Chapter 13
Accounting for Corporations
PowerPoint Presentation Modifications by Fred Blake
Faculty, San Antonio College
McGraw-Hill/Irwin
Topics
1. Corporate Form of Organization
2. Common Stock
3. Dividends
4. Stock Splits
5. Preferred Stock
6. Treasury Stock
7. Reporting Equity
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Topic 1
Corporate Form of Organization
Page 500
McGraw-Hill/Irwin
Corporate Form of Organization
An entity
created by law
Existence is
separate from
owners
Has rights and
privileges
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Privately Held
Ownership
can be
Publicly Held
Characteristics of Corporations
Advantages:
Separate legal entity
Limited liability of stockholders
Continuity of life
Transferability of ownership
No mutual agency
Ease of capital accumulation
Disadvantages:
Government regulation
Corporate taxation
McGraw-Hill/Irwin
Separate Legal Entity

A corporation is an artificial entity that exists apart from
its owners.

As a separate legal entity, a corporation may own and
dispose of property in its own name.

The corporation ownership is divided into units called
shares of stock.

The owners of the shares are called shareholders or
stockholders.
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Limited Liability
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
A stockholder cannot be held personally
responsible for debts of the corporation.

Liability is limited to ownership interest in shares of
the corporation.
Continuity of Life and Transferability

Corporations have continuous life regardless of
changes in ownership.

Stockholders can dispose of their shares of stock in
any manner they desire (sell, trade, gift, etc.).

Transfer of stock does not affect the continuity of the
corporation.
McGraw-Hill/Irwin
Mutual Agency


Definition:

Arrangement whereby all owners act as agents of the
business .

A contract signed by one owner is binding on the
whole business.
Does not apply to corporations - a single stockholder
cannot commit the corporation to a contract.
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Government Regulation

State and federal agencies monitor the activities of
corporations to protect investor, creditor and the general
public.

Additional reporting is required, of corporations, by the
regulatory agencies (i.e., SEC).
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Corporate Taxation

The corporation is a separate taxable entity.

It is subject to a variety of federal, state and local
taxes.

After tax earnings (dividends) distributed to
stockholders are also taxed again individually.

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This is called double taxation.
Corporate Form of Organization
Corporate Organization and Management
Page 501
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Forming a Corporation

First step is to file an application of
incorporation with the state.

Because state laws differ, corporations often
organize in states with more favorable laws.

McGraw-Hill/Irwin
More than half of the largest companies are
incorporated in Delaware.

State grants a charter or articles of
incorporation which formally create the
corporation.

Management and board of directors prepare
bylaws which are operation rules and
procedures.
Organizational Structure of a Corporation
Stockholders
(owners of corporation stock)
Board of Directors
(elected by stockholders)
Officers
(selected by board of directors)
Employees
(hired by officers)
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Corporate Form of Organization
Stockholders
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Rights of Stockholders
 Vote at stockholders’ meetings
 Sell or dispose of stock
 Purchase additional shares of stock
(Preemptive right )
 Receive dividends, if any
 Share equally in any assets remaining
after creditors are paid in a liquidation
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Stock Certificates and Transfer
Each unit of
ownership is
called a share of
stock.
A stock certificate
serves as proof
that a stockholder
has purchased
shares.
When the stock is sold, the stockholder signs a transfer
endorsement on the back of the stock certificate.
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Corporate Form of Organization
Basics of Capital Stock
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Basics of Capital Stock
Authorized
Issued
Outstanding
Number of Shares
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Par Value…...

is an arbitrary amount assigned to a share of stock.

Only establishes minimum legal capital.
Most companies set the par value of their common stock
quite low, to avoid legal difficulties from issuing their
stock below par.

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No-Par Stock…...

does not have a par value.

Some have a stated value.


McGraw-Hill/Irwin
is an arbitrary value assigned to a share of common
stock by the Board of Directors.
stated value is similar to par value (once declared by
the Board) and treated the same.
Classes of Stockholders
The two primary classes of paid-in capital are
common stock and preferred stock. The primary
attractiveness of preferred stocks is that they are
preferred over common as to dividends.
Money
available
for
dividends
McGraw-Hill/Irwin
Preferred
Stockholders
Common
Stockholders
Issuing (Selling) Stock
Initial Public Offering (IPO)
 First sale of stock to the public
 Issuing corporation obtains the assistance of an
underwriting firm (investment bank) to determine:
(1) Type of security (common or preferred)
(2) Best offering price
(3) Time to bring securities to market
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Issuing
(Selling) Stock
Stock
Selling
(Issuing)
Par value is an
arbitrary amount
assigned to each share
of stock when it is
authorized.
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
Market price is the
amount that each
share of stock will sell
for in the market.
Topic 2
Common Stock
Page 504
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Issuing Stock
Par Values

Par Value establishes minimum legal capital.

Stock Equity accounts are credited only for the par
value of each share of stock issued.
- Common Stock
- Preferred Stock

McGraw-Hill/Irwin
Stock par values are usually set forth in the Articles
of Incorporation.
Issuing
Stock
IssuingPar
Par Value
Value Stock
Stock Issued at Par Value
On June 5, Dillon, Inc. issued 30,000 shares of $10 par
value stock for $300,000.
Record:
1. The cash received.
2. The number of shares issued × the par value
per share in the Common Stock account.
McGraw-Hill/Irwin
Issuing Par Value Stock
Stock Issued at Par Value
On June 5, Dillon, Inc. issued 30,000 shares of $10 par
value stock for $300,000.
Jun 5 Cash
Common Stock, $10 Par Value
Issued 30,000 shares of $10 par
value common stock.
McGraw-Hill/Irwin
300 000.00
300 000 00
Issuing
Stock
IssuingPar
Par Value
Value Stock
Stock Issued at a Premium
On September 1, Matrix, Inc. issued 100,000 shares of $2
par value stock for $25 per share.
Record:
1. The cash received.
2. The number of shares issued × the par value
per share in the Common Stock account.
3. The remainder is assigned to Paid-In Capital
in Excess of Par Value, Common Stock.
McGraw-Hill/Irwin
Issuing Par Value Stock
Stock Issued at a Premium
On September 1, Matrix, Inc. issued 100,000
shares of $2 par value stock for $25 per share.
Sep
1 Cash (100,000 x $25)
Common Stock (100,000 x $2)
Paid-in Capital in Excess of Par-Common Stock
Issued 100,000 shares of common
stock at $25 per share.
McGraw-Hill/Irwin
2,500, 000 00
200 000 00
2,300 000 00
IssuingPar
Par Value
Value Stock
Issuing
Stock
Stockholders' Equity with Common Stock
Stockholders' Equity
Common Stock - $2 par value; 500,000 shares
authorized; 100,000 shares issued and
outstanding
$ 200,000
Paid-In Capital in Excess of Par
2,300,000
Retained earnings
650,000
Total stockholders' equity
$ 3,150,000
McGraw-Hill/Irwin
Issuing No-Par Stock
Par Values

No-Par Stock is stock that is issued without a par value.

Stock Equity accounts are credited for the full amount
received for each share of stock issued.
McGraw-Hill/Irwin
Issuing No-Par Stock
On October 20, a corporation issues 1,000 shares of no-par
common stock for $40 per share.
Oct 23 Cash
Common Stock, No-Par Value
Issued 1,000 shares of no-par
common stock at $40.
McGraw-Hill/Irwin
40 000 00
40 000 00
Issuing No-Par Stock
No-par stock may be assigned a stated value
per share. In this case the stated value is
recorded similar to a par value.
McGraw-Hill/Irwin
Issuing No-Par Stock

No-Par Stock, Stated Value per share.

Stock Equity accounts are credited for the stated
par value and the excess is credited to the
appropriate paid-in capital in excess of par account.

Accounting is essentially the same as for regular
par value stock.
McGraw-Hill/Irwin
Issuing Stock with a Stated Value
On June 17, issued an additional 1,000 shares of no-par common
stock at $36; stated value, $25.
Jun 17 Cash (1,000 x $36)
Common Stock (1,000 x $25)
25 000 00
Paid-in Capital in Excess of
Stated Value-Common Stock
11 000 00
Issued 1,000 shares of no-par
common stock at $36; stated
value, $25.
McGraw-Hill/Irwin
36 000 00
Issuing Stock for Non-Cash Assets
Stock issued for assets other than cash should be
recorded at the fair market value of the asset.
McGraw-Hill/Irwin
Issuing Stock for Non-Cash Assets
On Nov. 12, a corporation acquired land for which the fair market
value is $120,000. The corporation issued 10,000 shares of $10 par
common in exchange for the land.
Nov. 12 Land (10,000 x $12)
120 000 00
Common Stock (10,000 x $10)
Paid-in Capital in Excess of Par-Com. Stk
Issued 10,000 shares of $10 par
common stock for land.
McGraw-Hill/Irwin
100 000 00
20 000 00
Topic 3
Dividends
Page 507
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Dividends
Cash Dividends
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Cash Dividends
Regular cash dividends provide a return to
investors and almost always affect the
stock’s market value.
June
30
Corporation
Dividends
McGraw-Hill/Irwin
Stockholders
Cash Dividends

Dividends are distributions of retained earnings to
stockholders.

Dividends are never required, but once declared
become a legal liability of the corporation.
McGraw-Hill/Irwin
Accounting for Cash Dividends
Corporations generally declare and pay cash
dividends on shares outstanding when three
conditions exist:
1. Sufficient retained earnings
2. Sufficient cash
3. Formal action by the board of directors
Retained Earnings
50,000
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Accounting for Cash Dividends
There are three important
dates relating the
dividends.
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Accounting for Cash Dividends
Cash Dividend Dates

Date of Declaration (formal action by the Board).

Date of Record (establishes ownership of dividends).

Date of Payment (dividend checks are issued).
McGraw-Hill/Irwin
Accounting for Cash Dividends
Three important dates
Date of Declaration
Date of Record
Date of Payment
Record liability
for dividend.
No entry
required.
Record payment of
cash to stockholders.
McGraw-Hill/Irwin
Accounting for Cash Dividends
Date of Declaration
Assume that on January 9, Z-Tech, Inc. declares a $1 per share
dividend, with 5,000 outstanding shares. The dividend will be paid
on February 1 to stockholders of record on January 22.
Jan
9 Retained Earnings ($1 x 5,000)
Common Dividends Payable
Declared cash dividend.
McGraw-Hill/Irwin
5 000 00
5 000 00
Accounting for Cash Dividends
Date of Record
The second important date is the date of
record. For Z-Tech, Inc. this would be
January 22.
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Accounting for Cash Dividends
Date of Record
This date establishes ownership of the shares and
determines who receives the dividend.
No entry is required.
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Accounting for Cash Dividends
Date of Payment
On February 1, Z-Tech, Inc. issues dividend checks.
Jan. 2 Cash Dividends Payable
Cash
Paid cash dividends.
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5 000 00
5 000 00
Dividends
Stock Dividends
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Accounting for Stock Dividends
A distribution of dividends to stockholders in the form of
the firm’s own shares is called a stock dividend.
Why a stock dividend?
• Can be used to keep the market
price on the stock affordable.
• Can provide evidence of
management’s confidence that
the company is doing well.
McGraw-Hill/Irwin
Accounting for Stock Dividends

Stock Dividends:

are a proportional distribution of a
corporation’s own stock to its shareholders.

they do not change total stockholders’
equity.
nor do they transfer assets of the
corporation to the stockholders.

McGraw-Hill/Irwin
Accounting for Stock Dividends
Stock Dividend Dates

Date of Declaration (formal action by the Board).

Date of Record (establishes ownership of
dividends).
(No journal entry)

Date of Distribution (stock shares are issued).
McGraw-Hill/Irwin
Accounting for Stock Dividends




Small Stock Dividend
Distribution is  25% of the previously outstanding
shares.
Capitalize retained earnings for the market value of the
shares to be distributed.
Large Stock Dividend
Distribution is > 25% of the previously outstanding
shares.
Capitalize retained earnings for the minimum amount
required by state law, usually par or stated value of the
shares.
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Accounting for Stock Dividends
Small Stock Dividend
Dividend < 25% of the outstanding shares
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Recording a Small Stock Dividend
On December 31, 2008, Quest declared a 2% stock dividend,
when the stock was selling for $10 per share. The stock will
be distributed on January 20, 2009, to stockholders of record
as of January 15.
Dec. 31 Retained Earnings
Stock Dividends Distributable
Paid-in Capital in Excess of
Par—Common Stock
20 000 00
2 000 00
18 000 00
Declared 2% stock dividend.
Retained Earnings - (100,000 shares × 2% = 2,000 shares × $10 = $20,000)
Stock Dividends Distributable - ( 2,000 shares × $1 par = $2,000)
McGraw-Hill/Irwin
Quest, Inc.
Balance Sheet (Stockholders' Equity Section)
December 31, 2008
Before the
stock
dividend.
Common stock - $1 par value,
250,000 shares authorized,
100,000 shares issued and outstanding
Paid-in capital in excess of par value
Total paid-in capital
Retained earnings
Total stockholders' equity
$
$
$
Quest, Inc.
Balance Sheet (Stockholders' Equity Section)
December 31, 2008
Com m on stock - $1 par value,
250,000 shares authorized,
100,000 shares issued and outstanding
$
Com m on stock dividend distributable, 2,000 shares
Total com m on stock issued and to be issued
2,000
$
Paid-in capital in excess of par value
Total Paid-in capital
Total stockholders' equity
102,000
26,000
$
Retained earnings
McGraw-Hill/Irwin
100,000
128,000
15,000
$
143,000
After the
stock
dividend.
100,000
8,000
108,000
35,000
143,000
Recording a Small Stock Dividend
Date of Record
January 15
On this date, ownership of shares determines who
receives the stock dividend. No entry is required.
McGraw-Hill/Irwin
Recording a Small Stock Dividend
Date of Distribution
On January 20, Quest issues the stock. This action increases the
number of shares outstanding by 2,000.
Jan. 20 Stock Dividends Distributable
Common Stock
Issued stocks for the stock
dividend.
McGraw-Hill/Irwin
2, 000 00
2, 000 00
Accounting for Stock Dividends
Large Stock Dividend
Dividend > 25% of the outstanding shares
McGraw-Hill/Irwin
Recording a Large Stock Dividend
On December 31, 2008, Router declared a 40% stock dividend, when the
stock was selling for $8 per share. State law requires that large stock
dividends be capitalized at par value per share.
Dec. 31 Retained Earnings
Stock Dividends Distributable
20 000 00
20 000 00
Declared 20,000 share (40%) stock dividend.
50,000 × 40% = 20,000 shares × $1 par value = $20,000
McGraw-Hill/Irwin
Recording a Large Stock Dividend
Effects on the balance sheet accounts are similar to a small stock
dividend, except the paid-in capital in excess of par is not changed.
Router Corporation, December 31, 2008 (before dividend)
Common Stock, $1 par, 200,000 Auth, 50,000 Outstanding
Paid-in Capital in Excess of Par--Common Stock
Retained Earnings
Total Stockholders’ Equity
$50,000
75,000
100,000
$225,000
Router Corporation, December 31, 2008 (after dividend)
Common Stock, $1 par, 200,000 Auth, 50,000 Outstanding
Common Stock Dividend Distributable, 20,000 Shares
Paid-in Capital in Excess of Par--Common Stock
Retained Earnings
Total Stockholders’ Equity
McGraw-Hill/Irwin
$50,000
20,000
75,000
80,000
$225,000
Topic 4
Stock Splits
Page 510
McGraw-Hill/Irwin
Stock Splits
A corporation sometimes reduces the par or stated value of their
common stock and issues a proportionate number of additional
shares. This is called a stock split.
McGraw-Hill/Irwin
Accounting for Stock Splits
An example:
A corporation has 100,000 shares of $20 par common stock
outstanding, when a 2-for-1 stock split is declared by the Board
of Directors.
Before:
100,000 shares @ $20 par = $2,000,000
After:
200,000 shares @ $10 par = $2,000,000
The total legal capital is the same. Only the number of shares
and the par per share are changed. No journal entry is required.
McGraw-Hill/Irwin
Accounting for Stock Splits
Individual Shareholder
BEFORE
McGraw-Hill/Irwin
STOCK SPLIT
AFTER 2-1
STOCK SPLIT
4 shares, $20 par
8 shares, $10 par
$80 total par value
$80 total par value
Accounting for Stock Splits
A stock split does not change the balance of any corporation
account. However, it can make the stock more attractive to
investors by reducing the price of a share.
McGraw-Hill/Irwin
Topic 5
Preferred Stock
Page 510
McGraw-Hill/Irwin
Preferred Stock…….
A separate class of stock, typically having priority
over common shares in . . .


Dividend distributions
Distribution of assets in case of liquidation
Usually has a stated
dividend rate
McGraw-Hill/Irwin
Normally has no voting
rights
Preferred Stock…….
Participating
Dividends may exceed a
stated amount once
common stockholders
receive a dividend equal
to the preferred stated
rate.
Vs.
Non-Participating
Dividends are limited to a
maximum amount each
year. The maximum is
usually the stated dividend
rate.
Most preferred stock
is nonparticipating.
McGraw-Hill/Irwin
Non-Participating Preferred Stock


Are classified in two categories:
1 - Non-Cumulative Preferred Stock
2 - Cumulative Preferred Stock
Dividend rights of preferred stock are usually stated in
specific monetary terms or as a percentage of par value.
McGraw-Hill/Irwin
Issuing Preferred Stock
On July 1, Dillon, Inc. issues 50 shares, $100 par
value, for $120 per share.
Sep
1 Cash (50 x $120)
Preferred Stock (50 x $100)
Paid-in Capital in Excess of Par-Preferred Stock
Issued 50 shares of Preferred stock
at $120 per share.
McGraw-Hill/Irwin
6, 000 00
5 000 00
1 000 00
Non-Cumulative Preferred Stock
A non-participating (non-cumulative) preferred stock is limited to a
certain amount. Assume 1,000 shares of 4% non-participating,
$100 par, preferred stock and 4,000 shares of common stock and
the following:
Net income
Amount retained
Amount distributed
Preferred dividend
Common dividend
Dividends per share:
Preferred
Common
McGraw-Hill/Irwin
2007
$20,000
(10,000)
$10,000
(4,000)
$ 6,000
$ 4.00
$ 1.50
2008
2009
$55,000 $62,000
(20,000) (40,000)
$35,000 $22,000
(4,000)
(4,000)
$31,000 $18,000
$ 4.00
$ 7.75
$ 4.00
$ 4.50
Cumulative Preferred Stock
McGraw-Hill/Irwin

Cumulative preferred stock are entitled to receive
regular dividends each fiscal period, whether
declared or not.

Dividends, not declared for a period, accumulate
until paid and are said to be in arrears.

Preferred dividends in arrears and current
preferences are paid first before any dividends are
paid to common stockholders.
Cumulative Preferred Stock
So, preferred dividends
are two years in arrears.
Assume 1,000 shares of $4 cumulative, $100 par,
preferred stock and 4,000 shares of common
stock. No dividends were paid in 2006 and 2007.
McGraw-Hill/Irwin
Cumulative Preferred Stock
On November 7, 2008, the board of directors declares
dividends of $22,000.
McGraw-Hill/Irwin
Cumulative Preferred Stock
Preferred Stock Dividends
Dividends Paid in 2008
Total dividends paid,
$22,000
$4,000
$4,000
2006
(In arrears)
$4,000
2007
(In arrears)
$4,000
$10,000
$4,000
$4,000
2008
(Current dividend)
McGraw-Hill/Irwin
Preferred
Stock
Common
Stock
Reasons for Issuing Preferred Stock


To raise capital without sacrificing control.

To appeal to investors who may believe the common stock
is too risky or that the expected return on common stock
is too low.
To boost the return earned by common stockholders
through financial leverage.
McGraw-Hill/Irwin
Other Preferred Stock Options
 Convertible Preferred Stock – Gives the holders the option
to exchange their preferred shares for common shares
at a specific rate (i.e., 1:10).
 Callable Preferred Stock
(1) Gives the issuing corporation the right to retire this stock
from its holders at specified future dates and prices.
(2) The call price usually includes the stock par value plus a
premium.
McGraw-Hill/Irwin
Topic 6
Treasury Stock
Page 514
McGraw-Hill/Irwin
Treasury Stock Transactions
Occasionally, a corporation buys back its own
stock for the purpose of later reissuing it. This
stock is referred to as treasury stock.
McGraw-Hill/Irwin
Primary Uses of Treasury Stock
McGraw-Hill/Irwin

Employee stock purchase plans.

Employee/Officer bonus plans.

Influence stock market price.

Acquire another corporation.

To avoid hostile takeover of the company.
Treasury Stock Transactions
Treasury stock is stock that:
1. has been issued as fully paid.
2. has been reacquired by the corporation.
3. has not been canceled or reissued.
McGraw-Hill/Irwin
Treasury Stock Transactions
1. A commonly used method of accounting for
treasury stock is the cost method.
2. The account Treasury Stock is debited for the
cost of a purchase.
3. When sold, Treasury Stock is credited for its’
original cost and any difference is debited or
credited to an account titled Paid-In Capital,
Treasury Stock.
McGraw-Hill/Irwin
Treasury Stock Transactions




Acquiring treasury shares does not decrease the number
of shares issued.
Total equity decreases, as does the number of shares
outstanding.
Losses, on sales of treasury shares, are debited to Paidin Capital, Treasury Stock, to the extent there is a balance
in that account.
Losses, that exceed the balance of the Paid-in Capital,
Treasury Stock account, are debited to Retained
Earnings.
McGraw-Hill/Irwin
Treasury Stock Transactions
Cost Method
On January 5, a firm purchased 1,000 shares of treasury stock
(common stock, $25 par) at $45 per share.
Jan. 5 Treasury Stock, Common
Cash
Purchased 1,000 shares of
treasury stock at $45.
McGraw-Hill/Irwin
45 000 00
45 000 00
Treasury Stock Transactions
Cost Method
On June 2, sold 200 shares of treasury stock at $60 per share.
June 2 Cash (200 x $60)
Treasury Stock, Common (200 x $45)
9 000 00
Paid-in Capital, Treasury Stock
3 000 00
Sold 200 shares of treasury stock
at $60.
McGraw-Hill/Irwin
12 000 00
Treasury Stock Transactions
Cost Method
On September 3, sold 200 shares of treasury stock at $40 per share.
Sep. 3 Cash (200 x $40)
Paid-in Capital, Treasury Stock
Treasury Stock, Common (200 x $45)
Sold 200 shares of treasury stock at
$40.
McGraw-Hill/Irwin
8 000 00
1 000 00
9 000 00
Treasury Stock Transactions
Paid-in capital:
Common stock, $25 par (20,000 shares
authorized and issued, 19,400 outstanding).. $500,000
Excess of issue price over par…………………. 150,000
From sale of treasury stock……………………..
2,000
Total paid-in capital………………………..
$652,000
Retained earnings………………………………….
130,000
Total……………………………………………….
$782,000
Deduct treasury stock (600 shares at cost)…...
(27,000)
Total stockholders’ equity………………………..
$755,000
Debit balance of Treasury Stock account.
McGraw-Hill/Irwin
Treasury Stock Transactions
Cost Method
On October 4, sold 400 shares of treasury stock at
$39 per share. Loss exceeds balance in Paid-In
Capital From Sale of Treasury Stock Account.
Sep. 3 Cash (200 x $39)
15 600 00
Paid-In Capital, Treasury Stock
Retained Earnings
Treasury Stock, Common (400 x $45)
Sold 200 shares of treasury stock
at $39.
McGraw-Hill/Irwin
2 000 00
400 00
18 000 00
Topic 7
Reporting Equity
Page 516
McGraw-Hill/Irwin
Reporting Stockholders’ Equity
Total cumulative amount of reported net income, less any net losses
and dividends declared, since the company started operating.
Reed, Inc.
Statement of Retained Earnings
For Year Ended December 31, 2008
Retained earnings, 1/1/08
Plus: net income
Less: dividends declared
Retained earnings, 12/31/08
McGraw-Hill/Irwin
$ 875,000
155,600
(80,000)
$ 950,600
Reporting Stockholders’ Equity
Matrix, Inc.
Statement of Stockholders' Equity
For the Year Ended December 31, 2008
(In millions)
Balance at January 1, 2008
Stock sales
Stock repurchases and retirement
Cash dividends declared
Other, net
Net income
Balance at December 31, 2008
Common stock and
capital in excess of par
Shares
Amount
821
$
2,500
17
500
(17)
(260)
821
$
2,740
Retained
Earnings
$ 9,500
(925)
(150)
70
5,100
$ 13,595
Total
$ 12,000
500
(1,185)
(150)
70
5,100
$ 16,335
This is a more inclusive statement than the statement of
retained earnings.
McGraw-Hill/Irwin
Reporting Stockholders’ Equity
Restricted/Appropriated Retained Earnings

Retained earnings may be limited (restricted) by
action of the corporations’ board of directors.

Retained earnings may also be appropriated for
purposes such as business expansions.

Other restrictions may be result of legal and
contractual requirements.

These items remain a part of retained earnings,
however they are usually disclosed by notes to the
financial statements.
McGraw-Hill/Irwin
Restricted Retained Earnings
Legal
Contractual
Most states restrict
the amount of
treasury stock
purchases to the
amount of retained
earnings.
Loan agreements
can include
restrictions on
paying
dividends below a
certain amount of
retained earnings.
McGraw-Hill/Irwin
Appropriated Retained Earnings
A corporation’s directors can voluntarily limit dividends because of a
special need for cash such as the purchase of new facilities.
Reed, Inc.
Statement of Retained Earnings
For Year Ended December 31, 2008
Retained earnings, 1/1/08
McGraw-Hill/Irwin
$
875,000
Plus: net income
155,600
Less: dividends declared
(80,000)
Retained earnings, 12/31/08
$
950,600
Appropriated retained earnings
Unappropriated retained earnings
(450,000)
$ 500,600
Reporting Stockholders’ Equity
Prior Period Adjustments

Material errors, from previous periods, are not included
in the computation of current period net income.

Such adjustments are reflected as adjustments to the
Retained Earnings beginning balance, in the period they
are identified.

Adjustments are reported in the Statement of Retained
Earnings.
McGraw-Hill/Irwin
Reporting Stockholders’ Equity
Reed, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2008
Retained earnings, January 1, 2008…………………
$ 350,000
Prior Period Adjustment: Cost of land incorrectly
charged to expense…………………………………
30,000
Retained earnings, January 1, 2008, as adjusted…..
$380,000
Net income……………………………………………. $ 280,000
Less dividends declared………………………………
(75,000)
Increase in retained earnings………………………...
205,000
Retained earnings, December 31, 2008………………
$ 585,000
McGraw-Hill/Irwin
End of Chapter 13
McGraw-Hill/Irwin