1. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 13 1

2. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2 Account for stock dividends Account for stock splits Account for treasury stock Report restrictions on retained earnings Complete a corporate income statement including earnings per share

3. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for stock dividends 3 1 1

4. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A distribution of a corporation’s own stock Affects only stockholders’ equity accounts Stockholders receive proportionate shares Example–10% stock dividend; every stockholder receives 10% of shares distributed 4

5. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Conserve cash Reduce market price per share Reward investors 5

6. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Same three dates for a stock dividend Declaration date, record date, distribution date Small stock dividend Distribution is less than 20 to 25% of issued shares Debit Retained earnings for market value of shares to be distributed Credit Common stock for the par value of the stock and Credit Paid-in capital for excess of par—common 6

7. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Large Distribution is greater than 20% to 25% of issued shares Debit Retained earnings for par or stated value of shares Credit Common stock for par or stated value of shares Rare 7

8. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Equity after 5% Common Stock Dividend Equity after 50% Common Stock Dividend 8

9. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Compare and contrast the accounting for cash dividends and stock dividends. 1.In the space provided, insert either “Cash dividends,” “Stock dividends,” or “Both cash dividends and stock dividends” to complete each of the following statements: a. ________________decrease Retained earnings. b. ________________ has(have) no effect on a liability. 9

10. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. (Continued) c. ________________ increase Paid-in capital by the same amount that they decrease Retained earnings. d. ________________ decrease both total assets and total stockholders’ equity, resulting in a decrease in the size of the company. 10

11. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Yummy, Inc., had 310,000 shares of $1 par common stock issued and outstanding as of December 1, 2012. The company is authorized to issue 1,400,000 common shares. On December 15, 2012, Yummy declared and distributed a 5% stock dividend when the market value for Yummy’s common stock was $3. Requirements: 1. Journalize the stock dividend. 2. How many shares of common stock are outstanding after the dividend? 11

12. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1.Journalize the stock dividend. 2. How many shares of common stock are outstanding after the dividend? 12 Journal Entry DATE ACCOUNTS DEBITCREDIT

13. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for stock splits 13 2 2

14. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A stock split: Cuts par value per share Increases the number of shares of stock issued and outstanding Leaves all account balances and total stockholders’ equity unchanged Balances in the accounts are unchanged Record in a memorandum entry–a journal entry without debits and credits 14

15. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Before split 15 After split

16. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Stock dividends and stock splits have similarities and differences 16 Event Common stock Paid-in capital in excess of par Retained earnings Total stockholders ’ equity Cash dividend Stock dividend Stock split

17. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Decorator Plus Imports recently reported the following stockholders’ equity (adapted except par value per share): Suppose Decorator Plus split its common stock 2 for 1 in order to decrease the market price per share of its stock. The company’s stock was trading at $20 per share immediately before the split. 17

18. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1. Prepare the stockholders’ equity section of Decorator Plus Imports’ balance sheet after the stock split. 18 Paid-in capital: Common stock, $0.50 par, 960,000,000 shares authorized, 228,000,000 shares issued Paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders’ equity

19. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2. Were the account balances changed or unchanged after the stock split? 19

20. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for treasury stock 20 3 3

21. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Shares that a company has issued and later reacquired Reasons corporations purchase their own stock: To increase net assets by buying low and selling high To support the company’s stock price To avoid a takeover by an outside party To reward valued employees with stock A common practice among corporations 21

22. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Contra equity account Recorded at cost (not par) Reported beneath Retained earnings on the balance sheet Decreases outstanding shares 22

23. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Purchase of treasury stock Company debits Treasury stock and credits Cash Sale of treasury stock at cost 23

24. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Sale of treasury stock above cost Difference is credited to Paid-in capital from treasury stock transactions Sale of treasury stock below cost Difference is debited to Paid-in Capital from treasury stock transactions, if available Otherwise debit Retained earnings 24

25. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Sale of treasury stock below cost Paid-in capital from treasury stock transactions is insufficient to cover shortfall Debit Retained earnings for the difference 25

26. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Reported beneath Retained earnings as a reduction 26

27. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Discount Center Furniture, Inc., completed the following treasury stock transactions: a.Purchased 1,400 shares of the company’s $1 par common stock as treasury stock, paying cash of $5 per share. b.Sold 400 shares of the treasury stock for cash of $8 per share. Requirements 1.Journalize these transactions. Explanations are not required. 2.Show how Discount Center will report treasury stock on its December 31, 2012 balance sheet after completing the two transactions. In reporting the treasury stock, report only on the Treasury stock account. 27

28. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1.Journalize these transactions. Explanations are not required. 28 Journal Entry DATEACCOUNTSDEBITCREDIT Journal Entry DATEACCOUNTSDEBITCREDIT

29. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2. Show how Discount Center will report treasury stock on its December 31, 2012 balance sheet after completing the two transactions. In reporting the treasury stock, report only on the Treasury stock account. 29 Stockholders’ equity Treasury stock 1,000 shares at cost

30. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Report restrictions on retained earnings 30 4 4

31. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Restrictions Requirement by lenders to maintain a minimum level of equity by limiting: Reported in the notes to the financial statements Appropriations Restrictions on retained earnings recorded by formal journal entries Board of directors may designate purpose of appropriation Segregate in a separate account 31

32. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The heading Paid-in capital does not appear All additional paid-in capital accounts are combined 32

33. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Complete a corporate income statement including earnings per share 33 5 5

34. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. More complex with unique items Public corporations must publish financial statements Sections Continuing Operations Special Items Earnings Per Share Details important to investors 34

35. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Continuing Operations Unique items Gain on sales of machinery–other Income tax expense 35

36. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Reported after income from continuing operations Two distinctly different gains and losses 36

37. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Segment of a business that has been sold Reported separately because the segment will not be around in the future Shown net of tax 37

38. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Extraordinary gains and losses Both unusual and infrequent Not expected to recur in the foreseeable future Reported net of income tax effect Some items not qualifying as extraordinary 38

39. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Most widely used business statistic Measures amount of net income for each share of common stock outstanding Key measure of success in business Separate EPS figure for each element of income 39

40. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Calculation Preferred dividends also affect EPS 40

41. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Preferred dividends must be subtracted from income to compute EPS Preferred dividends are paid first Common will get what is left 41

42. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Altar, Corp., earned net income of $118,000 for 2012. Altar’s books include the following figures: Preferred stock, 3%, $50 par, 1,000 shares issued and outstanding..................... $ 50,000 Common stock, $2 par, 53,000 issued.......... 106,000 Paid-in capital in excess of par—common...... 460,000 Treasury stock, common, 1,200 at cost.......... 24,000 1.Compute Altar’s EPS for the year. 42

43. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Reports how retained earnings changed over the accounting period Corporate dividends appear where drawings would appear in proprietorships or partnerships 43

44. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 44

45. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Corrections for errors of an earlier period Due to the closing of accounts, the error is held in Retained earnings Correction called prior-period adjustment Reported on statement of retained earnings 45

46. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Change in total stockholders’ equity from all sources other than from its owners Net income plus or minus: Unrealized gains/losses on certain investments Foreign currency translation adjustments Gains (losses) from post-retirement benefit plans Deferred gains (losses) from derivatives 46

47. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 47

48. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 48