Corporations: Stock Values, Dividends, Treasury Stock, and Retained Earnings Chapter 20

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

Learning Unit 20-1 n Corporations often reserve the right to retire or redeem preferred stock at a specific price. This price is called redemption value. n Market value is the market value per share in the stock market.

Book value preferred = Redemption value + Dividends in arrears ÷ Number of shares outstanding Book value preferred = Redemption value + Dividends in arrears ÷ Number of shares outstanding Book value per share = Total stockholders’ equity ÷ Total shares outstanding Book value per share = Total stockholders’ equity ÷ Total shares outstanding Book value common = Stockholders’ equity – Amount assigned to preferred ÷ Number of shares outstanding Book value common = Stockholders’ equity – Amount assigned to preferred ÷ Number of shares outstanding Learning Unit 20-1

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 894,000 Total Stockholders’ Equity$1,254,000 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 894,000 Total Stockholders’ Equity$1,254,000 Book value per share: $1,254,000 ÷ 10,000 = $ Learning Unit 20-1

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, Preferred Stockholders$210,000 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, Preferred Stockholders$210,000 Redemption value=$206,000 Dividends in arrears=$ 14,000 Redemption value=$206,000 Dividends in arrears=$ 14,000 Learning Unit 20-1 Stockholders’ Equity

Book value per share preferred: $206,000 + $14,000 ÷ 2,000 = $110 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 Book value per share common: $894,000 – 220,000 ÷ 10,000 = $67.40 Learning Unit 20-1

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

Date of declaration Date of record Date of payment Learning Unit 20-2 There are three important dates associated with the dividend process.

Accounts Affected Category Rules Retained Earnings SE Dr. 10,000 Dividends Payable Liability Cr. 10,000 Retained Earnings SE Dr. 10,000 Dividends Payable Liability Cr. 10,000 On March 8, 200x, the board declares a $2 cash dividend per share on the 5,000 shares issued and outstanding. Learning Unit 20-2

Learning Unit 20-2 n A stock dividend is a distribution of the corporation’s own stock to shareholders. n It is a transfer of retained earnings to contributed capital. n It does not affect total stockholders’ equity.

Learning Unit 20-2 Jesse Company, 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? n 10,000 × 10% = 1,000 shares

Learning Unit 20-2 Retained Earnings30,000 Common Stock – Dividend Distributable20,000 Paid-In Capital in Excess10,000 Declaration of a 10% common stock dividend Retained Earnings30,000 Common Stock – Dividend Distributable20,000 Paid-In Capital in Excess10,000 Declaration of a 10% common stock dividend

Learning Unit 20-2 n Results of a stock split: – increases the number of shares outstanding – reduces the par or stated value in proportion – increases stock prices in the market – dividends per share increased

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

Learning Unit 20-3 n Treasury stock is the corporation’s own shares of issued stock. n Treasury stock has a debit balance. n It is not an asset. n The corporation buys the shares on the stock market, or directly from shareholders.

Learning Unit 20-3 n The stock is held in the treasury and used for issuance in stock options plans, etc. n Dividends are not paid on the treasury stock. n It is not outstanding.

Learning Unit 20-3 On June 1, 200x, Ashley 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? n Treasury Stock—Common 12,000 Cash 12,000 Purchase of previously issued stock

Learning Unit 20-3 n Stockholders’ equity (before purchase of treasury stock): n Paid-in capital: common stock, $10 par, 5,000 issued$ 50,000 +Paid-in capital in excess of par 30,000 =Total paid-in capital$ 80,000 +Retained earnings 60,000 =Total stockholders’ equity$140,000

Learning Unit 20-3 n After purchase of treasury stock: n Common stock, $10 par, 5,000 issued, 4,000 outstanding$ 50,000 +Paid-in capital in excess of par 30,000 +Retained earnings 60,000 =Subtotal$140,000 –Treasury stock, 1,000 shares at cost 12,000 =Total stockholders’ equity$128,000

Learning Unit 20-3 n Treasury stock can be reissued at a price above or below the cost of reacquiring the stock. n Excess of sales price over cost is credited to Paid-in Capital from Treasury Stock. n Assume that on July 8, Ashley Corporation sells 100 shares of treasury stock at $15.

Cash1,500 Treasury Stock1,200 Paid-In Capital from Treasury Stock 300 Sold 100 shares of treasury stock Cash1,500 Treasury Stock1,200 Paid-In Capital from Treasury Stock 300 Sold 100 shares of treasury stock Learning Unit 20-3

Preparing a statement of retained earnings. Learning Objective 4

Learning Unit 20-4 n Retained earnings appropriation is the amount of retained earnings that is not available for dividends. n No actual cash “set asides” are involved in the appropriation of retained earnings.

Learning Unit 20-4 n It can be noted in a memo entry or an actual journal entry that debits Retained Earnings and credits Appropriation (for a purpose). n The restriction can be contractual or voluntary.

Statement of Retained Earnings Beginning Retained Earnings Less:Prior Period Adjustments Error corrections Net loss Add:Net Income Error corrections Deduct:Dividends Equals:Ending Retained Earnings Beginning Retained Earnings Less:Prior Period Adjustments Error corrections Net loss Add:Net Income Error corrections Deduct:Dividends Equals:Ending Retained Earnings Learning Unit 20-4

Raymond Company Statement of Retained Earnings Year Ended December 31, 20x3 Retained Earnings, Jan. 1, 20x3$350,000 Less: Prior Period Adjustments: Correction of 20x1 error 12,000 Retained Earnings, Jan, 20x3, corrected$338,000 Add: Net Income for 20x3 40,000 Total$378,000 Deduct: Dividends declared in 20x3 25,000 Retained Earnings, Dec. 31, 20x3$353,000 Retained Earnings, Jan. 1, 20x3$350,000 Less: Prior Period Adjustments: Correction of 20x1 error 12,000 Retained Earnings, Jan, 20x3, corrected$338,000 Add: Net Income for 20x3 40,000 Total$378,000 Deduct: Dividends declared in 20x3 25,000 Retained Earnings, Dec. 31, 20x3$353,000 Learning Unit 20-4

End of Chapter 20