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Learning Objectives
1. Identify the rights associated with ownership
of common and preferred stock.
2. Record the issuance of stock for cash, on a
subscription basis, and in exchange for
noncash assets or for services.
3. Use both the cost and par value methods to
account for stock repurchases.
4. Account for the issuance of stock rights and
stock warrants.
Continued
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Learning Objectives
5. Explain the difference between the intrinsic
value and fair value methods, and use both in
accounting for a fixed stock option plan.
6. Distinguish between stock conversions that
require a reduction in retained earnings and
those that do not.
7. List the factors that impact the retained
earnings balance.
Continued
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Learning Objectives
8. Properly record cash dividends, property
dividends, small and large stock dividends,
and stock splits.
9. Explain the background of unrealized gains
and losses recorded as direct equity
adjustments, and list the major types of
equity reserves founds in foreign balance
sheets.
10. Prepare a statement of changes in
stockholders’ equity.
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5
Equity Items
ISSUE
preferred or
common
stock
PAY cash
dividends
INCREASE
shares
outstanding
through stock
dividends and
stock splits
GRANT
options to
officers and
employees
Equity Items
REPURCHASE
shares of stock
CONVERT
other securities
into shares of
common stock
REPORT
performance to
current and
potential investors
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Common Stock
The owners of common
stock of a corporation can be
thought of as the true
owners of the business.
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Common Stock
Unless restricted by terms
of the articles of
incorporation, the common
stockholder has certain
basic rights.
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Common Stock
 The right to vote in the election of
directors and in the determination of
certain corporate polices such as the
management compensation plan or
major corporate acquisitions.
 The right to maintain one’s
proportional interest in the corporation
through purchase of additional
common stock if and when it is issued.
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Common Stock
Rex Corporation issued 5,000 shares of
common stock with a par value of $1 on
April 1, 2005, for $30,000 cash.
Apr. 1 Cash
Common Stock
Additional Paid-In
Capital
30,000
5,000
at25,000
Par Value
Preferred Stock
The title
Preferred isn’t
“preferred”
stock is
better;
it’s
somewhat
different.
misleading.
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Preferred Stock
The rights of ownership given up
by preferred stockholders:
• Voting: In most cases, preferred stockholders
are not allowed to vote for the board of
directors.
• Sharing in success: The cash dividends
received by preferred stockholders are usually
fixed in amount. If the company does
exceptionally well, preferred stockholders do
not get to share in the success.
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Preferred Stock
The protection enjoyed by
preferred stockholders is:
• Cash dividend preference: Preferred
stockholders are entitled to receive their full
cash dividend before any cash dividend can
be issued to common stockholders.
• Liquidation preference: If the company goes
bankrupt, preferred stockholders are entitled
to have their investment repaid in full, before
common stockholders receive anything.
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Preferred Stock
Cumulative
Has the right to receive
accumulated dividends before
any dividends may be paid to
common stockholders.
NonCumulative
Has no right to “passed”
dividends.
Participating
Has claim to a portion of
common dividends after
receiving preferred dividends.
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Preferred Stock
Convertible
Callable
Redeemable
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Permits the holder to exchange
preferred stock for common
stock.
Permits the issuing company
to redeem the preferred stock.
Permits the holder to redeem the
stock—usually with some
restrictions.
Preferred Stock
Dividends on cumulative
preferred stock that are passed
are referred to as dividends in
arrears.
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Preferred Stock
And… dividends are not a
liability until declared by
the board of directors.
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Preferred Stock
Participating
preferred stock
issues
Callable
preferred
provide for additional
stock is preferred
dividends to be stock
paid tothat isRedeemable
preferred stock is
preferred stockholders
redeemable at the
preferred stock that is
after dividends
of
a
option of the
redeemable at the
specified amount
are
corporation.
option of the
paid to common
stockholder.
stockholders.
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Capital Stock Issued for Cash
Goode Corporation issued 4,000
shares of $1 par common stock on
April 1, 2005, for $45,000 cash.
Apr. 1 Cash
Common Stock
Paid-In Capital in
Excess of Par
45,000
4,000
41,000
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Capital Stock Issued for Cash
On April 1, 2005, Goode
Corporation issued 4,000 shares of
no-par common stock without a
stated value for $45,000 cash.
Apr. 1 Cash
Common Stock
45,000
45,000
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Capital Stock Sold on
Subscription
On November 1, 2005, a firm received
subscriptions for 5,000 shares of $1 par
common at $12.50 per share with 50%
down, balance due in 60 days.
Nov. 1 Common Stock Subscription
Receivable
62,500
Common Stock Subscribed
5,000
Paid-In Capital in Excess
of Par
57,500
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Capital Stock Sold on
Subscription
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On November 1, 2005, a firm received
subscriptions for 5,000 shares of $1 par
common at $12.50 per share with 50%
down, balance due in 60 days.
Nov. 1 Cash
Common Stock
Subscription Receivable
31,250
31,250
Capital Stock Sold on
Subscription
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On December 9, received balance due on
one-half of subscribers and issued stock
to fully paid subscribers, 2,500 shares.
Dec. 9 Cash
Common Stock
Subscription Receivable
9 Common stock Subscribed
Common Stock
15,625
15,625
2,500
2,500
Stock Issued for Consideration
Other Than Cash
AC Company issues 200 shares of $0.50
par value common stock in return for
land. The company’s stock is currently
selling for $50 per share.
Dec. 5 Land
Common Stock
Paid-In Capital in Excess
of Par
10,000
100
9,900
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Stock Issued for Consideration
Other Than Cash
Assume that the land has a readily
determinable market price of $12,000,
but AC Company’s common stock has
no established fair market value.
Dec. 5 Land
Common Stock
Paid-In Capital in Excess
of Par
12,000
100
11,900
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Stock Repurchases
1. Provide shares for incentive
compensation and employee savings
plans.
2. Obtain sharesCompanies
needed to satisfy
requests by acquired
holders oftheir
convertible
securities. own stock to…
3. Reduce the amount of equity relative
to the amount of debt.
4. Invest excess cash temporarily.
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Stock Repurchases
5. Remove some shares from the open
market in order to protect against a
hostile takeover.
6. Improve per-share earnings by
reducing the number of shares
outstanding and returning inefficiently
used assets to shareholders.
7. Display confidence that the stock is
currently undervalued by the market.
Treasury Stock
• Stock issued by a corporation but
subsequently reacquired by the corporation
and held for possible future reissuance or
retirement.
• Reported as a contra-equity account, not as an
asset.
• Does not create a gain or loss on reacquisition,
reissuance, or retirement.
• May decrease Retained Earnings, but cannot
increase it.
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Treasury Stock
Issued 10,000, $1 par value shares at $15 per share
Cost Method
Cash
Common Stock.
Paid-In Capital in
Excess of Par
150,000
10,000
140,000
Par Value Method
Cash
Common Stock.
Paid-In Capital in
Excess of Par
150,000
10,000
140,000
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Treasury Stock
Reacquired 1,000 shares at $40 per share.
Cost Method
Treasury Stock
Cash
40,000
40,000
Par Value Method
Treasury Stock
1,000
Paid-In Capital in Excess of Par 14,000
Retained Earnings
25,000
Cash
40,000
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Treasury Stock
Sold 200 shares of treasury stock at $50 per share.
Cost Method
Cash
Treasury Stock
Paid-In Capital from
Treasury Stock
10,000
8,000
2,000
Par Value Method
Cash
Treasury Stock
Paid-In Capital in Excess
of Par
10,000
200
9,800
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Treasury Stock
Sold 500 shares of treasury stock at $34 per share.
Cost Method
Cash
Paid-In Capital from Treasury
Stock
Retained Earnings
Cash
17,000
2,000
1,000
20,000
Par Value Method
Cash
Treasury Stock
Paid-In Capital in Excess
of Par
17,000
500
16,500
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Treasury Stock
Retired remaining 300 shares of treasury stock.
Cost Method
Common Stock
300
Paid-In Capital in Excess of Par 4,200
Retained Earnings
7,500
Treasury Stock
12,000
Par Value Method
Common Stock
Treasury Stock
300
300
Stock Rights, Warrants,
and Options
 Stock rights—Issued to existing
shareholders to permit them to maintain
their proportionate ownership interests
when new shares are to be issued.
 Stock warrants—Sold by the corporation
for cash, generally in conjunction with the
issuance of another security.
 Stock options—Granted to officers or
employees, usually as part of a
compensation plan.
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Stock Warrants
Stewart Co. sells 1,000 shares of $50 par
preferred stock for $58 per share. Stewart Co.
gives the purchaser detachable warrants
enabling the holders to subscribe to 1,000
shares of $2 par common stock for $25 per
share. Immediately following the issuance of
the stock, the warrants are selling for $3, and
the fair market value of a preferred share
without the warrant attached is $57.
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Stock Warrants
Value
Total
assigned to = issue
warrants
price
Market value of warrants
x
Market value Market
of security + value of
without
warrants
warrants
Value
$3
= $2,900
assigned to = $58,000 x
$57 + $3
warrants
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Stock Warrants
The entry on Stewart’s book to record
the sale of the preferred stock with
detachable warrants is:
Cash
Preferred Stock, $50 par
Paid-In Capital in Excess of
Par--Preferred Stock
Common Stock Warrants
58,000
50,000
5,100
2,900
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Stock Warrants
If the warrants are exercised, the entry to
record the issuance of common stock is:
Common Stock Warrants
Cash
Common Stock, $2 par
Paid-In Capital in Excess of
Par—Common Stock
2,900
25,000
2,000
25,900
Stock Warrants
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If these warrants were
allowed to expired, what
entry would be required?
Common Stock Warrants 2,900
Paid-In Capital from
Expired Warrants
2,900
Stock-Based Compensation
No
Yes
All employees eligible?
No
Shares offered equally?
Compensatory Plan
No
Grant and
Measurement
dates same?
Reasonable exercise period?
No
Yes
Exercise Prices » Market Price?
Non-compensatory Plan
Yes
No
Number of shares
and Exercise Price
known?
No
Yes
Record shares
issued when stock
is purchased.
Determine compensation
expense; amortize
over period employee
is to provide service.
Determine actual expense;
amortize over remaining
period employee is to
provide service.
Record shares issued
when stock is purchased.
Adjust for Unearned
Compensation, if any.
Estimate compensation
expense; amortize
over period employee
is to provide service.
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0
Stock-Based Compensation
The
Oncompany
January 1,estimates
2003, thea grant
boarddate
of
value
directors
of $10
of Neff
for each
Company
of the
authorize
employeethe
stock
grant
options.
of 10,000
Thestock
total
fair
options.
value Each
of theoption
options
permits
granted
theis
$100,000.
purchase of
Compensation
one share of cost
Neffis
common
allocatedstock
over three
at $50years
per share.
from
January 1, 2003 (the grant date) to
January 1, 2006 (the vesting date).
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Stock-Based Compensation
2003
Dec. 31 Compensation Expense
Paid-In Capital from
Stock Options
33,333
33,333
$100,000 ÷ 3
Similar entries would be
made in 2004 and 2005.
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Stock-Based Compensation
On December 31, 2006, all 10,000 of the
options are exercised to purchase Neff’s nopar common stock.
2006
Dec. 31 Cash
500,000
Paid-In Capital from Stock
Options
100,000
Common Stock (no par)
600,000
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Stock-Based Compensation
If the options had been allowed to expired,
the following entry would have been
necessary on December 31, 2006:
2006
Dec. 31 Paid-In Capital from Stock
Options
Paid-In Capital from
Expired Options
600,000
600,000
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Stock Conversions
Case 1
On December 31, 2005, 1,000 shares of
preferred stock (par $50) are exchanged for
4,000 shares of common stock (par $1)
2005
Dec. 31 Preferred Stock, $50 par
50,000
Paid-In Capital in Excess of
Par—Preferred
10,000
Common Stock
Paid-In Capital in Excess
of Par—Common
4,000
56,000
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Stock Conversions
Case 2
On December 31, 2005, 1,000 shares of
preferred stock (par $50) are exchanged for
4,000 shares of common stock (par $20)
2005
Dec. 31 Preferred Stock, $50 par
Paid-In Capital in Excess of
Par—Preferred
Retained Earnings
Common Stock
50,000
10,000
20,000
80,000
Factors Affecting
Retained Earnings
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Error corrections
Some changes in accounting
principle
Net income
Quasi-reorganizations
Retained
Earnings
Increases
Factors Affecting
Retained Earnings
Decrease
s
Error corrections
Prior period
adjustments
Treasury stock
Net loss
Retained
Earnings
Some changes in
accounting
principles
Cash and stock
dividends
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Accounting for Dividends
• Declaration date: The date the corporation’s
board of directors formally declares a
dividend will be paid.
• Date of record: The date on which
stockholders of record are identified as those
who will receive a dividend.
• Date of payment: The date when the
dividend is actually distributed to
stockholders.
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Cash Dividend
ABC Corporation declares a $100,000
dividend; the following journal entries should
be made:
Declaration Date
Dividends (Retained Earnings)
100,000
Dividends Payable
100,000
Payment Date
Dividends Payable
Cash
100,000
100,000
Property Dividend
What is a property
dividend?
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Property Dividend
It is a distribution to
stockholders that is
payable in some asset
other than cash.
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Property Dividend
Bigley Corporation owns 100,000 shares
in Tri-State Oil Co, carrying value
$2,700,000, current market value
$3,000,000, or $30 per share. There are
1,000,000 shares of Bigley stock
outstanding. A dividend of 1/10 of a
share of Tri-State Oil Co. is declared for
each share of Bigley stock outstanding.
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Property Dividend
54
Declaration of Dividend
Dividend (or Retained Earnings) 3,000,000
Property Dividends Payable
2,700,000
Gain on Distribution of Property
Dividend
300,000
Payment of Dividend
Property Dividends Payable
2,700,000
Investment in Tri-State Oil Co.
2,700,000
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Stock Dividends
• Small
– Less than 20-25% of the outstanding
shares.
– Debit Retained Earnings for the
MARKET value of the shares.
• Large
– Greater than 20-25% of the shares
outstanding.
– Debit Retained Earnings for the PAR
value of the shares.
Example 1: Stock Dividend
• Assume
Assumethe
thefollowing
followingabout
aboutGean,
Gean,Inc.:
Inc.:
thispar,
a large
or small
–– Common
Common stock
stockIs($2
($2
par,
10,000
10,000
stock dividend?
shares
shares outstanding)
outstanding)
$20,000
–– Additional
Additional paid-in
paid-in capital
capital
$24,200
–– Retained
Retained earnings
earnings
$12,500
–– Stock
Stock dividend
dividend declared
declared
1,500 shares
–– Market
Market price
price of
of stock
stock
$10/share
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Example 1: Stock Dividend
Because 1,500 shares
• Assume the following
about Gean,
Inc.:
represent
15% of
the
– Common stock ($2
par, 10,000
outstanding
stock, it is a
small stock dividend.
shares outstanding)
$20,000
– Additional paid-in capital
$24,200
– Retained earnings
$12,500
– Stock dividend declared
1,500 shares
– Market price of stock
$10/share
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Example 1: Stock Dividend
Declaration Date
Retained Earnings
15,000
Stock Dividends Distributable
3,000
Paid-In Capital in Excess of Par
12,000
Issuance Date
Stock Dividends Distributable
3,000
Common Stock
3,000
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Example 2: Stock Dividend
• Assume the following about Gimli’s Corp.:
– Common Stock ($5 par, 20,000
shares outstanding)
$100,000
– Additional Paid-In Capital
$100,000
– Retained Earnings
$52,000
– Stock Dividend Declared 10,000 shares
– Market Price of Stock
$20/share
Is this a large
smalldividend
stock dividend?
50% =orlarge
59
Example 2: Stock Dividend
Declaration Date
Retained Earnings
50,000
Stock Dividends Distributable
50,000
Issuance Date
Stock Dividends Distributable
50,000
Common Stock
50,000
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Unrealized Gains and Losses on
Available-For-Sale Securities
Available-for-sale securities are
…but the company also doesn’t
those that were not purchased
necessarily plan to hold these
with the immediate intention to
securities forever.
resell…
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Unrealized Gains and Losses on
Available-For-Sale Securities
Kendell had net income of $1,350. Other
items that impacted net income are:
Unrealized gain (loss) on availablefor-sale securities
$100
(Increase) Decrease in minimum
pension liability
(60 )
Unrealized gain (loss) on derivative
instruments
(20 )
Foreign currency translation
adjustment, increase (decrease) in
stockholders’ equity
300
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Unrealized Gains and Losses on
Available-For-Sale Securities
Net income
$1,350
Other comprehensive income:
Unrealized gain on available-forsale securities
60
Increase in minimum pension liability
(36 )
Unrealized loss on derivative
instruments
(12 )
Foreign current transaction
adjustments
180
Comprehensive income
$1,542
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Liquidating Dividend
A liquidating dividend is a
distribution representing a return
to stockholders of a portion of
contributed capital.
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Disclosures Related to the
Equity Section
Capital stock may be:
 Authorized but unissued.
 Subscribed for and held for issuance
pending receipt of cash for the full amount
of the subscription price.
 Outstanding in the hands of stockholders.
 Reacquired and held by the corporation for
subsequent reissuance.
 Canceled by appropriate corporate action.
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chapter 11
The End
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