Stockholders’ Equity Chapter 13 ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-1

Learning Objectives 1.Identify the characteristics of a corporation 2.Journalize the issuance of stock 3.Account for cash dividends, stock dividends, and stock splits ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-2

Learning Objectives 4.Account for the purchase and sale of treasury stock 5.Explain how equity is reported for a corporation 6.Use earnings per share, rate of return on common stock, and the price/earnings ratio to evaluate business performance ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-3

Learning Objective 1 Identify the characteristics of a corporation ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-4

Advantages and Disadvantages of Corporations ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-5

Basic Stock Certificate ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-6

Categories of Stock ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-7

Stockholder Rights common stockInvestors receive an ownership interest in the form of shares of common stock. All common stockholders have certain rights associated with ownership. 1.Vote (1 share = 1 vote) 2.Dividends (entitled to a proportionate share of dividends) 3.Liquidation (entitled to share in proceeds from a liquidation) 4.Preemptive Ownership Rights (entitled to maintain % ownership) ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-8

Preferred Stock A separate class of stock, typically having priority over common shares in... –Dividend distributions. –Distribution of assets in case of liquidation. Usually callable by the company. Usually states the dividend rate as a percent of par value. Normally no voting rights. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-9

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Learning Objective 2 Journalize the issuance of stock ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-16

Issuing Common Stock 1.debit Cash received 2.credit Common Stock for the number of shares issued x par value 3.credit Paid-In Capital in Excess of Par for the excess of issue price over par value ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-17

Issuing Common Stock at Par Smart Touch Learning sells 1,000,000 shares of stock on January 1 for $1 per share. The par value of the shares is $1 per share. Prepare the journal entry to record Smart Touch Learning’s issuance of common stock. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-18

Issuing Common Stock at Par Smart Touch Learning sells 1,000,000 shares of stock on January 1 for $1 per share. The par value of the shares is $1 per share. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-19

Issuing Common Stock at a Premium Smart Touch Learning sells 1,000,000 shares of stock on January 2 for $20 per share. The par value of the shares is $1 per share. Prepare the journal entry to record Smart Touch Learning’s issuance of common stock. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-20

Issuing Common Stock at a Premium Smart Touch Learning sells 1,000,000 shares of stock on January 2 for $20 per share. The par value of the shares is $1 per share. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-21

Reporting Common Stock ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-22

Issuing Preferred Stock Smart Touch Learning issues 1,000 shares of its $50 par, 6% preferred stock on January 3 at $55 per share. Prepare the journal entry to record Smart Touch Learning’s issuance of preferred stock. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-23

Issuing Preferred Stock Smart Touch Learning issues 1,000 shares of its $50 par, 6% preferred stock on January 3 at $55 per share. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-24

Reporting Preferred Stock ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-25

Learning Objective 3 Account for cash dividends, stock dividends, and stock splits ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-26

Dividend Accounting Time Line 1.Declaration date –Board of directors declares the dividend and it becomes a liability. 2.Record Date –Stockholders holding shares on this date will receive the dividend. 3.Payment Date –Record the payment of the dividend to stockholders. Not legally required. Requires sufficient Cash and Retained Earnings. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-27

Dividend Accounting Time Line 1.Declaration date ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-28

Dividend Accounting Time Line 1.Declaration date 2.Record Date ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-29

Dividend Accounting Time Line 1.Declaration date 2.Record Date 3.Payment Date ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-30

Recording Dividends On May 1, Smart Touch Learning’s Board of Directors declares a $0.25 per share cash dividend on 2,000,000 outstanding shares of common stock. Prepare the journal entry to record Smart Touch Learning’s declaration of a cash dividend. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-31

Recording Dividends On May 1, Smart Touch Learning’s Board of Directors declares a $0.25 per share cash dividend on 2,000,000 outstanding shares of common stock. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-32

Recording Dividends On May 30, Smart Touch Learning pays the dividend to its stockholders. Prepare the journal entry to record Smart Touch Learning’s payment of a cash dividend. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-33

Recording Dividends On May 30, Smart Touch Learning pays the dividend to its shareholders. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-34

Preferred Dividends Preferred dividends are determined by contract and get paid before dividends on common stock. vsNoncumulativeCumulative Dividends in arrears must be paid before dividends may be paid on common stock. Dividends in arrears do not have to be paid in future years. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-35

Preferred Dividends Fast forward to Smart Touch Learning’s preferred stock is cumulative. They did not declare any dividends in In 2016, the Board of Directors declares a $50,000 dividend. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-36

Preferred Dividends Prepare the journal entry to record Smart Touch Learning’s dividend declaration in ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-37

Preferred Dividends ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-38

Accounting for Stock Dividends No change in total stockholders’ equity All stockholders retain same percentage ownership No change in par values Distribution of additional shares of stock to stockholders ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-39

The Difference Between Small and Large Stock Dividends Small Stock Dividend Stock dividend < 20% to 25% Debit R/E for the market value of stock issued. Credit Common Stock and Paid-In Capital. Large Stock Dividend Stock dividend > 20% to 25% Debit R/E for the par value of the shares issued. Credit Common Stock. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-40

Stock Splits Increases both the number of issued shares and outstanding shares. Stock after the split has a proportionately lower par value. Total capital amount of the common stock account does not change Smart Touch Learning has 3,150,000 shares of $1 par value stock outstanding. A 2-for- 1 stock split will result in 6,300,000 shares with a par value of $0.50 per share. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-41

Learning Objective 4 Account for the purchase and sale of treasury stock ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-42

Treasury Stock Recorded at cost Appears as a contra-equity account No voting or dividend rights Companies will sometimes reacquire their own stock from the market. Used to: support the company’s stock price sell to employees at a discount fulfill stock option obligations ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-43

Recording Treasury Stock On May 31, Smart Touch Learning purchased 1,000 shares of previously issued common stock, paying $5 per share. Prepare the journal entry to record the purchase of treasury stock. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-44

Recording Treasury Stock On May 31, Smart Touch Learning purchased 1,000 shares of previously issued common stock, paying $5 per share. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-45

Reporting Treasury Stock ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-46

Learning Objective 5 Explain how equity is reported for a corporation ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-47

Statement of Retained Earnings Shows how the R/E balance changed during the period. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-48

Prior-Period Adjustments Errors from prior periods that must be corrected to make the R/E balance correct. Adjust beginning R/E. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-49

Statement of Stockholders’ Equity Shows the changes in all equity accounts for the period. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-50

Sjostrom, Inc. had beginning retained earnings of $300,000 on January 1, During the year, Sjostrom declared and paid $140,000 of cash dividends and earned $200,000 of net income. Prepare a statement of retained earnings for Sjostrom, Inc. for the year ending December 31, ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-51

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Learning Objective 6 Use earnings per share, rate of return on common stock, and the price/earnings ratio to evaluate business performance ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-53

Earnings Per Share A measure of the net income of the company expressed as an amount per each share of common stock outstanding. Companies report earnings per share only for common stock. EPS is reported on the income statement. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-54

Earnings Per Share Using the numbers below, compute the EPS for Green Mountain Coffee Roasters ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-55

Earnings Per Share ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-56

Price/Earnings Ratio Ratio of market price of a share of common stock to the company’s earnings per share.Ratio of market price of a share of common stock to the company’s earnings per share. A higher PE Ratio signifies a higher return on investment.A higher PE Ratio signifies a higher return on investment. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-57

Price/Earnings Ratio Assuming Green Mountain Coffee Roasters, Inc. has a market price of $17.90 per share of common stock. Their EPS is $1.39 per share. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-58

Price/Earnings Ratio Assuming Green Mountain Coffee Roasters, Inc. has a market price of $17.90 per share of common stock. Their EPS is $1.39 per share. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-59

Rate of Return on Common Stock Also called Return on EquityAlso called Return on Equity Using the information for Green Mountain Coffee Roasters, compute Return on EquityUsing the information for Green Mountain Coffee Roasters, compute Return on Equity ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-60

Rate of Return on Common Stock ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-61

Compute Vollmer Inc.’s EPS for 2015 ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-62

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Compute Vollmer Inc.’s P/E Ratio for 2015, assuming that the market price is $40 per common share. ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-64

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Compute Vollmer Inc.’s Return on Common Stockholders Equity for ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-66

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End of Chapter 13 ©2014 Pearson Education, Inc. Publishing as Prentice Hall13-68