Stockholders’ Equity Chapter 13 ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-1.

Stockholders’ Equity

Chapter 13

©2014 Pearson Education, Inc. Publishing as Prentice Hall 13-1

Learning Objectives

1. Identify the characteristics of a corporation

2. Journalize the issuance of stock

3. Account for cash dividends, stock dividends, and stock splits


Learning Objectives

4. Account for the purchase and sale of treasury stock

5. Explain how equity is reported for a corporation

6. Use earnings per share, rate of return on common stock, and the price/earnings ratio to evaluate business performance


Learning Objective 1

Identify the Identify the characteristics of characteristics of

a corporationa corporation


Advantages and Disadvantages of Corporations


Basic Stock Certificate


Categories of Stock


Stockholder Rights

• Investors receive an ownership interest in the form of shares of common stockcommon stock.

• All common stockholders have certain rights associated with ownership.

1.1. Vote (1 share = 1 vote)Vote (1 share = 1 vote)2.2. Dividends (entitled to a Dividends (entitled to a

proportionate share of proportionate share of dividends)dividends)

3.3. Liquidation (entitled to Liquidation (entitled to share in proceeds from share in proceeds from a liquidation)a liquidation)

4.4. Preemptive Ownership Preemptive Ownership Rights (entitled to Rights (entitled to maintain % ownership)maintain % ownership)


Preferred Stock

• A separate class of stock, typically having priority over common shares in . . .– Dividend distributions.– Distribution of assets in case of liquidation.

Usually callable by the company.

Usually states the dividend rate as a

percent of par value.

Normally no voting rights.


Stock Certificate

a. The maximum number of shares of stock that the corporate charter allows the corporation to issue.

Preemptive Right

b. Stock that gives its owners certain advantages over common stockholders.

Authorized Stock

c. Stockholders' right to maintain their proportionate ownership in the corporation.

Preferred Stock

d. Represents amounts received from stockholders of a corporation in exchange for stock.

Paid-in Capital e. Paper evidence of ownership in a corporation.

Match the key term to the definition.


Stock Certificate e. Paper evidence of ownership in a corporation.Preemptive RightAuthorized StockPreferred StockPaid-in Capital



Stock Certificate e. Paper evidence of ownership in a corporation.Preemptive Right


Authorized StockPreferred StockPaid-in Capital





Authorized Stock


Preferred StockPaid-in Capital





Authorized Stock


Preferred Stock


Paid-in Capital





Authorized Stock


Preferred Stock


Paid-in Capital

d. Represents amounts received from stockholders of a corporation in exchange for stock.




Journalize the Journalize the issuance of stockissuance of stock


Issuing Common Stock

1. debit Cash received

2. credit Common Stock for the number of shares issued x par value

3. credit Paid-In Capital in Excess of Par for the excess of issue price over par value


Issuing Common Stock at Par

Smart Touch Learning sells 1,000,000 shares of stock on January 1 for $1 per share. The par value of the shares is $1

per share.

Prepare the journal entry to record Prepare the journal entry to record Smart Touch Learning’s issuance of Smart Touch Learning’s issuance of

common stock.common stock.


Issuing Common Stock at Par


per share.


Issuing Common Stock at a Premium


per share.


common stock.common stock.


Issuing Common Stock at a Premium


per share.


Reporting Common Stock


Issuing Preferred Stock

Smart Touch Learning issues 1,000 shares of its $50 par, 6% preferred stock

on January 3 at $55 per share.


preferred stock.preferred stock.


Issuing Preferred Stock

Smart Touch Learning issues 1,000 shares of its $50 par, 6% preferred stock

on January 3 at $55 per share.


Reporting Preferred Stock



Account for cash Account for cash dividends, stock dividends, stock dividends, and dividends, and

stock splitsstock splits


Dividend Accounting Time Line

1. Declaration date– Board of directors declares

the dividend and it becomes a liability.

2. Record Date– Stockholders holding shares

on this date will receive the dividend.

3. Payment Date– Record the payment of the

dividend to stockholders.

Not legally required.

Requires sufficient Cash and Retained

Earnings.



1. Declaration date



1. Declaration date

2. Record Date



1. Declaration date

2. Record Date

3. Payment Date


Recording Dividends

On May 1, Smart Touch Learning’s Board of On May 1, Smart Touch Learning’s Board of Directors declares a $0.25 per share cash Directors declares a $0.25 per share cash

dividend on 2,000,000 outstanding shares of dividend on 2,000,000 outstanding shares of common stock.common stock.

Prepare the journal entry to record Prepare the journal entry to record Smart Touch Learning’s declaration of Smart Touch Learning’s declaration of

a cash dividend.a cash dividend.


Recording Dividends

On May 1, Smart Touch Learning’s Board of On May 1, Smart Touch Learning’s Board of Directors declares a $0.25 per share cash Directors declares a $0.25 per share cash

dividend on 2,000,000 outstanding shares of dividend on 2,000,000 outstanding shares of common stock.common stock.


Recording Dividends

On May 30, Smart Touch Learning pays the On May 30, Smart Touch Learning pays the dividend to its stockholders. dividend to its stockholders.

Prepare the journal entry to record Prepare the journal entry to record Smart Touch Learning’s payment of a Smart Touch Learning’s payment of a

cash dividend.cash dividend.


Recording Dividends

On May 30, Smart Touch Learning pays the On May 30, Smart Touch Learning pays the dividend to its shareholders. dividend to its shareholders.


Preferred Dividends

Preferred dividends are determined by contract Preferred dividends are determined by contract and get paid before dividends on common and get paid before dividends on common

stock.stock.

vsvs NoncumulativeNoncumulativeCumulativeCumulative

Dividends in Dividends in arrearsarrears must be must be

paid before paid before dividends may be dividends may be paid on common paid on common

stock.stock.

Dividends in Dividends in arrears do not have arrears do not have to be paid in future to be paid in future

years.years.


Preferred Dividends

Fast forward to 2016 . . .

Smart Touch Learning’s preferred stock is Smart Touch Learning’s preferred stock is cumulative. They did not declare any dividends cumulative. They did not declare any dividends

in 2015. In 2016, the Board of Directors in 2015. In 2016, the Board of Directors declares a $50,000 dividend.declares a $50,000 dividend.


Preferred Dividends

Prepare the journal entry to record Prepare the journal entry to record Smart Touch Learning’s dividend Smart Touch Learning’s dividend

declaration in 2016.declaration in 2016.


Preferred Dividends


Accounting for Stock Dividends

No change in total stockholders’ equity

All stockholders retain same percentage ownership

No change in par values

Distribution of additional shares of stock to stockholders


The Difference Between Small and Large Stock Dividends

Small Stock DividendSmall Stock Dividend•Stock dividend < 20% to 25%

•Debit R/E for the market value of stock issued.•Credit Common Stock and Paid-In Capital.

Large Stock DividendLarge Stock Dividend•Stock dividend > 20% to 25%

•Debit R/E for the par value of the shares issued.•Credit Common Stock.


Stock Splits

• Increases both the number of issued shares and outstanding shares.

• Stock after the split has a proportionately lower par value.

• Total capital amount of the common stock account does not change

Smart Touch Learning has

3,150,000 shares of $1 par value stock

outstanding. A 2-for-1 stock split will

result in 6,300,000 shares with a par value of $0.50 per

share.



Account for the Account for the purchase and sale purchase and sale of treasury stockof treasury stock


Treasury Stock

• Recorded at cost

• Appears as a contra-equity account

• No voting or dividend rights

Companies will sometimes reacquire their own Companies will sometimes reacquire their own stock from the market.stock from the market.

Companies will sometimes reacquire their own Companies will sometimes reacquire their own stock from the market.stock from the market.

Used to:•support the company’s

stock price•sell to employees at a

discount•fulfill stock option

obligations


Recording Treasury Stock

On May 31, Smart Touch Learning purchased On May 31, Smart Touch Learning purchased 1,000 shares of previously issued common 1,000 shares of previously issued common

stock, paying $5 per share.stock, paying $5 per share.

Prepare the journal entry to record the Prepare the journal entry to record the purchase of treasury stock.purchase of treasury stock.


Recording Treasury Stock

On May 31, Smart Touch Learning purchased On May 31, Smart Touch Learning purchased 1,000 shares of previously issued common 1,000 shares of previously issued common

stock, paying $5 per share.stock, paying $5 per share.


Reporting Treasury Stock



Explain how equity Explain how equity is reported for a is reported for a

corporationcorporation


Statement of Retained Earnings

Shows how the R/E balance changed Shows how the R/E balance changed during the period.during the period.


Prior-Period Adjustments

• Errors from prior periods that must be corrected to make the R/E balance correct.

• Adjust beginning R/E.


Statement of Stockholders’ Equity

Shows the changes in all equity accounts for Shows the changes in all equity accounts for the period.the period.


Sjostrom, Inc. had beginning retained Sjostrom, Inc. had beginning retained earnings of $300,000 on January 1, 2014. earnings of $300,000 on January 1, 2014. During the year, Sjostrom declared and During the year, Sjostrom declared and

paid $140,000 of cash dividends and paid $140,000 of cash dividends and earned $200,000 of net income. earned $200,000 of net income.

Prepare a statement of retained earnings Prepare a statement of retained earnings for Sjostrom, Inc. for the year ending for Sjostrom, Inc. for the year ending

December 31, 2014.December 31, 2014.



Use earnings per Use earnings per share, rate of return share, rate of return on common stock, on common stock,

and the and the price/earnings ratio price/earnings ratio to evaluate business to evaluate business

performanceperformance


Earnings Per Share

• A measure of the net income of the company expressed as an amount per each share of common stock outstanding.

• Companies report earnings per share only for common stock.

• EPS is reported on the income statement.

Earnings Per Share

= (Net

Income -

Preferred Dividends

) ÷Avg # of common

shares outstanding


Earnings Per Share

• Using the numbers below, compute the EPS for Green Mountain Coffee Roasters


Earnings Per Share

Earnings Per Share

= ( Net Income - Preferred Dividends

) ÷Avg # of common

shares outstanding = ( 199,501,000 - 0 ) ÷ 143,645,024 = 1.39$ per share


Price/Earnings Ratio

• Ratio of market price of a share of common Ratio of market price of a share of common stock to the company’s earnings per share.stock to the company’s earnings per share.

• A higher PE Ratio signifies a higher return on A higher PE Ratio signifies a higher return on investment.investment.


=

Market Price per share of common stock

÷Earnings Per

Share



Assuming Green Mountain Coffee Assuming Green Mountain Coffee Roasters, Inc. has a market price of Roasters, Inc. has a market price of

$17.90 per share of common stock. Their $17.90 per share of common stock. Their EPS is $1.39 per share.EPS is $1.39 per share.


= Market Price per share

of common stock÷

Earnings Per Share



Assuming Green Mountain Coffee Assuming Green Mountain Coffee Roasters, Inc. has a market price of Roasters, Inc. has a market price of

$17.90 per share of common stock. Their $17.90 per share of common stock. Their EPS is $1.39 per share.EPS is $1.39 per share.



of common stock÷

Earnings Per Share

= $17.90 ÷ $1.39

= 12.88


Rate of Return on Common Stock

• Also called Return on EquityAlso called Return on Equity

• Using the information for Green Mountain Using the information for Green Mountain Coffee Roasters, compute Return on EquityCoffee Roasters, compute Return on Equity

Return on Equity


) ÷Avg. common

stockholder's equity


Rate of Return on Common Stock

Return on Equity


) ÷Avg. common

stockholder's equity = ( 199,501,000 - 0 ) ÷ 1,305,730,000 = 15%


Compute Vollmer Inc.’s EPS for 2015Compute Vollmer Inc.’s EPS for 2015


Earnings Per Share


) ÷Avg # of common

shares outstanding = ( 80,000 - 2000 ) ÷ 12,000 = 6.50$ per share


Compute Vollmer Inc.’s P/E Ratio for 2015, Compute Vollmer Inc.’s P/E Ratio for 2015, assuming that the market price is $40 per assuming that the market price is $40 per

common share.common share.©2014 Pearson Education, Inc. Publishing as Prentice Hall 13-64



of common stock÷

Earnings Per Share

= $40.00 ÷ $6.50 = 6.15


Compute Vollmer Inc.’s Return on Compute Vollmer Inc.’s Return on Common Stockholders Equity for 2015.Common Stockholders Equity for 2015.


Return on Equity


) ÷Avg. common

stockholder's equity = ( 80,000 - 2000 ) ÷ 305,000 = 25.6%


End of Chapter 13


Stockholders’ Equity Chapter 13 ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-1.

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Transcript of Stockholders’ Equity Chapter 13 ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-1.