13-1
CHAPTER 13
CORPORATIONS: PAID-IN CAPITAL,
RETAINED EARNINGS, DIVIDENDS,
AND TREASURY STOCK
13-2
Paid-in (Contributed) Capital
Refers to all capital contributed to a
corporation. Sources are:
Sale of Stock
Stock Dividends
Treasury Stock
Donated Capital
13-3
Retained Earnings
Definition
Net earnings (profits less losses) since
the inception of the corporation less
dividends paid since inception.

Normal Balance?
Credit

Debit Balance is called?
“Deficit”
13-4
Partial Balance Sheet
Stockholders' Equity:
Paid-in Capital:
Preferred Stock-6%, $100 par value;
authorized, issued, and
outstanding 4,000 shares
$ 400,000
Common Stock-no par value;
$5 stated value; authorized, issued,
and outstanding 400,000 shares
2,000,000 $ 2,400,000
Paid-in CapitalFrom Preferred Stock
$ 40,000
From Common Stock
10,000
50,000
Total Paid-in Capital
$ 2,450,000
Retained Earnings
500,000
Total Stockholders' Equity
$ 2,950,000
13-5
Dividends
Distributions of
earnings to
stockholders
Declared by board of
directors
Not legally
required
Liability created at
declaration
13-6
Dividends

Types of dividend distributions:
Cash (the norm)
 Stock (infrequent)

Both types of dividends require the
Retained Earnings credit balance be
> or = to the amount to be distributed
 Cash dividends require sufficient
cash to pay the dividend
 Dividend dates for both types

Date of declaration
 Date of record
 Date of payment

13-7
Cash Dividends

Date of Declaration
Board of directors declares the dividend
 Corp. records a liability

GENERAL JOURNAL
Date
Description
Retained Earnings
Dividends Payable
Post.
Ref.
Page 12
Debit
Credit
XXX
XXX
13-8
Cash Dividends

Date of Record
Stockholders owing shares on this date
will receive the dividend
 No entry is made!

X
13-9
Cash Dividends

Date of Payment
Cash paid to stockholders
 Corp. records the payment

GENERAL JOURNAL
Date
Description
Dividends Payable
Cash
Post.
Ref.
Page 12
Debit
Credit
XXX
XXX
13-10
Cash Dividends
Question
On June 1, 1999 a corporation’s board of directors
declared a dividend for the 2,500 shares of its
$100 par value, 8% preferred stock. The dividend
will be paid on July 15. Which of the following
will be included in the July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
13-11
Cash Dividends
Question
On June 1, 1999 a corporation’s board of directors
declared a dividend for the 2,500 shares of its
$100 par value, 8% preferred stock. The dividend
will be paid on July 15. Which of the following
will be included in the July 15 entry?
July 15 is the date of payment. On
this date, the corporation would
a. Debit Retained Earnings
$20,000.Payable and
debit Dividends
credit Cash
for $20,000.
b. Debit Dividends Payable
$20,000.
$100 × 8%
= $8 dividend per share
c. Credit Dividends Payable
$20,000.
d. Credit Preferred Stock
$20,000.
$8 × 2,500
= $20,000 total dividend
13-12
Stock Dividends
Distributions of additional shares of
stock to stockholders
 Why issue a stock dividend?

Corporation may be low on cash so can’t
issue a cash dividend
 To decrease market price of stock
Know complete list of 4
reasons on p. 469

13-13
Stock Dividends

Effect on Stockholders
Receive a percentage increase in the
number of shares they own.
 e.g., with a 10% stock dividend, if you own
100 shares, you get 10 additional shares


Effect on Corporation
No change in total
stockholders’ equity
 No change in par values

13-14
Stock Dividends
Recorded by transferring an amount
from the retained earnings section of
the balance sheet to the paid-in capital
section
(i.e., from the “temporary” part of
stockholders’ equity to the
“permanent” part)
This is known as “capitalizing”
retained earnings
13-15
Balance Sheet Presentation
Stockholders’ Equity:
Paid-in Capital
Preferred Stock - $100 par, 7%,
Cumulative; 10,000 shares authorized,
issued, and outstanding
Common Stock - $10 par, 300,000
shares authorized, 40,000 issued and
outstanding
$ 1,000,000
Total Paid-in Capital
Retained Earnings
Total Stockholders' Equity
$ 1,400,000
300,000
$ 1,700,000
400,000
13-16
Small Stock Dividends
Stock dividend < 20% to 25%
Record at current market value
of stock
13-17
Large Stock Dividends
Stock dividend > 20% to 25%
Record at par or stated value of
stock
13-18
Small Stock Dividend Example
Prepare the journal entries to record the following
stock dividend.
On March 1, 1999, Beachfront Condos, Inc. issued
a 15% stock dividend. Beachfront has 3,000
shares of $50 par value common stock
outstanding. The market price of the stock just
prior to the stock dividend announcement was
$125 per share.
On April 15, 1999, Beachfront Condos, Inc.
distributes the stock dividend.
13-19
Small Stock Dividend Example
Declaration Entry
GENERAL JOURNAL
Date
Mar.
Description
1 Retained Earnings
Page 34
Post.
Ref.
Credit
(Market) 56,250
Stock Dividend Distributable
Paid-in Capital-Stock Dividend
To record stock dividend declaration
3,000 × 15% = 450 shares
450 × $125 mkt. = $56,250
450 × $50 par = $22,500
Debit
(Par) 22,500
(Plug) 33,750
13-20
Balance Sheet Presentation
(BEFORE TRANSFER)
Paid-in Capital
Preferred Stock - $100 par, 7%,
Cumulative; 10,000 shares authorized,
issued, and outstanding
Common Stock - $10 par, 300,000
shares authorized, 40,000 issued and
outstanding
Paid-in Capital in excess of Par Value
Preferred Stock
$ 100,000
Common Stock
80,000
Total Paid-in Capital
Retained Earnings
Total Stockholders' Equity
$ 1,000,000
400,000
180,000
$ 1,580,000
300,000
$ 1,880,000
13-21
Balance Sheet Presentation
(AFTER TRANSFER - similar to p. 477)
Paid-in Capital
Preferred Stock - $100 par, 7%,
Cumulative; 10,000 shares authorized,
issued, and outstanding
Common Stock - $10 par, 300,000
shares authorized, 40,000 issued and
outstanding
Stock dividend distributable
Paid-in Capital in excess of par
Preferred Stock
$ 100,000
Common Stock
80,000
Stock dividend
33,750
Total Paid-in Capital
Retained Earnings
Total Stockholders' Equity
$ 1,000,000
400,000
22,500
213,750
$ 1,636,250
243,750
$ 1,880,000
13-22
Small Stock Dividend Example
Distribution Entry
GENERAL JOURNAL
Date
Description
Apr. 15 Stock Dividend Distributable
Common Stock
To record stock dividend distribution
Page 34
Post.
Ref.
Debit
Credit
22,500
22,500
13-23
Balance Sheet Presentation
(AFTER DISTRIBUTION)
Paid-in Capital
Preferred Stock - $100 par, 7%,
Cumulative; 10,000 shares authorized,
issued, and outstanding
Common Stock - $10 par, 300,000
shares authorized, 40,000 issued and
outstanding
Stock dividend distributable
Paid-in Capital in excess of par
Preferred Stock
$ 100,000
Common Stock
80,000
Stock dividend
33,750
Total Paid-in Capital
Retained Earnings
Total Stockholders' Equity
$ 1,000,000
422,500
-
213,750
$ 1,636,250
243,750
$ 1,880,000
13-24
Large Stock Dividend
Example
Now assume that instead of a 15% stock dividend,
Beachfront Condos, Inc. issued a 50% stock
dividend.
Prepare the journal entries for March 1 and
April 15.
13-25
Large Stock Dividend
Example
GENERAL JOURNAL
Date
Description
Page 34
Post.
Ref.
Mar. 1 Retained Earnings
Stock Dividend Distributable
To record stock dividend declaration
3,000 × 50% = 1,500 shares
1,500 × $50 par = $75,000
Debit
Credit
75,000
75,000
13-26
Large Stock Dividend
Example
GENERAL JOURNAL
Date
Description
Mar. 1 Retained Earnings
Page 34
Post.
Ref.
Debit
Credit
75,000
Stock Dividend Distributable
75,000
To record stock dividend declaration
Apr. 15 Stock Dividend Distributable
Common Stock
To record stock dividend distribution
75,000
75,000
13-27
Stock Splits
Distributions of
100% or more
of stock to
stockholders
Ice Cream Parlor
Banana Splits
On Sale Now
13-28
Stock Splits

Decrease par value of stock

Increase number of outstanding shares

No change in stockholders’ equity not even in the composition
13-29
Stock Splits - Real World Examples
[January 29, 1997]
13-30
Stock Split
Assume that a corporation had 5,000 shares
of $1 par value common stock outstanding
before a 2–for–1 stock split.
Before
Split
5,000
Common Stock Shares
Par Value per Share
$ 1.00
Total Par Value
$ 5,000
After
Split
13-31
Stock Split
Assume that a corporation had 5,000 shares
of $1 par value common stock outstanding
before a 2–for–1 stock split.
Before
Split
5,000
Common Stock Shares
After
Split
10,000
Increase
Par Value per Share
$ 1.00
$ 0.50
Decrease
Total Par Value
$ 5,000
$ 5,000
No
Change
13-32
Stock Split
Another Example
XYZ corporation had 5,000 shares of $60 par value
common stock outstanding before a 2-for-1 stock
split.
Prepare the journal entry to record the stock split.
GENERAL JOURNAL
Date
Description
Page 34
Post.
Ref.
Debit
Credit
13-33
Stock Split
Another Example
XYZ corporation had 5,000 shares of $60 par value
common stock outstanding before a 2-for-1 stock
split.
Prepare the journal entry to record the stock split.
GENERAL JOURNAL
Date
Description
Common Stock-$60 par
Common Stock-$30 par
To record 2 for 1 stock split
Page 34
Post.
Ref.
Debit
Credit
300,000
300,000
13-34
Stock Split
Another Example
XYZ corporation had 5,000 shares of $60 par value
common stock outstanding before a 2-for-1 stock
split.
Before
After
PrepareCommon
the journal
entry
Stock Shares
Split
to5,000
record
Par Value per Share
$ 60.00
GENERAL JOURNAL
Date
Split
the
stock
10,000
$
30.00
Total Par Value
$ 300,000 Post.$ 300,000
Description
Ref.
Debit
Common Stock-$60 par
Common Stock-$30 par
To record 2 for 1 stock split
split.
Page 34
Credit
300,000
300,000
Summary of Effects of Stock
Dividends and Stock Splits
Effect on:
Total
Stockholders'
Equity
Common
Stock
Other Paid-in
Capital
Retained
Earnings
Number of
Shares
Outstanding
Par Value per
Share
Small
Stock
Dividend
Large
Stock
Dividend
Stock
Splits
No Effect
No Effect
No Effect
Increases
Increases
No Effect
Increases
No Effect
No Effect
Decreases Decreases No Effect
Increases
Increases
Increases
No Effect
No Effect Decreases
13-35
13-36
Retained Earnings
Appropriations
Contractual or voluntary restrictions on
retained earnings available for dividends
Simply splits one amount into two amounts!!
 Does not change total retained earnings

GENERAL JOURNAL
Date
Description
Retained Earnings - Unappropriated
Retained Earnings- Appropriated
Page 34
Post.
Ref.
Debit
Credit
XXXX
XXXX
13-37
Statement of Retained Earnings

One of the four basic financial
statements

Summarizes changes in retained
earnings for the period

Net Income (+)

Net Losses (-)

Dividends (-)
13-38
Statement of Retained Earnings
Simple Format: (p. 20)
R/E - Beginning of Period
$
$$$
Add: Net Income for
for the Period
$$$
Subtract: Dividends for
the Period
$$$
R/E - End of Period
Complex Format: (p. 474)
Not responsible for it!
$
$$$
13-39
Treasury Stock
Repurchased shares of a
corporation’s own stock.
Why reacquire own stock?
To reduce ownership
 To reissue later at a higher market
price
 To increase earnings per share
 To use in employee stock option
programs

This list is in 2nd par. on p. 475
13-40
Treasury Stock
Repurchased shares of a
corporation’s own stock.
Considered issued but not
outstanding stock
 Has no voting rights
 Has no dividend rights
 Reduces stockholders’ equity
on the Balance Sheet

See bottom of Illustration 13.7 on
p. 477 for typical B/S presentation
13-41
Treasury Stock
Acquisition of Treasury Stock is
recorded at cost to reacquire the stock.
GENERAL JOURNAL
Date
Description
Treasury Stock
Common
Cash
Stock-$30 par
Page 78
Post.
Ref.
Debit
Credit
(Cost) XXXX
XXXX
13-42
Treasury Stock
At reissuance of the treasury shares,
Treasury Stock is credited at cost.
GENERAL JOURNAL
Date
Description
Cash
Common
Treasury Stock
Stock-$30 par
Paid-in Capital-Treasury Stock
Page 78
Post.
Ref.
Debit
Credit
XXXX
(Cost) XXXX
XXXX
13-43
Treasury Stock

Nature of Treasury Stock account
Contra Stockholders’ Equity account
 Shown last in Stockholders’ Equity section
of the Balance Sheet as a deduction
 Is not an asset account


Sale of Treasury Stock
“Gain” is credited to Paid-in Capital-Treasury
Stock Transactions, a new account for us
 “Loss” is debited to Paid-in Capital-Treasury
Stock Transactions (as long as it does not
force this account into a debit balance)

13-44
Treasury Stock
Example
On May 1, 1997 Photo Inc. reacquired 3,000
shares of its common stock at $55 per share.
Prepare the journal entry.
GENERAL JOURNAL
Date
Description
Page 78
Post.
Ref.
Debit
Credit
13-45
Treasury Stock
Example
On May 1, 1997 Photo Inc. reacquired 3,000
shares of its common stock at $55 per share.
Prepare the journal entry.
GENERAL JOURNAL
Date
Description
May 1 Treasury Stock
Common
Cash
Stock-$30 par
To record repurchase of stock
3,000 × $55 = $165,000
Page 78
Post.
Ref.
Debit
Credit
165,000
165,000
13-46
Treasury Stock
Example
On December 3, 1999 Photo Inc. reissued
1,000 shares of the stock at $75 per share.
Prepare the journal entry.
GENERAL JOURNAL
Date
Description
Page 78
Post.
Ref.
Debit
Credit
13-47
Treasury Stock
Example
On December 3, 1999 Photo Inc. reissued
1,000 shares of the stock at $75 per share.
Prepare the journal entry.
1,000 × $75 = $75,000
GENERAL
JOURNAL
1,000 × $55
= $55,000
Description
$75,000
– $55,000 =
Date
Post.
Ref.
$20,000
Dec. 3 Cash
Page 78
Debit
Credit
75,000
Treasury Stock
55,000
Paid-in Capital-Treasury Stock
20,000
To record stock reissuance
Net Income Inclusions and
Exclusions
Let’s review
the income
statement as
we currently
know it.
13-48
13-49
Gifts Etc.
Net Sales
$ 250,000
Cost of Goods Sold
75,000
Gross Margin
$ 175,000
Operating Expenses
54,000
Income from Operations $ 121,000
Non-Operating Items
(6,000)
Income before Taxes
Income Taxes
Net Income
$ 115,000
34,000
$ 81,000
Net Income Inclusions and
Exclusions
Now, let’s see
how some
“weird” items
will affect the
financial
statements.
13-50
13-51
Rest of Chapter 4 “Weird” Reporting Situations

Extraordinary Items

Discontinued Operations

Cumulative Effect of a Change in
Accounting Principles

Prior Period Adjustments
13-52
Income Statement
(Top part of ILL. 13.8, p. 479)
“THE LINE”
13-53
3 Weird Items Shown Below
“The Line” on Income Statement

Discontinued Operations

Extraordinary Items

Cumulative Effect of a Change in
Accounting Principles
Note: All are shown net of tax effects
13-54
Discontinued Operations
Sale or abandonment of a segment of
a business
e.g., Product Line, Division, Subsidiary
13-55
Discontinued Operations

Must account for two items
 Profit or loss on the discontinued segment
for the period up to the point of sale
 Gain or loss on the disposal of the
discontinued segment itself

Remember

Both of these must be shown net of any tax
effect
13-56
Discontinued Operations
Example
During the year, Gifts Etc. sold an
unprofitable segment of the company. The
segment had a net loss for the period of
$150,000 and was sold for a gain of
$100,000. All items are taxed at 30%.
How will this appear on Gifts Etc.’s income
statement illustrated earlier on slide #49?
13-57
Discontinued Operations
Calculations
Loss on Segment Operations*
Add: Tax Benefit
($150,000 × 30%)
$ (150,000)
Net Loss
$ (105,000)
Gain on Segment Disposal
Less: Tax Expense
($100,000 × 30%)
$ 100,000
Net Gain
$
*Up to point of sale
45,000
(30,000)
70,000
13-58
Discontinued Operations
Income Statement
Income before Discontinued Operations
$
Discontinued Operations:
Loss on Operations
(net of $45,000 tax benefit)
$ (105,000)
Gain on Disposal
(net of $30,000 tax expense)
70,000
* 81,000
(35,000)
* Previously shown as “Net Income” on income statement on slide #49
13-59
Extraordinary Items
Unusual
Infrequent
13-60
Extraordinary Items
Two criteria, both of which must be met:
1. Unusual in nature and
2. Infrequent in occurrence, given the
environment in which the company
exists
Note, however, that the FASB dictated that gains or
losses on early extinguishment (i.e., retirement) of
debt must also be reported as extraordinary, even
though the above criteria may not be met.
13-61
Extraordinary Items
Example
During the year, Gifts Etc. experienced an
extraordinary loss of $75,000 due to an
earthquake. All items are subject to a 30%
tax rate.
How would this item appear on Gifts Etc.’s
income statement?
13-62
Extraordinary Items
Calculation
Earthquake Loss
Tax Benefit/Savings
($75,000 × 30%)
$ (75,000)
Net Loss
$ (52,500)
22,500
13-63
Extraordinary Items
Income Statement
Income before Discontinued Operations
$
Discontinued Operations:
Loss on Operations
(net of $45,000 tax benefit)
$ (105,000)
Gain on Disposal
(net of $30,000 tax expense)
70,000
Extraordinary Items:
Earthquake Loss
(net of $22,500 tax benefit)
81,000
(35,000)
(52,500)
13-64
Extraordinary Items
Alternative Calculation of Tax Savings
Gifts Etc. has
Extraord. Loss
Lucky Inc.
Has No Loss
Tax Liability Calculation:
Income before taxes
$500,000
$500,000
Extraordinary Earthquake Loss
(75,000)
0
.
Taxable Income
425,000
500,000
Tax Rate
30%
30% .
Tax Liability
$127,500
$150,000
Difference due to tax benefit
(i.e., savings) of extraord. loss
$22,500
Therefore, the loss (net of tax savings) is only 52,500
(75,000 - 22,500) as shown on the previous slides.
13-65
Change in Accounting Principles
Old GAAP
Method
Change to
New GAAP
Method
Occurs when changing from one GAAP
to another GAAP
 Examples

Double-declining-balance method to
Straight-line method of depreciation
 Percentage-of-Sales to Percentage-ofReceivables for Uncollectible Accounts

13-66
Change in Accounting Principles
Fact that a change occurred must be
disclosed in notes to financial
statements
 Cumulative effect of change must be
shown on income statement

i.e., the change must be reflected on the
financial statements as if the company had
always been using the new method
13-67
Change in Accounting Principles
Example
During the year, Gifts Etc. decided to
change from the double-declining-balance
method to the straight-line method for
depreciation. The net effect of this change
is an increase in net income of $65,000. All
items are subject to a 30% tax rate.
How would this item appear on Gifts Etc.’s
income statement?
13-68
Change in Accounting Principles
Calculation
Increase in Net Income $65,000
Less: Tax Expense
($65,000 × 30%)
(19,500)
Net Increase
$45,500
13-69
Change in Accounting Principles
Income Statement
Income before Discontinued Operations
$
Discontinued Operations:
Loss on Operations
(net of $45,000 tax benefit)
$ (105,000)
Gain on Disposal
(net of $30,000 tax expense)
70,000
Extraordinary Items:
Earthquake Loss
(net of $22,500 tax benefit)
Cumulative Effect of a Change
in Accounting Principle:
Change in Depreciation Methods
(net of $19,500 tax expense)
Net Income
$
81,000
(35,000)
(52,500)
45,500
39,000
13-70
Prior Period Adjustments
Corrections of errors from a
previous period
Appear on the Statement of
Retained Earnings as an
adjustment to beginning
retained earnings balance
13-71
Prior Period Adjustments

Only two situations qualify as prior
period adjustments
Misapplications of GAAP
 Mathematical mistakes

Must be shown net of income tax effects
 Do corrections have to be made for bad
estimates in prior years?

13-72
Prior Period Adjustments
Example
While reviewing the depreciation entries for
1995-1998, the controller found that in 1997
depreciation expense was incorrectly
debited for $150,000 when in fact it should
have been debited $125,000. All items are
taxed at 30%.
Prepare the necessary journal entry in 1998
to correct this prior period error.
13-73
Prior Period Adjustments
Example
GENERAL JOURNAL
Date
Description
Page 78
Post.
Ref.
Debit
Credit
1997 Entry Made:
Depreciation Expense
Accumulated Depreciation
To correct this entry,
can we just reverse it?
Why or why not?
150,000
150,000
13-74
Prior Period Adjustments
Example
GENERAL JOURNAL
Date
Description
Page 98
Post.
Ref.
Debit
1998 Correcting Entry:
Accumulated Depreciation
25,000
We can debit Accumulated Depreciation
since it is a permanent account.
Credit
13-75
Prior Period Adjustments
Example
GENERAL JOURNAL
Date
Description
Page 98
Post.
Ref.
Debit
1998 Correcting Entry:
Accumulated Depreciation
Retained Earnings
However, we can’t credit
Depreciation Expense since it
was closed to Income Summary
and then to Retained Earnings.
25,000
Credit
13-76
Prior Period Adjustments
Example
GENERAL JOURNAL
Date
Description
Page 98
Post.
Ref.
Debit
Credit
1998 Correcting Entry:
Accumulated Depreciation
25,000
Federal Income Taxes
Retained Earnings
Remember to consider the tax effects:
$25,000 × 30% = $7,500 taxes payable
7,500
17,500
13-77
Earnings Per (Common) Share
Is one of the “gods” of the stock market
 Calculated only for common stock
 Calculated for each major item on the
income statement

Income from Continuing Operations
 Discontinued Operations
 Extraordinary Items
 Cumulative Effect of a Change in Accounting
Principle
 Net Income

(See bottom of ILL. 13.8, p. 478)
13-78
Earnings Per (Common) Share

Calculated as
Net Income - Dividends to Preferred Stockholders
Average Number of Common Shares Outstanding

Pronouncements were 17 & 100 pages...
13-79
WHOSE
IDEA
WAS
THIS?
OH NO!
YOURS...