Shareholders’ Equity
Sid Glandon, DBA, CPA
Associate Professor of Accounting
The University of Texas at El Paso
Components of Equity

Contributed capital
– Capital stock


Preferred stock
Common stock
– Additional paid-in capital





Preferred stock
Common stock
Retained earnings
Less: treasury stock
Total shareholders’ equity
Corporate Form
Governed by state corporation law
 Capital stock or share system
 Multiple ownership interests
 Limited liability of stockholders
 Formality of profit distribution

Preferred Stock

Preference as to
– Dividends
– Assets in liquidation
Nonvoting
 Stated at par with dividend expressed
as a percentage of par

Features of Preferred
Stock

Cumulative preferred stock
– Dividends in arrears

Participating preferred stock
– Fully participating
– Partially participating
Convertible preferred stock
 Callable preferred stock

– Dividends in arrears must be paid first
Issuance of Common Stock
Par value stock
 No-par stock (stated value)
 Stock sold for cash
 Stock sold on contract
 Stock exchanged for services, etc.
 Lump sum sales of securities
 Stock issue costs

Reacquisition of
Shares
Provide tax efficient distributions
 Increase EPS and ROE
 Provide stock

– Employee stock compensation contracts
– Potential mergers needs

Thwart takeover attempts
– Reduce the number of shareholders

Make a market for the stock
Treasury Stock
Reacquired stock not retired
 Not an asset
 Issued but not outstanding
 Purchase of treasury stock

– Cost method
– Par or stated value method
Cost Method of Recording Treasury Stock
Account
Cash
Common stock
Additional paid-in capital, common stock
Debit
$110,000
Credit
$100,000
10,000
To record the sale of 1,000 shares of $100 par value common stock at $110
per share.
Account
Debit
$11,200
Credit
Treasury stock
Cash
$11,200
To record the purchase of 100 shares of treasury stock at $112 per share.
Cost Method of Recording Treasury Stock
Account
Debit
$1,120
Credit
Debit
$1,300
Credit
Cash
Treasury stock
$1,120
To record the sale of 10 shares of treasury stock for $112 per share.
Account
Cash
Treasury stock
$1,120
Additional paid-in capital, treasury stock
180
To record the sale of 10 shares of treasury stock for $130 per share.
Cost Method of Recording Treasury Stock
Account
Debit
$980
140
Credit
Debit
$1,050
40
30
Credit
Cash
Additional paid-in capital, treasury stock
Treasury stock
$1,120
To record the sale of 10 shares of treasury stock for $98 per share.
Account
Cash
Additional paid-in capital, treasury stock
Retained earnings
Treasury stock
$1,120
To record the sale of 10 shares of treasury stock for $105 per share.
Cost Method of Recording Treasury Stock
T-Account: Treasury stock
Description
Debit
Reacquired 100 shares @$112
$11,200
Reissued 10 shares @ $112
Reissued 10 shares @ $130
Reissued 10 shares @ $98
Reissued 10 shares @ $105
Balance
$6,720
Credit
$1,120
1,120
1,120
1,120
Cost Method of Recording Treasury Stock
T-Account: Additional paid-in capital, treasury stock
Description
Debit
Credit
Reissued 10 shares at $130
$180
Reissued 10 shares at $98
$140
Reissued 10 shares at $105
40
Balance
$0
Additional Paid-In Capital, Treasury Stock

When credit balance is eliminated,
excess of cost over selling price is
debited to retained earnings.
Treasury Stock Account

Contra equity account
– Cost method record full cost of stock
Subtract treasury stock from total
stockholders equity
 Reduces the number of outstanding
shares

Retiring Treasury Stock
Authorized but not issued
 Journal entry similar to sale except the
debit is to additional paid-in capital
from retirement of treasury stock

Cost Method: Retirement of Treasury Stock
Account
Common stock
Additional paid-in capital, common stock
Retained earnings
Treasury stock
Debit
$1,000
100
20
Credit
$1,120
To record the retirement of 10 shares of $100 par value common stock,
originally issued at $110 per share, and reacquired as treasury stock for
$112 per share.
Cost Method: Retirement of Treasury Stock
Account
Common stock
Additional paid-in capital, common stock
Treasury stock
Additional paid-in capital, treasury stock
Debit
$1,000
100
Credit
$980
120
To record the retirement of 10 shares of $100 par value common stock,
originally issued at $110 per share, and reacquired as treasury stock for $98
per share.
Retained Earnings

Debits
–
–
–
–
–
Net loss
Cash dividends
Property dividends
Stock dividends
Loss on treasury
stock transactions
– Prior period
adjustments

Credits
– Net income
– Prior period
adjustments
– Adjustments due to
quasi-reorganization
Dividend Policy
Restricted by debt covenants
 Limited by state corporation laws
 Internal financing-reinvest earnings
 Smooth out dividend payments
 Build up cushion for future
 Availability of funds to pay dividends
 No dividends paid on treasury stock

Types of Dividends
Cash dividends
 Property dividends
 Scrip dividends (deferred)
 Liquidating dividends (return of capital)
 Stock dividends (do not reduce total
stockholders equity)

Cash Dividends

Declaration date
– Date dividends are declared and accrued

Date of record
– List of recipient stockholders is final

Payment date
– Dividends are paid to stockholders of
record
Cash Dividends: Example

10,000 shares issued and outstanding
– June 10, 2005 declared a $1 dividend
– June 24, 2005 date of record
– July 16, 2005 paid dividends
Journal Entries: Cash Dividends
Date
Account
6/10/05 Retained earnings
Dividends payable
Debit
$10,000
Credit
$10,000
To record the declaration of $1 cash dividend on the 10,000 shares issued
and outstanding.
Date
Account
6/24/05 No entry at the date of record
Debit
Credit
Date
Account
Debit
Credit
7/16/05 Dividends payable
$10,000
Cash
$10,000
To record the payment of $1 cash dividend declared on June 10, 2005.
Property Dividends
Payable in nonmonetary assets
 Non-reciprocal transfers
 Valued at FMV at date of declaration
 Corporation recognizes gain or loss

Property Dividends: Example

Company distributes marketable securities
as a property dividend
– Date of declaration: December 21, 2004
– Date of record: January 14, 2005
– Date of payment: January 21, 2005

FMV of securities
– December 21, 2004, $134,000
– January 21, 2005, $135,900

Cost of securities: $110,000
Journal Entries: Property Dividends
Date
Account
Debit
Credit
12/21/04 Investment in securities
$24,000
Gain on appreciation of securities
$24,000
To record the appreciation on investment securities to be used in a property
Date
Account
12/21/04 Retained earnings
Property dividends payable
To record the declaration of property dividends.
Debit
$134,000
Credit
$134,000
Date
Account
Debit
Credit
1/21/005 Property dividends payable
$134,000
Investment in securities
$134,000
To record the distribution of investment securities as property dividends.
Liquidating Dividends
Return of corporate paid-in capital
 Reduces paid-in capital
 Corporation winding up operations
 Dividends are specified as to income
(regular) and capital (liquidating)
portions

Liquidating Dividends: Example

December 30, 2004, declared a
dividend of $1,200,000
– Income portion $900,000
– Capital portion $300,000

January 15, 2005, paid dividend of
$1,200,000
Journal Entries: Liquidating Dividends
Date
Account
Debit
Credit
12/30/04 Retained earnings
$900,000
Additional paid-in capital
300,000
Dividends payable
$1,200,000
To record the declaration of dividends as follows:
Ordinary dividends from income
$900,000
Liquidating dividends from capital
300,000
Total dividends payable
$1,200,000
Date
Account
Debit
Credit
1/15/05 Dividends payable
$1,200,000
Cash
$1,200,000
To record the distribution dividends declared on December 30, 2004.
Stock Dividends
Results in more shares issued
 Ordinary (small) stock dividends

– Issue of less than 20%-25% of stock
– Accounting is based on FMV

Large stock dividends
– Issue of more than 20%-25% of stock
– Accounting is based on par value
Ordinary Stock Dividends: Example
Issued and outstanding stock: 1,000
shares, $10 par value
 April 1, 2005

– 10% stock dividend declared (100
shares)
– $12 per share FMV at date of declaration

May 1, 2005
– Stock dividends paid
Journal Entries: Ordinary Stock Dividends
Date
Account
4/1/05 Retained earnings
Common stock dividend distributable
Additional paid-in capital, common stock
Debit
$1,200
Credit
$1,000
$200
To record the declaration of 10% stock dividend on the 1,000 shares of $10
par value of common stock issued and outstanding. Fair market value of
the common stock on the date of declaration is $12 per share.
Date
Account
Debit
5/1/05 Common stock dividend distributable
$1,000
Common stock
To record the issuance of common stock dividends.
Credit
$1,000
Large Stock Dividends: Example
Issued and outstanding stock: 3,000
shares, $10 par value
 April 1, 2004

– 30% stock dividend declared (900
shares)
– $12 per share FMV on date of declaration

May 1, 2005
– Stock dividends paid
Journal Entries: Large Stock Dividends
Date
Account
4/1/05 Retained earnings
Common stock dividend distributable
Debit
$9,000
Credit
$9,000
To record the declaration of 30% stock dividend on the 3,000 shares of $10
par value of common stock issued and outstanding. Fair market value of
the common stock on the date of declaration is $12 per share.
Date
Account
Debit
5/1/05 Common stock dividend distributable
$9,000
Common stock
To record the issuance of common stock dividends.
Credit
$9,000
Stock Splits
Par value decreases
 Number of shares increases
 Stockholders’ equity does not change
 Composition of equity does not change
 No formal journal entry
 Splits make shares less expensive
