© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Chapter 11 Reporting and Interpreting Owners’ Equity

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Business Background Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limited liability

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Business Background Because a corporation is a separate legal entity, it can... Own assets. Sue and be sued. Incur liabilities. Enter into contracts.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Ownership of a Corporation Rights ¶Voting (in person or by proxy). ·Proportionate distributions of profits. ¸Proportionate distributions of assets in a liquidation. Stockholders

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Ownership of a Corporation Elected by shareholders Appointed by directors

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Authorized, Issued, and Outstanding Capital Stock The maximum number of shares of capital stock that can be sold to the public. Authorized Shares

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Authorized, Issued, and Outstanding Capital Stock Authorized Shares Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Authorized, Issued, and Outstanding Capital Stock Authorized Shares Unissued Shares Treasury Shares Outstanding Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Outstanding shares are issued shares that are owned by stockholders.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Types of Capital Stock Common Stock Preferred Stock

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Common Stock Basic voting stock Ranks after preferred stock Dividend set by board of directors

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Par Value and No-par Value Stock Legal capital is the amount of capital, required by the state, that must remain invested in the business. Par Value Nominal value Legal capital

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Par Value Market Value  I get it!

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Special Features of Preferred Stock Convertible preferred stock may be exchanged for common stock. Callable preferred stock may be repurchased by the corporation at a predetermined price.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Accounting for Capital Stock Two primary sources of stockholders’ equity Retained earnings Contributed capital Par value Additional paid-in capital

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Sale and Issuance of Capital Stock Initial public offering (IPO) Seasoned new issue The first time a corporation sells stock to the public. Subsequent sales of new stock to the public. Wal-Mart issues new stock. Wal-Mart

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Secondary Markets Transactions between two investors that do not affect the corporation’s accounting records.(Like when you buy and sell stock) I’d like to sell some of my Wal-Mart stock. I’d like to buy some of your Wal-Mart stock.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Sale and Issuance of Capital Stock On July 6, Wal-Mart issued 100,000 shares of $0.10 par value common stock for $22 per share. Prepare the journal entry to record this transaction.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Sale and Issuance of Capital Stock 100,000 shares × $22 per share = $2,200, ,000 shares × $0.10 par value = $10,000 On July 6, Wal-Mart issued 100,000 shares of $0.10 par value common stock for $22 per share.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Treasury Stock Wal-Mart buys its own stock in the secondary market. (Treasury stock) Stockholders Management Management compensation package includes salary and stock options. Stock options allow management to purchase stock from the corporation at a fraction of the stock’s value in the secondary market. Wal-Mart

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Treasury Stock No voting or dividend rights Contra equity account When stock is reacquired, the corporation records the treasury stock at cost.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Treasury Stock On May 1, Wal-Mart reacquired 100,000 shares of its common stock at $22 per share. The journal entry for May 1 is....

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Treasury Stock 10,000 shares × $30 = $300,000 10,000 shares × $22 cost = $220,000 On December 3, Wal-Mart reissued 10,000 shares of the treasury stock at $30 per share. The journal entry for December 3 is...

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Accounting for Cash Dividends Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Dividend Dates Declaration date Board of directors declares the dividend. Record a liability.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Dividend Dates Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) X

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Dividend Dates Date of Payment Record the payment of the dividend to stockholders.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Dividends on Preferred Stock ¶Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock. ·Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid. ¶Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock. ·Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Dividends on Preferred Stock If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Dividends on Preferred Stock Kites, Inc. has the following stock outstanding: Common stock: $1 par, 100,000 shares Preferred stock: 3%, $100 par, cumulative, 5,000 shares Preferred stock: 6%, $50 par, noncumulative, 3,000 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 stock receive?

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Dividends on Preferred Stock

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Dividends on Preferred Stock

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Dividends on Preferred Stock

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Focus on Cash Flows Wal-Mart

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Accounting for Stock Dividends (Saving cash) Distribution of additional shares of stock to stockholders(less than 25%). No change in total stockholders’ equity. All stockholders retain same percentage ownership. No change in par values.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Stock Splits Distributions of 25% or more of stock to stockholders. Ice Cream Parlor Banana Splits On Sale Now

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Stock Splits Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Stock Splits Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split. Increase Decrease No Change

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Restrictions on Retained Earnings If I loan you $150,000, I will want you to restrict your retained earnings. Why would you want to do that?

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Restrictions on Retained Earnings Because I want to restrict the amount you can pay out in dividends.

© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill End of Chapter 11 C’mon Chester! With your smarts and my savvy, we could make a great partnership!!