Chapter 11 Stockholders’ Equity

Chapter 11 Stockholders’ Equity
Financial Accounting, 11e © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Learning Objectives Identify and explain the management issues related to contributed capital. Identify the components of stockholders’ equity and their characteristics. Account for the issuance of stock for cash and other assets. Account for treasury stock. Account for stock dividends and stock splits. Describe the statement of stockholders’ equity, and compute book value per share © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

The Corporate Form of Business (slide 1 of 2)
Advantages of Incorporation Separate legal entity Limited liability Ease of capital generation Ease of transfer of ownership Share of stock: Easily transferable unit of ownership Lack of mutual agency Continuous existence Centralized authority and responsibility Professional management © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

The Corporate Form of Business (slide 2 of 2)
Disadvantages of Incorporation Government regulation Double Taxation Double taxation: Corporate earnings are subject to federal and state income taxes, which may be as much as 35 percent of corporate earnings; any after-tax earnings paid out as dividends are taxed again as income to the stockholders. Limited liability Separation of ownership and control © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Equity Financing (slide 1 of 2)
Equity financing involves issuing stock to investors in exchange for assets (usually cash). Par value: An arbitrary amount assigned to each share of stock and recorded in the capital stock accounts; par value usually bears little, if any, relationship to the market price of the shares. Legal capital: The number of shares issued times the par value; minimum amount that a corporation can report as contributed capital. Underwriter: An intermediary between the corporation and the investing public who guarantees the sale of the stock for a fee. Start-up and organization costs: Costs of forming a corporation that are incurred before a corporation begins operations. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Equity Financing (slide 2 of 2)
Advantages of equity financing Decreased financial risk Increased cash for company operations Better debt to equity ratio Disadvantages of equity financing Increased tax liability Decreased stockholder control © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Dividend Policies Dividend: A distribution among stockholders of the assets that a corporation’s earnings have generated. Liquidating dividend: When a corporation does declare a dividend that exceeds retained earnings, it is, in essence, returning to the stockholders part of their contributed capital. Factors affecting a company’s decision to pay dividends: Earnings Industry policies Volatility of earnings Effect on cash flows © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Dividend Dates Declaration date: Date on which the corporation is going to pay a dividend. Record date: Date determined for ownership of stock and right to receive a dividend. Payment date: Date on which the dividend is paid to the stockholders of record. Ex-dividend: Sale of shares of stock before the date of payment so the right to the dividend remains with the seller; it does not transfer with the shares to the second owner. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Dividend Transactions (slide 1 of 4)
Assume a board of directors declares a cash dividend of $28,000 on December 21. The record date is December 31,which is also the end of the company’s accounting period. The dividend payment date is January 11. Declaration Date: Analysis: The journal entry to record the dividend on the declaration date (Dec. 21) ▲ increases the equity account Dividends with a debit on the declaration date and Companies usually pay and ▲ increases the liability account Dividends Payable with a credit in the amount of the total dividends declared. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a website for classroom

Comment: The Dividends account reduces equity by appearing as a deduction on the statement of retained earnings, and Dividends Payable appears as a liability on the balance sheet. Record Date Analysis: No entry © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a website for classroom

Payment Date: Analysis: The journal entry to record the dividend on the payment date (January 11) ▼ decreases the liability account Dividends Payable with a debit in the amount of the total dividends declared and ▼ decreases the asset account Cash with a credit. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Comment: When the date of declaration and the payment date occur in the same accounting period, the amount of dividends on the statement of retained earnings and on the statement of cash flows will be equal. Here, the accounting period ended between the dates of declaration and payment. Thus, dividends declared during the period ending December 31 exceed the amount paid for dividends. As a result, The statement of retained earnings for the accounting period will show a decrease in the amount of the dividends declared of $28,000. The statement of cash flows will not show the dividends because the cash has not yet been paid out. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Financial Ratio: Dividends Yield
Dividends yield ratio: Current return to stockholders in the form of dividends. Dividends Yield = Dividends per Share Market Price per Share = $0.52 $ = 1.8% © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Financial Ratio: Return on Equity
Return on equity: A measure of management’s performance. Return on Equity = Net Income Average Total Stockholders’ Equity* * For a corporation, total equity is the same as stockholders’ equity. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Financial Ratio: Price/Earnings Ratio
Price/earnings (P/E) ratio: A measure of confidence in a company’s future. Price/Earnings (P/E) Ratio = Market Price per Share Earnings per Share © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Stock Options as Compensation
Stock option plans: Plans that give employees the right to purchase stock in the future at a fixed price. As the market value of the stock goes up, the difference between the option price and the market price grows, which increases the amount of compensation. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

a. advantage of the corporate form of business
Match each item on the left with the topic on the right to which it pertains. a. advantage of the corporate form of business b. disadvantage of the corporate form of business c. dividend policies d. performance evaluation e. stock option ___ 1. U.S. tax policies ___ 2. Return on equity ___ 3. Separate legal entity ___ 4. Employee’s right to purchase shares at a given price ___ 5. Ease of ownership transfer ___ 6. Distributing cash to stockholders ___ 7. Need to deal with government regulation SOLUTION 1. b; 2. d; 3. a; 4. e; 5. a; 6. c; 7. b © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Components of Stockholders’ Equity
Contributed capital: The stockholders’ investments in the corporation. Retained earnings: The earnings of the corporation since its inception, less any losses, dividends, or transfers to contributed capital. Treasury stock: Shares of the corporation’s own stock that it has bought back on the open market. The cost of these shares is treated not as an investment, but as a reduction in stockholders’ equity. Other comprehensive income (loss): Items that do not appear on the income statement, but go directly to stockholders’ equity (e.g., foreign exchange adjustment). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Stockholders’ Equity Section of a Balance Sheet
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Types of Stock Common stock: Basic form of stock that a corporation issues; shares of stock that carry voting rights. Residual equity: The equity that remains after claims of all creditors and preferred stockholders is satisfied. Preferred stock: Owners given preference over common stockholders in terms of dividends and claims to assets if the corporation is liquidated. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Types of Shares Authorized shares: The maximum number of shares that a corporation’s state charter allows it to issue. Issued shares: Shares that a corporation sells or otherwise transfers to stockholders. Outstanding shares: Shares that a corporation has issued and that are still in circulation. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Relationship of Authorized Shares to Unissued, Issued, Outstanding, and Treasury Shares

Preferred Stock: Preference as to Dividends & Assets
Noncumulative preferred stock: If a dividend is not declared in any given year, the company is under no obligation to make it up in future years. Cumulative preferred stock: Dividend amount per share accumulates from year to year, and must be paid before dividends can be paid on common stock. Dividends in arrears: Dividends not paid on cumulative preferred stock. Preference as to assets Preferred stockholders often have preference in terms of their claims to a corporation’s assets if the corporation goes out of business. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Preferred Stock: Convertible & Callable
Convertible preferred stock: Preferred stock that the owner can exchange for common stock. Callable preferred stock: Preferred stock that the issuing corporation can redeem or retire at a stated price. Stockholder is entitled to: The par value of the stock The call premium Any dividends in arrears The current period’s dividend prorated by the proportion of the year to the call date © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

STOP & APPLY > Nicea Corporation has 2,000 shares of $100 par value, 7 percent cumulative preferred stock outstanding and 200,000 shares of $1 par value common stock outstanding. In the corporation’s first three years of operation, its board of directors declared cash dividends as follows: 2011: $20, : $30,000 Determine the total cash dividends paid to the preferred and common stockholders during each of the three years. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

STOP & APPLY > SOLUTION 2011: Preferred dividends in arrears (2,000 shares × $100 × 0.07) $14,000 Current year remainder to preferred ($20,000 – $14,000) 6,000 Total to preferred stockholders $20, : Preferred dividends in arrears ($14,000 – $6,000) $ 8,000 Current year to preferred (2,000 shares × $100 × 0.07) 14,000 Total to preferred stockholders $22,000 Total to common stockholders ($30,000 – $22,000) 8,000 Total dividends in 2012 $30,000 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Issuance of Stock for Cash and Other Assets
Par value stock When a corporation issues par value stock, the appropriate Capital Stock account (usually Common Stock or Preferred Stock) is credited for the par value. When a corporation issues stock at a price greater than par value, as is usually the case, the proceeds in excess of par are credited to Additional Paid-In Capital. No-par stock: Capital stock that does not have a par value. Stated value: A value that a board of directors assigns to no-par stock. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Issuing Stock Above Par Value (slide 1 of 2)
Stock: Winter Corporation is authorized to issue 10,000 shares of $10 par value common stock. On January 1, 2011, it issues 5,000 shares at $12 each. Analysis: The journal entry to record this issuance of stock above par value ▲ increases Cash with a debit for the proceeds of $60,000 (5,000 shares × $12), ▲ increases Common Stock with a credit for the total par value of $50,000 (5,000 shares × $10), and ▲ increases Additional Paid-In Capital with a credit for the difference of $10,000 (5,000 shares × $2). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Issuing Stock Above Par Value (slide 2 of 2)
Comment: If a corporation issues stock for less than par value, an account called Discount on Capital Stock is debited for the difference. The issuance of stock at a discount rarely occurs; it is illegal in many states. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Issuing No-Par Stock with No Stated Value (slide 1 of 2)
Stock: On January 1, 2011, Winter issues 5,000 shares of no-par common stock at $15 per share. Analysis: The journal entry to record this no-par stock with no stated value ▲ increases Cash with a debit of $75,000 (5,000 shares × $15) and ▲ increases Common stock with a credit of $75,000. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Issuing No-Par Stock with No Stated Value (slide 2 of 2)
Comment: Because the stock does not have a stated or par value, all proceeds of the issue ($75,000) are credited to Common Stock and are part of the company’s legal capital. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Issuing No-Par Stock with a Stated Value (slide 1 of 2)
Stock: On January 1, 2011, Winter issues 5,000 shares of no-par common stock at $15 per share and puts a $10 stated value on each share of its no-par stock. Analysis: The journal entry to record this no-par stock with a stated value ▲ increases Cash with a debit of $75,000 (5,000 shares × $15), ▲ increases Common stock with a credit of $50,000 (the stated value decided by Summer’s board of directors), and ▲ increases Additional Paid-In Capital with a credit of $25,000, which is the difference between the proceeds ($75,000) and the total stated value ($50,000). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Issuing No-Par Stock with a Stated Value (slide 2 of 2)
Comment: In this case, the company’s legal capital is $50,000 because the no-par common stock has a stated value. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Issuing Stock for Noncash Assets When No Market Value for the Stock Exists (slide 1 of 2)
Stock: When Winter was formed on January 1, 2011, its attorney agreed to accept 200 shares of its $10 par value common stock for services rendered. At that time, the market value of the stock could not be determined. However, for similar services, the attorney would have charged Winter $3,000. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Analysis: The journal entry to record stock for noncash assets when no market value for the stock exists ▲ increases Legal Expenses with a debit of $3,000 (estimated cost for attorney services), ▲ increases Common stock for the total par value of $2,000, and ▲ increases Additional Paid-In Capital with a credit for the difference of the proceeds ($3,000) and the total stated value ($2,000). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Issuing Stock for Noncash Assets When Market Value for the Stock Exists (slide 1 of 2)
Stock: Two years later, Winter exchanged 500 shares of its $10 par value common stock for a piece of land. At the time of the exchange, Winter’s stock was selling on the market for $16 per share. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Analysis: In this case, the market value of the land is irrelevant because the value of the stock is known. The journal entry to record stock for noncash assets when market value for the stock exists ▲ increases Land with a debit of $8,000 (500 shares × $16), ▲ increases Common stock with a credit of $5,000 (500 ×$10), and ▲ increases Additional Paid-In Capital with a credit for $3,000 ($8,000 - $5,000). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

STOP & APPLY > Omron Company is authorized to issue 10,000 shares of common stock. The company sold 1,000 shares at $10 per share. Prepare the journal entries to record the sale of stock for cash under each of the following alternatives: (1) The stock has a par value of $2, and (2) the stock has no-par value but a stated value of $1 per share. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

STOP & APPLY > Omron Company is authorized to issue 10,000 shares of common stock. The company sold 1,000 shares at $10 per share. Prepare the journal entries to record the sale of stock for cash under each of the following alternatives: (1) The stock has a par value of $2, and (2) the stock has no-par value but a stated value of $1 per share. SOLUTION 1. The stock has a par value of $2. Cash ,000 Common Stock 2,000 Additional Paid-in Capital 8,000 (Issued $2 par value common stock at $10 per share) 2. The stock has a no-par value but has a stated value of $1. Cash ,000 Common Stock 1,000 Additional Paid-in Capital 9,000 (Issued no-par value common stock with a stated value of $1 at $10 per share) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Purchase of Treasury Stock ( slide 1 of 2)
Stock: On September 15, Marble Corp. purchases 2,000 shares of its $5 par value common stock on the market at a price of $50 per share. Analysis: The journal entry to record this purchase of treasury stock ▲ increases Treasury Stock, Common with a debit of $100,000 (2,000 shares × $50) and ▼ decreases Cash with a credit of $100,000 (2,000 shares × $50). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Purchase of Treasury Stock (slide 2 of 2)
Comment: In the stockholders’ equity section of Marble Corporation’s balance sheet, $100,000 would be deducted from total contributed capital and retained earnings. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Sale of Treasury Shares at Cost
Stock: On September 15, Marble sold 2,000 shares of its $5 par value common stock on the market at a price of $50 per share. Analysis: The journal entry to record this sale of treasury stock at cost ▲ increases Cash with a debit for the sales amount and ▼ decreases Treasury Stock and Common Stock with a credit for the same amount. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Sale of Treasury Shares at Above Cost (slide 1 of 2)
Stock: On October 15, Marble sold for $60 per share 1,000 of the treasury shares that it repurchased at $50 per share Analysis: The journal entry to record this sale of treasury stock above cost ▲ increases Cash with a debit of $60,000 (1,000 shares x $60), ▼ decreases Treasury Stock, Common with a credit of $50,000 (1,000 shares x $50), and ▲ increases Paid-In Capital, Treasury Stock with a credit of $10,000 ($60,000 - $50,000) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Sale of Treasury Shares at Above Cost (slide 2 of 2)
Comment: Note that when treasury shares are sold for an amount greater than their cost, the excess of the sales price over the cost is not considered a gain but is credited to Paid-In Capital, Treasury Stock. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Sale of Treasury Shares at Below Cost (slide 1 of 2)
Stock: On December 15, Marble sells remaining 1,000 treasury shares, from original purchase, for $38 per share. Analysis: The journal entry to record this sale of treasury stock below cost ▲ increases Cash with a debit of $38,000 (1,000 shares x $38), ▼ decreases Paid-in Capital, Treasury Stock with a debit of $10,000 [$50,000 – ($38,000 + $2,000)], ▼ decreases Retained Earnings with a debit for the remaining $2,000 ($50,000 - $38,000 - $10,000), and ▼ decreases Treasury Stock, Common with a credit of $50,000 ($38,000 + $10,000 + $2,000). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Sale of Treasury Shares at Below Cost (slide 2 of 2)
Comment: Note that the decrease in Treasury Stock, Common increases stockholders’ equity. Further, Retained Earnings is debited only when the Paid-In Capital, Treasury Stock account does not exist or has been depleted. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Retiring Treasury Stock (slide 1 of 2)
Stock: On Nov. 15, Marble retires the 2,000 shares of stock that it bought back for $100,000. The $5 par value common stock was originally issued at $6 per share. Analysis: The journal entry to record this retirement of treasury stock ▼ decreases Common Stock with a debit of $10,000 (2,000 shares x $5), ▼ decreases Additional Paid-In Capital with a debit of $2,000 [$100,000 - ($10,000 + $88,000)] ▼ decreases Retained Earnings with a debit of $88,000 ($100, $10,000 - $2,000), and ▼ decreases Treasury Stock, Common with a credit of $100,000 (2,000 shares x $50). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Retiring Treasury Stock (slide 2 of 2)
Comment: Note that this transaction does not change the total stockholders’ equity because all accounts are in stockholders’ equity. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

STOP & APPLY Prepare journal entries to record the following stock transactions of the Paulo Company during 2011: May 1 Purchased 5,000 shares of its own $1 par value common stock for $10 per share, the current market price. 17 Sold 1,000 shares of treasury stock purchased on May 1 for $11 per share. SOLUTION May 1 Treasury Stock 50,000 Cash 50,000 Purchased 5,000 shares of Paulo Company’s common stock at $10 per share 17 Cash 11,000 Treasury Stock 10,000 Paid-in Capital, Treasury Stock 1,000 Sold 1,000 shares of treasury stock for $11 per share © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Stock Dividends Stock dividend: Proportional distribution of shares among a corporation’s stockholders. A stock dividend may be declared: To give evidence of the company’s success To reduce the stock’s market price To make a nontaxable distribution to stockholders To increase the company’s permanent capital © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Stock Dividend Transactions (slide 1 of 5)
Stock: Stockholders’ equity in Wing is: Stock Dividend: On Feb. 24, when the market price of Wing’s $5 par value common stock is $20 per share, the corporation’s board of directors declares a 10% stock dividend to be distributed on Mar. 31 to stockholders of record on Mar. 15. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Declaration Date: Analysis: The journal entry to record this stock dividend on the declaration date (February 24) ▲ increases the Stock Dividends account with a debit of $30,000 (0.10 × 15,000 × $20), the total market value of the stock dividend, ▲ increases Common Stock Distributable (a temporary account until the 1,500 shares are distributed on March 31) with a credit at total par value of $7,500 (1,500 × $5), and ▲ increases Additional Paid-In Capital with a credit of $22,500 ($30,000 – $7,500), the amount by which the total market value of the stock to be issued exceeds its total par value. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Comment: Because Common Stock Distributable represents an obligation to distribute additional shares of capital stock, it is a stockholders’ equity account, not a liability account, as Cash Dividends Payable is. Also, the Stock Dividends account appears as a deduction on the statement of retained earnings. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Record Date: Analysis: No entry is needed on March 15. Payment Date: Analysis: The journal entry to record the stock dividend on the distribution, or payment, date (March 31) ▼ decreases Common Stock Distributable to zero with debit of $7,500 (1,500 shares x $5) and ▲ increases Common Stock with a credit of $7,500 (5,000 shares x $15). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Effects of Stock Dividends
Effect of a Stock Dividend on Stockholders’ Equity Total stockholders’ equity is the same before and after the stock dividend. The assets of the corporation are not reduced, as they would be by a cash dividend. The proportionate ownership in the corporation of any individual stockholder is the same before and after the stock dividend. Large Stock Dividends (greater than percent) Have material impact on stock price. Should be accounted for by transferring the par or stated value of the stock on the declaration date from retained earnings to contributed capital. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Stock Splits Stock split: Occurs when a corporation increases the number of shares of stock issued and outstanding and reduces the par or stated value proportionally. A company may issue stock splits: To lower its stock’s market price per share and thereby increase the demand and volume of trading for its stock at this lower price. To signal to the market its success in achieving its operating goals. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Stock Split (slide 1 of 3)
Stock: Wing Corporation has 15,000 shares of $5 par value stock outstanding and that the market value is $70 per share. The corporation plans a 2-for-1 split. Analysis: The journal entry to record this split ▼ decreases the par value to $2.50 per share ($5.00 / 2) and ▲ increases the number of shares outstanding to 30,000 (15,000 shares x 2). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

After the split, a stockholder who previously owned 200 shares of the $5 par value stock will own: 400 shares of the $2.50 par value stock in outstanding shares of stock. the same proportionate share of the company as before the split. approximately the same total market value of stock because the 2-for-1 stock split will cause the price of the stock to drop by approximately 50%, to about $35. A journal entry is unnecessary, but a memorandum entry notes the change. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Comment: The balances of all accounts remain the same. Only the par value and number of shares issued and outstanding change. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

(300,000 shares – 100,000 shares) × 0.02 ÷ 4,000 shares
STOP & APPLY Kelly Corporation’s board of directors declared a 2 percent stock dividend applicable to the outstanding shares of its $10 par value common stock, of which 1,000,000 shares are authorized, 300,000 are issued, and 100,000 are held in the treasury. It then declared a 2-for-1 stock split on issued shares. How many authorized, issued, and treasury shares existed after each of these transactions? What is the par value per share? SOLUTION Stock dividend applies to outstanding shares: (300,000 shares – 100,000 shares) × 0.02 ÷ 4,000 shares Stock split applies to all issued shares: 304,000 shares × 2 ÷ 608,000 shares Authorized shares are unchanged (1,000,000, but par value is now $5 per share); issued shares are 608,000; and outstanding shares are 208,000 (200, ,000). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

The Statement of Stockholders’ Equity
Statement of stockholders’ equity (statement of changes in stockholders’ equity): Summarizes changes in the components of the stockholders’ equity section of the balance sheet. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

EXAMPLE: Statement of Stockholders’ Equity
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom.

EXAMPLE: Stockholders’ Equity Section of a Balance Sheet
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom.

Book Value Book value of stock: A company’s total assets less its liabilities; the stockholders’ equity in a company or a company’s net assets. Book value per share: The equity of the owner of one share of stock in the net assets of a company. Stockholders’ equity ÷ Common shares outstanding = Book value per share © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

STOP & APPLY Using the data from the stockholders’ equity section of Lisa Corporation’s balance sheet shown below, compute the book value per share for both the preferred and common stock. Contributed capital Preferred stock, $100 par value, 6 percent cumulative, 20,000 shares authorized, 2,000 shares issued and outstanding* $ 200,000 Common stock, $5 par value, 200,000 shares authorized, 100,000 shares issued and outstanding ,000 Additional paid-in capital ,000 Total contributed capital $1,000,000 Retained earnings ,000 Total stockholders’ equity $1,500,000 * The preferred stock is callable at $104 per share, and one year’s dividends are in arrears. SOLUTION Preferred stock book value per share: $104 + $6 = $110 Common stock book value per share: [$1,500,000 – (2,000 preferred shares × $110)] ÷ 100,000 common shares = $12.80 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom

Chapter 11 Stockholders’ Equity

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Chapter 11 Stockholders’ Equity

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