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Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A.,

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Presentation on theme: "Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A.,"— Presentation transcript:

1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Chapter 18 Shareholders’ Equity

2 18-2 The Nature of Shareholders’ Equity Assets – Liabilities = Shareholders’ Equity Shareholders’ Equity Paid-in Capital Retained Earnings Amounts earned by corporation Amounts invested by shareholders Accumulated Other Comprehensive Income Other gains and losses not included in net income Sources of Shareholders’ Equity Net Assets

3 18-3 Financial Reporting Overview

4 18-4 Accumulated Other Comprehensive Income Deferred gains (losses) from derivatives. Gains (losses) from and amendments to postretirement benefit plans. Gains (losses) from foreign currency translations. Net holding gains (losses) on investments. Accumulated other comprehensive income includes four types of gains and losses not included in net income.

5 18-5 There are 2 options for reporting comprehensive income created during the reporting period. The accumulated amount of comprehensive income is reported as a separate item of shareholders’ equity in the balance sheet. As an additional section of the income statement. As a separate statement immediately following the income statement Accumulated Other Comprehensive Income Comprehensive income is reported periodically as it is created and also is reported as a cumulative amount.

6 18-6 U.S. GAAP vs. IFRS Capital stock:  Common stock.  Preferred stock.  Paid ‐ in capital—excess of par, common.  Paid ‐ in capital—excess of par, preferred. Share capital:  Ordinary shares.  Preference shares.  Share premium, ordinary shares.  Share premium, preference shares. Terminology Differences

7 18-7 U.S. GAAP vs. IFRS  Accumulated other comprehensive income:  Net gains (losses) on investment ― AOCI.  Net gains (losses) foreign currency translation —AOCI.  Fair value adjustments not permitted.  Retained earnings.  Total shareholders’ equity.  Presented after liabilities  Reserves:  Investment revaluation reserve.  Translation reserve.  Revaluation reserve.  Retained earnings.  Total equity.  Often presented before liabilities. Terminology Differences

8 18-8 The Corporate Organization Continuous existence Easy ownership transfer Limited liability Easy to raise capital Advantages of a corporation Disadvantages of a corporation Double taxation Government regulation

9 18-9 Types of Corporations Publicly-held corporations whose shares are widely owned by the general public. Privately-held corporations whose shares are owned by only a few individuals. Not-for-profit corporations include hospitals, charities, and government agencies such as FDIC.

10 18-10 Hybrid Organizations S Corporation  Limited liability protection of a corporation.  Maximum number of owners. Limited liability company  Limited liability protection of a corporation.  All owners may be involved in management without losing limited liability protection.  No limit on number of owners. Limited liability partnership  Owners are liable for their own actions but not entirely liable for actions of other partners. S Corporation  Limited liability protection of a corporation.  Maximum number of owners. Limited liability company  Limited liability protection of a corporation.  All owners may be involved in management without losing limited liability protection.  No limit on number of owners. Limited liability partnership  Owners are liable for their own actions but not entirely liable for actions of other partners. Double taxation avoided.

11 18-11 Board of directors appoint officers. The Model Business Corporation Act Articles of incorporation are filed with the state. Board of directors elected by shareholders. Shares of stock issued. State issues a corporate charter. Corporate Charter  Nature and location of business activities.  Number and classes of shares authorized.

12 18-12 Fundamental Share Rights Right to share in distribution of assets if company is liquidated. Right to share in profits when dividends are declared. Right to vote. Preemptive right to maintain percentage ownership.

13 18-13 Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold. Authorized shares are the maximum number of shares of capital stock that can be sold to the public. Authorized, Issued, and Outstanding Shares

14 18-14 Authorized Shares Unissued Shares Treasury Shares Outstanding Shares Issued Shares Treasury shares are issued shares that have been reacquired by the corporation. Outstanding shares are issued shares that are owned by stockholders. Retired Shares Retired shares have the same status as authorized but unissued shares. Authorized, Issued, and Outstanding Shares

15 18-15 Capital Stock Par value stock  Dollar amount per share is stated in the corporate charter.  Par value has no relationship to market value. No-par stock  Dollar amount per share is not designated in corporate charter.  Corporations can assign a stated value per share (treated as if par value). Legal capital is...  The portion of shareholders’ equity that must be contributed to the firm when stock is issued.  The amount of capital, required by state law, that must remain invested in the business.  Refers to par value, stated value, or full amount paid for no- par stock.

16 18-16 Capital Stock Common stock is the basic voting stock of the corporation. It ranks after preferred stock for dividend and liquidation distribution. Dividends are determined by the board of directors. Dividend and liquidation preference over common stock. Generally does not have voting rights. Usually has a par or stated value. May be convertible, callable, and/or redeemable. Preferred Stock

17 18-17 Preferred Stock Dividends  Are usually stated as a percentage of the par or stated value.  May be cumulative or noncumulative.  May be partially participating, fully participating, or nonparticipating. Unpaid dividends must be paid in full before any distributions to common stock. Dividends in arrears are not liabilities, but the per share and aggregate amounts must be disclosed.

18 18-18 U.S. GAAP vs. IFRS  Preferred stock normally is reported as equity, but is reported as debt with the dividends reported in the income statement as interest expense if it is “mandatorily redeemable” preferred stock.  Most non-mandatorily redeemable preferred stock (preference shares) also is reported as debt as well as some preference shares that aren’t redeemable. Under IFRS (IAS No. 32), the critical feature that distinguishes a liability is if the issuer is or can be required to deliver cash (or another financial instrument) to the holder. Distinction between Debt and Equity for Preferred Stock

19 18-19 Shares Issued for Cash 10,000 shares of stock are issued for $100,000 cash. $1 Par Value No Par Value No Par, $1 Stated Value Cash....................................................... 100,000 Common stock, par value.............. 10,000 Paid-in capital – excess of par …… 90,000 To record issue of common stock. Cash....................................................... 100,000 Common stock............................. 100,000 To record issue of common stock. Cash................................................................... 100,000 Common stock, stated value..................... 10,000 Paid-in capital – excess of stated value …. 90,000 To record issue of common stock.

20 18-20 Shares Issued for Noncash Consideration Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly evident. If market values cannot be determined, use appraised values. Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly evident. If market values cannot be determined, use appraised values.

21 18-21 More Than One Security Issued for a Single Price  Allocate the lump-sum received based on the relative fair values of the two securities.  If only one fair value is known, allocate a portion of the lump- sum received based on that fair value and allocate the remainder to the other security. Toys Inc. issued 5,000 shares of common stock, $10 par value, and 3,000 shares of preferred stock, $5 par value, for $450,000. The market values of the common stock and preferred stock were $55 and $75, respectively. Calculate the additional paid-in capital for each class of stock.

22 18-22 More Than One Security Issued for a Single Price Cash............................................................................ 450,000 Common stock, $10 par..................................... 50,000 Paid-in capital – excess of par common ……….. 197,500 Preferred stock, $5 par 15,000 Paid-in capital – excess of par preferred ………. 187,500 To record issue of common and preferred stock.

23 18-23 Share Issue Costs Share issue costs reduce net proceeds from selling shares, resulting in a lower amount of additional paid-in capital.  Registration fees  Underwriter commissions  Printing and clerical costs  Legal and accounting fees  Promotional costs

24 18-24 Share Buybacks A corporation might reacquire shares of its stock to...  support the market price.  increase earnings per share.  distribute in stock option plans.  issue as a stock dividend.  use in mergers and acquisitions.  thwart takeover attempts. A corporation might reacquire shares of its stock to...  support the market price.  increase earnings per share.  distribute in stock option plans.  issue as a stock dividend.  use in mergers and acquisitions.  thwart takeover attempts. Companies can account for the reacquired shares by retiring them or by holding them as treasury shares.

25 18-25 Accounting for Retired Shares When shares are formally retired, we reduce the same capital accounts that were increased when the shares were issued – common or preferred stock, and additional paid-in capital. 5,000 shares of $2 par value stock that were issued for $20 per share are reacquired for $17 per share.  Price paid is less than issue price. Common stock............................................................10,000 Paid-in capital – excess of par common ……………....90,000 Paid-in capital – share repurchase …………….. 15,000 Cash ………………………………………………..85,000 To record repurchase and retirement of common stock.

26 18-26  Price paid is more than issue price. Accounting for Retired Shares 5,000 shares of $2 par value stock that were issued for $20 per share are reacquired for $25 per share. Common stock............................................................10,000 Paid-in capital – excess of par common ……………….90,000 Paid-in capital – share repurchase ……………………..25,000 Cash ……………………………………………….. 125,000 To record repurchase and retirement of common stock. Reduce Retained Earnings if the Paid-in capital—share repurchase account balance is insufficient.

27 18-27 Accounting for Treasury Stock Acquisition of Treasury Stock  Recorded at cost to acquire. Resale of Treasury Stock  Treasury Stock credited for cost.  Difference between cost and issuance price is (generally) recorded in paid-in capital—share repurchase. Treasury stock usually does not have:  Voting rights.  Dividend rights.  Preemptive rights.  Liquidation rights. Treasury stock is reported as an unallocated reduction of total Shareholders’ Equity.

28 18-28 Accounting for Treasury Stock On 5/1/12, Photos-in-a-Second reacquired 3,000 shares of its common stock at $55 per share. On 12/3/13, Photos-in-a-Second reissued 1,000 shares of the stock at $75 per share. Which of the following would be included in the 12/3/13 entry? a. Credit Cash for $165,000. b. Debit Treasury Stock for $75,000. c. Credit Treasury Stock for $55,000. d. Credit Cash for $75,000. May 1, 2012: Treasury stock.............................................. 165,000 Cash................................................... 165,000 To record purchase of treasury stock. December 3, 2013: Cash............................................................. 75,000 Treasury stock.................................... 55,000 Paid-in capital – share repurchase …. 20,000 To record reissue of treasury stock.

29 18-29 Where We’re Headed The FASB and IASB are working to establish a common standard for presenting information in the financial statements, An important part of the proposal involves the organization of elements of the balance sheet, statement of comprehensive income, and statement of cash flows into a common set of classifications. A key feature of the new format is that each of the financial statements will include classifications by operating, investing, and financing activities (similar to the current statement of cash flows). Operating and investing activities will be included within a new category, “business” activities. Each statement also will include three additional groupings: discontinued operations, income taxes, and multi- category transactions (if needed).

30 18-30 Retained Earnings Represents the undistributed earnings of the company since its inception.  The statement of retained earnings may also contain the correction of an accounting error that occurred in the financial statements of a prior period, called a prior period adjustment.  Any restrictions on retained earnings must be disclosed in the notes to the financial statements.

31 18-31 Accounting for Cash Dividends Declared by board of directors. Creates liability at declaration. Requires sufficient Retained Earnings and Cash. Declaration date  Board of directors declares a $10,000 cash dividend.  Record a liability. Declaration Date: Retained earnings........................................ 10,000 Dividends payable.............................. 10,000 To record declaration of cash dividend. Not legally required.

32 18-32 Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) Dividend Dates Date of Payment Record the dividend payment to stockholders. Ex-dividend date The first day the shares trade without the right to receive the declared dividend. (No entry) Date of Payment: Dividends payable........................................ 10,000 Cash ……………….............................. 10,000 To record payment of cash dividend.

33 18-33 Property Dividends  Distributions of non- cash assets.  Record at fair value of noncash asset.  Recognize gain or loss for difference between book value and fair value.  Distributions of non- cash assets.  Record at fair value of noncash asset.  Recognize gain or loss for difference between book value and fair value.

34 18-34 Accounting for Stock Dividends Distribution of additional shares of stock to owners. No change in total stockholders’ equity. All stockholders retain same percentage ownership. No change in par values. Stock dividend < 25% Record at current fair value of stock. Small Stock dividend > 25% Record at par value of stock. Large

35 18-35 Accounting for Stock Dividends CarCo declares and distributes a 20% stock dividend on 5 million common shares. Par value is $1 and market value is $20. The required journal entry would be: Retained earnings..................................................... 20,000,000 Common stock …………………………………. 1,000,000 Paid-in capital – excess of par common ……..19,000,000 To record declaration and distribution of small stock dividend. 5,000,000 shares × 20 % = 1,000,000 shares issued × $20 = $20,000,000

36 18-36 Stock splits change the par value per share and the number of shares outstanding, but the total par value is unchanged, and no journal entry is required. Stock Splits Assume that a corporation had 3,000 shares of $2 par value common stock outstanding before a 2–for–1 stock split. Increase Decrease No Change

37 18-37 Stock Splits Effected in the Form of Large Stock Dividends Matrix Inc. declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend. The company has 1,000,000, $1 par value common stock outstanding. The stock is trading in the open market for $14 per share. The per share par value of the shares is not to be changed. Paid-in capital – excess of par common …................. 1,000,000 Common stock ……………..……………………. 1,000,000 To record declaration and distribution of 2-for-1 stock split effected in the form of a 100% stock dividend.

38 18-38 Appendix 18 ─ Quasi Reorganizations Purpose To allow a company undergoing financial difficulty, but with favorable future prospects, to get a fresh start by writing down inflated assets and eliminating an accumulated balance in retained earnings. Procedures  Assets and liabilities are revalued to reflect market values, with corresponding debits and credits to retained earnings.  The debit balance in retained earnings is eliminated first against additional paid-in capital, and then, if necessary, against common stock.  Retained earnings is dated to indicate when the new accumulation of earnings began.

39 18-39 Emerson-Walsch Corporation has incurred losses for several years. The board of directors voted to implement a quasi reorganization, subject to shareholder approval. The balance sheet prior to restatement, in millions, follows : Quasi Reorganizations Fair values: Inventory = $300,000,000 and Property, plant, and equipment = $225,000,000. Let’s prepare the journal entries necessary for the quasi reorganization.

40 18-40 To revalue assets Quasi Reorganizations To eliminate the deficit in retained earnings Retained earnings ………………………….................. 250,000,000 Inventory …………………………………………. 75,000,000 Property, plant, & equipment ……………………175,000,000 To record reduction to fair value of assets. Paid-in capital – excess of par common …….............. 150,000,000 Common stock ………….………………………………. 400,000,000 Retained earnings ………………..………………550,000,000 To eliminate the deficit in retained earnings. $300,000,000 + $250,000,000

41 18-41 Balance sheet immediately after restatement. Quasi Reorganizations

42 18-42 End of Chapter 18


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