PREVIEW OF CHAPTER 15
Intermediate Accounting
15th Edition
Kieso Weygandt Warfield
15-1
15
Stockholders’ Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Discuss the characteristics of the
corporate form of organization.
6.
Describe the policies used in distributing
dividends.
2.
Identify the key components of
stockholders’ equity.
7.
Identify the various forms of dividend
distributions.
3.
Explain the accounting procedures for
issuing shares of stock.
8.
Explain the accounting for small and large
stock dividends, and for share splits.
4.
Describe the accounting for treasury
stock.
9.
Indicate how to present and analyze
stockholders’ equity.
5.
Explain the accounting for and reporting
of preferred stock.
15-2
Stockholders’ Equity
The
Corporate
Form
Corporate law
Capital stock
or share
system
Variety of
ownership
interests
Equity
Issuance of
stock
Reacquisition
of shares
Preferred
Stock
Dividend
Policy
Features
Financial
condition and
dividend
distributions
Accounting
for and
reporting
preferred
stock
Types of
dividends
Stock split
Disclosure of
restrictions
15-3
Presentation
and Analysis
Presentation
Analysis
Measuring Corporate Performance
Debt Versus Equity Decision
15-4
BUT: Stock financing may be necessary if debt is already at high
levels. If a corp. is growing rapidly, often the huge funding
needed for expansion can only be obtained in a public stock
offering. Also, public stock financing can provide liquidity to
insider’s investments.
Different Forms of Organization
Three primary forms of business organization
Proprietorship
One capital acct in
which is recorded
owner contributions,
drawing, and profits
One capital acct for
each partner in which
is recorded owner
contributions,
drawing, and profits
Propr. Or Partnership
Cash
Capital - contributions
Assets
Capital – net income
Capital – drawing
Cash
15-5
Corporation
Partnership
Several kinds of
capital accts: (1)
contributed capital
(stock), and (2)
earned capital
(retained earnings)
Corporation
Cash
Capital Stock
Assets
Ret. Earnings – net income
Ret. Earnings – dividends
Cash
The Corporate Form of Organization
Usually by “corporation” we mean a “C”
Corp.
There is also an “S” Corp which is legally a
corporation but is treated for tax purposes like a
partnership:
 no double taxation
 cannot have more than 75 shareholders
15-6
SO 1 Identify and discuss the major characteristics of a corporation.
The Corporate Form of Organization
An entity separate and distinct from its owners.
Classified by Purpose
Not-for-Profit
Publicly held
For Profit
Privately held
 Salvation Army
 American Cancer
Society
 Gates Foundation
15-7
Classified by Ownership




Nike
General Motors
IBM
General Electric
 Cargill Inc.
Advantages of a Corporation
ADVANTAGES
 Separate legal existence; acts of firm don’t
bind owners & vice versa.
 Limited liability of owners, who generally
can’t be sued
 Transferable ownership rights; you can sell
your equity quickly
 Ability to acquire capital; can raise huge
amounts of cash.
 Continuous life; doesn’t dissolve when an
owner dies.
 Professional management (usually come at big
cost, though)
15-8
8
Disadvantages of a Corporation
DISADVANTAGES
 Absentee Ownership - Management is appointed
by the board whose members are elected by
owners. Other than electing the board,
owners have little to do with THEIR company.


15-9
Extensive government regulation
Separate corporate income tax paid (one of the
highest rates in the world). Same money is
taxable to owners who receive corporate
distributions. This results in a double tax.
9
The Corporate Form of Organization
State Corporate Law
Corporation must submit articles of incorporation to the
state in which incorporation is desired.

General Motors - incorporated in Delaware.

U.S. Steel - incorporated in New Jersey.
Accounting for stockholder’s equity follows the provisions of
each states business incorporation act.
15-10
LO 1 Discuss the characteristics of the corporate form of organization.
Forming a Corporation
Forming a “C” 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 engaged in interstate commerce must obtain a
license from each state in which they do business.
15-11
SO 1 Identify and discuss the major characteristics of a corporation.
Regulation of Corporations
15-12
12
15-13
The Corporate Form of Organization
Capital Stock or Share System
In the absence of restrictive provisions, each share carries
the following rights:
1. To share proportionately in profits and losses.
2. To share proportionately in management (the right to vote
for directors).
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.
15-14
LO 1 Discuss the characteristics of the corporate form of organization.
A picture illustration of shareholder rights
15-15
Stock Issue Considerations
Prenumbered
Shares
Illustration 11-4
Name of corporation
Stockholder’s
name
Signature of
corporate official
15-16
SO 1 Identify and discuss the major characteristics of a corporation.
Example of a
proxy card, where
owners vote using
an absentee
ballot. Notice
that the owners
don’t vote on
much.
15-17
17
Stock Issue Considerations
Primary Market: Corporation can issue common
stock in an IPO or Secondary Offering:

directly to investors or

indirectly through an investment banking firm.
Secondary Market: Once shares are sold, they
can be resold to other investors on U.S.
securities exchanges
15-18

New York Stock Exchange

American Stock Exchange

13 regional exchanges

NASDAQ national market
Authorized Stock...
Maximum amount of stock a corporation is allowed to sell as
authorized by corporate charter.
Issued Stock...
Number of shares of issued stock have been sold and been paid for
and that have not been cancelled.
Outstanding Stock...
Number of shares of issued stock that are being held by
stockholders (does not include shares repurchased by the corporation
and held in treasury (treasury stock)
Example: XYZ Corp. has 12 million shares authorized, 4 million
shares issued, and 3.5 million shares outstanding (0.5 million
shares held in treasury stock)
15-19
The Corporate Form of Organization
Variety of Ownership Interests
Common stock represents basic ownership interest.
Bears ultimate risks of loss.
Receives the benefits of success.
Not guaranteed dividends nor assets upon dissolution.
Preferred stock is created by contract, when
stockholders’ sacrifice certain rights (such as
the right to vote) in return for other rights or
privileges, usually dividend preference.
15-20
LO 1 Discuss the characteristics of the corporate form of organization.
129 NORTH
ORANGE
STREET
WHAT’S
YOUR
PRINCIPLE
15-21
LO 1
The Corporate Form of Organization
Variety of Ownership Interests
Common stock is the residual corporate interest.

Bears ultimate risks of loss.

Receives the benefits of success.

Not guaranteed dividends nor assets upon dissolution.
Preferred stock is a special class of stock is created by contract,
when stockholders’ sacrifice certain rights in return for other rights
or privileges, usually dividend preference.
15-22
LO 1
15
Stockholders’ Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Discuss the characteristics of the
corporate form of organization.
6.
Describe the policies used in distributing
dividends.
2.
Identify the key components of
stockholders’ equity.
7.
Identify the various forms of dividend
distributions.
3.
Explain the accounting procedures for
issuing shares of stock.
8.
Explain the accounting for small and large
stock dividends, and for share splits.
4.
Describe the accounting for treasury
stock.
9.
Indicate how to present and analyze
stockholders’ equity.
5.
Explain the accounting for and reporting
of preferred stock.
15-23
Corporate Capital
Common Stock
Account
Contributed
Capital
Additional Paidin Capital
Preferred Stock
Account
Account
Two Primary
Sources of
Equity
Retained Earnings
Account
Other Components:
Less:
Treasury Stock
15-24
Plus or Minus:
Accum. Other. Comprehensive
Income
LO 2 Identify the key components of stockholders’ equity.
STOCKHOLDERS’ EQUITY OUTLINE (or Shareholders’ Equity)
Paid-In Capital or Contributed Capital
Capital Stock
Preferred Stock, $par, % dividend, cumulative or participating, # of shares
authorized, issued and outstanding
Common Stock, $par, # of shares authorized, issued and outstanding
Less: Treasury Stock, # of shares (if par value method, which is rare)
Common Stock Subscribed, # of shares (very rare to have this)
Common Stock Dividend Distributable, # of shares
Additional Paid-In Capital (or Contrib. Cap. in Excess of Par, or Premium on CS)
Excess Over Par - Common
Excess Over Par - Preferred
Excess Over Par - Treasury
Donated Capital (from gov’t sources only)
Earned Capital
Retained Earnings
Appropriated (set aside for a certain purpose)
Unappropriated
Accumulated Other Comprehensive Income (Unrealized gains/losses on AFS securities, excess
of min. pension liability over UPSC, foreign currency translation gains/losses, or
deferred compensation expense from stock options)
Contra Equity Items:
Less: Treasury Stock, # of shares (if cost method, which is common)
Less: Subscriptions Receivable (very rare to have this)
TOTAL STOCKHOLDERS’ EQUITY
15-25
15
Stockholders’ Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Discuss the characteristics of the
corporate form of organization.
6.
Describe the policies used in distributing
dividends.
2.
Identify the key components of
stockholders’ equity.
7.
Identify the various forms of dividend
distributions.
3.
Explain the accounting procedures for
issuing shares of stock.
8.
Explain the accounting for small and large
stock dividends, and for share splits.
4.
Describe the accounting for treasury
stock.
9.
Indicate how to present and analyze
stockholders’ equity.
5.
Explain the accounting for and reporting
of preferred stock.
15-26
Corporate Capital
Issuance of Stock
Shares authorized - Shares sold - Shares issued
Accounting problems:
1. Par value stock.
2. No-par stock.
3. Stock issued in combination with other securities.
4. Stock issued in noncash transactions.
5. Costs of issuing stock.
15-27
LO 3
Corporate Capital
Par Value Stock
Low par values help companies avoid a contingent liability.
Corporations maintain accounts for:
15-28

Preferred Stock or Common Stock.

Paid-in Capital in Excess of Par (also called Additional
Paid-in Capital or Premium on Common Stock or
Contributed Capital in Excess of Par)
LO 3
Corporate Capital
Par Value Stock
-- Par value for bonds is easy to understand – it equals the face
or maturity value of the debt
-- Par value for stock is more tricky – it constitutes minimum
legal capital; because stockholders are contingently liable to
contribute capital up to the legal minimum, par is usually set very
low. For example, Ford’s par is $.01 and Pepsi’s is 1 2/3 cents.
This minimizes the chance of stock being sold for less than par.
E.g. If $5 par stock was sold for $4, the stockholder may have
to contribute the difference ($1) to the company in the case of
bankruptcy, because min. legal capital is $5.
-- Dividend rates are often expressed as a percent of par. For
example, a 6% dividend on preferred stock with par of $100
equals $6.00.
-- Some states allow a stated value to substitute for par value
(e.g. Nike, P&G.) Although some legal differences exist between
stated and par values, for accounting purposes they are treated
identically.
15-29
LO 3
Corporate Capital
Illustration: Blue Diamond Corporation issued 300 shares of $10
par value common stock for $4,500. Prepare the journal entry to
record the issuance of the shares.
Cash
15-30
4,500
Common Stock (300 x $10)
3,000
Paid-in Capital in Excess of Par Value
1,500
LO 3
Corporate Capital
Illustration: Some states require that no-par stock have a stated
value. If a company issued 1,000 of the shares with a $5 stated
value at $15 per share for cash, it makes the following entry.
Cash
Common Stock
Paid-in Capital in Excess of Stated Value
15-31
15,000
5,000
10,000
LO 3
Corporate Capital
No-Par Stock
-- Many states now allow stock to be issued without a par
value. This is becoming increasingly common.
-- Advantages of no par stock: it avoids contingent liability
for shareholders, and avoids confusion between par and
fair values.
-- Disadvantages of no par stock: some states levy a high tax
on no par stock (e.g. Deleware); also, some states consider
the total amount of no par stock to be legal capital, which
could reduce the flexibility in paying dividends
15-32
LO 3
Corporate Capital
Illustration: Muroor Electronics Corporation is organized with
authorized common stock of 10,000 shares without par value. If
Muroor Electronics issues 500 shares for cash at $10 per share, it
makes the following entry.
Cash
Common Stock
15-33
5,000
5,000
LO 3
Corporate Capital
Stock Issued with Other Securities (Lump-Sum)
Two methods of allocating proceeds:
1. Proportional method.
2. Incremental method.
15-34
LO 3
Corporate Capital
Illustration: Beveridge Corporation issued 300 shares of $10 par
value common stock and 100 shares of $50 par value preferred stock
for a lump sum of $13,500. Common stock had a recent market value
of $20 per share, and preferred stock had a recent market value of $90
per share.
Use the Proportional Method to record the sale of these shares
because a recent price is available for both common and preferred
shares.
15-35
LO 3
Corporate Capital
Prepare the
journal entry
to record
issuance of
shares.
Common shares
Preferred shares
Allocation:
Issue price
Allocation %
Total
Cash
Number
300
100
Common
$ 13,500
40%
$
5,400
Amount
Total
x $
20.00 = $ 6,000
x
90.00
9,000
Fair Market Value $ 15,000
Preferred
$
13,500
60%
$
8,100
Proportional
Method
13,500
Preferred Stock (100 x $50)
15-36
Percent
40%
60%
100%
5,000
Paid-in Capital in Excess of Par – Preferred PLUG
3,100
Common Stock (300 x $10)
3,000
Paid-in Capital in Excess of Par – Common PLUG
2,400
8,100
5,400
LO 3
Corporate Capital
Illustration: Beveridge Corporation issued 300 shares of $10 par value
common stock and 100 shares of $50 par value preferred stock for a
lump sum of $13,500. The common stock had a recent market value of
$20 per share, and the value of preferred stock is unknown.
Use the Incremental Method to record the sale of these shares because
a recent price is available for only common or preferred shares, but not
both.
15-37
LO 3
Corporate Capital
Prepare the
journal entry
to record
issuance of
shares.
Common shares
Preferred shares
Allocation:
Issue price
Ordinary
Total
Cash
15-38
Number
300
100
Common
$
6,000
Amount
Total
x $
20.00 = $ 6,000
x
Fair Market Value $ 6,000
Preferred
$
13,500
(6,000)
$
7,500
Incremental
Method
13,500
Preferred Stock (100 x $50)
5,000
Paid-in Capital in Excess of Par – Preferred PLUG
2,500
Common Stock (300 x $10)
3,000
Paid-in Capital in Excess of Par – Common PLUG
3,000
7,500
6,000
LO 3
Corporate Capital
Stock Issued in Noncash Transactions
The general rule: Companies should record stock issued
for services or property other than cash at the

fair value of the stock issued or

fair value of the noncash consideration received,
whichever is more clearly determinable.
15-39
LO 3
Corporate Capital
Illustration: The following series of transactions illustrates the
procedure for recording the issuance of 10,000 shares of $10 par
value common stock for a patent for Arganda Company, in
various circumstances.
1. Arganda cannot readily determine the fair value of the patent,
but it knows the fair value of the stock is $140,000.
Patents
140,000
Common Stock
Paid-in Capital in Excess of Par - Common
15-40
100,000
40,000
LO 3
Corporate Capital
2. Arganda cannot readily determine the fair value of the stock,
but it determines the fair value of the patent is $150,000.
Patents
150,000
Common stock
Paid-in Capital in Excess of Par - Common
15-41
100,000
50,000
LO 3
Corporate Capital
3. Arganda cannot readily determine the fair value of the stock
nor the fair value of the patent. An independent consultant
values the patent at $125,000 based on discounted expected
cash flows.
Patents
125,000
Common stock
Paid-in Capital in Excess of Par - Common
15-42
100,000
25,000
LO 3
Corporate Capital
Costs of Issuing Stock
Direct costs incurred to sell stock, such as

underwriting costs,

accounting and legal fees,

printing costs, and

taxes,
should be reported as a reduction of the amounts paid in (Paid-in
Capital in Excess of Par).
15-43
LO 3
DISAPPEARING
WHAT’S YOUR RECEIVABLE
PRINCIPLE
15-44
LO 3
15
Stockholders’ Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Discuss the characteristics of the
corporate form of organization.
6.
Describe the policies used in distributing
dividends.
2.
Identify the key components of
stockholders’ equity.
7.
Identify the various forms of dividend
distributions.
3.
Explain the accounting procedures for
issuing shares of stock.
8.
Explain the accounting for small and large
stock dividends, and for share splits.
4.
Describe the accounting for treasury
stock.
9.
Indicate how to present and analyze
stockholders’ equity.
5.
Explain the accounting for and reporting
of preferred stock.
15-45
Treasury Stock
Reasons for stock buybacks include:
(1) have shares to distribute to employees in
stock option plans (ESOPs) without dealing
with issue costs & regulations (e.g. Honeywell)
(2) tax-efficient distribution of cash to
owners without raising dividend expectations
(3) support the stock price by creating
demand (e.g. IBM, or 1987 market crash)
Stockholders
Treasurer’s
vault at
Netflix
15-46
Treasury Stock
Reasons for stock buybacks (cont.):
(4) increase earnings per share
(5) provide shares for potential corporate
takeovers where stock is exchanged
(6) avoid a hostile takeover (e.g. Reebok, CBS)
(7) increase ROE (return on equity) by
increasing debt-equity ratio
15-47
Treasury Stock
More stock has been repurchased than issued in recent
years!
15-48
15-49
Corporate Capital
Purchase of Treasury Stock
Two acceptable methods:

Cost method (more widely used).

Par or Stated value method.
Treasury stock reduces
stockholders’ equity.
15-50
LO 4 Describe the accounting for treasury stock.
Corporate Capital
Illustration: Cripe Company issued 100,000 shares of $1 par value
common stock at a price of $10 per share. In addition, it has retained
earnings of $300,000.
On January 20, Cripe acquires 10,000 of its shares at $11 per share.
Cripe records the reacquisition as follows.
Treasury Stock
Cash
15-51
110,000
110,000
LO 4
Corporate Capital
Sale of Treasury Stock

Above Cost

Below Cost
Both increase total assets and stockholders’ equity.
If TS was purchased at several different costs, a
LIFO/FIFO assumption must be made
When a debit plug is needed, always first reduce any
balance in APIC-TS and then debit retained earnings
15-52
LO 4 Describe the accounting for treasury stock.
Corporate Capital
Sale of Treasury Stock above Cost. Pacific acquired 10,000
treasury share at $11 per share. It now sells 1,000 shares at $15
per share on March 10. Pacific records the entry as follows.
Cash
15,000
Treasury Stock
11,000
Paid-in Capital from Treasury Stock
4,000
NOTE: If TS was purchased at several
different costs, a LIFO/FIFO
assumption must be made
15-53
LO 4 Describe the accounting for treasury stock.
Corporate Capital
Sale of Treasury Stock below Cost. Pacific sells an additional
1,000 treasury shares on March 21 at $8 per share, it records
the sale as follows.
Cash
8,000
**Paid-in Capital from Treasury Stock
3,000
Treasury Stock
11,000
** IMPORTANT RULE: When a debit
plug is needed, always first reduce
any balance in APIC-TS and then
debit retained earnings
15-54
LO 4 Describe the accounting for treasury stock.
Corporate Capital
Illustration 15-5
Illustration: Assume that Pacific sells an additional 1,000
shares at $8 per share on April 10.
Cash
8,000
Paid-in Capital from Treasury Stock
1,000
Retained Earnings
2,000
Treasury Stock
15-55
11,000
LO 4 Describe the accounting for treasury stock.
Corporate Capital
Retiring Treasury Stock
Decision results in

cancellation of the treasury stock and

a reduction in the number of shares of issued
stock.
15-56
LO 4 Describe the accounting for treasury stock.
Corporate Capital
Illustration: The stockholders’ equity section for Cripe after
purchase of the treasury stock.
Illustration 15-5
15-57
LO 4
Cancelled stock certificate
15-58
15
Stockholders’ Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Discuss the characteristics of the
corporate form of organization.
6.
Describe the policies used in distributing
dividends.
2.
Identify the key components of
stockholders’ equity.
7.
Identify the various forms of dividend
distributions.
3.
Explain the accounting procedures for
issuing shares of stock.
8.
Explain the accounting for small and large
stock dividends, and for share splits.
4.
Describe the accounting for treasury
stock.
9.
Indicate how to present and analyze
stockholders’ equity.
5.
Explain the accounting for and reporting
of preferred stock.
15-59
Preferred Stock
Features often associated with preferred stock.
1.
Preference as to dividends.
2.
Preference as to assets in the event of liquidation.
3.
Convertible into common stock.
4.
Callable at the option of the corporation.
5.
Nonvoting.
Companies with preferred stock:
http://www.dividendyieldhunter.com/preferred-stocks-sortedalphabetically
15-60
LO 5
Preferred Stock
Illustration: Bishop Co. issues 10,000 shares of $10 par value
preferred stock for $12 cash per share. Bishop records the
issuance as follows:
Cash
120,000
Preferred stock
Paid-in Capital in Excess of Par - Preferred
15-61
100,000
20,000
LO 5
15
Stockholders’ Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Discuss the characteristics of the
corporate form of organization.
6.
Describe the policies used in distributing
dividends.
2.
Identify the key components of
stockholders’ equity.
7.
Identify the various forms of dividend
distributions.
3.
Explain the accounting procedures for
issuing shares of stock.
8.
Explain the accounting for small and large
stock dividends, and for share splits.
4.
Describe the accounting for treasury
stock.
9.
Indicate how to present and analyze
stockholders’ equity.
5.
Explain the accounting for and reporting
of preferred stock.
15-62
Dividend Policy
Few companies pay dividends in amounts equal to their
legally available retained earnings. Why?
15-63

Maintain agreements with creditors.

Meet state incorporation requirements.

To finance growth or expansion.

To smooth out dividend payments.

To build up a cushion against possible losses.
LO 6
Dividend Policy
Dividend distributions generally are based on
accumulated profits (retained earnings).
Few companies pay dividends in amounts equal to
their legally available retained earnings. Why?
Maintain agreements with creditors.
Meet state incorporation requirements.
To finance growth or expansion.
To smooth out dividend payments.
To build up a cushion against possible losses.
15-64
LO 6 Describe the policies used in distributing dividends.
15-65
15
Stockholders’ Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Discuss the characteristics of the
corporate form of organization.
6.
Describe the policies used in distributing
dividends.
2.
Identify the key components of
stockholders’ equity.
7.
Identify the various forms of dividend
distributions.
3.
Explain the accounting procedures for
issuing shares of stock.
8.
Explain the accounting for small and large
stock dividends, and for share splits.
4.
Describe the accounting for treasury
stock.
9.
Indicate how to present and analyze
stockholders’ equity.
5.
Explain the accounting for and reporting
of preferred stock.
15-66
Dividend Policy
Types of Dividends
1. Cash dividends.
3. Liquidating dividends.
2. Property dividends.
4. Stock dividends.
All dividends, except for stock dividends, reduce the total
stockholders’ equity in the corporation. All dividends, except
liquidating dividends, reduce retained earnings.
15-67
LO 7
Dividend Policy
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.
Three dates:
a. Date of declaration
b. Date of record
c. Date of payment
See http://seekingalpha.com/news/dividends
15-68
LO 7
Dividend Dates
Dividends require information concerning three dates:
The Ex-Dividend Date is two business days before the date of
record. This is the date on which anyone acquiring the stock does
not get the dividend. In this example, it is Dec. 18.
See http://seekingalpha.com/news/dividends
15-69
15-70
70
Dividend Policy
Illustration: David Freight Corp. on June 10 declared a cash dividend
of 50 cents a share on 1.8 million shares payable July 16 to all
stockholders of record June 24.
At date of declaration (June 10)
Retained Earnings
900,000
Dividends Payable
At date of record (June 24)
900,000
No entry
At date of payment (July 16)
Dividends Payable
Cash
15-71
900,000
900,000
LO 7
Property Dividend
Property Dividends
Dividends
payable in
assets other
than cash.
Restate at fair
value the
property it will
distribute,
recognizing any
gain or loss.
15-72
Dividend Policy
Types of Dividends
1. Cash dividends.
3. Liquidating dividends.
2. Property dividends.
4. Stock dividends.
All dividends, except for stock dividends, reduce the total
stockholders’ equity in the corporation. All dividends, except
liquidating dividends, reduce retained earnings.
15-73
LO 7
Property Dividend
Illustration: A dividend is declared Jan. 5th and paid
Jan. 25th, in bonds held as an investment; the bonds have
a book value of $100,000 and a fair market value of
$135,000.
Debit
Date of Declaration
Investment in bonds
Gain on investment
35,000
and
Retained earnings
Property dividend payable
135,000
Credit
35,000
135,000
Date of Issuance
Property dividend payable
Investment in bonds
15-74
135,000
135,000
LO 7 Identify the various forms of dividend distributions.
Dividend Policy
Types of Dividends
1. Cash dividends.
3. Liquidating dividends.
2. Property dividends.
4. Stock dividends.
All dividends, except for stock dividends, reduce the total
stockholders’ equity in the corporation. All dividends, except
liquidating dividends, reduce retained earnings.
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LO 7
Liquidating Dividends
Liquidating Dividends
Any dividend not based on earnings that reduces
corporate paid-in capital.
A liquidating dividend, which is paid out of
additional paid-in capital, is the only dividend not
paid out of retained earnings.
Is called “liquidating” because owners are
receiving some of their original capital back,
thus liquidating their investment
15-76
LO 7 Identify the various forms of dividend distributions.
Dividend Policy
Illustration: Horaney Mines Inc. issued a “dividend” to its common
stockholders of $1,200,000. The cash dividend announcement noted
stockholders should consider $900,000 as income and the remainder a
return of capital. Horaney Mines records the dividend as follows.
Date of declaration
Retained Earnings
900,000
Paid-in Capital in Excess of Par-Common
300,000
Dividends Payable
1,200,000
Date of payment
Dividends Payable
Cash
15-77
1,200,000
1,200,000
LO 7
15
Stockholders’ Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Discuss the characteristics of the
corporate form of organization.
6.
Describe the policies used in distributing
dividends.
2.
Identify the key components of
stockholders’ equity.
7.
Identify the various forms of dividend
distributions.
3.
Explain the accounting procedures for
issuing shares of stock.
8.
Explain the accounting for small and large
stock dividends, and for share splits.
4.
Describe the accounting for treasury
stock.
9.
Indicate how to present and analyze
stockholders’ equity.
5.
Explain the accounting for and reporting
of preferred stock.
15-78
Stock Dividends
Reasons why corporations issue stock dividends:
1. To achieve the same effect as a stock split,
which is to lower the share price to within a
popular trading range.
2. To satisfy stockholders’ dividend expectations
without spending cash.
3. To increase the marketability of the corporation’s
stock.
4. To emphasize that a portion of stockholders’
equity has been permanently reinvested in the
business.
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Stock Dividends
Pro rata distribution of the corporation’s own stock.
Results in decrease in retained earnings and increase in paid-in
capital (called capitalization of retained earnings)
15-80
Effect of Stock
Dividend
10% Stock
Before
Total Stkhlders' Equity $
# shares
Price per share
Your shares
Price per share
1,500,000
100,000
$
Dividend
$ 1,500,000
10,000
15.00
100
$
15.00
TL value of your shares $
1,500.00
110,000
$
10
CONCLUSION: you have more shares, each worth
proportionately less; NO CHANGE IN WEALTH
15-81
After
13.64
110
$
13.64
$ 1,500.00
Stock Dividends
Stock Dividends Are:
When a stock dividend is more than 20-25% (large stock
dividend), it essentially serves as a stock split and thus is
done at par value, not market value.
When a stock dividend is less than 20–25 percent of the
common shares outstanding, company transfers fair
market value from retained earnings (small stock
dividend).
O% to 20%
SMALL
15-82
20% to 25%
NO MAN’S LAND
25% TO 100%+
LARGE
Small Stock Dividend
Illustration: HH Inc. has 5,000 shares issued and
outstanding. The per share par value is $1, book value
$32 and market value is $40.
10% stock dividend is declared
Debit
Retained earnings
20,000
Common stock dividend distributable
Additional paid-in capital
Credit
500
19,500
Stock issued
Common stock div. distributable
Common stock
15-83
500
500
LO 8 Explain the accounting for small and large stock
dividends, and for stock splits.
Large Stock Dividend
Illustration: HH Inc. has 5,000 shares issued and
outstanding. The per share par value is $1, book
value $32 and market value is $40.
50% stock dividend is declared
Retained earnings
Common stock dividend distributable
Debit
2,500
Credit
2,500
Stock issued
Common stock dividend distributable
Common stock
15-84
2,500
2,500
LO 8 Explain the accounting for small and large stock
dividends, and for stock splits.
Stock Dividend vs. Split
Stock Split and Stock Dividend Differentiated
If the stock dividend is large, it has the same effect on
market price as a stock split.
A stock dividend of more than 20–25 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.
15-85
LO 8 Explain the accounting for small and large stock
dividends, and for stock splits.
Dividend Policy
Stock Split

To reduce the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number of shares.
Illustration 15-10
15-86
LO 8
SPLITSVILLE
WHAT’S
YOUR PRINCIPLE
15-87
LO 8
Stock Splits
• typically two-for-one, which would double the number of shares,
each share worth half as much as before, thus generating no real
economic value.
• does not change any components of stockholders' equity except the
number of shares increases, the par value decreases. The market
value should remain the same – it simply divides the pie into more
pieces but the pie stays the same size in total.
• however, usually viewed as a positive signal. Studies show that
stocks that split have returns outperforming those that don't.
Obviously, stocks would only split when their value has been rising
significantly.
• reasons for splits:
(1) popular trading range, where shares are traded for cheaper
commissions in round lots (100 shares)
(2) sends a positive signal
(3) benefits brokers and others who make their living processing
stock transactions
• Going against the grain: consider Warren Buffet and his BerkshireHathaway stock (BRKA).
15-88
Stock Split
Illustration: HH Inc. has 5,000 shares issued and
outstanding. The per share par value is $1, book
value $32 and market value is $40.
2 for 1 Stock Split
No Entry -- Disclosure that par is now $.50 and
shares outstanding are 10,000.
15-89
LO 8 Explain the accounting for small and large stock
dividends, and for stock splits.
Reverse Splits
• results in less shares each worth more; not as common as
forward stock splits
• reasons for reverse stock splits:
(1) avoid penny stock labels; however this can be viewed as
additional bad news (e.g. when Webvan, a now defunct internet
grocer, did a 1-for-25 reverse stock split)
(2) increase marketability of stock when price is within popular
trading range
(3) force out small shareholders to gain control (e.g. in 1-for-3000
reverse split, anyone owning less than 3000 shares will end up
with a partial share and their investment will be liquidated. Then
the company can undergo a 1-for-3000 stock split to restore the
stock to its original price!)
(4) meet minimum stock prices required on some exchanges
(Nasdaq de-lists stocks with prices less than $1 for 30 days). But
some exchanges have rules that preclude reverse stock splits for
this purpose.
(5) reduce trading costs to investors
15-90
Dividend Policy
Illustration: Luna Steel, Inc. declared a 30 percent share dividend on
November 20, payable December 29 to stockholders of record
December 12. At the date of declaration, 1,000,000 shares, par value
$10, are outstanding and with a fair value of $200 per share. The
entries are:
15-91
LO 8
15-92
DIVIDENDS UP, DIVIDENDS DOWN
15-93
LO 8
Dividend Policy
Restrictions on Retained Earnings

Restrictions are best disclosed by note.

Restrictions may be based on the retention of a certain
retained earnings balance, the ability to maintain certain
working capital requirements, additional borrowing, and
other considerations.
Illustration 15-12
Disclosure of Restrictions on
Retained Earnings and Dividends
15-94
LO 8
Summary of Dividend Entries
15-95
15
Stockholders’ Equity
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1.
Discuss the characteristics of the
corporate form of organization.
6.
Describe the policies used in distributing
dividends.
2.
Identify the key components of
stockholders’ equity.
7.
Identify the various forms of dividend
distributions.
3.
Explain the accounting procedures for
issuing shares of stock.
8.
Explain the accounting for small and large
stock dividends, and for share splits.
4.
Describe the accounting for treasury
stock.
9.
Indicate how to present and analyze
stockholders’ equity.
5.
Explain the accounting for and reporting
of preferred stock.
15-96
Presentation and Analysis of Equity
Presentation
15-97
Illustration 15-13
LO 9
Presentation and Analysis of Equity
Statement of Stockholders’ Equity
Illustration 15-14
15-98
LO 9
Presentation and Analysis of Equity
Analysis
Analysts use stockholders’ equity ratios to evaluate a
company’s profitability and long-term solvency.
Three ratios:
1. Rate of return on common stock equity.
2. Payout ratio.
3. Book value per share.
15-99
LO 9
Analysis
Rate of Return on Common Stock Equity
Illustration: Marshall's Inc. had net income of $360,000, declared
and paid preferred dividends of $54,000, and average common
stockholders’ equity of $2,550,000.
Illustration 15-15
Ratio shows how many dollars of net income the company earned
for each dollar invested by the owners.
15-100
LO 9
Analysis
Payout Ratio
Illustration: Midgley Co. has cash dividends of $100,000 and net
income of $500,000, and no preferred stock outstanding.
Illustration 15-16
In the fourth quarter of 2011, 36 percent of the earnings of the
S&P 500 was distributed via dividends.
15-101
LO 9
Analysis
Book Value per Share
Illustration: Uretz Corporation’s common stockholders’ equity is
$1,000,000 and it has 100,000 shares of common stock outstanding
Illustration 15-17
Amount each share would receive if the company were liquidated
on the basis of amounts reported on the balance sheet.
15-102
LO 9
APPENDIX
15A
DIVIDEND PREFERENCES AND BOOK VALUE
PER SHARE
Dividend Preferences
Illustration: In 2014, Mason Company is to distribute $50,000 as
cash dividends, its outstanding common stock have a par value of
$400,000, and its 6 percent preferred stock have a par value of
$100,000.
1. If the preferred stock are noncumulative and nonparticipating:
Illustration 15A-1
15-103
LO 10 Explain the different types of preferred stock dividends
and their effect on book value per share.
APPENDIX
15A
DIVIDEND PREFERENCES AND BOOK VALUE
PER SHARE
Illustration: In 2014, Mason Company is to distribute $50,000 as
cash dividends, its outstanding common stock has a par value of
$400,000, and its 6 percent preferred stock has a par value of
$100,000.
2. If the preferred stock is cumulative and non-participating, and
Mason Company did not pay dividends on the preferred stock in
the preceding two years:
Illustration 15A-2
15-104
LO 10
APPENDIX
15A
DIVIDEND PREFERENCES AND BOOK VALUE
PER SHARE
3. If the preferred stock is noncumulative and is fully participating:
Illustration 15A-3
15-105
LO 10
APPENDIX
15A
DIVIDEND PREFERENCES AND BOOK VALUE
PER SHARE
Illustration: In 2014, Mason Company is to distribute $50,000 as
cash dividends, its outstanding common stock has a par value of
$400,000, and its 6 percent preferred stock has a par value of
$100,000.
4. If the preferred stock is cumulative and fully participating, and
Mason Company did not pay dividends on the preferred stock in
the preceding two years:
Illustration 15A-4
15-106
LO 10
APPENDIX
15A
DIVIDEND PREFERENCES AND BOOK VALUE
PER SHARE
Book Value Per Share
Book value per share is computed as net assets divided by
outstanding stock at the end of the year. The computation becomes
more complicated if a company has preferred stock.
Illustration 15A-5
15-107
LO 10
APPENDIX
15A
DIVIDEND PREFERENCES AND BOOK VALUE
PER SHARE
Assume that the same facts exist except that the 5 percent preferred
stock is cumulative, participating up to 8 percent, and that dividends
for three years before the current year are in arrears.
Illustration 15A-6
15-108
LO 10
RELEVANT FACTS - Similarities
15-109

The accounting for the issuance of shares and purchase of treasury
stock are similar under both IFRS and GAAP.

The accounting for declaration and payment of dividends and the
accounting for stock splits are similar under both IFRS and GAAP.
LO 11 Compare the procedures for accounting for
stockholders’ equity under GAAP and IFRS.
RELEVANT FACTS - Differences
15-110

Major differences relate to terminology used, introduction of concepts
such as revaluation surplus, and presentation of stockholders’ equity
information.

Many countries have different investor groups than the United States.
For example, in Germany, financial institutions like banks are not only
the major creditors but often are the largest shareholders as well.

The accounting for treasury share retirements differs between IFRS and
GAAP. Under GAAP, a company has three options: (1) charge the
excess of the cost of treasury shares over par value to retained
earnings, (2) allocate the difference between paid-in capital and retained
earnings, or (3) charge the entire amount to paid-in capital. Under IFRS,
the excess may have to be charged to paid-in capital, depending on the
original transaction related to the issuance of the shares.
LO 11
RELEVANT FACTS - Differences
15-111

The statement of changes in equity is usually referred to as the
statement of stockholders’ equity (or shareholders’ equity) under GAAP.

Both IFRS and GAAP use the term retained earnings. However, IFRS
relies on the term “reserve” as a dumping ground for other types of
equity transactions, such as other comprehensive income items as well
as various types of unusual transactions related to convertible debt and
share option contracts. GAAP relies on the account Accumulated Other
Comprehensive Income (Loss).

Under IFRS, it is common to report “revaluation surplus” related to
increases or decreases in items such as property, plant, and equipment;
mineral resources; and intangible assets. The term surplus is generally
not used in GAAP. In addition, unrealized gains on the above items are
not reported in the financial statements under GAAP.
LO 11
ON THE HORIZON
The IASB and the FASB are currently working on a project related to financial
statement presentation. An important part of this study is to determine whether
certain line items, subtotals, and totals should be clearly defined and required
to be displayed in the financial statements. For example, it is likely that the
statement of changes in equity and its presentation will be examined closely. In
addition, the options of how to present other comprehensive income under
GAAP will change in any converged standard.
15-112
LO 11
IFRS SELF-TEST QUESTION
Under IFRS, the amount of capital received in excess of par value
would be credited to:
a. Retained Earnings.
b. Contributed Capital.
c.
Share Premium.
d. Par value is not used under IFRS.
15-113
LO 11
IFRS SELF-TEST QUESTION
The term reserves is used under IFRS with reference to all of the
following except:
a. gains and losses on revaluation of property, plant, and
equipment.
b. capital received in excess of the par value of issued shares.
c.
retained earnings.
d. fair value differences.
15-114
LO 11
IFRS SELF-TEST QUESTION
Under IFRS, a purchase by a company of its own shares results in:
a. an increase in treasury shares.
b. a decrease in assets.
c.
a decrease in equity.
d. All of the above.
15-115
LO 11
Copyright
Copyright © 2013 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
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errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
15-116