1. Financial Accounting, Seventh Edition
Chapter 11
Corporations: Organization, Stock Transactions, Dividends,and Retained Earnings

2. The Corporate Form of Organization
Characteristics that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Advantages
Disadvantages

3. Consolidated Statement of Retained Earnings
2012
2011
2010
Retained Earnings, at the beginning of year
$114,269
$135,866
$147,687
Net Earnings
52,004
43,938
53,063
Cash Dividends
(47,729)
(18,360)
(18,078)
Stock Dividends
(38,334)
(47,175)
(46,806)
Retained Earnings at the end of the year
$80,210

4. Components of Stockholders’ Equity
Authorized Shares: Total amount of stock that a corporation’s charter authorized it to sell.
SHAREHOLDERS’ EQUITY: (in thousands of dollars)
Dec 31, 2012
Dec 31, 2011
Common Stock, $0.69-4/9 par value— 120,000,000 shares authorized— 36,649,000 and 36,479,000 respectively, issued
$ 25,450
$ 25,333
Class B common stock, $.69-4/9 par value— 40,000,000 shares authorized— 21,627,000 and 21,025,000 respectively, issued
15,018
14,601
Capital in excess of par value
547,576
533,677
Retained earnings, per accompanying statement
80,210
114,269
Accumulated other comprehensive loss
(16,447)
(19,953)
Treasury stock (at cost) – 73,000 shares and 71,000 shares respectively
(1,992)
Total shareholders’ equity
$ 649,815
$ 665,935
Issued Shares: TOTAL shares that have been issued to stockholders.
Treasury Stock: Shares which were purchased and are currently held by the company
OUTSTANDING Shares = Issued Shares – Treasury Shares
(NOTE: Dividends are ONLY paid on outstanding shares)

5. Stock Issue Considerations
Authorized Stock
Charter indicates the amount of stock that a corporation is authorized to sell.
Number of authorized shares is often reported in the stockholders’ equity section.

6. Stock Issue Considerations
Issuance of Stock
Corporation can issue common stock directly to investors or indirectly through an investment banking firm.
Factors in setting price for a new issue of stock:
the company’s anticipated future earnings
its expected dividend rate per share
its current financial position
the current state of the economy
the current state of the securities market
An investment in GROUPON of $1,000 on November 4, 2011 (Price per share = $26.11)
Is worth $ on April 10, 2013 (Price per share = $6.15)

7. Stock Issue Considerations
Market Value of Stock
Stock of publicly held companies is traded on organized exchanges.
Interaction between buyers and sellers determines the prices per share.
Prices set by the marketplace tend to follow the trend of a company’s earnings and dividends.
Factors beyond a company’s control, may cause day-to-day fluctuations in market prices.

8. Par Value and Market Value
Par value is an arbitrary amount assigned to each share of stock when it is authorized.
Market value is the amount that each share of stock will sell for in the market.
Par Value = $0.001
Market Price (on April 10, 2, 2013) : $791.00

9. Corporate Capital
Common Stock
Account
Paid-in Capital
Paid-in Capital in Excess of Par
Account
Preferred Stock
Account
Two Primary Sources of Equity
Retained Earnings
Account
Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.
Retained earnings is net income that a corporation retains for future use.

10. Issuing Par Value Common Stock for Cash
Accounting for Common Stock Issuance
Issuing Par Value Common Stock for Cash
Rose Company issued 1,000 shares of common stock of $1 par value at par. Record the transaction.
Rose Company issued 1,000 shares of $1 par value common stock for $70 per share. Record the transaction. 72 47

11. Accounting for Common Stock Issuance
Issuing Common Stock for Services or
Noncash Assets
Corporations also may issue stock for:
Services (attorneys or consultants).
Noncash assets (land, buildings, and equipment).
Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable.

12. Accounting for Common Stock Issuance
Illustration: Assume that attorneys have helped Tulips Company incorporate. They have billed the company $50,000 for their services, and agree to accept 5,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction.

13. Accounting for Common Stock Issues
Daffodils Company exchanged 4,000 shares of $4 par common stock for a building. Market value of the building is $80,000. Record the transaction.

14. Accounting for Common Stock Issuance
Issuing No-Par Common Stock for Cash
Assume that Jasmine Company issues 10,000 shares of $5 stated value no-par common stock for $18 per share. Record the journal entry.
Prepare the entry assuming there is no stated value:

15. Knowledge Check Question 1:
Northern Company purchased a building in exchange for 20,000 shares of common stock with a par value of $1 per share. The building has a market value of $350,000, but has an outstanding mortgage balance of $250,000 (which is now being taken over by Northern). As result of this transaction, Northern Company’s accounting equation will NOT
Show an increase in Assets of $350,000
Show an increase in Contributed Capital of $20,000
Show an increase in Stockholders’ Equity of $100,000
Show an increase in Liabilities of $250,000

16. Accounting for Treasury Stock
Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired.
Corporations purchase their outstanding stock:
To reissue the shares to officers and employees under bonus and stock compensation plans.
To enhance the stock’s market value.
To have additional shares available for use in the acquisition of other companies.
To increase earnings per share.
To rid the company of disgruntled investors, perhaps to avoid a takeover.

17. Accounting for Treasury Stock
Purchase of Treasury Stock
Debit Treasury Stock for the price paid to reacquire the shares.
Treasury stock is a contra stockholders’ equity account, not an asset.
Purchase of treasury stock reduces stockholders’ equity.

18. Accounting for Treasury Stock
On January 1, 2012, Magnolia Company purchased 1,000 shares of its own $1 par common stock for $8 per share. Record the transaction.

19. Accounting for Treasury Stock
Treasury Stock is shown as a reduction in
Stockholders’ Equity on the balance sheet.
The number of shares issued (100,000), number of
shares outstanding (99,000), and
the number of shares held as treasury (1,000)
are disclosed in the Stockholder’s Equity section.

20. Accounting for Treasury Stock
Disposal of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders’ equity.

21. Selling Treasury Stock Above Cost
On March 1, 2012, Magnolia Company reissued 500 shares of treasury stock (originally purchased for $8 a share) for $12 per share. Record the transaction.
A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.

22. Selling Treasury Stock Below Cost
On April 1, 2012, Magnolia Company reissued 300 shares of treasury stock (originally purchased for $8 per share) for $3 per share. Record the transaction.
Magnolia uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares.

23. Selling Treasury Stock Below Cost
On May 1, 2012, Magnolia Company reissued the remaining 200 shares of treasury stock (originally purchased for $8 per share) for $1 per share. Record the transaction.

24. Knowledge Check Question 2:
Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31, 2012 showed the following:
Common Stock, $1 par value, 20,000 shares authorized and issued $20,000
Paid-in-Capital in excess of par – Common Stock ,000
Treasury Stock, common, 2,000 shares (at cost) (40,000)
Paid-in-Capital, Treasury Stock ,000
Retained Earnings ,000
Total Stockholders’ Equity $200,000
On January 1, 2013, Northern Company reissued 2,000 shares of Treasury stock at a market price of $12 per share. The resulting journal entry will:
Debit Cash by $40,000
Debit Treasury Stock by $24,000
Debit Paid-in-Capital, Treasury Stock by $20,000
Debit Retained Earnings by $6,000

25. Preferred Stock Features often associated with preferred stock.
Preference as to dividends.
Preference as to assets in liquidation.
Nonvoting.
Accounting for preferred stock at issuance is similar to that for common stock.

26. Preferred Stock
Illustration: Dahlia Corporation issues 10,000 shares of
$10 par value preferred stock for $25 cash per share. Journalize the issuance of the preferred stock.
Preferred stock may have a par value or no-par value.

27. Preferred Stock Dividend Preferences
Right to receive dividends before common stockholders.
Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount.
Cumulative dividend – holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends.

28. Dividends
A distribution of cash or stock to stockholders on a pro rata (proportional) basis.
Common types of Dividends :
Cash dividends.
Stock dividends.
Cash Dividends may be expressed as:
as a percentage of the par or stated value, or
as a dollar amount per share.

29. A Dividend Announcement Example (Source: investor.apple.com)
On October 25, 2012, Apple’s Board of Directors declared a cash dividend of $2.65 per share of the Company’s common stock. The dividend is payable on November 15, 2012, to shareholders of record as of the close of business on November 12, 2012.
Excerpted from APPLE INC’s 10K Statement dated September 29, 2012:
Shareholders’ Equity:
Sep 29, 2012
Common stock, no par value; 1,800,000,000 shares authorized; 939,208,000 shares issued and outstanding
16,422 million

30. APPLE, Inc’s Dividend Entries:
Oct 25, 2012 (Date of Declaration):
November 12, 2012 (Date of Record):
November 15 , 2012 (Date of Payment): 72 30 47

31. INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS
Dividends for Mr. Bill Gates? (Source:
Microsoft Press Release:
REDMOND, Wash. — Mar. 11, 2013 — Microsoft Corp. today announced that its board of directors declared a quarterly dividend of $0.23 per share.  The dividend is payable June 13, 2013 to shareholders of record on May 16, 2013. 
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS
William H. Gates III, (Chairman): 460,984,209 (5.47%)
So, Cash Dividends to be paid to Mr. Gates on June 13, 2013 (for one quarter only):
460,984,209 shares * $0.23 per share ~ $106 million

32. Cash Dividends
Allocating Cash Dividends Between Preferred and Common Stock
Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends.

33. Cumulative vs Noncumulative Dividends
Dividends in arrears must be paid before dividends may be paid on common stock.
Undeclared dividends from current and prior years do not have to be paid in future years.
Most preferred stock is cumulative.

34. Cumulative vs Noncumulative Dividends
Example: Consider the following partial Statement of Stockholders’ Equity
The Board of Directors did not declare or pay dividends in In 2012, the Board of Directors declare and pay total cash dividends of $30,000

35. Cumulative vs Noncumulative Dividends
If Preferred Stock is NonCumulative:
Preferred Dividends Common Dividend
Year 2011:
Year 2012:
If Preferred Stock is Cumulative:
Preferred Dividends Common Dividends
Year 2011:
Year 2012:

36. Knowledge Check Question 3
Jordan Company has 1,000 shares of $50 par value, 4.5% cumulative and nonparticipating preferred stock and 10,000 shares of $10 par value common stock outstanding. The company paid total cash dividends of $1,000 in its first year of operation, and declared total cash dividends of $5,000 in its second year of operation. The cash dividend paid to common stockholders in the second year will be:
$1,500.
$3,500.
$2,250.
$2,750.

37. Stock Dividends Stock Dividends
Reasons why corporations issue stock dividends:
To satisfy stockholders’ dividend expectations without spending cash.
To increase the marketability of the corporation’s stock.
To emphasize that a portion of stockholders’ equity has been permanently reinvested in the business.
Results in decrease in retained earnings and increase in paid-in capital.

38. Stock Dividends Size of Stock Dividends
Small stock dividend (less than 20–25% of the corporation’s issued stock, recorded at fair market value)
Large stock dividend (greater than 20–25% of issued stock, recorded at par value) *
* This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares.

39. Stock Dividends
Illustration: Lily Corp. has 50,000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share. Record the relevant journal entries.
Journal entry to declare a 10% stock dividend:
Journal entry when the stocks are issued:

40. Stock Dividends
Illustration: Violet Corp. has 50,000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share. Record the relevant journal entries.
Journal entry to declare a 50% stock dividend:
Journal entry when the stocks are issued:

41. Stock Dividends
Stockholders’ Equity with Dividends Distributable

42. Stock Dividends
Effects of Stock Dividends on Stockholders’ Equity:

43. Knowledge Check Question 4:
Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31, 2012 showed the following:
Common Stock, $1 par value, 20,000 shares authorized and issued $20,000
Paid-in-Capital in excess of par – Common Stock ,000
Treasury Stock, common, 2,000 shares (at cost) (40,000)
Paid-in-Capital, Treasury Stock ,000
Retained Earnings ,000
Total Stockholders’ Equity $200,000
On January 1, 2013, Northern Company declared a 10% stock dividend, when the market price per share was $30 per share. The resulting journal entry will:
Debit Stock Dividends by $60,000
Credit Common Stock Dividends Distributable by $20,000
Credit Paid-in-Capital, Common Stock by $52,200
Credit Common Stock by $2,000

44. Knowledge Check Question 5:
Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31, 2012 showed the following:
Common Stock, $1 par value, 20,000 shares authorized and issued $20,000
Paid-in-Capital in excess of par – Common Stock ,000
Treasury Stock, common, 2,000 shares (at cost) (40,000)
Paid-in-Capital, Treasury Stock ,000
Retained Earnings ,000
Total Stockholders’ Equity $200,000
On January 1, 2013, Northern Company declared a 30% stock dividend, when the market price per share was $30 per share. The resulting journal entry will:
Debit Stock Dividends by $162,000
Credit Common Stock Dividends Distributable by $5,400
Credit Paid-in-Capital, Common Stock by $156,600
Credit Common Stock by $6,000

45. Stock Splits Stock Split Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of shares.

46. Stock Splits
Illustration: Assume Daisy Corporation splits its 50,000 shares of common stock on a 2-for-1 basis.
Results in a reduction of the par or stated value per share.

47. The Implication of Stock Splits
Price of 1 share of Microsoft common stock on March 13, 1986 = $28.00
Price of 1 share of Microsoft common stock on April 10, 2013 = $30.12
Microsoft's initial public offering (IPO) was March 13, 1986
Split
Payable Date
Split Type
Equivalent # of Shares
First
Sept. 18, 1987
2 for 1
1 x 2 = 2
Second
April 12, 1990
2 x 2 = 4
Third
June 26, 1991
3 for 2
4 x 1.5 = 6
Fourth
June 12, 1992
6 x 1.5 = 9
Fifth
May 20, 1994
9 x 2 = 18
Sixth
December 6, 1996
18 x 2 = 36
Seventh
February 20, 1998
36 x 2 = 72
Eighth
March 26, 1999
72 x 2 = 144
Ninth
February 18, 2003
144 x 2 = 288
This means, 1 share of Microsoft in 1986 = 288 shares today
So, an investment of $28 on March 13, 1986 = $8,672 on April 10, 2013

48. BERKSHIRE HATHAWAY, Inc. Class A (CEO: Mr. Warren Edward Buffet)
What happens when a stock does NOT split?
BERKSHIRE HATHAWAY, Inc. Class A (CEO: Mr. Warren Edward Buffet)
Stock price on October 14, 1976 = $67
Stock price on April 10, 2013 = $158,846
(Shares outstanding = 1.65 million)

49. What's in a name? That which we call a rose
End of Chapter 11
What's in a name? That which we call a rose
by any other word would smell as sweet."
--Shakespeare in Romeo and Juliet