Slide 13-2
Chapter 11Corporations: Corporations:
Organization, Stock Organization, Stock Transactions, Dividends, and Transactions, Dividends, and
Retained EarningsRetained Earnings
Financial Accounting, Seventh Edition
Slide 13-3
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.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Slide 13-4
Cash dividendsCash dividends
Stock dividendsStock dividends
Stock splitsStock splits
Corporate Corporate Organization and Organization and
Stock Stock TransactionsTransactions
Corporate Corporate Organization and Organization and
Stock Stock TransactionsTransactions
Corporate form of Corporate form of organizationorganization
Common stock Common stock issuesissues
Treasury stockTreasury stock
Preferred stockPreferred stock
Retained earnings Retained earnings restrictionsrestrictions
Prior period Prior period adjustmentsadjustments
Retained earnings Retained earnings statementstatement
DividendsDividendsDividendsDividends Retained Retained EarningsEarningsRetained Retained EarningsEarnings
Statement Statement Presentation and Presentation and
AnalysisAnalysis
Statement Statement Presentation and Presentation and
AnalysisAnalysis
Corporations: Organization, Stock Transactions, Corporations: Organization, Stock Transactions, Dividends, and Retained EarningsDividends, and Retained Earnings
Corporations: Organization, Stock Transactions, Corporations: Organization, Stock Transactions, Dividends, and Retained EarningsDividends, and Retained Earnings
PresentationPresentation
AnalysisAnalysis
Slide 13-5
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
Not-for-Profit
For Profit
Classified by Ownership
Publicly held
Privately held
McDonald’s Ford Motor Company PepsiCo Google
Salvation Army American Cancer
Society Gates
Foundation
Cargill Inc.
Slide 13-6
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.
Slide 13-7
Characteristics that distinguish corporations from proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Corporation acts under its own name rather than in the name of its stockholders.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Slide 13-8
Characteristics that distinguish corporations from proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Limited to their investment.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Slide 13-9
Characteristics that distinguish corporations from proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Shareholders may sell their stock.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Slide 13-10
Characteristics that distinguish corporations from proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Corporation can obtain capital through the issuance of stock.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Slide 13-11
Characteristics that distinguish corporations from proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Slide 13-12
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics that distinguish corporations from proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Separation of ownership and management prevents owners from having an active role in managing the company.
Slide 13-13
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics that distinguish corporations from proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Slide 13-14
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics that distinguish corporations from proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends.
Slide 13-15
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.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
Slide 13-17
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
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.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.
Slide 13-18
1. Vote in election of board of directors and on actions that require stockholder approval.
Stockholders have the right to:
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
2. Share the corporate earnings through receipt of dividends.
Illustration 11-3
Slide 13-19
3. Keep the same percentage ownership when new shares of stock are issued (preemptive right*).
Stockholders have the right to:
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
* A number of companies have eliminated the preemptive right.
Illustration 11-3
Slide 13-20
4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.
Stockholders have the right to:
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Illustration 11-3
Slide 13-21
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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
Slide 13-22
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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.
Authorized Stock
Slide 13-23
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Corporation can issue common stock directly to investors or indirectly through an investment banking firm.
Factors in setting 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
Slide 13-24
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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
Slide 13-26
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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
Slide 13-27
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained Retained EarningsEarningsAccountAccount
Retained Retained EarningsEarningsAccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred StockAccountAccount
Preferred StockPreferred StockAccountAccount
Corporate CapitalCorporate CapitalCorporate CapitalCorporate Capital
Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Slide 13-28
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained Retained EarningsEarningsAccountAccount
Retained Retained EarningsEarningsAccountAccount
Additional Paid-Additional Paid-in Capitalin CapitalAccountAccount
Additional Paid-Additional Paid-in Capitalin CapitalAccountAccount
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred StockAccountAccount
Preferred StockPreferred StockAccountAccount
Corporate CapitalCorporate CapitalCorporate CapitalCorporate Capital
Retained earnings is net income that a corporation retains for future use.
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Slide 13-29
Corporate CapitalCorporate CapitalCorporate CapitalCorporate Capital
Comparison of the owners’ equity (stockholders’ equity) accounts reported on a balance sheet for a proprietorship and a corporation.
Illustration 11-6
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Slide 13-30
At the end of its first year of operation, Doral
Corporation has $750,000 of common stock
and
Solution on notes page
net income of $122,000. Prepare (a) the closing entry for net
income and (b) the stockholders’ equity section at year-end.
Corporate CapitalCorporate CapitalCorporate CapitalCorporate Capital
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Slide 13-31
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.
Slide 13-32
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
Common stock (1,000 x $1)
1,000Paid-in capital in excess of par value
4,000
a.
b.
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.
Issuing Par Value Common Stock for Cash
Slide 13-33
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.
Illustration 11-7
Slide 13-34
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
Common stock (5,000 x $5)
25,000Paid-in capital in excess of stated value
15,000
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.
Issuing No-Par Common Stock for Cash
Prepare the entry assuming there is no stated value?
Cash 40,000
Common stock
40,000
Slide 13-35
Issuing Common Stock for Services orNoncash Assets
Corporations also may issue stock for:
Services (attorneys or consultants).
Noncash assets (land, buildings, and equipment).
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.
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.
Slide 13-36
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
Common stock (4,000 x $1)
4,000Paid-in capital in excess of par
1,000
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
Slide 13-37
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
Common stock (10,000 x $5)
50,000Paid-in capital in excess of par
30,000
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
Slide 13-38
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained Retained EarningsEarningsAccountAccount
Retained Retained EarningsEarningsAccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Less:Less:Treasury StockTreasury Stock
Account
Less:Less:Treasury StockTreasury Stock
Account
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred StockAccountAccount
Preferred StockPreferred StockAccountAccount
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.
Slide 13-39
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.
Slide 13-40
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.
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.
Slide 13-41
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.
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.
Illustration 11-8
Slide 13-42
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.
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
Slide 13-44
Disposal of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders’ equity.
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.
Slide 13-45
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.
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.
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.
Slide 13-46
Paid-in capital treasury stock 800
Illustration: On February 1, 2011, Mead acquired 4,000 shares of its stock at $8 per share.
On Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share.
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.
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
Slide 13-47
Paid-in capital treasury stock 1,200
Illustration: On February 1, 2011, Mead acquired 4,000 shares of its stock at $8 per share.
On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share.
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.
Dec. 1
Retained earnings 1,000
Cash 15,400
Treasury stock (2,200 x $8)
17,600
Below Cost
Limited to
balance on hand
Slide 13-48
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.
Slide 13-49
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.
SO 4 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred 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.
Slide 13-50
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.
SO 4 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
Slide 13-51
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.
Slide 13-52
Dividends require information concerning three dates:
DividendsDividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Illustration 11-12
Slide 13-53
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
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-54
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)
Retained earnings 50,000
Dividends payable 50,000
December 22 (Date of Record)
January 20 (Payment Date)
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Dividends payable 50,000
Cash 50,000
No entry
Cash DividendsCash Dividends
Slide 13-55
Allocating Cash Dividends Between Preferred and Common Stock
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends.
Cash DividendsCash Dividends
Slide 13-56 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.
Retained earnings 6,000
Dividends payable
6,000Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000
Cash DividendsCash Dividends
Slide 13-57 SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock
dividends.dividends.
2011 2012
Dividends declared 6,000$
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
Cash DividendsCash Dividends
Slide 13-58 SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock
dividends.dividends.
Retained earnings 50,000
Dividends payable
50,000
Illustration: At December 31, 2012, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend.
Cash DividendsCash Dividends
Slide 13-60
Stock Dividends
Pro rata distribution of the corporation’s own stock.
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Results in decrease in retained earnings and increase in paid-in capital.
Illustration 11-14
Slide 13-61
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.
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-62
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)
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
* This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares.
*
Slide 13-63
10% stock dividend is declared
Retained earnings (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 $15 per share.
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-64
Stockholders' equityPaid-in capital
Common stock 500,000$ Common stock dividends distributable 50,000
Total stockholders' equity 550,000$
Medland CorporationBalance Sheet (partial)
Stockholders’ Equity with Dividends Distributable
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Illustration 11-15
Slide 13-65
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Effects of Stock DividendsIllustration 11-16
Slide 13-66
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
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-67
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
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-68
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
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-69
Illustration: Assume Medland Corporation splits its
50,000 shares of common stock on a 2-for-1 basis.
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Illustration 11-17
Results in a reduction of the par or stated value per share.
Stock SplitsStock Splits
Slide 13-70
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.
Slide 13-71
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Retained Earnings RestrictionsRetained Earnings Restrictions
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Illustration 11-22
Slide 13-72
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
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Slide 13-73
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 $50,000 error (net of tax) that caused the 2010 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2010. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2011?
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Prior Period AdjustmentsPrior Period Adjustments
Slide 13-74
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2011
Balance, January 1, as previously reported 1,050,000$ 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$
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Prior Period AdjustmentsPrior Period Adjustments
Slide 13-75
Retained Earnings StatementRetained Earnings Statement
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
The company prepares the statement from the Retained Earnings account.
Illustration 11-24
Slide 13-76
Retained Earnings StatementRetained Earnings Statement
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Illustration 11-25
Slide 13-77
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
Retained Earnings StatementRetained Earnings Statement
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Slide 13-78
SO 7
Statement Presentation and AnalysisStatement Presentation and Analysis
Illustration 11-26
Slide 13-79
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.
Slide 13-80
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
Slide 13-81
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
Slide 13-82
While home-equity loans tend to have fixed rates, home-equity lines of credit, which allow the homeowner to borrow up to a certain amount whenever they want to, have variable rates. Rates on home-equity lines of credit averaged 8.33% in April 2006, versus about 14% for credit card debt.
Home-equity loan interest is tax-deductible (like home mortgage interest). Interest on car loans, most student loans, and credit cards is not.
Slide 13-83
Home-equity loans can be very tempting. Suppose that you wanted to borrow $5,000to take a vacation. You could spread your payments over 15 years and you would haveto pay only about $50 per month. But look what your total payments would be over thelife of the 15-year loan. Some vacation!
Slide 13-84
Your home has increased in value by $50,000 during the last five years. You have very little savings outside of the equity in your home. You desperately need a vacation, and you are considering taking out a $5,000 home-equity loan to finance a two-week dream vacation in Europe. Is this is a bad idea?YES: This represents a significant portion of your savings. Home-equity loans should be used to finance investments of a lasting nature, not items of a fleeting nature like vacations.
NO: You need a vacation. If you use a little of the equity in your home now, you can make it up when your house increases in value in the future.
Slide 13-85
Stockholders’ Equity StatementStockholders’ Equity Statement
SO 8 Describe the use and content of the stockholders’’ SO 8 Describe the use and content of the stockholders’’ statement.statement.
Appendix Appendix 11A11A
Illustration 11A-1
When a stockholders’ equity statement is presented, a retained earnings statement is not necessary.
Slide 13-86
Book Value—Another Per-Share AmountBook Value—Another Per-Share Amount
Appendix Appendix 11B11B
Illustration 11B-1
The equity a common stockholder has in the net assets of the corporation.
Book Value per Share
SO 9 Compute book value per share.SO 9 Compute book value per share.
Slide 13-87
Book Value—Another Per-Share AmountBook Value—Another Per-Share Amount
Appendix Appendix 11B11B
The computation of book value per share involves the following steps.
1. Compute the preferred stock equity. This equity is equal to the sum of the call price of preferred stock plus any cumulative dividends in arrears. If the preferred stock does not have a call price, the par value of the stock is used.
2. Determine the common stock equity. Subtract the preferred stock equity from total stockholders’ equity.
3. Determine book value per share. Divide common stock equity by shares of common stock outstanding.
Book Value per Share
SO 9 Compute book value per share.SO 9 Compute book value per share.
Slide 13-88
Book Value—Another Per-Share AmountBook Value—Another Per-Share Amount
Appendix Appendix 11B11BIllustration: using the stockholders’ equity section of
Graber Inc. shown in Illustration 11-26. Graber’s preferred stock is callable at $120 per share and is cumulative. Assume that dividends on Graber’s preferred stock were in arrears for one year, $54,000 (6,000 $9). The computation of preferred stock equity (Step 1 in the preceding list) is:
Illustration 11B-2
SO 9 Compute book value per share.SO 9 Compute book value per share.
Slide 13-89
Book Value—Another Per-Share AmountBook Value—Another Per-Share Amount
Computation of book value:
Illustration 11B-2
Illustration 11B-3
SO 9 Compute book value per share.SO 9 Compute book value per share.
Slide 13-90
Book Value—Another Per-Share AmountBook Value—Another Per-Share Amount
SO 9 Compute book value per share.SO 9 Compute book value per share.
Appendix Appendix 11B11B
The correlation between book value and the annual range of a company’s market value per share is often remote.
Book Value versus Market Value
Illustration 11B-4
Slide 13-91
“Copyright © 2010 John Wiley & Sons, Inc. All rights
reserved. Reproduction or translation of this work beyond
that permitted in Section 117 of the 1976 United States
Copyright Act without the express written permission of
the copyright owner is unlawful. Request for further
information should be addressed to the Permissions
Department, John Wiley & Sons, Inc. The purchaser may
make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by
the use of these programs or from the use of the
information contained herein.”
CopyrightCopyrightCopyrightCopyright
Top Related