11-1
11
Reporting and Analyzing
Stockholders’ Equity
Kimmel ● Weygandt ● Kieso
Financial Accounting, Eighth Edition
11-2
CHAPTER OUTLINE
LEARNING OBJECTIVES
11-3
1
Discuss the major characteristics of a corporation.
2
Explain how to account for the issuance of common and
preferred stock, and the purchase of treasury stock.
3
Explain how to account for cash dividends and describe the
effect of stock dividends and stock splits.
4
Discuss how stockholders’ equity is reported and analyzed.
LEARNING
OBJECTIVE
1
Discuss the major characteristics of a
corporation.
An entity separate and distinct from its owners.
Classified by Ownership
Classified by Purpose
Not-for-Profit
Publicly held
For Profit
Privately held
►
Salvation Army
►
Facebook
►
American Cancer
Society
►
IBM
►
Caterpillar
►
General Electric
11-4
►
Cargill Inc.
LO 1
CHARACTERISTICS OF A CORPORATION
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-5
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporation Management
Government Regulations
Additional Taxes
Advantages
Disadvantages
LO 1
CHARACTERISTICS OF A CORPORATION
Characteristics that distinguish corporations from
proprietorships and partnerships.
Corporation acts
Separate Legal Existence
under its own name
rather than in the
Limited Liability of Stockholders
name of its
Transferable Ownership Rights
stockholders.
Ability to Acquire Capital
11-6
Continuous Life
Corporation Management
Government Regulations
Additional Taxes
LO 1
CHARACTERISTICS OF A CORPORATION
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-7
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporation Management
Government Regulations
Additional Taxes
Limited to their
investment.
LO 1
CHARACTERISTICS OF A CORPORATION
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-8
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporation Management
Government Regulations
Additional Taxes
Shareholders may
sell their stock.
LO 1
CHARACTERISTICS OF A CORPORATION
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-9
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporation Management
Government Regulations
Additional Taxes
Corporation can
obtain capital
through the issuance
of stock.
LO 1
CHARACTERISTICS OF A CORPORATION
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-10
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporation Management
Government Regulations
Additional Taxes
Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
stockholder, employee,
or officer.
LO 1
CHARACTERISTICS OF A CORPORATION
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-11
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporation Management
Government Regulations
Additional Taxes
Separation of
ownership and
management
prevents owners from
having an active role
in managing the
company.
LO 1
CHARACTERISTICS OF A CORPORATION
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-12
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporation Management
Government Regulations
Additional Taxes
LO 1
CHARACTERISTICS OF A CORPORATION
Characteristics that distinguish corporations from
proprietorships and partnerships.
11-13
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporation Management
Government Regulations
Additional Taxes
Corporations pay
income taxes as a
separate legal entity
and in addition,
stockholders pay
taxes on cash
dividends.
LO 1
CHARACTERISTICS OF A CORPORATION
Stockholders
ILLUSTRATION 11-1
Corporation organization chart
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General
Counsel/
Secretary
Vice President
Marketing
Treasurer
11-14
Vice President
Finance/Chief
Financial Officer
Vice President
Operations
Vice President
Human
Resources
Controller
LO 1
PEOPLE, PLANET, AND PROFIT INSIGHT
The Impact of Corporate Social Responsibility
A survey conducted by Institutional Shareholder Services, a proxy advisory
firm, shows that 83% of investors now believe environmental and social factors
can significantly impact shareholder value over the long term. This belief is
clearly visible in the rising level of support for shareholder proposals requesting
action related to social and environmental issues. The following table shows
that the number of corporate social responsibility (CSR) related shareholder
proposals rose from 150 in 2000 to 191 in 2010. Moreover, those proposals
received average voting support of 18.4% of votes cast versus just 7.5% a
decade earlier.
Trends in Shareholder Proposals on Corporate Responsibility
Number of proposals voted
Average voting support
Percent proposals receiving >10% support
2000
2005
2010
150
7.5%
16.7%
155
9.9%
31.2%
191
18.4%
52.1%
Source: Investor Responsibility Research Center, Ernst & Young, Seven Questions
CEOs and Boards Should Ask About: “Triple Bottom Line” Reporting.
11-15
LO 1
Other Forms of Business Organization
11-16
Limited partnerships
Limited liability partnerships (LLPs)
Limited liability companies (LLCs)
S Corporation
►
No double taxation.
►
Cannot have more than 100 shareholders.
LO 1
FORMING A 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.
11-17
LO 1
STOCKHOLDER RIGHTS
1. Vote in election of board of
directors and on actions that
require stockholder approval.
2. Share the corporate earnings
through receipt of dividends.
ILLUSTRATION 11-3
Ownership rights of stockholders
11-18
LO 1
STOCKHOLDER RIGHTS
3. Keep the same percentage ownership when new
shares of stock are issued (preemptive right).
ILLUSTRATION 11-3
Ownership rights of stockholders
11-19
LO 1
STOCKHOLDER RIGHTS
4. Share in assets upon liquidation in proportion to their
holdings. This is called a residual claim.
ILLUSTRATION 11-3
Ownership rights of stockholders
11-20
LO 1
STOCKHOLDER RIGHTS
Prenumbered
ILLUSTRATION 11-4
A stock certificate
Shares
Name of
corporation
Stockholder’s
name
11-21
Signatures of
corporate officials
STOCK ISSUE CONSIDERATIONS
Authorized Stock
Charter indicates the amount of stock that a
corporation is authorized to sell.
Number of authorized shares is often reported in the
stockholders’ equity section.
11-22
LO 1
STOCK ISSUE CONSIDERATIONS
Issuance of Stock
Corporation can issue common stock
►
directly to investors or
►
indirectly through an investment banking firm.
Top five exchanges by value of shares traded:
1. New York Stock Exchange
2. Nasdaq stock market
3. London Stock Exchange
4. Tokyo Stock Exchange
5. Euronext
11-23
LO 1
ANATOMY OF A FRAUD
The president, chief operating officer, and chief financial officer of SafeNet, a
software encryption company, were each awarded employee stock options by the
company’s board of directors as part of their compensation package. Stock options
enable an employee to buy a company’s stock sometime in the future at the price that
existed when the stock option was awarded. For example, suppose that you received
stock options today, when the stock price of your company was $30. Three years
later, if the stock price rose to $100, you could “exercise” your options and buy the
stock for $30 per share, thereby making $70 per share. After being awarded their
stock options, the three employees changed the award dates in the company’s
records to dates in the past, when the company’s stock was trading at historical lows.
For example, using the previous example, they would choose a past date when the
stock was selling for $10 per share, rather than the $30 price on the actual award
date. In our example, this would increase the profit from exercising the options to $90
per share.
Total take: $1.7 million
THE MISSING CONTROL
Independent internal verification. The company’s board of directors should have
ensured that the awards were properly administered. For example, the date on the
minutes from the board meeting should be compared to the dates that were
recorded for the awards. The dates should again be confirmed upon exercise.
11-24
LO 1
STOCK ISSUE CONSIDERATIONS
Par and No-Par Value Stocks
Par value stock is capital stock that has been
assigned a value per share.
Years ago, par value determined the legal capital per
share that a company must retain in the business for
the protection of corporate creditors.
Many states do not require a par value.
No-par value stock is fairly common.
In many states the board of directors assigns a stated
value to no-par shares.
11-25
LO 1
STOCK ISSUE CONSIDERATIONS
Review Question
Which of these statements is false?
a. Ownership of common stock gives the owner a voting
right.
b. The stockholders’ equity section begins with paid-in
capital.
c. The authorization of capital stock does not result in a
formal accounting entry.
d. Legal capital is intended to protect stockholders.
11-26
LO 1
CORPORATE CAPITAL
Common Stock
Account
Paid-in Capital
Preferred Stock
Paid-in Capital in
Excess of Par
Account
Account
Two Primary
Sources of
Equity
Retained Earnings
Account
Paid-in capital is the total amount of cash and other assets paid in
to the corporation by stockholders in exchange for shares of
ownership.
11-27
LO 1
CORPORATE CAPITAL
Common Stock
Account
Paid-in Capital
Preferred Stock
Paid-in Capital in
Excess of Par
Account
Account
Two Primary
Sources of
Equity
Retained Earnings
Account
Retained earnings is net income that a corporation retains for
future use in the business.
11-28
LO 1
DO IT!
1
Corporate Organization
Indicate whether each of the following statements is true or false.
1. Similar to partners in a partnership, stockholders of
a corporation have unlimited liability.
False
2. It is relatively easy for a corporation to obtain capital
through the issuance of stock.
True
3. The separation of ownership and management is an
advantage of the corporate form of business.
False
4. The journal entry to record the authorization of
capital stock includes a credit to the appropriate
capital stock account.
False
5. All states require a par value per share for capital
stock.
False
11-29
LO 1
LEARNING
OBJECTIVE
2
Explain how to account for the issuance of
common and preferred stock, and the purchase of
treasury stock.
ACCOUNTING FOR COMMON STOCK
Primary objectives:
1) Identify the specific sources of paid-in capital.
2) Maintain the distinction between paid-in capital and
retained earnings.
Other than consideration received, the issuance of
common stock affects only paid-in capital accounts.
11-30
LO 2
Issuing Par Value Common Stock for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of
$1 par value common stock. Prepare Hydro-Slide’s journal entry if
(a) 1,000 share are issued for $1 per share, and (b) 1,000 shares
are issued for $5 per share.
(a)
Cash
1,000
Common Stock (1,000 x $1)
(b)
11-31
Cash
1,000
5,000
Common Stock (1,000 x $1)
1,000
Paid-in Capital in Excess of Par Value
4,000
LO 2
Issuing Par Value Common Stock for Cash
Stockholders’ equity section assuming Hydro-Slide, Inc. has
retained earnings of $27,000.
ILLUSTRATION 11-5
Stockholders’ equity—paid-in capital in excess of par value
11-32
LO 2
STOCK ISSUE CONSIDERATIONS
Review Question
ABC Corp. issues 1,000 shares of $10 par value common
stock at $12 per share. When the transaction is recorded,
credits are made to:
a. Common Stock $10,000 and Paid-in Capital in Excess
of Stated Value $2,000.
b. Common Stock $12,000.
c. Common Stock $10,000 and Paid-in Capital in Excess
of Par Value $2,000.
d. Common Stock $10,000 and Retained Earnings
$2,000.
11-33
LO 2
ACCOUNTING FOR PREFERRED STOCK
Typically, preferred stockholders have a priority in relation to
1. dividends and
2. assets in the event of liquidation.
However, they sometimes do not have voting rights.
Each paid-in capital account title should identify the stock to
which it relates:
11-34
Paid-in Capital in Excess of Par Value—Preferred Stock
Paid-in Capital in Excess of Par Value—Common Stock
LO 2
ACCOUNTING FOR PREFERRED STOCK
Illustration: Stine Corporation issues 10,000 shares of
$10 par value preferred stock for $12 cash per share. Journalize
the issuance of the preferred stock.
Cash
Preferred Stock (10,000 x $10)
Paid-in Capital in Excess of Par –
Preferred Stock
120,000
100,000
20,000
Preferred stock may have a par value or no-par value.
11-35
LO 2
INVESTOR INSIGHT
How to Read Stock Quotes
Organized exchanges trade the stock of publicly held companies at dollar
prices per share established by the interaction between buyers and sellers.
For each listed security, the financial press reports the high and low prices
of the stock during the year, the total volume of stock traded on a given
day, the high and low prices for the day, and the closing market price, with
the net change for the day. Facebook is listed on the Nasdaq exchange.
Here is a recent listing for Facebook:
These numbers indicate the following. The high and low market prices for
the last 52 weeks have been $86.07 and $54.66. The trading volume for
the day was 54,156,600 shares. The high, low, and closing prices for that
date were $85.59, $83.11, and $84.63, respectively. The net change for
the day was a decrease of $0.629 per share.
11-36
LO 2
DO IT!
2
Issuance of Stock
Cayman Corporation begins operations on March 1 by issuing 100,000
shares of $1 par value common stock for cash at $12 per share. On
March 28, Cayman issues 1,500 shares of $10 par value preferred
stock for cash at $30 per share. Journalize the issuance of the common
and preferred shares.
Mar. 1
Cash
1,200,000
Common Stock (100,000 × $1)
100,000
Paid-in Capital in Excess of Par Value—
Common Stock
1,100,000
Mar. 28 Cash
45,000
Preferred Stock (1,500 × $10)
Paid-in Capital in Excess of Par Value—
Preferred Stock
11-37
15,000
30,000
LO 2
TREASURY STOCK
Common Stock
Account
Paid-in Capital
Preferred Stock
Paid-in Capital
in Excess of Par
Account
Account
Two Primary
Sources of
Equity
Retained
Earnings
Account
Less:
Treasury Stock
Account
11-38
LO 2
TREASURY STOCK
Treasury stock is a corporation’s own stock that has been
reacquired by the corporation and is being held for future use.
Corporations purchase their outstanding stock:
1. To reissue shares to officers and employees under bonus
and stock compensation plans.
2. To increase trading of the company’s stock in the securities
market.
3. To have additional shares available for use in acquiring other
companies.
4. To increase earnings per share.
Another infrequent reason is to eliminate hostile shareholders.
11-39
LO 2
TREASURY STOCK
Purchase of Treasury Stock
Generally accounted for by the cost method.
Debit Treasury Stock for the price paid.
Treasury stock is a contra stockholders’ equity account,
not an asset.
Treasury Stock decreases by the same amount when
the company later sells the shares.
11-40
LO 2
Purchase of Treasury Stock
ILLUSTRATION 11-6
Stockholders’ equity with
no treasury stock
Illustration: On February 1, 2017, Mead acquires 4,000 shares of its
stock at $8 per share. Prepare the entry.
Treasury Stock (4,000 x $8)
Cash
11-41
32,000
32,000
LO 2
Purchase of Treasury Stock
ILLUSTRATION 11-7
Stockholders’ equity with
treasury stock
Both the number of shares issued (100,000), outstanding (96,000),
and the number of shares held as treasury (4,000) are disclosed.
11-42
LO 2
Purchase of Treasury Stock
Review Question
Treasury stock may be repurchased:
a. to reissue the shares to officers and employees under
bonus and stock compensation plans.
b. to signal to the stock market that management believes
the stock is underpriced.
c. to have additional shares available for use in the
acquisition of other companies.
d. More than one of the above.
11-43
LO 2
DO IT!
2b
Treasury Stock
Santa Anita Inc. purchases 3,000 shares of its $50 par value
common stock for $180,000 cash on July 1. It expects to hold the
shares in the treasury until resold. Journalize the treasury stock
transaction.
July 1
11-44
Treasury Stock
Cash
180,000
180,000
LO 2
LEARNING
OBJECTIVE
3
Explain how to account for cash dividends and
describe the effect of stock dividends and stock
splits.
A dividend is a distribution to stockholders on a pro rata
(proportional to ownership) basis.
Types of Dividends:
1. Cash dividends.
3. Stock dividends.
2. Property dividends.
4. Scrip (promissory note)
Dividends expressed: (1) as a percentage of the par or stated
value, or (2) as a dollar amount per share.
11-45
LO 3
CASH DIVIDENDS
For a corporation to pay a cash dividend, it must have:
1. Retained earnings - Payment of dividends from retained
earnings is legal in all states.
2. Adequate cash.
3. Declaration by the Board of Directors.
11-46
LO 3
Entries for Cash Dividends
Dividends require information concerning three dates:
11-47
LO 3
Entries for Cash Dividends
Illustration: On December 1, the directors of Media General declare a
$0.50 per share cash dividend on 100,000 shares of $10 par value
common stock. The dividend is payable on January 20 to
shareholders of record on December 22:
December 1 (Declaration Date)
Cash Dividends
Dividends Payable
50,000
December 22 (Record Date)
No entry
50,000
January 20 (Payment Date)
Dividends Payable
Cash
11-48
50,000
50,000
LO 3
Entries for Cash Dividends
Review Question
Entries for cash dividends are required on the:
a. declaration date and the record date.
b. record date and the payment date.
c. declaration date, record date, and payment date.
d. declaration date and the payment date.
11-49
LO 3
ACCOUNTING ACROSS THE ORGANIZATION
Up, Down, and ??
The decision whether to pay a dividend, and how much to pay, is a very important
management decision. As the chart below shows, from 2002 to 2007, many companies
substantially increased their dividends, and total dividends paid by U.S. companies hit
record levels. One reason for the increase is that Congress lowered, from 39% to 15%,
the tax rate paid by investors on dividends
received, making dividends more
attractive to investors. Then the
financial crisis of 2008 occurred.
As a result, in 2009, 804 companies
cut their dividends (see chart),
the highest level since Standard &
poor’s started collecting data in 1995.
In 2010, more companies started to
increase their dividends. However,
potential higher taxes on dividends
coming in the future and the possibility
of a low growth economy may stall any
significant increase.
11-50
LO 3
DIVIDEND PREFERENCES
Preferred stockholders have the right to receive dividends
before common stockholders.
Per share dividend amount is stated as a percentage of
the preferred stock’s par value or as a specified amount.
Cumulative dividend – holders of preferred stock must be
paid their annual dividend plus any dividends in arrears
before common stockholders receive dividends.
11-51
Preference on corporate assets if the corporation fails.
Preference may be for the par value of the shares or for a
specified liquidating value.
LO 3
Cumulative Preferences
Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par
value, cumulative preferred stock outstanding. Each $100 share
pays a $7 dividend (.07 x $100). The annual dividend is $35,000
(5,000 x $7 per share). If dividends are two years in arrears,
preferred stockholders are entitled to receive the following
dividends in the current year.
Dividends in arrears ($35,000 × 2)
Current-year dividends
Total preferred dividends
$ 70,000
35,000
$105,000
ILLUSTRATION 11-8
Computation of total dividends
to preferred stock
11-52
LO 3
Cumulative Preferences
Review Question
U-Bet Corporation has 10,000 shares of 8%, $100 par
value, cumulative preferred stock outstanding at December
31, 2017. No dividends were declared in 2015 or 2016. If
U-Bet wants to pay $375,000 of dividends in 2017,
common stockholders will receive:
a. $0.
b. $295,000.
c. $215,000.
d. $135,000.
11-53
LO 3
DO IT!
3a
Preferred Stock Dividends
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2017. At December
31, 2017, the company declared a $60,000 cash dividend.
Determine the dividend paid to preferred stockholders and
common stockholders under each of the following scenarios.
1. The preferred stock is noncumulative, and the company has
not missed any dividends in previous years.
SOLUTION
Preferred stockholders (2,000 x .06 x $100)
$ 12,000
Common stockholders ($60,000 - $12,000)
48,000
Total dividends
11-54
$60,000
LO 3
DO IT!
3a
Preferred Stock Dividends
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2017. At December
31, 2017, the company declared a $60,000 cash dividend.
Determine the dividend paid to preferred stockholders and
common stockholders under each of the following scenarios.
2. The preferred stock is noncumulative, and the company did
not pay a dividend in each of the two previous years.
SOLUTION
Preferred stockholders (2,000 x .06 x $100)
$ 12,000
Common stockholders ($60,000 - $12,000)
48,000
Total dividends
11-55
$60,000
LO 3
DO IT!
3a
Preferred Stock Dividends
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2017. At December
31, 2017, the company declared a $60,000 cash dividend.
Determine the dividend paid to preferred stockholders and
common stockholders under each of the following scenarios.
3. The preferred stock is cumulative, and the company did not
pay a dividend in each of the two previous years.
SOLUTION
Preferred stockholders (3 x 2,000 x .06 x $100)
Common stockholders ($60,000 - $36,000)
Total dividends
11-56
$ 36,000
24,000
$60,000
LO 3
STOCK DIVIDENDS
Pro rata distribution of the corporation’s own stock.
ILLUSTRATION 11-10
Effect of stock split for stockholders
11-57
LO 3
STOCK DIVIDENDS
Pro rata distribution of the corporation’s own stock.
Results in decrease in retained earnings and increase
in paid-in capital.
Reasons why corporations issue stock dividends:
1. Satisfy stockholders’ dividend expectations without
spending cash.
2. Increase the marketability of the corporation’s stock.
3. Emphasize that a portion of stockholders’ equity has
been permanently reinvested in the business.
11-58
LO 3
Effects of Stock Dividends
11-59
Changes the composition of stockholders’ equity.
Total stockholders’ equity remains the same.
No effect on the par or stated value per share.
Increases the number of shares outstanding.
LO 3
Effects of Stock Dividends
Illustration: Medland Corp. declares a 10% stock dividend on its $10
par common stock when 50,000 shares were outstanding. The
market price was $15 per share.
11-60
ILLUSTRATION 11-9
Stock dividend effects
LO 3
STOCK SPLITS
▼ HELPFUL HINT
A stock split changes the
par value per share but
does not affect any
balances in stockholders’
equity.
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of shares.
ILLUSTRATION 11-10
Effect of stock split for
stockholders
11-61
LO 3
STOCK SPLITS
Illustration: Assuming that instead of issuing a 10% stock
dividend, Medland splits its 50,000 shares of
common stock on a 2-for-1 basis.
11-62
ILLUSTRATION 11-11
Stock split effects
LO 3
STOCK DIVIDENDS vs STOCK SPLITS
Differences between the effects of stock dividends and stock
splits.
ILLUSTRATION 11-12
Effects of stock splits and stock dividends differentiated
11-63
LO 3
STOCK DIVIDENDS
Review Question
Which of these statements about stock dividends is true?
a. Stock dividends reduce a company’s cash balance.
b. A stock dividend has no effect on total stockholders’
equity.
c. A stock dividend decreases total stockholders’
equity.
d. A stock dividend ordinarily will increase total
stockholders’ equity.
11-64
LO 3
INVESTOR INSIGHT
Berkshire Hathaway
A No-Split Philosophy
Warren Buffett’s company, Berkshire Hathaway, has two classes of
shares. Until recently, the company had never split either class of
stock. As a result, the class A stock had a market price of $97,000 and
the class B sold for about $3,200 per share. Because the price per
share is so high, the stock does not trade as frequently as the stock of
other companies. Buffett has always opposed stock splits because he
feels that a lower stock price attracts short-term investors. He appears
to be correct. For example, while more than 6 million shares of IBM are
exchanged on the average day, only about 1,000 class A shares of
Berkshire are traded. Despite Buffett’s aversion to splits, in order to
accomplish a recent acquisition, Berkshire decided to split its class B
shares 50 to 1.
Source: Scott Patterson, “Berkshire Nears Smaller Baby B’s,” Wall Street
Journal Online (January 19, 2010).
11-65
LO 3
DO IT!
3b
Stock Dividends; Stock Splits
The market price of Sing CD Corporation’s 500,000 shares of $2 par value
common stock is $45. President Joan Elbert is considering either a 10%
stock dividend or a 2-for-1 stock split. She asks you to show the beforeand-after effects of each option on (a) retained earnings, (b) total
stockholders’ equity, and (c) par value per share.
Stock dividend amount is $2,250,000 [(500,000 × 10%) × $45].
11-66
LO 3
LEARNING
OBJECTIVE
4
Discuss how stockholders’ equity is reported and
analyzed.
RETAINED EARNINGS
Retained earnings is net income that a company retains
for use in the business.
Net income increases Retained Earnings and a net loss
decreases Retained Earnings.
Retained earnings is part of the stockholders’ claim on
the total assets of the corporation.
A debit balance in Retained Earnings is identified as a
deficit.
11-67
LO 4
RETAINED EARNINGS
ILLUSTRATION 11-14
Stockholders’ equity with deficit
11-68
LO 4
RETAINED EARNINGS RESTRICTIONS
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
ILLUSTRATION 11-15
Disclosure of unrestricted retained earnings
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LO 4
BALANCE SHEET PRESENTATION
Two classifications of paid-in capital:
1. Capital stock
2. Additional paid-in capital
Other comprehensive income items include
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certain adjustments to pension plan assets,
types of foreign currency gains and losses, and
some gains and losses on investments.
LO 4
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ILLUSTRATION 11-16
Stockholders’ equity section of balance sheet
LO 4
DO IT!
4a
Stockholders’ Equity Section
Jennifer Corporation has issued 300,000 shares of $3 par value
common stock. It is authorized to issue 600,000 shares. The paid-in
capital in excess of par value on the common stock is $380,000. The
corporation has reacquired 15,000 shares at a cost of $50,000 and
is currently holding those shares. It also had a cumulative other
comprehensive loss of $82,000.
The corporation also has 4,000 shares issued and outstanding of
8%, $100 par value preferred stock. It is authorized to issue 10,000
shares. The paid-in capital in excess of par value on the preferred
stock is $97,000. Retained earnings is $610,000.
Prepare the stockholders’ equity section of the balance sheet.
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LO 4
11-73
LO 4
ANALYSIS OF STOCKHOLDERS’ EQUITY
Dividend Record
Illustration: The following is the calculation of the payout ratio for Nike
in 2014 and 2013.
ILLUSTRATION 11-17
Nike’s payout ratio
The payout ratio measures the percentage of earnings a company
distributes in the form of cash dividends.
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LO 4
ANALYSIS OF STOCKHOLDERS’ EQUITY
Earnings Performance
Illustration: The following is the calculation of Nike’s return on
common stockholders’ equity ratios for 2014 and 2013.
This ratio shows how many dollars of net income a company earned for
each dollar of common stockholders’ equity.
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LO 4
DEBT VERSUS EQUITY DECISION
ILLUSTRATION 11-20
Advantages of bond financing over common stock
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LO 4
DEBT VERSUS EQUITY DECISION
ILLUSTRATION 11-21
Components of the return on
common stockholders’ equity
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LO 4
DEBT VERSUS EQUITY DECISION
Illustration: Microsystems Inc. currently has 100,000 shares of
common stock outstanding issued at $25 per share and no debt. It is
considering two alternatives for raising an additional $5 million: Plan A
involves issuing 200,000 shares of common stock at the current market
price of $25 per share. Plan B involves issuing $5 million of 12% bonds at
face value. Income before interest and taxes will be $1.5 million; income
taxes are expected to be 30%.
ILLUSTRATION 11-22
Effects on return on common stockholders’ equity
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DO IT!
4b
Analyzing Stockholders’ Equity
On January 1, 2017, Siena Corporation purchased 2,000 shares of
treasury stock. Other information regarding Siena Corporation is
provided below.
2017
2016
Net income
$110,000 $110,000
Dividends on preferred stock
$10,000
$10,000
Dividends on common stock
$1,600
$2,000
Common stockholders’ equity, beg. of year
$400,000* $500,000
Common stockholders’ equity, end of year
$400,000 $500,000
*Adjusted for purchase of treasury stock.
Compute the return on common stockholders’ equity for each year.
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LO 4
DO IT!
4b
Analyzing Stockholders’ Equity
Net income
Dividends on preferred stock
Dividends on common stock
Common stockholders’ equity, beg. of year
Common stockholders’ equity, end of year
2017
2016
$110,000 $110,000
$10,000
$10,000
$1,600
$2,000
$400,000* $500,000
$400,000 $500,000
*Adjusted for purchase of treasury stock.
Compute the return on common stockholders’ equity for each year.
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LO 4
LEARNING
OBJECTIVE
5
APPENDIX 11A: Prepare entries for stock
dividends.
Illustration: Medland Corporation declares a 10% stock dividend on its
50,000 shares of $10 par value common stock. The current fair market
value of its stock is $15 per share. Record the entry on the declaration
date:
Stock Dividends
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75,000
Common Stock Dividends Distributable
50,000
Paid-in Capital in Excess of Par Value
25,000
LO 5
STOCK DIVIDENDS
ILLUSTRATION 11A-1
Statement presentation of
common stock dividends distributable
Illustration: Record the journal entry when Medland issues the
dividend shares.
Common Stock Dividends Distributable
Common Stock
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50,000
50,000
LO 5
A Look at IFRS
LEARNING
OBJECTIVE
6
Compare the accounting for
stockholders’ equity under GAAP and
IFRS.
KEY POINTS
Similarities
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Aside from the terminology used, the accounting transactions
for the issuance of shares and the purchase of treasury stock
are similar.
Like GAAP, IFRS does not allow a company to record gains or
losses on purchases of its own shares.
The accounting related to prior period adjustment is essentially
the same under IFRS and GAAP.
LO 6
A Look at IFRS
Similarities
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A statement of comprehensive income is presented in a one- or
two-statement format. The single-statement approach includes
all items of income and expense, as well as each component of
other comprehensive income or loss by its individual
characteristic. In the two-statement approach, a traditional
income statement is prepared. It is then followed by a statement
of comprehensive income, which starts with net income or loss
and then adds other comprehensive income or loss items.
Regardless of which approach is reported, income tax expense
is required to be reported.
The computations related to earnings per share are essentially
the same under IFRS and GAAP.
LO 6
A Look at IFRS
Differences
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Under IFRS, the term reserves is used to describe all equity
accounts other than those arising from contributed (paid-in)
capital. This would include, for example, reserves related to
retained earnings, asset revaluations, and fair value differences.
Many countries have a different mix of investor groups than in
the United States. For example, in Germany, financial
institutions like banks are not only major creditors of
corporations but often are the largest corporate stockholders as
well. In the United States, Asia, and the United Kingdom, many
companies rely on substantial investment from private investors.
LO 6
A Look at IFRS
Differences
11-86
There are often terminology differences for equity accounts.
LO 6
A Look at IFRS
Differences
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A major difference between IFRS and GAAP relates to the
account Revaluation Surplus. Revaluation Surplus arises under
IFRS because companies are permitted to revalue their
property, plant, and equipment to fair value under certain
circumstances. This account is part of general reserves under
IFRS and is not considered contributed capital.
IFRS often uses terms such as retained profits or accumulated
profit or loss to describe retained earnings. The term retained
earnings is also often used.
Equity is given various descriptions under IFRS, such as
shareholders’ equity, owners’ equity, capital and reserves, and
shareholders’ funds.
LO 6
A Look at IFRS
LOOKING TO THE FUTURE
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 stockholders’
equity and its presentation will be examined closely.
Both the IASB and FASB are working toward convergence of any
remaining differences related to earnings per share computations.
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LO 6
A Look at IFRS
IFRS Practice
Which of the following is true?
a) In the United States, the primary corporate stockholders are
financial institutions.
b) Share capital means total assets under IFRS.
c) The IASB and FASB are presently studying how financial
statement information should be presented.
d) The accounting for treasury stock differs extensively
between GAAP and IFRS.
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LO 6
A Look at IFRS
IFRS Practice
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.
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LO 6
A Look at IFRS
IFRS Practice
Earnings per share computations related to IFRS and GAAP:
a) are essentially similar.
b) result in an amount referred to as earnings per share.
c) must deduct preferred (preference) dividends when
computing earnings per share.
d) All of the answer choices are correct.
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LO 6
COPYRIGHT
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