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Chapter 11

Reporting and Interpreting Owners’ Equity

Acct 2301 Fall 09

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Topics on owners’ equity

• Terminology • Authorized, issued, and outstanding shares

• (additional) Paid-in capital (APIC)

• Preferred stock, common stock, treasury stock

• Sale of stock

• Purchase of stock

• Dividends

• Stock dividend and stock split

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Equity in Corporations

The equity section for a corporation is divided into two parts:• Retained Earnings -- earnings (net

income) the company has earned since it was founded, less any dividends paid

• Contributed Capital --amount that owners have contributed

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Presentation of Stockholders’ Equity in Corporations

Preferred stock, $10 par value, 100,000 shares authorized, 2,000 shares issued $20,000

Common stock, $1 par value, 1,000,000 shares authorized, 100,000 shares issued

100,000Paid-in capital (common) 985,000Less: treasury stock (common)

at cost, 5,000 shares (105,000)Retained earnings 670,000Other comprehensive income 50,000

Total Stockholders’ Equity $ 1,720,000

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Capital Stock

• Common Stock• Preferred Stock• Treasury Stock

– Shares, either common stock or preferred stock, repurchased by the corporation

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Capital Stock• Authorized Shares: The maximum number of shares of capital stock that can be sold to the public is called the authorized number of shares.

• Issued Shares -- shares sold • Unissued shares -- shares have never been sold

• Outstanding shares -- number of shares issued and not retained by the company.

• Shares in Treasury (treasury shares) -- shares repurchased by the corporation

Authorized shares = Issued shares + Unissued shares

Issued shares = Outstanding shares + Shares in Treasury

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Capital Stock

Par value: the nominal value per share of capital stock• Has no relationship to market value.• Serves as the basis for legal capital

No-par value is capital stock that does not have an amount per share

APIC: Additional Paid-in CapitalAlso called Paid-in capital or Capital in

excess of par

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Accounting for Sale of Stock

Balancing amount is Additional paid-in capital (APIC)

Debit Credit

Cash $3,600

ABC Co. issued 300 shares of $1 par common stock for $12 per share.

Common Stock 300APIC 3,300

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Treasury Stock

Outstanding (common or preferred) stock that was subsequently reacquired and is still being held by that corporation.

Why would a corporation reacquire its own stock?

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More on Treasury Stock

• Treasury Stock:• is considered issued stock but not

outstanding stock• has no voting or dividend rights• is a contra-equity account on the

Balance Sheet• is recorded at cost• Can be subsequently resold

• NO gains or losses are recorded on treasury stock

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Treasury Stock Example

ABC Inc. purchased 120 shares of its own common stock from the stock market at $10 per share

Debit Credit

Treasury Stock$1,200 Cash $1,200

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Treasury Stock Example

Scenario One: Sold 100 shares of Treasury Stock at $13 per share.

Cash 1,300 APIC 300

Treasury Stock 1,000

Scenario Two: Sold 100 shares of Treasury Stock at $9 per share.

Cash 900APIC 100

Treasury Stock 1,000

The treasury stock was resold laterDebit Credit

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Dividends

• Dividends are declared by board of directors • Dividends (both cash and stock) are

distributions of earnings to the shareholders – not an expense– based only on shares outstanding

• Once a dividend is declared, a liability is created

• Cash dividends require sufficient cash and positive retained earnings (past earnings)

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Dividend dates

• Declaration date– Board declares dividend (charge Retained

Earnings)– Creates a legal liability (Dividend Payable)

• Date of Record: who will receive dividend• Payment Date

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Dividend Dates Journal Entries

Declaration date: Dr. Retained Earnings

Cr. Dividends payable Record date: No entry

Payment date: Dr. Dividends payable Cr. Cash

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Dividends on Preferred Stock

• Current preferred dividends must be paid before paying any dividends to common stock.

• If a preferred dividend is not paid, the unpaid amount is either cumulative (a dividend in arrears) or non-cumulative. – Cumulative: Unpaid dividends must be paid before

common dividends.

– Non-cumulative: Unpaid dividends are lost.

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Stock Dividends

• Stock dividends are distributions to stockholders of additional shares of stock.

• All stockholders receive the same percentage increase in the number of shares they own (pro rata basis).– No change in total stockholders’ equity.– No change in par values.

Why issue a stock dividend?

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ABC Co. declared a 10% stock dividend on its 200 shares of $1 par common stock. The market value is $20 per share.

Retained earnings $400

Common stock 20

Additional paid in capital 380

• Income Statement: No effect on Income• Statement of Changes in Equity: No effect on

equity• Statement of Cash Flows: No effect on cash flow

Accounting for Stock Dividends

debit credit

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2:1 Stock Split

1 share of stock $10 par value

Before stock split

2 shares of stock $5 par value

After stock split

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Accounting for Stock Splits

• Distributions of 100% or more of stock to stockholders

• Decrease par value of stock• Increase number of outstanding shares• No change in total stockholders’ equity

Thus, no journal entry is needed!