Reporting and Interpreting Owners’ Equity Chapter 11 Reporting and Interpreting Owners’ Equity

Business Background Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limited liability

Because a corporation is a separate legal entity, it can . . . Business Background Because a corporation is a separate legal entity, it can . . . Own assets Sue and be sued Incur liabilities Enter into contracts

Ownership of a Corporation Voting (in person or by proxy) Proportionate distribution of profits Proportionate distribution of assets in a liquidation Shareholders Rights

Ownership of a Corporation Elected by shareholders Appointed by directors

Authorized, Issued, and Outstanding Shares The maximum number of shares that can be sold to the public. This is frequently set to an unlimited amount to provide maximum flexibility to the corporation.

Authorized, Issued, and Outstanding Shares Issued shares are authorized shares that have been sold. Unissued shares are authorized shares that never have been sold.

Authorized, Issued, and Outstanding Shares Treasury shares are issued shares that have been reacquired by the corporation. In Canada, reacquired shares are usually cancelled. Outstanding shares are issued shares that are owned by shareholders. Authorized Shares Outstanding Shares Unissued Shares Issued Shares Treasury Shares

Types of Share Capital Common Shares Preferred Shares

Ranks after preferred shares Dividend set by board of directors Common Shares Basic voting shares Ranks after preferred shares Dividend set by board of directors

Par Value and No-par Value Shares Nominal value Legal capital Legal capital is the amount of capital that must remain invested in the business until it is liquidated.

Par Value and No-par Value Shares  Par Value Market Value I get it!

Some states do not require that a par value be stated in the charter. No-par Value Shares Some states do not require that a par value be stated in the charter. The Canada Business Corporations Act, and most Provincial Charters do not require a par value to be stated in the charter.

Preferred Shares Preference over common shares Usually has no voting rights Usually has a fixed dividend rate

Special Features of Preferred Shares Convertible preferred shares may be exchanged for common shares. Callable preferred shares may be repurchased by the corporation at a predetermined price.

Accounting for Share Capital Two primary sources of shareholders’ equity Retained earnings Share capital

Sale and Issuance of Capital Shares Initial public offering (IPO) Seasoned new issue The first time a corporation sells shares to the public Subsequent sales of new shares to the public BCE BCE issues new shares

Secondary Markets Transactions between two investors that do not affect the corporation’s accounting records. I’d like to sell some of my BCE shares. I’d like to buy some of your BCE shares.

Sale and Issuance of Shares On July 6, BCE issued 100,000 common shares for $22 per share. Prepare the journal entry to record this transaction.

Sale and Issuance of Shares On July 6, BCE issued 100,000 common shares for $22 per share. 100,000 shares × $22 = $2,200,000 100,000 shares × $22 per share = $2,200,000

Shares Sold for Non-cash Assets and/or Services BCE Issues shares Provides accounting services Accountant Record assets or services received at the market value of the shares at the date of the transaction.

Shares Sold for Non-cash Assets and/or Services BCE Issues shares Provides accounting services Accountant If the market value of the shares cannot be determined, then the market value of the assets or services received should be used.

Shares Sold for Non-cash Assets and/or Services On March 14, BCE issued 10,000 common shares to the Rose Law firm. The share was selling for $15. Prepare the journal entry to record this transaction.

Capital Stock Sold for Noncash Assets and/or Services On March 14, BCE issued 10,000 common shares to the Rose Law firm. The share was selling for $15. 10,000 shares × $15 per share = $150,000 10,000 shares × $15 = $150,000

Management compensation package includes salary and stock options. BCE If BCE does not have new shares to issue when the stock options are exercised, then . . Management compensation package includes salary and stock options. Stock options allow management to purchase shares from the corporation at a fraction of the share price in the secondary market. Management

Repurchase of Shares BCE buys its own shares in BCE Shareholders the secondary market. Management compensation package includes salary and stock options. Stock options allow management to purchase stock from the corporation at a fraction of the share price in the secondary market. Management

Repurchased Shares Most Canadian corporations cancel repurchased shares. For example, if BCE reacquired 100,000 common shares at $22 per share on May 1, the journal entry would be . . . .

Accounting for Cash Dividends Declared by board of directors Not legally required Creates liability at declaration Requires sufficient retained earnings and cash

Dividend Dates Declaration date Board of directors declares the dividend. Record a liability.

Dividend Dates Date of Record Shareholders holding shares on this date will receive the dividend. (No entry) X

Dividend Dates Date of Payment Record the payment of the dividend to shareholders.

Dividend Yield Dividend Yield Dividends Per Share Market Price Per Share = The 2001 dividend per common share for BCE is $1.20. The market price is $36.00 This ratio is often used to compare the dividend-paying performance of different investment alternatives.

Dividend Yield Dividend Yield Dividends Per Share Market Price Per Share = Dividend Yield $1.20 $36.00 = = 3.3% This ratio is often used to compare the dividend-paying performance of different investment alternatives.

Dividend Yield This ratio is often used to compare the dividend-paying performance of different investment alternatives.

Dividends on Preferred Shares Current Dividend Preference: The current preferred dividends must be paid before paying any dividends on common shares. Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before dividends on common shares are paid.

Dividends on Preferred Shares If the preferred share is noncumulative, any dividends not declared in previous years are lost permanently.

Dividends on Preferred Shares Kites, Inc. has the following types of shares outstanding: Common shares: 40,000 shares Preferred shares: $1.20, 5,000 shares Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000. How much will each class of shares receive?

Dividends on Preferred Shares

Dividends on Preferred Stock

Dividends Question On November 1, 2003 a corporation’s board of directors declared a dividend for its 10,000 outstanding shares. The dividend is $2 per share, and will be paid on December 1. Which of the following will be included in the December 1 entry? a. Debit Retained Earnings, $20,000. b. Debit Dividends Payable, $20,000. c. Credit Dividends Payable, $20,000. d. Credit Preferred Shares, $20,000.

Dividends Question On November 1, 2003 a corporation’s board of directors declared a dividend for its 10,000 outstanding shares. The dividend is $2 per share, and will be paid on December 1. Which of the following will be included in the December 1 entry? a. Debit Retained Earnings $20,000. b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000.

Focus on Cash Flows BCE

Accounting for Stock Dividends Distribution of additional shares to shareholders No change in total shareholders’ equity All shareholders retain the same percentage ownership Retained earnings decrease

Stock Dividends Small Large Stock dividend < 25% Record at current market value per share Record at average issue price per share

Stock Splits Distributions of 100% or more of outstanding shares to shareholders Ice Cream Parlor Banana Splits On Sale Now

Stock Splits Assume that a corporation had 5,000 shares outstanding with a book value of $5,000 before a 2–for–1 stock split.

Stock Splits Assume that a corporation had 5,000 shares outstanding with a book value of $5,000 before a 2–for–1 stock split. Increase No Change Decrease

Restrictions on Retained Earnings If I lend you $150,000, I will want you to restrict your retained earnings. Why would you want to do that?

Restrictions on Retained Earnings Because I want to restrict the amount you can pay out in dividends.

In 2001, BCE earned $459,000,000 and paid $1,033,000,000 in dividends. Dividend Payout Ratio Dividend Payout = Dividends Net Income In 2001, BCE earned $459,000,000 and paid $1,033,000,000 in dividends. This ratio indicates the portion of current earnings paid to shareholders in the form of dividends.

Dividend Payout Ratio Dividend Payout = Dividends Net Income 1,033 459 = 225% This ratio indicates the portion of current earnings paid to shareholders in the form of dividends.

Dividend Payout Ratio This ratio is often used to compare the dividend policy of different investment alternatives.

Accounting and Reporting for Unincorporated Businesses

C’mon Chester! With your smarts and my savvy, we could make a great partnership!! End of Chapter 11