsoft's initial public offering (IPO) was March 13, 1986
Split
Payable Date
Split Type Equivalent # of Shares
First
Sept. 18, 1987
2 for 1
1x2=2
Second
April 12, 1990
2 for 1
2x2=4
Third
June 26, 1991
3 for 2
4 x 1.5 = 6
Fourth
June 12, 1992
3 for 2
6 x 1.5 = 9
Fifth
May 20, 1994
2 for 1
9 x 2 = 18
Sixth
December 6, 1996
2 for 1
18 x 2 = 36
Seventh
February 20, 1998
2 for 1
36 x 2 = 72
Eighth
Ninth
March 26, 1999
February 18, 2003
2 for 1
2 for 1
72 x 2 = 144
144 x 2 = 288
This means, 1 share of Microsoft in 1986 = 288 shares today
Slide
So,
13-47
an investment of $28 on March 13, 1986 = $8,672 on April 10, 2013
What happens when a stock does NOT split?
BERKSHIRE HATHAWAY, Inc. Class A
(CEO: Mr. Warren Edward Buffet)
Stock price on October 14, 1976 = $67
Stock price on April 10, 2013 = $158,846
(Shares outstanding = 1.65 million)
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13-48
End of Chapter 11
Slide
13-49