Chapter 11
Reporting and Interpreting
Owners’ Equity
Acct 2301 Fall 09
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Topics on owners’ equity
• Terminology
• Authorized, issued, and outstanding shares
• (additional) Paid-in capital (APIC)
• Preferred stock, common stock, treasury stock
• Sale of stock
• Purchase of stock
• Dividends
• Stock dividend and stock split
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Equity in Corporations
The equity section for a corporation is divided
into two parts:
• Retained Earnings -- earnings (net
income) the company has earned since it
was founded, less any dividends paid
• Contributed Capital --amount that
owners have contributed
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Presentation of Stockholders’
Equity in Corporations
Preferred stock, $10 par value,
100,000 shares authorized, 2,000 shares issued
Common stock, $1 par value, 1,000,000 shares
authorized, 100,000 shares issued
Paid-in capital (common)
Less: treasury stock (common)
at cost, 5,000 shares
Retained earnings
Other comprehensive income
Total Stockholders’ Equity
$20,000
100,000
985,000
(105,000)
670,000
50,000
$ 1,720,000
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Capital Stock
• Common Stock
• Preferred Stock
• Treasury Stock
– Shares, either common stock or preferred
stock, repurchased by the corporation
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Capital Stock
• Authorized Shares: The maximum number of shares
•
•
•
•
of capital stock that can be sold to the public is called
the authorized number of shares.
Issued Shares -- shares sold
Unissued shares -- shares have never been sold
Outstanding shares -- number of shares issued and
not retained by the company.
Shares in Treasury (treasury shares) -- shares
repurchased by the corporation
Authorized shares = Issued shares + Unissued shares
Issued shares = Outstanding shares + Shares in Treasury
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Capital Stock
Par value: the nominal value per share of
capital stock
• Has no relationship to market value.
• Serves as the basis for legal capital
No-par value is capital stock that does not
have an amount per share
APIC: Additional Paid-in Capital
Also called Paid-in capital or Capital in
excess of par
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Accounting for Sale of Stock
ABC Co. issued 300 shares of $1 par common stock
for $12 per share.
Debit
Cash
Credit
$3,600
Common Stock
APIC
300
3,300
Balancing amount is Additional
paid-in capital (APIC)
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Treasury Stock
Outstanding (common or preferred) stock
that was subsequently reacquired and is
still being held by that corporation.
Why would a corporation reacquire its own
stock?
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More on Treasury Stock
• Treasury Stock:
• is considered issued stock but not
outstanding stock
• has no voting or dividend rights
• is a contra-equity account on the
Balance Sheet
• is recorded at cost
• Can be subsequently resold
• NO gains or losses are recorded on
treasury stock
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Treasury Stock Example
ABC Inc. purchased 120 shares of its own
common stock from the stock market at $10
per share
Debit
Treasury Stock
Cash
Credit
$1,200
$1,200
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Treasury Stock Example
The treasury stock was resold later
Debit
Scenario One:
Sold 100 shares of
Treasury Stock at $13
per share.
Scenario Two:
Sold 100 shares of
Treasury Stock at $9
per share.
Cash
Credit
1,300
APIC
Treasury Stock
Cash
APIC
300
1,000
900
100
Treasury Stock
1,000
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Dividends
• Dividends are declared by board of directors
• Dividends (both cash and stock) are
distributions of earnings to the shareholders
– not an expense
– based only on shares outstanding
• Once a dividend is declared, a liability is
created
• Cash dividends require sufficient cash and
positive retained earnings (past earnings)
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Dividend dates
• Declaration date
– Board declares dividend (charge Retained
Earnings)
– Creates a legal liability (Dividend Payable)
• Date of Record: who will receive dividend
• Payment Date
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Dividend Dates Journal Entries
Declaration date:
Dr. Retained Earnings
Cr. Dividends payable
Record date:
No entry
Payment date:
Dr. Dividends payable
Cr. Cash
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Dividends on Preferred Stock
• Current preferred dividends must be paid
before paying any dividends to common
stock.
• If a preferred dividend is not paid, the unpaid
amount is either cumulative (a dividend in
arrears) or non-cumulative.
– Cumulative: Unpaid dividends must be paid before
common dividends.
– Non-cumulative: Unpaid dividends are lost.
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Stock Dividends
• Stock dividends are distributions to
stockholders of additional shares of stock.
• All stockholders receive the same
percentage increase in the number of
shares they own (pro rata basis).
– No change in total stockholders’ equity.
– No change in par values.
Why issue a stock dividend?
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Accounting for Stock Dividends
ABC Co. declared a 10% stock dividend on its 200
shares of $1 par common stock. The market value is
$20 per share.
debit
credit
Retained earnings
$400
Common stock
Additional paid in capital
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380
• Income Statement: No effect on Income
• Statement of Changes in Equity: No effect on equity
• Statement of Cash Flows: No effect on cash flow
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2:1 Stock Split
Before stock split
1 share of stock
$10 par value
After stock split
2 shares of stock
$5 par value
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Accounting for Stock Splits
• Distributions of 100% or more of stock to
stockholders
• Decrease par value of stock
• Increase number of outstanding shares
• No change in total stockholders’ equity
Thus, no journal entry is needed!
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