Study
Study Objectives
Objectives
Reporting and Analyzing
Stockholders’ Equity
Chapter
11-1
Chapter
11-2
Reporting
Stockholders
Reporting and
and Analyzing
Analyzing Stockholders’
Stockholders’’ Equity
Equity
The
Corporate
Form of
Organization
Characteristics
Formation
Stockholder
rights
Stock Issue
Consideration
Authorized
stock
Issuance
Par and nonopar value
Accounting for
common stock
issues
Accounting
for Treasury
Stock
Purchase of
treasury stock
Preferred
Stock
Dividend
preferences
Liquidation
preference
Dividends
and Retained
Earnings
Cash dividends
Stock dividends
Stock splits
Retained
earnings
restrictions
Financial
Statement
Presentation
and
Corporate
Performance
Balance sheet
Statement of
cash flows
Dividend record
Earnings
performance
Debt vs. equity
decision
Chapter
11-4
The
The Corporate
Corporate Form
Form of
of Organization
Organization
An entity separate and distinct from its owners.
2.
Record the issuance of common stock.
3.
Explain the accounting for the purchase of treasury stock.
4.
Differentiate preferred stock from common stock.
5.
Prepare the entries for cash dividends and understand the
effect of stock dividends and stock splits.
6.
Identify the items that affect retained earnings.
7.
Prepare a comprehensive stockholders’ equity section.
8.
Evaluate a corporation’s dividend and earnings performance
from a stockholder’s perspective.
9.
Prepare entries for stock dividends.
The
The Corporate
Corporate Form
Form of
of Organization
Organization
Characteristics of a Corporation
Separate Legal Existence
Classified by Ownership
Not-for-Profit
Publicly held
For Profit
Privately held
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
The
The Corporate
Corporate Form
Form of
of Organization
Organization
¾
¾
¾
¾
Nike
General Motors
IBM
General Electric
¾ Cargill Inc.
Corporate Management
Government Regulations
Chapter
11-6
Characteristics of a Corporation
Other Forms of Business Organization
Chairman and
Board of
Directors
Treasurer
Chapter
11-7
Vice President
Finance/Chief
Financial Officer
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
The
The Corporate
Corporate Form
Form of
of Organization
Organization
Stockholders
Vice President
Marketing
Disadvantages
Additional Taxes
¾ Limited partnerships
¾ Limited liability partnerships (LLPs)
President and
Chief Executive
Officer
General
Counsel and
Secretary
Advantages
Continuous Life
¾ Salvation Army
¾ American Cancer
Society
¾ Gates Foundation
Chapter
11-5
Illustration 11-1
Corporation
organization chart
Identify and discuss the major characteristics of a
corporation.
Chapter
11-3
Financial Accounting, Fifth Edition
Classified by Purpose
1.
¾ Limited liability companies (LLCs)
Vice President
Operations
¾ S Corporation
Vice President
Human
Resources
9
no double taxation
9
cannot have more than 75 shareholders
Controller
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
Chapter
11-8
Chapter
11-9
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
The
The Corporate
Corporate Form
Form of
of Organization
Organization
The
The Corporate
Corporate Form
Form of
of Organization
Organization
Forming a Corporation
Stockholders Rights
Initial Steps:
The
The Corporate
Corporate Form
Form of
of Organization
Organization
Illustration 11-3
Stockholders Rights
3. Keep the same percentage ownership when new
shares of stock are issued (preemptive right).
1. Vote in election of board of
directors and on actions that
require stockholder approval.
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).
Illustration 11-3
2. Share the corporate earnings
through receipt of dividends.
Corporations engaged in interstate commerce must obtain a
license from each state in which they do business.
Chapter
11-10
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
The
The Corporate
Corporate Form
Form of
of Organization
Organization
Stockholders Rights
Chapter
11-11
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
Stock
Stock Issue
Issue Considerations
Considerations
Illustration 11-3
Chapter
11-12
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
Stock
Stock Issue
Issue Considerations
Considerations
Prenumbered
Authorized Stock
Charter indicates the amount of stock that a
corporation is authorized to sell.
4. Share in assets upon liquidation in proportion to
their holdings. This is called a residual claim.
Number of authorized shares is often reported
in the stockholders’ equity section.
Shares
Illustration 11-4
Name of corporation
Stockholder’s
name
Signature of
corporate official
Chapter
11-13
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
Chapter
11-14
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
Chapter
11-15
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
Stock
Stock Issue
Issue Considerations
Considerations
Stock
Stock Issue
Issue Considerations
Considerations
Stock
Stock Issue
Issue Considerations
Considerations
Issuance of Stock
Par and No-Par Value Stocks
Review Question
Corporation can issue common stock
Capital stock that has been assigned a value per share.
¾ directly to investors or
Years ago, par value determined the legal capital per
share that a company must retain in the business for
the protection of corporate creditors.
¾ indirectly through an investment banking firm.
U.S. securities exchanges
b. The stockholders’ equity section begins with paidin capital.
No-par value stock is quite common today.
¾ American Stock Exchange
c. The authorization of capital stock does not result
in a formal accounting entry.
In many states the board of directors assigns a stated
value to no-par shares.
¾ 13 regional exchanges
¾ NASDAQ national market
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
a. Ownership of common stock gives the owner a
voting right.
Today many states do not require a par value.
¾ New York Stock Exchange
Chapter
11-16
Which of these statements is false?
Chapter
11-17
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
d. Legal capital is intended to protect stockholders.
Chapter
11-18
SO 1 Identify and discuss the major characteristics of a corporation.
corporation.
Stock
Stock Issue
Issue Considerations
Considerations
Common
CommonStock
Stock
Account
Account
Paid-in Capital
Paid
Paid-in
Capital
Preferred
PreferredStock
Stock
Stock
Stock Issue
Issue Considerations
Considerations
Common
CommonStock
Stock
Paid-in Capital
Paid
Paid-in
Capitalin
in
Excess
Excessof
ofPar
Par
Paid-in Capital
Paid
Paid-in
Capital
Account
Account
Preferred
PreferredStock
Stock
Account
Account
Two Primary
Sources of
Equity
Retained
RetainedEarnings
Earnings
Account
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.
Chapter
11-19
SO 2 Record the issuance of common stock.
Account
Account
Stock
Stock Issue
Issue Considerations
Considerations
Accounting for Common Stock Issues
Additional
Paid
AdditionalPaidPaidin
inCapital
Capital
Two Primary
Sources of
Equity
Account
Account
Other than consideration received, the issuance of
common stock affects only paid-in capital accounts.
Retained earnings is net income that a corporation retains
for future use.
Chapter
11-20
SO 2 Record the issuance of common stock.
Accounting for Common Stock Issues
Accounting for Common Stock Issues
Illustration: Assume that Hydro-Slide, Inc. issues 1,000
shares of $1 par value common stock at par. Prepare the
journal entry.
Illustration: Now assume Hydro-Slide, Inc. issues an
additional 1,000 shares of the $1 par value common stock for
cash at $5 per share. Prepare Hydro-Slide’s journal entry.
Chapter
11-23
Stock
Stock Issue
Issue Considerations
Considerations
Identify the specific sources of paid-in capital.
2) Maintain the distinction between paid-in capital and
retained earnings.
Retained
RetainedEarnings
Earnings
Stock
Stock Issue
Issue Considerations
Considerations
SO 2 Record the issuance of common stock.
1)
Account
Account
Stock
Stock Issue
Issue Considerations
Considerations
Chapter
11-22
Primary objectives:
Account
Account
SO 2 Record the issuance of common stock.
Chapter
11-21
SO 2 Record the issuance of common stock.
Stock
Stock Issue
Issue Considerations
Considerations
Stockholders’ equity section assuming Hydro-Slide, Inc.
has retained earnings of $27,000.
Illustration 11-5
Chapter
11-24
SO 2 Record the issuance of common stock.
Accounting
Accounting for
for Treasury
Treasury Stock
Stock
Review Question
Common
CommonStock
Stock
ABC Corp. issues 1,000 shares of $10 par value common stock
at $12 per share. When the transaction is recorded, credits
are made to:
Paid-in Capital
Paid
Paid-in
Capital
Preferred
PreferredStock
Stock
Two Primary
Sources of
Equity
b. Common Stock $12,000.
c. Common Stock $10,000 and Paid-in Capital in Excess of
Par Value $2,000.
Account
Account
Retained
RetainedEarnings
Earnings
Account
Account
Less:
Less:
Treasury
TreasuryStock
Stock
Account
Account
d. Common Stock $10,000 and Retained Earnings $2,000.
SO 2 Record the issuance of common stock.
Paid-in Capital
Paid
Paid-in
Capitalin
in
Excess
Excessof
ofPar
Par
Account
Account
a. Common Stock $10,000 and Paid-in Capital in Excess of
Stated Value $2,000.
Chapter
11-25
Account
Account
Chapter
11-26
Chapter
11-27
SO 3 Explain the accounting for the purchase of treasury stock.
Accounting
Accounting for
for Treasury
Treasury Stock
Stock
Accounting
Accounting for
for Treasury
Treasury Stock
Stock
Treasury stock - corporation’s own stock that it has
reacquired from shareholders, but not retired.
Illustration 11-6
Purchase of Treasury Stock
Generally accounted for by the cost method.
Corporations purchase their outstanding stock:
1.
Accounting
Accounting for
for Treasury
Treasury Stock
Stock
Debit Treasury Stock for the price paid.
To reissue the shares to officers and employees under
bonus and stock compensation plans.
Treasury stock is a contra stockholders’ equity
account, not an asset.
2. To increase trading of the company’s stock in the
securities market.
3. To have additional shares available for use in acquiring
other companies.
Purchase of treasury stock reduces stockholders’
equity.
4. To increase earnings per share.
Illustration: On February 1, 2008, Mead acquires 4,000
shares of its stock at $8 per share. Prepare the entry.
Another infrequent reason is to eliminate hostile shareholders.
Chapter
11-28
SO 3 Explain the accounting for the purchase of treasury stock.
Accounting
Accounting for
for Treasury
Treasury Stock
Stock
Chapter
11-29
SO 3 Explain the accounting for the purchase of treasury stock.
Chapter
11-30
SO 3 Explain the accounting for the purchase of treasury stock.
Accounting
Accounting for
for Treasury
Treasury Stock
Stock
Stockholders’ Equity with Treasury stock
Review Question
Illustration 13-7
Treasury stock may be repurchased:
a. to reissue the shares to officers and employees
under bonus and stock compensation plans.
b. to signal to the stock market that management
believes the stock is underpriced.
c. to have additional shares available for use in the
acquisition of other companies.
d. more than one of the above.
Both the number of shares issued (100,000), outstanding (96,000), and
the number of shares held as treasury (4,000) are disclosed.
Chapter
11-31
SO 3 Explain the accounting for the purchase of treasury stock.
Preferred
Preferred Stock
Stock
Features often associated with preferred stock.
1.
Preference as to dividends.
2. Preference as to assets in liquidation.
Chapter
11-32
SO 3 Explain the accounting for the purchase of treasury stock.
Preferred
Preferred Stock
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.
Chapter
11-33
Preferred
Preferred Stock
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.
3. Nonvoting.
Each paid-in capital account title should identify the
stock to which it relates:
Cumulative dividend – holders of preferred stock
must be paid their annual dividend plus any dividends
in arrears before common stockholders receive
dividends.
9 Paid-in Capital in Excess of Par Value—Preferred Stock
9 Paid-in Capital in Excess of Par Value—Common Stock
Chapter
11-34
SO 4 Differentiate preferred stock from common stock.
Preferred stock may have a par value or no-par value.
Chapter
11-35
SO 4 Differentiate preferred stock from common stock.
Chapter
11-36
SO 4 Differentiate preferred stock from common stock.
Preferred
Preferred Stock
Stock
Liquidation Preference
Preferred
Preferred Stock
Stock
Review Question
M-Bot Corporation has 10,000 shares of 8%, $100 par
value, cumulative preferred stock outstanding at
December 31, 2010. No dividends were declared in 2008
or 2009. If M-Bot wants to pay $375,000 of dividends in
2010, common stockholders will receive:
Preference on corporate assets if the
corporation fails.
Preference may be
9
for the par value of the shares or
9
for a specified liquidating value.
Dividends
Dividends
A distribution of cash or stock to stockholders on a
pro rata (proportional to ownership) basis.
Types of Dividends:
a. $0.
b. $295,000.
c. $215,000.
1.
Cash dividends.
3.
Stock dividends.
2.
Property dividends.
4.
Scrip (promissory note)
Dividends expressed: (1) as a percentage of the par or
stated value, or (2) as a dollar amount per share.
d. $135,000.
Chapter
11-37
SO 4 Differentiate preferred stock from common stock.
Dividends
Dividends
Chapter
11-38
SO 4 Differentiate preferred stock from common stock.
Dividends
Dividends
Cash Dividends
Chapter
11-39
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Dividends
Dividends
Dividends require information concerning three dates:
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.
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)
2. Adequate cash.
December 22 (Date of Record)
3. A declaration of dividends by the Board of
Directors.
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Chapter
11-40
January 20 (Payment Date)
Chapter
11-41
Dividends
Dividends
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Chapter
11-42
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Dividends
Dividends
Stock Dividends
Review Question
Illustration 11-10
Pro rata distribution of the corporation’s own stock.
Entries for cash dividends are required on the:
a. declaration date and the record date.
b. record date and the payment date.
c. declaration date, record date, and payment date.
d. declaration date and the payment date.
Results in decrease in retained earnings and increase in paid-in capital.
Chapter
11-43
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Chapter
11-44
Chapter
11-45
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Dividends
Dividends
Dividends
Dividends
Stock Dividends
Dividends
Dividends
Effects of Stock Dividends
Reasons why corporations issue stock dividends:
Changes the composition of stockholders’ equity.
1. To satisfy stockholders’ dividend expectations
without spending cash.
Illustration: Medland Corp. declares a 10% stock dividend
on its $10 par common stock when 50,000 shares were
outstanding. The market price was $15 per share.
Illustration 11-9
Total stockholders’ equity remains the same.
No effect on the par or stated value per share.
2. To increase the marketability of the corporation’s
stock.
Increases the number of shares outstanding.
3. To emphasize that a portion of stockholders’ equity
has been permanently reinvested in the business.
(Answers on notes page)
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Chapter
11-46
Dividends
Dividends
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Chapter
11-47
Dividends
Dividends
Stock Split
Reduces the market value of shares.
Chapter
11-48
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Dividends
Dividends
Illustration: Assuming that instead of issuing a 10% stock
dividend, Medland splits its 50,000 shares of common stock
on a 2-for-1 basis.
Differences between the effects of stock dividends
and stock splits.
Illustration 11-11
No entry recorded for a stock split.
Illustration 11-12
Decrease par value and increase number of
shares.
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Chapter
11-49
Dividends
Dividends
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Retained
Retained Earnings
Earnings
Review Question
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Retained
Retained Earnings
Earnings
Illustration 11-14
Net income increases Retained Earnings and a
net loss decreases Retained Earnings.
a. Stock dividends reduce a company’s cash balance.
b. A stock dividend has no effect on total
stockholders’ equity.
Retained earnings is part of the stockholders’
claim on the total assets of the corporation.
c. A stock dividend decreases total stockholders’
equity.
A debit balance in Retained Earnings is
identified as a deficit.
d. A stock dividend ordinarily will increase total
stockholders’ equity.
SO 5 Prepare the entries for cash dividends and understand
the effect of stock dividends and stock splits.
Chapter
11-51
Retained earnings is net income that a company
retains for use in the business.
Which of these statements about stock dividends is true?
Chapter
11-52
(Answers on notes page)
(Answers on notes page)
Chapter
11-50
Chapter
11-53
SO 6 Identify the items that affect retained earnings.
Chapter
11-54
SO 6 Identify the items that affect retained earnings.
Retained
Retained Earnings
Earnings
Presentation
Presentation of
of Stockholders’
Stockholders’ Equity
Equity
Retained Earnings Restrictions
Presentation
Presentation of
of Stockholders’
Stockholders’ Equity
Equity
Balance
Sheet
Presentation
Balance Sheet Presentation
Restrictions can result from:
Two classifications of paid-in capital:
1. Legal restrictions.
1. Capital stock
2. Contractual restrictions.
2. Additional paid-in capital
Illustration 11-16
3. Voluntary restrictions.
Chapter
11-55
SO 6 Identify the items that affect retained earnings.
Measuring
Measuring Corporate
Corporate Performance
Performance
Chapter
11-56
SO 7 Prepare a comprehensive stockholders’ equity section.
Measuring
Measuring Corporate
Corporate Performance
Performance
Earnings Performance
Illustration: Using the information shown below, calculate
the payout ratio for Nike in 2007 and 2006.
Illustration: Calculate Nike’s return on common
stockholders’ equity ratios for 2007 and 2006.
$357.2
$1,491.5
= 24%
$304.9
$1,392.0
Debt Versus Equity Decision
Illustration 11-21
Illustration 11-20
= 22%
The payout ratio measures the percentage of earnings a company distributes
in the form of cash dividends.
Chapter
11-58
SO 7 Prepare a comprehensive stockholders’ equity section.
Measuring
Measuring Corporate
Corporate Performance
Performance
Dividend Record
Illustration 11-18
Chapter
11-57
SO 8 Evaluate a corporation’s dividend and earnings
performance from a stockholder’s perspective.
Measuring
Measuring Corporate
Corporate Performance
Performance
Debt Versus Equity Decision
Illustration 11-22
This ratio shows how many dollars of net income a company earned for each
dollar of common stockholders’ equity.
(Answers on notes page)
Chapter
11-59
SO 8 Evaluate a corporation’s dividend and earnings
performance from a stockholder’s perspective.
Entries
Entries for
for Stock
Stock Dividends
Dividends
Chapter
11-60
SO 8 Evaluate a corporation’s dividend and earnings
performance from a stockholder’s perspective.
Entries
Entries for
for Stock
Stock Dividends
Dividends
Illustration: Medland Corporation 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. The entry to record this
transaction at the declaration date is:
Illustration: When Medland issues the dividend shares, it decreases
Common Stock Dividends Distributable and increases Common Stock
as follows.
Illustration 11A-1
Chapter
11-61
SO 8 Evaluate a corporation’s dividend and earnings
performance from a stockholder’s perspective.
Chapter
11-62
SO 9 Prepare entries for stock dividends.
Chapter
11-63
SO 9 Prepare entries for stock dividends.