slide 13-1 chapter 11 corporations: organization, stock transactions, dividends, and retained...

1

Chapter 11Corporations: Corporations:

Organization, Stock Organization, Stock Transactions, Dividends, and Transactions, Dividends, and

Retained EarningsRetained Earnings

Financial Accounting, Seventh Edition

2

CHAPTER 11 - Part 1CHAPTER 11 - Part 1CHAPTER 11 - Part 1CHAPTER 11 - Part 1

SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.

Major Characteristics of a corporation

Forming a corporation

Stockholders’ Rights

3

1. Identify the major characteristics of a corporation.

2. Record the issuance of common stock.

3. Explain the accounting for treasury stock.

4. Differentiate preferred stock from common stock.

5. Prepare the entries for cash dividends and stock

dividends.

6. Identify the items that are reported in a retained

earnings statement.

7. Prepare and analyze a comprehensive stockholders’

equity section.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

4

An entity separate and distinct from its owners.

The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization

Classified by Purpose and

Not-for-Profit

For Profit

Classified by Ownership

Publicly held

Privately held

Wendy’s Ford Motor Company Coke Amazon

Hopelink Susan B Komen Bill & Melinda

Gates Foundation

Mars (the Snickers Co.

5

Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Corporate Management

Government Regulations

Additional TaxesSO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a

corporation.corporation.

Advantages

Disadvantages

The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization

Characteristics that distinguish corporations from proprietorships and partnerships.

6

______________________________________________

The Stockholders

Separate Legal Existence - AdvSeparate Legal Existence - Adv

Stockholders are separate from the company. The

word “corporation”

comes from the root work

“corpus” or body. A corporation is a separate legal

entity.

7

The Corporation

______________________________________________

The Stockholders –$$$$$$$$$$$$$$$$$$$

BUT: The stockholders’ personal assets are

NOT at risk.

LimitedLimited Liability of StockholdersLiability of Stockholders - Adv LimitedLimited Liability of StockholdersLiability of Stockholders - Adv

Stockholder are at risk ONLY to

the extent of their investment. In other words, a

stockholder can either make

money on his/her stock (if the price rises) or….worst

case scenario, LOSE IT ALL. But no more.

8

Easy to buy/sell stock – the transactions are public, not

personal, and do not require the consensus of other

owners.

Transferable Ownership RightsTransferable Ownership Rights - Adv Transferable Ownership RightsTransferable Ownership Rights - Adv

Stockholder are can sell their

stock without consent of other owners. And…changing owners does NOT affect the company’s

day-to day operations.

9

It is easy to obtain capital through the stock market and

investors can be BIG or small….

Ability to Acquire CapitalAbility to Acquire Capital - AdvAbility to Acquire CapitalAbility to Acquire Capital - Adv

It is easy to obtain capital through the stock market and

investors can be BIG or small….Investors can

buy stock… a lot or a little with

ease.

10

A corporation’s life is not limited by the lifetime of its

owners

Continuous Life–ADVContinuous Life–ADV

The corporate charter (read ahead

for forming a corporation and

writing a charter) can limit its life, but most corporations

live on indefinitely, not limited by its

owner’s lives.

11

Having professional managers is an advantage.

Having professional managers who are not owners….might

be a disadvantage.

Corporate Management Corporate Management - AdvCorporate Management Corporate Management - Adv

Stockholders elect the Board of Directors, who elect the CEO, who hires

the managers.

Question: Should the managers own stock?

Would owning stock make them more invested in the

company?

12

Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation


Stockholders

Chairman and Board of Directors

President andChief Executive

Officer

General Counsel and

Secretary

Vice PresidentMarketing

Vice PresidentFinance/Chief

Financial Officer

Vice PresidentOperations

Vice PresidentHuman

Resources

Treasurer Controller

Illustration 11-1 Corporation organization chart

13

Many requirements: reports, federal laws, state laws, SEC

rules, stock exchange requirements (NYSE, NASDAC,

ASE…)

Government RegulationsGovernment Regulations – DIS ADVGovernment RegulationsGovernment Regulations – DIS ADV

14

Double Taxation. The stockholders are taxed on their

dividend earnings AND the corporation is taxed on its

earnings.

AND, the corporation CANNOT deduct dividend payments!

Additional TaxesAdditional Taxes– DIS ADVAdditional TaxesAdditional Taxes– DIS ADV

16

File application with the Secretary of State.

State grants charter.

Corporation develops by-laws.

Initial Steps:

Forming a CorporationForming a CorporationForming a CorporationForming a Corporation


Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey).

Corporations expense organization costs as incurred.

17

1. Vote in election of board of directors and on actions that require stockholder approval.

Stockholders have the right to:

Stockholders’ Rights Stockholders’ Rights Stockholders’ Rights Stockholders’ Rights


2. Share the corporate earnings through receipt of dividends.

Illustration 11-3

18

3. Keep the same percentage ownership when new shares of stock are issued (preemptive right*).


Stockholders’ Rights Stockholders’ Rights Stockholders’ Rights Stockholders’ Rights


* A number of companies have eliminated the preemptive right.

Illustration 11-3

19

4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.


Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders


Illustration 11-3

20

Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders

Class A COMMON STOCK

Class A COMMON STOCK

PAR VALUE $1 PER SHARE

PAR VALUE $1 PER SHARE

Stock Certificate

Stock Certificate

Name of corporation

Stockholder’s name

Class

Shares

Signature of corporate official

PrenumberedIllustration 11-4

21

PracticePracticePracticePractice


Practice: Do Self Study Questions: 1,2,3

See solution at the end of the chapter

22



Common Stock

Treasury Stock

Preferred Stock

23

Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations

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.

Note: the number of authorized shares does NOT

mean there are the SAME number of investors in

the company. These are just the number of

shares the company would EVER be authorized

to sell.

Authorized Stock

24


Corporation can issue common stock directly to investors or indirectly through an investment banking firm.

How does a company set the price for a new issue of stock?

1. the company’s anticipated future earnings

2. its expected dividend rate per share

3. its current financial position

4. the current state of the economy

5. the current state of the securities market

Issuance of Stock

Note: Ultimately,

it is the market

demand that will set the

current selling price.

25


Stock of publicly held companies is

traded on organized exchanges.

Interaction between buyers and sellers

determines the prices per share.

Prices set by the marketplace tend to

follow the trend of a company’s

earnings and dividends.

Factors beyond a company’s control,

may cause day-to-day fluctuations in

market prices.

Market Value of Stock

After the Company has sold a share of

stock, any subsequent sale

(at profit or loss), does NOT impact the company.

26


The Chocolate Company sells 1

share of stock at $30 to Joseph Blow.

One year later, Joseph sells it for

$40.

There is a $10 profit.

Who receives it? The company or

Joseph?

For example…

Chocolate!

First, answer this on YOUR OWN and then go to next

slide

27


Joseph earns the $10

profit.

However… The

Chocolate Company

gets the prestige of its

rising prices.

For example…

29


Years ago, par value determined the legal capital

per share that a company must retain in the

business for the protection of corporate creditors.

Today many states do not require a par value.

No-par value stock is quite common today.

In many states the board of directors assigns a

stated value to no-par shares.

Par and No-Par Value Stock

30

CapitalCapitalCapitalCapital

Assets = Liabilities + Stockholders’ Equity

Remember the Accounting Equation?

Assets = The Company’s Resources

Liabilities & Stockholders’ Equity = How the

Company financed these resources. The Choices

are:

DEBT

EQUITY (owners)

31

Capital Capital ((EQUITY) HAS TWO SOURCES:EQUITY) HAS TWO SOURCES:Capital Capital ((EQUITY) HAS TWO SOURCES:EQUITY) HAS TWO SOURCES:

PAID IN CAPITAL

EARNED CAPITAL

Common Stock

PIC, in Excess of Par Value, Common

Stock

Preferred Stock

PIC, in Excess of Par Value, Preferred

Stock

Retained Earnings

Paid in Capital is the total amount of cash and other

assets paid into the corporation by stockholders in exchange

for capital stock.

Retained Earnings – the net income (less

dividends paid out) that a corporation retains for

future use.

32

Primary objectives:

1) Identify the specific sources of paid-in capital.

2) Maintain the distinction between paid-in capital and retained earnings.

Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues

SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.

Other than consideration received, the issuance of common stock

affects only paid-in capital accounts.

33

IllustrationIllustration: : 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.

b.



Issuing Par Value Common Stock for Cash

Stop: Try these Journal Entries in your Course Pack

34

IllustrationIllustration: : 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.

Cash 1,000

Common stock (1,000 x $1)

1,000Cash 5,000


1,000Paid-in capital in excess of par value

4,000

a.

b.



Issuing Par Value Common Stock for Cash

Note these Journal Entries in your Course Pack

35



Illustration 11-7

36

IllustrationIllustration: : Assume that Hydro-Slide, Inc. issues 5,000 shares of $5 stated value no-par common stock for $8 per share. The entry is:



Issuing No-Par Common Stock for Cash

Prepare the entry assuming there is no stated value?


37

IllustrationIllustration: : Assume that Hydro-Slide, Inc. issues 5,000 shares of $5 stated value no-par common stock for $8 per share. The entry is:

Cash 40,000


25,000Paid-in capital in excess of stated value

15,000



Issuing No-Par Common Stock for Cash

Prepare the entry assuming there is no stated value?

Cash 40,000

Common stock

40,000


38

Issuing Common Stock for Services orNoncash Assets

Corporations also may issue stock for:

Services (attorneys or consultants).

Noncash assets (land, buildings, and equipment).



Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable.

39

Illustration: Assume that attorneys have helped Jordan Company incorporate. They have billed the company $5,000 for their services. They agree to accept 4,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction.




40

Illustration: Assume that attorneys have helped Jordan Company incorporate. They have billed the company $5,000 for their services. They agree to accept 4,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction.

Organizational expense 5,000


4,000Paid-in capital in excess of par

1,000



41

Illustration: Assume that Athletic Research Inc. is an existing publicly held corporation. Its $5 par value stock is actively traded at $8 per share. The company issues 10,000 shares of stock to acquire land recently advertised for sale at $90,000. Prepare the journal entry for this transaction.




42

Illustration: Assume that Athletic Research Inc. is an existing publicly held corporation. Its $5 par value stock is actively traded at $8 per share. The company issues 10,000 shares of stock to acquire land recently advertised for sale at $90,000. Prepare the journal entry for this transaction.

Land (10,000 x $8) 80,000


50,000Paid-in capital in excess of par

30,000



43

Practice: Do Problem 11-1B



See solution at the end of the Powerpoint slides

44

TREASURY STOCKTREASURY STOCKTREASURY STOCKTREASURY STOCK

PAID IN CAPITAL

EARNED CAPITAL

Common Stock

PIC, in Excess of Par

Value, Common

Stock

Preferred Stock

PIC, in Excess of Par

Value, Preferred

Stock

Retained Earnings

Paid in Capital is the total amount of cash and other assets paid into the corporation by stockholders in exchange for capital

stock.

Retained Earnings – the net income (less dividends paid out)

that a corporation retains for future use.

LESS: Treasury Stock

45

Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired.

Corporations purchase their outstanding stock:

1. To reissue the shares to officers and employees under

bonus and stock compensation plans.

2. To enhance the stock’s market value.

3. To have additional shares available for use in the

acquisition of other companies.

4. To increase earnings per share.

5. To rid the company of disgruntled investors, perhaps to

avoid a takeover.

Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock

SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.

46

Purchase of Treasury Stock

Debit Treasury Stock for the price paid to

reacquire the shares.*

Treasury stock is a contra stockholders’ equity

account, not an asset.

Purchase of treasury stock reduces

stockholders’ equity.

* Debit T-Stock at Cost (note-there are alternative ways to record T-Stock,

but not learned until more advanced courses)


47

Treasury stock (4,000 x $8) 32,000

Cash

32,000

Illustration: On February 1, 2011, Mead acquires 4,000 shares of its stock at $8 per share.



Illustration 11-8

48



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.

Illustration 11-9

49

What is the relationship between…What is the relationship between…

AuthorizedAuthorized IssuedIssued OutstandingOutstanding Treasury StockTreasury Stock

Assume: 1,000,000 shares are authorized.Assume: 1,000,000 shares are authorized.

400,000 shared issued and 15,000 shares in 400,000 shared issued and 15,000 shares in treasury stock. How many are outstanding?treasury stock. How many are outstanding?

50

What is the relationship between…What is the relationship between…

Authorized = 1,000,000Authorized = 1,000,000 Issued = 400,000Issued = 400,000 Outstanding = Outstanding = 385,000385,000 Treasury Stock = 15,000Treasury Stock = 15,000

--Total Issued Shares = 400,000 ----Total Issued Shares = 400,000 --

-------------Total Authorized Shares = 1,000,000 ------------------------Total Authorized Shares = 1,000,000 -----------

Assume: 1,000,000 shares are authorized.Assume: 1,000,000 shares are authorized.

400,000 shared issued and 15,000 shares in treasury stock. How many are outstanding?400,000 shared issued and 15,000 shares in treasury stock. How many are outstanding?

385,00015,000

51

What about the unissued shares?What about the unissued shares?

Authorized = 1,000,000Authorized = 1,000,000 Issued = 400,000Issued = 400,000 Outstanding = Outstanding = 385,000385,000 Treasury Stock = 15,000Treasury Stock = 15,000

--Total Issued Shares = 400,000 ----Total Issued Shares = 400,000 --


Unissued shares have no value. They are just the maximum number of additional shares that Unissued shares have no value. They are just the maximum number of additional shares that the company can issue (without revising the corporate charter).the company can issue (without revising the corporate charter).

385,000 Unissued Shares = ????15,000

52

What about the unissued shares?What about the unissued shares?

Authorized = 1,000,000Authorized = 1,000,000 Issued = 400,000Issued = 400,000 Outstanding = Outstanding = 385,000385,000 Treasury Stock = 15,000Treasury Stock = 15,000 Unissued = Unissued = 600,000600,000--Total Issued Shares = 400,000 ----Total Issued Shares = 400,000 --


Unissued shares have Unissued shares have no value. no value. They are just the maximum number of additional shares that They are just the maximum number of additional shares that the company can issue (without revising the corporate charter).the company can issue (without revising the corporate charter).

385,000 Unissued Shares = 600,00015,000

54

Disposal of Treasury Stock

Above Cost

Below Cost

Both increase total assets (Cash) and stockholders’ equity (reducing/eliminating the contra account (T-Stock).



55

Treasury stock (1,000 x $8)

8,000

Illustration: On February 1, 2011, Mead acquired 4,000 shares of its stock at $8 per share.

On July 1, Mead sells for $10 per share 1,000 shares of its treasury stock, previously acquired at $8 per share.



Above Cost

July 1

Paid-in capital treasury stock

2,000

Cash 10,000

A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.

Note this Journal Entries in your Course Pack

56

Paid-in capital treasury stock 800


On Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share.



Oct. 1

Treasury stock (800 x $8)

6,400

Cash 5,600

Mead uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares.

Below Cost


57

Paid-in capital treasury stock 1,200


On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share.



Dec. 1

Retained earnings 1,000

Cash 15,400

Treasury stock (2,200 x $8)

17,600

Below Cost

Limited to

balance on hand


58

Practice: Do Problem 11-2B


Accounting for Treasury Stock Accounting for Treasury Stock Accounting for Treasury Stock Accounting for Treasury Stock

See solution at the end of the Powerpoint slides

59

Features often associated with preferred stock.

1. Preference as to dividends.

2. Preference as to assets in liquidation.

3. Nonvoting.

SO 4 Differentiate preferred stock from common stock.

Preferred StockPreferred StockPreferred StockPreferred Stock

Accounting for preferred stock at issuance is similar to that for common stock.

60

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 120,000

Preferred stock (10,000 x $10)

100,000Paid-in capital in excess of par – Preferred stock

20,000Preferred stock may have a par value or no-par value.


61



Cash Dividends

Stock Dividends

Stock Splits

Retained Earnings

62

Dividend Preferences

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.



63

Preferred Stock Dividends - examplePreferred Stock Dividends - example

oPreferred Stock Dividends are usually expressed as a % of par, for example:

o 10%, $100 par value Preferred Stock

o= $10.00 Preferred Dividend per share

64

A distribution of cash or stock to stockholders on a pro rata (proportional) basis.

Types of Dividends:

DividendsDividends

SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.

1. Cash dividends.

2. Property dividends.

Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share.

3. Scrip (note)

4. Stock dividends.

65

Declaration Date - The Board of directors announces a dividend

Record Date -The date ownership is determined. Current

stockholder on this date receives the dividend

Payment Date The date the dividend is paid to the stockholder of

record on the Record Date.

Accounting for DividendsAccounting for DividendsAccounting for DividendsAccounting for Dividends

Liability Recorded

No journal entry made

Liability paid

66

Cash Dividends

For a corporation to pay a cash dividend, it must

have:

1. Retained earnings - Payment of cash dividends

from retained earnings is legal in all states.

2. Adequate cash.

3. A declaration of dividends by the Board of

Directors.

Cash DividendsCash Dividends


67

Illustration: On Dec. 1, the directors of Media General declare a 50¢ per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on Jan. 20 to shareholders of record on Dec. 22?

December 1 (Declaration Date)

Cash Dividends 50,000

Dividends payable 50,000

December 22 (Date of Record)

January 20 (Payment Date)


Dividends payable 50,000

Cash 50,000

No entry



68

Allocating Cash Dividends Between Preferred and Common Stock


Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends.


69 SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock

dividends.dividends.

Illustration: On December 31, 2011, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock. It also has 50,000 shares of $10 par value common stock outstanding. At December 31, 2011, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend.

Cash Dividends - AllocationsCash Dividends - Allocations


Even though the Preferred

Shareholders have an 8%

dividend feature, IBR can only pay

them $6,000



Illustration: On December 31, 2011, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock. It also has 50,000 shares of $10 par value common stock outstanding. At December 31, 2011, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend.

Cash Dividends 6,000

Dividends payable

6,000Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000

Cash Dividends – Watch the DatesCash Dividends – Watch the Dates




2011 2012

Dividends declared 6,000$

Dividends in arrears

Allocation to Pref erred 6,000

Remainder to Common -$

* 1,000 shares x $100 par x 8% = $8,000

*

** 2010 Pfd. dividends $8,000 – declared $6,000 = $2,000

**

Illustration: At December 31, 2012, IBR declares a $50,000 cash dividend. Show the allocation of dividends to each class of stock.

$ 50,0002,000

8,000

$ 40,000


72

Dividends in Arrears - PracticeDividends in Arrears - Practice

YEAR DIVIDENDs PAID BALANCE IN ARREARS

19X1 15,000 15,000 019X219X3

PREFERRED STOCK, CUMULATIVE DIVIDENDS: Source: Rigos CPA review materials, 2002

At 12/31 19x2, and 19x3, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, 19x1.

•Apex did NOT declare a dividend during 19x2.•During 19x3, Apex paid a cash dividend of $10,000 on its preferred stock.

Apex should report dividends in arrears in its 19x3 financial statements as a (an)a. Accrued Liability of $15,000b. Disclosure of $15,000c. Accrued liability of $20,000d. Disclosure of $20,000

Show your work:

See solution at the end of the Powerpoint

slides

74

Stock Dividends

Pro rata distribution of the corporation’s own stock.

Stock DividendsStock Dividends


Results in decrease in retained earnings and increase in paid-in capital. But no change in total Stockholders’ Equity

Illustration 11-14

75

Stock Dividends

Reasons why corporations issue stock

dividends:

1. To satisfy stockholders’ dividend

expectations without spending

cash.

2. To increase the marketability of the

corporation’s stock.

3. To emphasize that a portion of

stockholders’ equity has been

permanently reinvested in the

business.



76

Size of Stock Dividends

Small stock dividend (less than 20–25% of the corporation’s issued stock, recorded at fair market value)

Large stock dividend (greater than 20–25% of issued stock, recorded at par value)



* This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares.

*

77

10% stock dividend is declared

Stock Dividend (50,000 x 10% x $15) 75,000

Common stock dividends distributable 50,000

Paid-in capital in excess of par value

25,000

Stock issued

Common stock dividends distributable

50,000

Common stock 50,000

Illustration: Medland Corp. has 50,000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share.



78

Stockholders' equityPaid-in capital

Common stock 500,000$ Common stock dividends distributable 50,000

Total stockholders' equity 550,000$

Medland CorporationBalance Sheet (partial)

Stockholders’ Equity with Dividends Distributable



Illustration 11-15

79



Effects of Stock DividendsIllustration 11-16

Note: total Stockholders’ Equity is the same

80

Which of the following statements about small stock dividends is true?

a. A debit to Retained Earnings for the par value of the shares issued should be made.

b. A small stock dividend decreases total stockholders’ equity.

c. Market value per share should be assigned to the dividend shares.

d. A small stock dividend ordinarily will have no effect on book value per share of stock.

Question



81

Which of the following statements about small stock dividends is true?

a. A debit to Retained Earnings for the par value of the shares issued should be made.

b. A small stock dividend decreases total stockholders’ equity.

c. Market value per share should be assigned to the dividend shares.

d. A small stock dividend ordinarily will have no effect on book value per share of stock.

Question



82

In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n):

a. deduction from total paid-in capital and retained earnings.

b. current liability.

c. deduction from retained earnings.

d. addition to capital stock.

Question



83

In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n):

a. deduction from total paid-in capital and retained earnings.

b. current liability.

c. deduction from retained earnings.

d. addition to capital stock.

Question



84

Stock Split

Reduces the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number of

shares.

Stock SplitsStock Splits

85

Illustration: Assume Medland Corporation splits its

50,000 shares of common stock on a 2-for-1 basis.

Results in a reduction of the par or stated value per share.


Before Split:Common Stock (50,000 shares outstanding, $10 par value) $500,000Paid in capital in excess of par value 0Total Paid in Capital $500,000

Retained Earnings $300,000

Total Stockholders’ Equity $800,000

Outstanding Shares 50,000

86

Illustration: Assume Medland Corporation splits its

50,000 shares of common stock on a 2-for-1 basis.

Results in a reduction of the par or stated value per share.


AFTER Split:Common Stock (100,000 shares outstanding, $5 par value) $500,000Paid in capital in excess of par value 0Total Paid in Capital $500,000

Retained Earnings $300,000

Total Stockholders’ Equity $800,000

Outstanding Shares 100,000

87

So what is the value in a stock split???


When stock is split, the market responds. Let’s say the Medland stock was trading at $80 in the market.

After the split, the market will adjust its price to match the split and move to $40. (This will not affect the stockholder, who know owns 2 shares of stock with a total value of $80)

Often, lowering the price of a share of stock, will stimulate trades.

More trades mean more demand, which often drives the stock price UP.

88

Stock splits can be structure any way….

Stock Splits – other typesStock Splits – other types

For example, they can be 3 shares issued for every 2 shares owned:

Before: Outstanding Shares of 10,000 at a $6 par value $60,000

After:Outstanding Shares of 15,000 at a $4 par value $60,000

89

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.

Retained EarningsRetained Earnings

SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.

90

Restrictions can result from:

1. Legal restrictions.

2. Contractual restrictions.

3. Voluntary restrictions.

Retained Earnings RestrictionsRetained Earnings Restrictions


Illustration 11-22

91

Corrections of Errors

Result from: mathematical mistakes mistakes in application of accounting

principles oversight or misuse of facts

Corrections treated as prior period

adjustments

Adjustment made to the beginning balance of

Retained Earnings

Prior Period AdjustmentsPrior Period Adjustments


92

Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2011

Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$

Before issuing the report for the year ended December 31, 2011, you discover a $50,000 error (net of tax) that caused the 2010 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2010. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2011?



93

Woods, Inc.Statement of Retained Earnings

For the Year Ended December 31, 2011

Balance, January 1, as previously reported 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1, as restated 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$



94

Retained Earnings StatementRetained Earnings Statement


The company prepares the statement from the Retained Earnings account.

Illustration 11-24

95



Illustration 11-25

96

All but one of the following is reported in a retained earnings statement. The exception is:

a. cash and stock dividends.

b. net income and net loss.

c. some disposals of treasury stock below cost.

d. sales of treasury stock above cost.

Question



97

SO 7

Statement Presentation and AnalysisStatement Presentation and Analysis

Illustration 11-26

98

Analysis

Net Income Available to Common Stockholders

Return on Common

Stockholders’ Equity

= Average Common

Stockholders’ Equity

SO 7 Prepare and analyze a comprehensive stockholders’ equity section.

Statement Analysis and PresentationStatement Analysis and Presentation

This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders.

99

Analysis

SO 7 Prepare and analyze a comprehensive stockholders’ equity section.

Statement Analysis and PresentationStatement Analysis and Presentation

Illustration: Kellogg Company’s beginning-of-the-year and end-of-the-year common stockholders’ equity were $2,526 and $1,448 million, respectively. Its net income was $1,148 million, and no preferred stock was outstanding. The return on common stockholders’ equity ratio is computed as follows.

Solution on notes page

Illustration 11-28

100

Home-equity loans are now difficult to get. The reasons are that banks are not making the loans, and sinking home prices give homeowners less equity to borrow against.

Four major reasons why many individuals employ home-equity loans are: (1) to invest, (2) to get a tax deduction, (3) to defer other debt, or (4) to buy from a wish list.

Home-Equity Loans

101

Good Bye and Good Luck!

Solutions to problems next

End of Chapter 11End of Chapter 11End of Chapter 11End of Chapter 11

102

(a) Jan. 10 Cash (80,000 X $4) 320,000Common Stock (80,000 X $3) 240,000Paid-in Capital in Excess of Stated Value—Common Stock (80,000 X $1) 80,000

Mar. 1 Cash (5,000 X $105) 525,000Preferred Stock (5,000 X $100) 500,000Paid-in Capital in Excess of Par Value—Preferred Stock (5,000 X $5) 25,000

Apr. 1 Land 85,000Common Stock (24,000 X $3) 72,000Paid-in Capital in Excess of Stated Value—Common Stock ($85,000 – $72,000) 13,000

May 1 Cash (80,000 X $4.50) 360,000Common Stock (80,000 X $3) 240,000Paid-in Capital in Excess of Stated Value—Common Stock (80,000 X $1.50) 120,000

Aug. 1 Organization Expense 40,000Common Stock (10,000 X $3) 30,000Paid-in Capital in Excess of Stated Value—Common Stock ($40,000 – $30,000) 10,000

Sept. 1 Cash (10,000 X $5) 50,000Common Stock (10,000 X $3) 30,000Paid-in Capital in Excess of Stated Value—Common Stock (10,000 X $2) 20,000

Prob 11-1B

103

Prob 11-1B

PROBLEM 11-1B (Continued)(c) KEELER CORPORATION

Stockholders’ equityPaid-in capital

Capital stock8% Preferred stock, $100 par value, 10,000 shares authorized, 6,000 shares issued $ 600,000Common stock, no par, $3 stated value, 500,000 shares authorized, 204,000 shares issued 612,000

Total capital stock 1,212,000Additional paid-in capital

In excess of par value— preferred stock $ 34,000In excess of stated value— common stock 243,000

Total additional paid-in capital 277,000Total paid-in capital $1,489,000

104

(a) Mar. 1 Treasury Stock (5,000 X $8) 40,000Cash 40,000

June 1 Cash (1,000 X $12) 12,000Treasury Stock (1,000 X $8) 8,000Paid-in Capital from Treasury Stock (1,000 X $4) 4,000

Sept. 1 Cash (2,000 X $10) 20,000Treasury Stock (2,000 X $8) 16,000Paid-in Capital from Treasury Stock (2,000 X $2) 4,000

Dec. 1 Cash (1,000 X $6) 6,000Paid-in Capital from Treasury Stock (1,000 X $2) 2,000

Treasury Stock (1,000 X $8) 8,00031 Income Summary 40,000

Retained Earnings 40,000

Prob 11-2B

105

Prob 11-2B

(c) GOLDBERG CORPORATIONStockholders’ equity

Paid-in capitalCapital stock

Common stock, $5 par, 100,000 shares issued and 99,000 outstanding $500,000

Additional paid-in capitalIn excess of par value $200,000From treasury stock 6,000

Total additional paid-in capital 206,000Total paid-in capital 706,000

Retained earnings 140,000Total paid-in capital and retained earnings 846,000

Less: Treasury stock (1,000 commonshares, at cost) (8,000)

Total stockholders’ equity $838,000

106

Prob 11-3B

(a) Feb. 1 Cash 100,000Common Stock (25,000 X $1) 25,000Paid-in Capital in Excess of Stated Value—Common Stock ($100,000 – $25,000) 75,000

Apr. 14 Cash 33,000Treasury Stock—Common (6,000 X $4) 24,000Paid-in Capital from Treasury Stock-Common ($33,000 – $24,000) 9,000

Sept. 3 Patent 30,000Common Stock (5,000 X $1) 5,000Paid-in Capital in Excess of Stated Value—Common Stock ($30,000 – $5,000) 25,000

Nov. 10 Treasury Stock—Common 6,000Cash 6,000

Dec. 31 Income Summary 452,000Retained Earnings 452,000

107

Prob 11-3B

(c) PORT CORPORATIONStockholders’ equity

Paid-in capitalCapital stock 8% Preferred stock, $50 par value, cumulative, 10,000 shares authorized,

8,000 shares issued and outstanding $ 400,000 Common stock, no par, $1 stated value,

2,000,000 shares authorized, 1,030,000 shares issued

and 1,025,000 shares outstanding 1,030,000 Total capital stock 1,430,000Additional paid-in capital

In excess of par value— preferred stock $ 100,000

In excess of stated value— common stock 1,550,000

From common treasury

stock 9,000 Total additional paid-in capital 1,659,000

Total paid-in capital 3,089,000Retained earnings (see Note X) 2,268,000

Total paid-in capital and retained earnings 5,357,000

Less: Treasury stock (5,000 commonshares) (22,000)

Total stockholders’ equity $5,335,000

Note X: Dividends on preferred stock totaling $32,000 [8,000 X (8% X$50)] are in arrears.

108

Dividends in Arrears – Practice – SolutionDividends in Arrears – Practice – Solution

YEAR DIVIDENDs PAID BALANCE IN ARREARS

19X1 15,000 15,000 019X2 15,000 0 15,00019X3 15,000 10,000 25,000

PREFERRED STOCK, CUMULATIVE DIVIDENDS: Source: Rigos CPA review materials, 2002

At 12/31 19x2, and 19x3, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, 19x1.

•Apex did NOT declare a dividend during 19x2.•During 19x3, Apex paid a cash dividend of $10,000 on its preferred stock.

Apex should report dividends in arrears in its 19x3 financial statements as a (an)a. Accrued Liability of $15,000b. Disclosure of $15,000c. Accrued liability of $20,000d. Disclosure of $20,000

Show your work:

slide 13-1 chapter 11 corporations: organization, stock transactions, dividends, and retained...

Documents

edition slide

stock dividends

stock transactions

stock market

hisher stock

preferred stock

treasury stock

issuance of common stock