Corporations: Stock Values, Dividends, Treasury Stock, and Retained Earnings Chapter 19 2

Calculating the book value of preferred and common stock. Learning Objective 1 Calculating the book value of preferred and common stock. 4

Learning Unit 19-1 (Understanding Values) Redemption Value Market Value 4

Learning Unit 19-1 (Understanding Values) Book value per share Total stockholders’ equity Total shares outstanding = Book value preferred Redemption value + Dividends in arrears Number of shares of preferred stock outstanding = Book value common Stockholders’ equity – Amount assigned to preferred Number of shares of common stock outstanding =

Learning Unit 19-1 (Understanding Values) Stockholders’ Equity Paid-in Capital: Common Stock, $25 par value, 10,000 shares authorized, issued, and outstanding $250,000 Paid-in capital in excess of par – common 110,000 Total paid-in capital $360,000 Retained earnings 90,000 Total stockholders’ equity $450,000 Book value per share: $450,000 ÷ 10,000 = $45

Learning Unit 19-1 (Understanding Values) Ryan Corporation Stockholders’ Equity Paid-in capital: Preferred 7% stock, $100 par value, authorized 3,000 shares cumulative and nonparticipating, 2,000 shares issued and outstanding $200,000 Paid-in capital in excess of par – preferred 10,000 Total paid-in capital by preferred stockholders $210,000 Common stock, $50 par value, authorized 12,000 shares, 10,000 shares issued and outstanding 500,000 Paid-in capital in excess of par value – common 20,000 Total paid-in capital by common stockholders 520,000 Total paid-in capital $730,000

Learning Unit 19-1 (Understanding Values) Ryan Corporation Stockholders’ Equity Total paid-in capital $730,000 Retained earnings 164,000 Total stockholders’ equity $894,000 Redemption value ($103/share × 2,000 shares) $206,000 Dividends in arrears 14,000 (220,000) Equity allocated to common stock $674,000 Book value per share preferred: $206,000 + $14,000 ÷ 2,000 = $110 Book value per share common: $894,000 – 220,000 ÷ 10,000 = $67.40

Journalizing entries to record issuance of a cash dividend Learning Objective 2 Journalizing entries to record issuance of a cash dividend and a stock dividend. 4

Learning Unit 19-2 (Dividends) Date of declaration Date of record Date of payment 4

Learning Unit 19-2 (Dividends) On March 8, 20xx, the board of Tell Corporation declares a $2 cash dividend per share on the 5,000 shares issued and outstanding. Accounts Affected Category Rules Retained Earnings SE Dr. 10,000 Dividends Payable Liability Cr. 10,000

Learning Unit 19-2 (Dividends) A stock dividend is a distribution of the corporation’s own stock to shareholders. It is a transfer of Retained Earnings to Paid-in Capital. It does not affect total stockholders’ equity.

Learning Unit 19-2 (Dividends) Jesse Corporation, with 10,000 shares of $20 par value common stock outstanding, declares a 10% stock dividend when the shares are trading at $30. How many shares are issued in the dividend? 10,000 × 10% = 1,000 shares

Learning Unit 19-2 (Dividends) Retained Earnings 30,000 Common Stock Dividend Distributable 20,000 Paid-In Capital in Excess of Par Value – Stock Dividend 10,000 Declaration of a 10% common stock dividend

Learning Unit 19-2 (Dividends) A stock split will... 1 increase the number of shares outstanding. 2 reduce the par or stated value in proportion. 6

Journalizing the purchase and sale of treasury stock. Learning Objective 3 Journalizing the purchase and sale of treasury stock. 4

Learning Unit 19-3 (Treasury Stock) Treasury stock is the corporation’s own shares of issued stock. Treasury stock has a debit balance. It is not an asset. The corporation buys the shares on the stock market, or directly from shareholders.

Learning Unit 19-3 (Treasury Stock) The stock is held in the treasury and used for issuance in stock options plans, etc. Dividends are not paid on the treasury stock. It is not outstanding.

Learning Unit 19-3 (Treasury Stock) On June 1, 20xx, Ashly Corporation purchased 1,000 shares of its own $10 par value common stock at $12 per share (5,000 shares are outstanding). What is the journal entry? Treasury Stock – Common 12,000 Cash 12,000 Purchase of previously issued stock

Learning Unit 19-3 (Treasury Stock) Treasury stock can be reissued at a price above or below the cost of reacquiring the stock. Excess of sales price over cost is credited to Paid-in Capital from Treasury Stock. Assume that on July 8, Ashly Corporation sells 100 shares of treasury stock at $15.

Learning Unit 19-3 (Treasury Stock) Cash 1,500 Treasury Stock – Common 1,200 Paid-In Capital from Treasury Stock 300 Sold 100 shares of treasury stock

Learning Objective 4 Preparing a statement of retained earnings. 4

Learning Unit 19-4 (Appropriations of Retained Earnings) Retained earnings appropriation is the amount of retained earnings that is not available for dividends. No actual cash “set asides” are involved in the appropriation of retained earnings.

Learning Unit 19-4 (Appropriations of Retained Earnings) It can be noted in a memo entry or an actual journal entry that debits Retained Earnings and credits Appropriation (for a purpose). The restriction can be contractual or voluntary.

Learning Unit 19-4 (Appropriations of Retained Earnings) Ralston Company Statement of Retained Earnings Year Ended December 31, 20x2 Retained earnings, Jan. 1, 20x2 $350,000 Less: Prior period adjustment: Correction of 20x1 error 12,000 Retained earnings, Jan, 20x2, corrected $338,000 Add: Net income for 20x2 40,000 Total $378,000 Deduct: Dividends declared in 20x2 28,000 Retained earnings, Dec. 31, 20x2 $350,000

End of Chapter 19