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

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

3. 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

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

5. Ownership of a Corporation
Elected by shareholders
Appointed by directors

6. 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.

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

8. 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

9. Types of Share Capital
Common Shares
Preferred Shares

10. 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

11. 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.

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

13. 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.

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

15. 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.

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

17. 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

18. 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.

19. 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.

20. 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

21. 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.

22. 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.

23. 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.

24. 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

25. 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

26. 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

27. 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

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

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

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

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

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

33. 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.

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

35. 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.

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

37. 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?

38. Dividends on Preferred Shares

39. Dividends on Preferred Stock

40. 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.

41. 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.

42. Focus on Cash Flows
BCE

43. 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

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

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

46. 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.

47. 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

48. 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?

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

50. 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.

51. 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.

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

53. Accounting and Reporting for Unincorporated Businesses

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