1. © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 8
Accounting for and Presentation of
Owners’ Equity
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved.

2. Owners’ Equity Section
LO 1

3. Paid-in Capital Common Stock
LO 1
Common Stock
On January 1, 2010, Matrix, Inc. issued 100,000 of its $3 par value common stock for $14 per share. The following entry is recorded:
This transaction has the following effect on the financial statements of Matrix:

4. Common Stock Authorized Shares
LO 1
Issued shares that have been reacquired.
Issued shares include outstanding and treasury shares.
Authorized Shares
Issued shares that are owned by stockholders.

5. Has a par or stated value with dividend expressed as a percent of par.
Preferred Stock
LO 2
Normally no voting rights, but dividend payment has preference over common stock.
Has a par or stated value with dividend expressed as a percent of par.
If callable, may be retired. If convertible, may be exchanged for common shares.

6. Preferred Stock Versus Bonds
LO 2

7. Additional Paid-in Capital
LO 2
Represents the excess of the amount received from the sale of preferred or common stock over par (or stated) value.

8. Retained earnings is NOT cash.
LO 2
Represents the cumulative earnings of a corporation less the cumulative dividends paid since the business started operations.
Retained earnings is NOT cash.

9. Cash Dividends
LO 3
Dividends must be declared by the board of directors before they can be legally paid.
The company must have sufficient cash and retained earnings to pay the dividend.
The company is not legally required to pay dividends, but once declared a legal liability is created.

10. Stock Dividends
LO 4
Distribution of additional shares of stock to stockholders.
No change in par value of stock or in total stockholders’ equity.
Stockholders retain percentage ownership in the company (preemptive right)
Reasons for stock dividends:
Preserve cash.
Decrease market price of stock.
Reduce retained earnings.

11. Stock Dividend Small Stock Dividend Large Stock Dividend
LO 4
Small Stock Dividend
Record at par or stated value of stock.
Stock dividend more than 25% or the outstanding shares.
Large Stock Dividend
Stock dividend less than 25% of outstanding shares.
Record at current market value of stock.

12. Stock Split Increase the number of shares outstanding.
LO 4
Increase the number of shares outstanding.
Decrease the par value per share.
No change to total stockholders’ equity.
No journal entry required.

13. Other Comprehensive Income
LO 5
A new category in owners’ equity called accumulated other comprehensive income (loss) includes the following unrealized changes to owners’ equity:
Cumulative foreign currency translation adjustments;
Unrealized gains or losses on available-for-sale investments, net of related income taxes; and
Additional minimum pension liability adjustments, net of related income taxes.

14. Proprietorships and Partnerships
LO 7
Proprietorships (single owner) and partnerships (two or more owners) do not issue stock.
Proprietorship
Partnership
Drawing accounts are distributions to owners similar to dividends.
Net income and drawing accounts are transferred to capital accounts at the end of the period.

15. Not-for-Profit Organizations
LO 7
Owners’ equity in not-for-profit and governmental organizations are referred to as fund balances. Individual resource providers do not have specific claims against an organization’s assets.

16. Noncontrolling Interest
LO 8
Noncontrolling interest is also known as a minority interest. It is the portion of equity in a subsidiary not attributable to the parent company. The balance sheet model can be expanded as follows:
ASSETS = LIABILITIES+(OWNERS’ EQUITY + NON-OWNERS’ EQUITY)