1. Ch.11 Shareholders’ Equity
Prof. J. Wang

2. Assets = Liabilities + Owners’ Equity
Part I: Introduction
Assets = Liabilities + Owners’ Equity

3. Part I: Introduction Equity v. Debt Financing
Advantage of equity financing:
flexibility
Advantage of debt financing:
tax deductible,
Benefit shareholders if the borrowing rate is lower than the rate of return using the borrowed money
Shareholders’ ownership interest is not diluted

4. Expanded Accounting Equation
Assets = Liabilities + Owners’ Equity
Assets = Liabilities + Stockholders’ Equity
Contributed
Capital
Retained
Earnings
Ch.9&10
Ch.11

5. Part II: Contributed Capital
Common Stock
Basic stock of corporation
Normally carries voting rights
Preferred Stock
Optional
No voting rights

6. Preferred Stock
In exchange for giving up voting rights, have dividend preference over common stock
Stated dividend rate
Percentage of the stock’s par value
Per-share amount
Preferred dividends usually are cumulative
$100 par,
7% preferred stock
LO2

8. Number of Shares of Stock
Authorized
1,000
Maximum
Allowable
Issued: sold or
distributed
Outstanding: not
repurchased or retired

9. Par Value “Legal capital”
Arbitrary amount (usually small) stated on stock certificate
Also called “stated value”
Certificate of Stock
$1.00 Par Value

10. Additional Paid-in Capital
Amount received in excess of par when stock was issued
Certificate of Stock
$1.00 Par Value 15

11. Stock Issued for Cash Example: Common Stock $ 10,000
1,000 shares of
$10 par value stock
sold for $15 per share
Common Stock $ 10,000
( $10 par value × 1,000 shares)
Additional Paid-In Capital $5,000
(($15 – $10) × 1,000 shares)
Example:
Journal entry:
Cash ,000
Common Stock ,000
Additional Paid-In Capital—Common ,000
To record the issuance of 1,000 shares of $10 common stock at $15 per share.
LO3

12. Stock Issued for Noncash Consideration
Record at fair market value of consideration given or received, whichever is more readily determinable
Certificate of Stock
Title
to land,
building,
etc.

13. Stock Issued for Non-cash Assets
issued1,000 shares of $10 par value stock
For land with a fair value of $15,000
Common Stock $ 10,000
( $10 par value × 1,000 shares)
Additional Paid-In Capital $5,000
Example:
Journal entry:
Land ,000
Common Stock ,000
Additional Paid-In Capital—Common ,000
To record the issuance of 1,000 shares of $10 common stock for land.
LO3

14. Part III: Retained Earnings

15. Retained Earnings
Net income retained in the business (not paid out as dividends) since its inception
Reinvested in a variety of assets (not necessarily liquid)

16. Retained Earnings Increases when net income is earned
Decreases when dividends are paid

17. Retained Earnings Connects the Income Statement and the Balance Sheet
Revenues $ xxx
Less: Expenses xxx
Net Income $ inc
Statement of Retained Earnings
Retained Earnings, Beginning Balance $ xxx
Add: Net Income inc
Deduct: Dividends xxx
Retained Earnings, Ending Balance $ end
Balance Sheet
Total Assets $ xxx
Total Liabilities xxx
Stockholders’ Equity xxx
Retained Earnings end
Total Liabilities and Stockholders' Equity $ xxx

18. Cash Dividend Requirements
Sufficient cash
Positive retained earnings

19. Cash Dividends Payment date on Date of declaration Paid to
dividend check for
Date
Dept.. of Treasurer
Jane Doe
Payment
date on 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
Date of
declaration 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
Paid to
Stockholders
on date of record

20. Dividends (2) 1/15/07, $5,000 cash dividends were paid 12/31/06
Journal entry required to record:
(1) 12/31/06, $5,000 cash dividends declared
(2) 1/15/07, $5,000 cash dividends were paid
12/31/06
1/15/07
Reduce
retained
earnings
Pay
dividends

21. Recording Cash Dividends
dividend check for
Date
Dept.. of Treasurer
Jane Doe
Recording Cash Dividends
Retained Earnings 5,000
Cash Dividend Payable ,000
To record the declaration of a cash dividend on 12/31/06.
Cash Dividend Payable 5,000
Cash ,000
To record the payment of a cash dividend on 1/15/07.

22. If the company has preferred stocks outstanding then dividends must be divided between common and preferred shareholders
If preferred dividends are cumulative, preferred shareholders will receive dividends in arrears and for the current year before common shareholders receive any dividends.
If preferred dividends are non-cumulative, preferred shareholders will only receive dividends for the current year before common shareholders receive theirs.

23. Allocation of Cash Dividends when preferred stock is cumulative
Distribute dividends in arrears, if any, to preferred
Distribute current year’s dividends to preferred
Distribute remainder to common (or to both if preferred is participating) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
2004 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
2005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
2006 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
2007
LO5

24. Cash Dividends Example
Stricker Company declares a $70,000 dividend in 2007 (no dividends were paid in 2005 or 2006). There are 10,000 shares of $10 par, 8% preferred stock and 40,000 shares of $5 par common stock outstanding.

25. Cash Dividends Example
Noncumulative Preferred Stock
To Preferred To Common
Step 1: Distribute current-year dividend
to preferred (10,000 shares × $10 par ×
8% × 1 year) $8,000
Step 2: Distribute remaining dividend to
common ($70,000 – $8,000) $62,000
Total allocated $8, $62,000
$0.80
per share
$1.55
per share

26. Cash Dividends Example
Cumulative Preferred Stock
To Preferred To Common
Step 1: Distribute dividends in arrears
to preferred (10,000 shares × $10 par ×
8% × 2 years) $16,000
Step 2: Distribute current-year dividend
8% × 1 year) ,000
Step 3: Distribute remainder to common
($70,000 – $8,000) $46,000
Total allocated $24, $46,000
$0.80
per share
$1.55
per share

27. Stock Dividends
Issue of additional shares proportionately to existing stockholders
Certificate of Stock
Certificate of Stock
Certificate of Stock
Certificate of Stock
Certificate of Stock
Certificate of Stock
Reasons:
Insufficient cash
Market price reduction
Nontaxable to recipients
LO6

28. Small Stock Dividend Example
Stockholders’ Equity:
Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000
Additional paid-in capital—Common ,000
Retained earnings ,000
Total stockholders’ equity $150,000
Before Dividend
Assume Shah Company declares a 10% stock dividend;
500 additional shares will be issued. Assume that market value
Per share at the time is $40.

29. Assets = Liabilities + Stockholders’ Equity
Contributed
Capital
Retained
Earnings
+$20,000
- $20,000

30. Small Stock Dividend Example
Stockholders’ Equity:
Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000
Additional paid-in capital—Common , ,000
Retained earnings , ,000
Total stockholders’ equity $150,000 $150,000
Before After + + –
$20,000 ($40*500) market value deducted from retained earnings; allocated between Common Stock (initially Common Stock Dividend Distributable) ($10*500) and Additional Paid-In Capital ($30*500).

31. Small Stock Dividend Example
Before After
Stockholders’ Equity:
Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000
Additional paid-in capital—Common , ,000
Retained earnings , ,000
Total stockholders’ equity $150,000 $150,000 + + –
Total S/E is unchanged

32. Large Stock Dividend Example
Stockholders’ Equity:
Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000
Additional paid-in capital—Common ,000
Retained earnings ,000
Total stockholders’ equity $150,000
Before Dividend
Assume Shah Company declares 100% stock dividend
That is, additional 5,000 shares will be issued

33. Large Stock Dividend Example
Stockholders’ Equity:
Common stock, $10 par, 10,000 shares $ 50,000 $100,000
Additional paid-in capital—Common 30,000 30,000
Retained earnings , ,000
Total stockholders’ equity $150,000 $150,000
Before After + –
Retained earnings is reduced by the total par value It’s recorded in the Common Stock account at par. Additional Paid-In Capital account is unaffected.

34. Large Stock Dividend Example
Before After
Stockholders’ Equity:
Common stock, $10 par, 10,000 shares $ 50,000 $100,000
Additional paid-in capital—Common , ,000
Retained earnings , ,000
Total stockholders’ equity $150,000 $150,000 + –
Total S/E is unchanged

35. Stock Splits Results in additional issuance of shares
Reduces par value per share
No change in Stockholders’ Equity accounts
Certificate of Stock
$1 par value
Certificate of Stock
$3 par value
LO 7

36. Stock Splits Not recorded in accounts
Disclose
in notes
Not recorded in accounts
Reduce market price per share and make the stock more accessible to a wider range of investors

37. 2-for-1 Stock Split Example
Stockholders’ Equity:
Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000
Additional paid-in capital—Common ,000
Retained earnings ,000
Total stockholders’ equity $150,000
Before Split
Assume Shah Company declares 2-for-1 stock split

38. 2-for-1 Stock Split Example
Before After
Stockholders’ Equity:
Common stock, $5 par, 10,000 shares $ 50,000 $ 50,000
Additional paid-in capital—Common , ,000
Retained earnings , ,000
Total stockholders’ equity $150,000 $150,000
All accounts are unchanged
Only disclosures are affected

39. Part IV: Treasury Stock
Company buys back its own stock
Contra-equity account (debit balance)
Not outstanding (no voting rights)
Certificate of Stock
LO4

40. Reasons for Repurchasing Stock
Provide for employee bonuses or benefit plans
Maintain a favorable market price
Improve financial ratios
Maintain control of ownership
Prevent unwanted takeover or buyout attempts

41. Assets = Liabilities + Stockholders’ Equity
For example, the company purchased 100 shares of its own outstanding stock at $25 per share
Dr. Treasury Stock 2,500
Cr. Cash
Assets = Liabilities + Stockholders’ Equity
-$2,500
-$2,500

42. Presentation of Treasury Stock
Common stock, $10 par value, 1,000
shares issued, 900 outstanding $10,000
Additional paid-in capital—Common 12,000
Retained earnings 15,000
Total contributed capital and
retained earnings 37,000
Less: Treasury stock, 100 shares
at cost ($25 per share) ,500
Total stockholders’ equity $34,500