Equity FinancingEquity Financing

C H A P T E R 12

Learning Objective 1

Distinguish between debt and equity financing and describe the advantages and disadvantages of organizing a business as a proprietorship or a partnership.

Describe the Time Line ofBusiness Issues

Differentiate Between Debt and Equity

Debt Financing Equity Financing

Define Proprietorships and Partnerships

Proprietorship

Partnership

Ease of Formation

Limited Life

Unlimited Liability

List Characteristics Shared by Proprietorships and

Partnerships

Learning Objective 2

Describe the basic characteristics of a corporation and the nature of common and preferred stock.

What is a Corporation?

List Characteristics of a Corporation

Corporation

What are the Steps to Starting a Corporation?

Common Stock

List basic rights inherent in common stock ownership:

Preferred StockDefine the following terms.

Preferred Stock

Convertible Preferred Stock

Learning Objective 3

Account for the issuance and repurchase of common and preferred stock.

Issuing Stock

Par ValueNominal value assigned to and printed on the face of each share of a corporation’s stock.

Contributed CapitalThe portion of owners’ equity contributed by investors (the owners) in exchange for shares of stock.

Example: Issuing Stock

The Angelfish Corporation issued 5,000 shares of $20 par common stock for $40 per share. Record the transaction.

Example: Issuing Stock

The Angelfish Corporation issued 5,000 shares of $20 no-par common stock for $40 per share. Record the transaction.

Example: Issuing Stock

The Angelfish Corporation exchanged 2,000 shares of $20 par common stock for land. Market value of the stock is $40 per share. Record the transaction.

What is Treasury Stock?

Why purchase treasury stock?

Treasury Stock

Example: Reissuing Treasury Stock

The Goldfish Company purchased 1,000 shares of its own $20 par common stock for $30 per share. Record the transaction.

Treasury Stock

TreasuryStock

Resoldbelow cost

Paid-In Capital, Treasury Stock

Resoldabove cost

Debit Paid-In Capital,Treasury Stock If it Exists,

Otherwise Debit Retained Earnings

Example: Reissuing Treasury Stock

The Goldfish Company reissued 500 shares of treasury stock for $35 per share. Record the transaction.

Example: Reissuing Treasury Stock

The Goldfish Company reissued 300 shares of treasury stock (originally issued for $30 per share) for $25 per share. Record the transaction.

Example: Reissuing Treasury Stock

The Goldfish Company reissued 150 shares of treasury stock (originally issued for $30 per share) for $22 per share. Record the transaction.

Learning Objective 4

Understand the factors that affect retained earnings, describe the factors determining whether a company can and should pay cash dividends, and account for cash dividends.

Retained Earnings and Dividends

The portion of a corporation’s owners’ equity that has been earned from profitable operations and not distributed to stockholders.

Distributions to the owners (stockholders) of a corporation.

Cash distribution of earnings to stockholders.

Cash Dividends

Dividends

Retained Earnings

RetainedEarnings

Accounting forRetained Earnings

Net Income

LossesDividends

Match Important Dividend Dates

The date the corporation’s board of directors formally decides to pay a dividend to stockholders.

The date selected by a corporation’s board of directors on which the stockholders of record are identified as those who will receive dividends.

The date on which a corporation pays dividends to its stockholders.

Declaration Date

Payment Date

Date of Record

Example: Cash Dividend

The Dolphin Company declared a $0.50 dividend on January 1, 2003; 4,000 shares are outstanding. Record the appropriate journal entries.

Discuss Dividend Preferences

Current-Dividend Preference

Cumulative-Dividend Preference

Define Dividend Preferences

Dividends in Arrears

Example: Preferred Dividend

Lobster Company did not pay dividends last year, but it has declared a $5,000 dividend in the current year. Outstanding stock includes the following. Calculate the dividend.

Preferred, 5% Cumulative, $20 par 2,000 sharesCommon, $5 par 5,000 shares

Example: Preferred DividendLobster Company did not pay dividends last year, but it has declared a $5,000 dividend in the current year. Outstanding stock was previously listed. Given this calculation, provide the appropriate journal entries.

Learning Objective 5

Describe the purpose of reporting comprehensive income in the equity section of the balance sheet and prepare a statement of stockholders’ equity.

Define These Other Equity Terms

Accumulated Other Comprehensive Income

Statement of Comprehensive Income

Statement of Stockholders’ Equity

Comprehensive Income in the Balance Sheet

Killer Whale Corp. has the following comprehensive income items in the current year:1. Investment securities increased in value by $600 during the current year.2. Assets owned by Killer Whale’s British subsidiary decreased in value by $350 due to a decline in the strength of the British Pound.How would this information appear in the equity section of the balance sheet?

Comprehensive Income in the Balance Sheet

Killer Whale Corp.

Expanded MaterialLearning Objective 6

Account for stock dividends and distinguish them from stock splits.

Match Accounting for Stock Dividends

A pro rata distribution of additional shares of stock to stockholders.

Less than 25 percent.

Greater than 25 percent.

Small Stock

Dividend

Large Stock

Dividend

Stock Dividen

d

Stock Dividends

If the stock dividend is 25 percent or more of the outstanding company stock, the journal entry requires that retained earnings be debited only for par value.

OutstandingStock

25%

75%

If the stock dividend is less than 25 percent of the outstanding company stock, the journal entry requires the use of the market value of the stock.

Example: Accounting for Stock Dividends

Oyster Corporation declares a 20 percent stock dividend. The company has 2,000 shares of common stock ($5 par) outstanding. What is the necessary entry if the stock price is $15 when the dividends are declared and issued?

Example: Accounting for Stock Dividends

Oyster Corporation declares a 30 percent stock dividend. The company has 2,000 shares of common stock ($5 par) outstanding. What is the necessary entry if the stock price is $15 when the dividends are declared and issued?

Define Stock Split

Differentiate Between aStock Split vs.

a Stock Dividend

Stock

Stock

Expanded MaterialLearning Objective 7

Explain prior-period adjustments and prepare a statement of retained earnings.

Define Prior-Period Adjustmentsand the Statement of Retained

Earnings

Prior-Period Adjustments

Statement of Retained Earnings

Retained earnings, January 1, 2003. . . . . . . . . . $300,000 Prior-period adjustment:Deduct adjustment for 2002 inventory correction. (25,000)Balance as restated. . . . . . . . . . . . . . . . . . . . . . . $275,000 Net income for 2003 . . . . . . . . . . . . . . . . . . . . . . 50,000 Less dividends declared in 2003:Preferred stock . . . . . . . . . . . . . . . . . . . . . $10,000Common stock. . . . . . . . . . . . . . . . . . . . . . 12,000

(22,000)

Retained earnings, December 31, 2003 . . . . . . . $303,000

Statement of Retained Earnings

Oyster CorporationStatement of Retained Earnings

For the Year Ended December 31, 2003

Chapter 12 is Complete