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11-1
11-2
REPORTING AND ANALYZING
STOCKHOLDER’S EQUITY
Accounting, Fourth Edition
11
11-3
1. Identify and discuss the major characteristics of a corporation.
2. Record the issuance of common stock.
3. Explain the accounting for the purchase of treasury stock.
4. Differentiate preferred stock from common stock.
5. Prepare the entries for cash dividends and understand the
effect of stock dividends and stock splits.
6. Identify the items that affect retained earnings.
7. Prepare a comprehensive stockholders’ equity section.
8. Evaluate a corporation’s dividend and earnings performance
from a stockholder’s perspective.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
11-4
Authorized stock
Issuance
Par and no-par value
Accounting for common stock issues
The The Corporate Corporate Form of Form of
OrganizationOrganization
The The Corporate Corporate Form of Form of
OrganizationOrganization
Characteristics
Formation
Stockholder rights
Purchase of treasury stock
Dividend preferences
Liquidation preference
Stock Issue Stock Issue ConsiderationsConsiderations
Stock Issue Stock Issue ConsiderationsConsiderations
Accounting Accounting for Treasury for Treasury
StockStock
Accounting Accounting for Treasury for Treasury
StockStock
Preferred Preferred StockStock
Preferred Preferred StockStock
Dividends Dividends and Retained and Retained
EarningsEarnings
Dividends Dividends and Retained and Retained
EarningsEarnings
Cash dividends
Stock dividends
Stock splits
Retained earnings restrictions
Financial Financial Statement Statement
Presentation Presentation and Corporate and Corporate PerformancePerformance
Financial Financial Statement Statement
Presentation Presentation and Corporate and Corporate PerformancePerformance
Balance sheet
Statement of cash flows
Dividend record
Earnings performance
Debt vs. equity decision
Reporting and Analyzing Stockholders’ EquityReporting and Analyzing Stockholders’ EquityReporting and Analyzing Stockholders’ EquityReporting and Analyzing Stockholders’ Equity
11-5
An entity separate and distinct from its owners.
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
Classified by Purpose
Not-for-Profit
For Profit
Classified by Ownership
Publicly held
Privately held
► Nike► General Motors► IBM► General Electric
► Salvation Army► American Cancer
Society► Gates Foundation
► Cargill Inc.
11-6
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
Advantages
Disadvantages
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
11-7
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Corporation acts under its own name rather than in the name of its stockholders.
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Characteristics of a Corporation
11-8
Limited to their investment.
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
11-9
Shareholders may sell their stock.
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
11-10
Corporation can obtain capital through the issuance of stock.
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
11-11
Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
11-12
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
Separation of ownership and management prevents owners from having an active role in managing the company.
11-13 SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics of a Corporation
11-14
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Characteristics of a Corporation
Corporations pay income taxes as
a separate legal entity and
stockholders pay taxes on cash dividends.
11-15
Stockholders
Chairman and Board of Directors
President andChief Executive
Officer
General Counsel and
Secretary
Vice PresidentMarketing
Vice PresidentFinance/Chief
Financial Officer
Vice PresidentOperations
Vice PresidentHuman
Resources
Treasurer Controller
Illustration 11-1 Corporation organization chart
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
11-16
11-17
Other Forms of Business Organization
Limited partnerships
Limited liability partnerships (LLPs)
Limited liability companies (LLCs)
S Corporation
► no double taxation
► cannot have more than 75 shareholders
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Characteristics of a Corporation
11-18
Forming a Corporation
File application with the Secretary of State.
State grants charter.
Corporation develops by-laws.
Initial Steps:
Companies generally incorporate in a state whose laws are
favorable to the corporate form of business (Delaware, New Jersey).
Corporations engaged in interstate commerce must obtain a license
from each state in which they do business.
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
11-19
1. Vote in election of board of
directors and on actions that
require stockholder approval.
Stockholders Rights
2. Share the corporate earnings
through receipt of dividends.
Illustration 11-3
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
11-20
3. Keep the same percentage ownership when new shares of stock are issued (preemptive right).
Illustration 11-3
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Stockholders Rights
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
11-21
4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.
Illustration 11-3
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Stockholders Rights
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
11-22
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
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.
Authorized Stock
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
11-23
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Name of corporation
Stockholder’s name
Shares
Signature of corporate official
Prenumbered Illustration 11-4
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
11-24
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Corporation can issue common stock
► directly to investors or
► indirectly through an investment banking firm.
U.S. securities exchanges
► New York Stock Exchange
► American Stock Exchange
► 13 regional exchanges
► NASDAQ national market
Issuance of Stock
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
11-25
11-26
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Capital stock that has been assigned a value per share.
Years ago, par value determined the legal capital per
share that a company must retain in the business for the
protection of corporate creditors.
Today many states do not require a par value.
No-par value stock is quite common today.
In many states the board of directors assigns a stated
value to no-par shares.
Par and No-Par Value Stocks
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
11-27
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Review Question
SO 1 Identify and discuss the major characteristics of a corporation.SO 1 Identify and discuss the major characteristics of a corporation.
Which of these statements is false?
a. Ownership of common stock gives the owner a voting right.
b. The stockholders’ equity section begins with paid-in capital.
c. The authorization of capital stock does not result in a formal accounting entry.
d. Legal capital is intended to protect stockholders.
11-28
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained EarningsRetained EarningsAccountAccount
Retained EarningsRetained EarningsAccountAccount
Paid-in Capital in Paid-in Capital in Excess of ParExcess of Par
AccountAccount
Paid-in Capital in Paid-in Capital in Excess of ParExcess of Par
AccountAccount
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred StockAccountAccount
Preferred StockPreferred StockAccountAccount
Paid-in capital is the total amount of cash and other assets paid in
to the corporation by stockholders in exchange for capital stock.
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
11-29
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained EarningsRetained EarningsAccountAccount
Retained EarningsRetained EarningsAccountAccount
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred StockAccountAccount
Preferred StockPreferred StockAccountAccount
Retained earnings is net income that a corporation retains for
future use.
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Paid-in Capital in Paid-in Capital in Excess of ParExcess of Par
AccountAccount
Paid-in Capital in Paid-in Capital in Excess of ParExcess of Par
AccountAccount
11-30
Primary objectives:
1) Identify the specific sources of paid-in capital.
2) Maintain the distinction between paid-in capital and
retained earnings.
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Other than consideration received, the issuance of common stock affects only paid-in capital accounts.
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Accounting for Common Stock Issues
11-31
Illustration: Assume that Hydro-Slide, Inc. issues 1,000
shares of $1 par value common stock at par. Prepare the
journal entry.
Cash 1,000
Common stock (1,000 x $1) 1,000
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Accounting for Common Stock Issues
11-32
Cash 5,000
Common stock (1,000 x $1) 1,000
Paid-in capital in excess of par value 4,000
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Accounting for Common Stock Issues
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Illustration: Now assume Hydro-Slide, Inc. issues an
additional 1,000 shares of the $1 par value common stock for
cash at $5 per share. Prepare Hydro-Slide’s journal entry.
11-33 SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Illustration 11-5
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Stockholders’ equity section assuming Hydro-Slide, Inc.
has retained earnings of $27,000.
11-34
ABC Corp. issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, credits are made to:
a. Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $2,000.
b. Common Stock $12,000.
c. Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000.
d. Common Stock $10,000 and Retained Earnings $2,000.
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Review Question
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
11-35
11-36
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained EarningsRetained EarningsAccountAccount
Retained EarningsRetained EarningsAccountAccount
Paid-in Capital in Paid-in Capital in Excess of ParExcess of Par
AccountAccount
Paid-in Capital in Paid-in Capital in Excess of ParExcess of Par
AccountAccount
Less:Less:Treasury StockTreasury Stock
Account
Less:Less:Treasury StockTreasury Stock
Account
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred StockAccountAccount
Preferred StockPreferred StockAccountAccount
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for the purchase of treasury stock.SO 3 Explain the accounting for the purchase of treasury stock.
11-37
Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired.
Corporations purchase their outstanding stock:
1. To reissue shares to officers and employees under bonus and stock compensation plans.
2. To increase trading of the company’s stock in the securities market.
3. To have additional shares available for use in acquiring other companies.
4. To increase earnings per share.
Another infrequent reason is to eliminate hostile shareholders.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for the purchase of treasury stock.SO 3 Explain the accounting for the purchase of treasury stock.
11-38
Purchase of Treasury Stock
Generally accounted for by the cost method.
Debit Treasury Stock for the price paid.
Treasury stock is a contra stockholders’ equity
account, not an asset.
Purchase of treasury stock reduces stockholders’
equity.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for the purchase of treasury stock.SO 3 Explain the accounting for the purchase of treasury stock.
11-39
Treasury stock (4,000 x $8) 32,000
Cash
32,000
Illustration: On February 1, 2012, Mead acquires 4,000 shares of its stock at $8 per share. Prepare the entry.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
Illustration 11-6
SO 3 Explain the accounting for the purchase of treasury stock.SO 3 Explain the accounting for the purchase of treasury stock.
11-40
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
Stockholders’ Equity with Treasury stock
Both the number of shares issued (100,000), outstanding (96,000), and
the number of shares held as treasury (4,000) are disclosed.
Illustration 11-7
SO 3 Explain the accounting for the purchase of treasury stock.SO 3 Explain the accounting for the purchase of treasury stock.
11-41
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for the purchase of treasury stock.SO 3 Explain the accounting for the purchase of treasury stock.
Review Question
Treasury stock may be repurchased:
a. to reissue the shares to officers and employees under bonus and stock compensation plans.
b. to signal to the stock market that management believes the stock is underpriced.
c. to have additional shares available for use in the acquisition of other companies.
d. more than one of the above.
11-42
Features often associated with preferred stock.
Preference as to dividends.
Preference as to assets in liquidation.
Nonvoting.
SO 4 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
Each paid-in capital account title should identify the stock
to which it relates:
Paid-in Capital in Excess of Par Value—Preferred Stock
Paid-in Capital in Excess of Par Value—Common Stock
11-43
Illustration: Stine Corporation issues 10,000 shares of
$10 par value preferred stock for $12 cash per share.
Journalize the issuance of the preferred stock.
SO 4 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
Cash 120,000
Preferred stock (10,000 x $10)
100,000Paid-in capital in excess of par –
Preferred stock
20,000Preferred stock may have a par value or no-par value.
11-44 SO 4 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
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.
Dividend Preferences
11-45
Preference on corporate assets if the corporation fails.
Preference may be
► for the par value of the shares or
► for a specified liquidating value.
SO 4 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
Liquidation Preference
11-46
Review Question
SO 4 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
M-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2010. No dividends were declared in 2008 or 2009. If M-Bot wants to pay $375,000 of dividends in 2010, common stockholders will receive:
a. $0.
b. $295,000.
c. $215,000.
d. $135,000.
11-47
A distribution of cash or stock to stockholders on a pro rata (proportional to ownership) basis.
Types of Dividends:
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
1. Cash dividends.
2. Property dividends.
Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share.
3. Stock dividends.
4. Scrip (promissory note)
11-48
Cash Dividends
For a corporation to pay a cash dividend, it must have:
1. Retained earnings - Payment of cash dividends
from retained earnings is legal in all states.
2. Adequate cash.
3. Declaration by the Board of Directors.
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
11-49
Dividends require information concerning three dates:
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
11-50
Illustration: On Dec. 1, the directors of Media General declare a 50¢ per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on Jan. 20 to shareholders of record on Dec. 22:
December 1 (Declaration Date)
Cash dividends 50,000
Dividends payable 50,000
December 22 (Record Date)
January 20 (Payment Date)
DividendsDividendsDividendsDividends
Dividends payable 50,000
Cash 50,000
No entry
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
11-51
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
Review Question
Entries for cash dividends are required on the:
a. declaration date and the record date.
b. record date and the payment date.
c. declaration date, record date, and payment date.
d. declaration date and the payment date.
11-52
Stock Dividends
Pro rata distribution of the corporation’s own stock.
DividendsDividendsDividendsDividends
Results in decrease in retained earnings and increase in paid-in capital.
Illustration 11-10
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
11-53
Stock Dividends
Reasons why corporations issue stock dividends:
1. Satisfy stockholders’ dividend expectations without
spending cash.
2. Increase the marketability of the corporation’s stock.
3. Emphasize that a portion of stockholders’ equity has
been permanently reinvested in the business.
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
11-54
Effects of Stock Dividends
Changes the composition of stockholders’ equity.
Total stockholders’ equity remains the same.
No effect on the par or stated value per share.
Increases the number of shares outstanding.
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
11-55
Illustration: Medland Corp. declares a 10% stock dividend on its $10 par common stock when 50,000 shares were outstanding. The market price was $15 per share.
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
Illustration 11-9
11-56
Stock Split
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of
shares.
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
11-57
Illustration: Assuming that instead of issuing a 10% stock dividend, Medland splits its 50,000 shares of common stock on a 2-for-1 basis.
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
Illustration 11-11
11-58
Differences between the effects of stock dividends and stock splits.
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
Illustration 11-12
11-59
Review Question
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and understand the SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.effect of stock dividends and stock splits.
Which of these statements about stock dividends is true?
a. Stock dividends reduce a company’s cash balance.
b. A stock dividend has no effect on total stockholders’ equity.
c. A stock dividend decreases total stockholders’ equity.
d. A stock dividend ordinarily will increase total stockholders’ equity.
11-60
Retained earnings is net income that a company
retains for use in the business.
Net income increases Retained Earnings and a
net loss decreases Retained Earnings.
Retained earnings is part of the stockholders’
claim on the total assets of the corporation.
A debit balance in Retained Earnings is identified
as a deficit.
Retained EarningsRetained EarningsRetained EarningsRetained Earnings
SO 6 Identify the items that affect retained earnings.SO 6 Identify the items that affect retained earnings.
11-61
Retained EarningsRetained EarningsRetained EarningsRetained Earnings
SO 6 Identify the items that affect retained earnings.SO 6 Identify the items that affect retained earnings.
Illustration 11-14
11-62
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Retained Earnings Restrictions
Retained EarningsRetained EarningsRetained EarningsRetained Earnings
SO 6 Identify the items that affect retained earnings.SO 6 Identify the items that affect retained earnings.
11-63
Balance Sheet Presentation
Presentation of Stockholders’ EquityPresentation of Stockholders’ EquityPresentation of Stockholders’ EquityPresentation of Stockholders’ Equity
SO 7 Prepare a comprehensive stockholders’ equity section.SO 7 Prepare a comprehensive stockholders’ equity section.
Two classifications of paid-in capital:
1. Capital stock
2. Additional paid-in capital
11-64 SO 7 Prepare a comprehensive stockholders’ equity section.SO 7 Prepare a comprehensive stockholders’ equity section.
Presentation of Stockholders’ EquityPresentation of Stockholders’ EquityPresentation of Stockholders’ EquityPresentation of Stockholders’ Equity
Balance Sheet Presentation
Illustration 11-16
11-65
Dividend Record
Measuring Corporate PerformanceMeasuring Corporate PerformanceMeasuring Corporate PerformanceMeasuring Corporate Performance
SO 8 Evaluate a corporation’s dividend and earnings SO 8 Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective.performance from a stockholder’s perspective.
Illustration: The following is the calculation of the payout ratio for Nike in 2009 and 2008.
The payout ratio measures the percentage of earnings a company distributes in the form of cash dividends.
Illustration 11-18Illustration 11-18
11-66
Measuring Corporate PerformanceMeasuring Corporate PerformanceMeasuring Corporate PerformanceMeasuring Corporate Performance
SO 8 Evaluate a corporation’s dividend and earnings SO 8 Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective.performance from a stockholder’s perspective.
This ratio shows how many dollars of net income a company earned for each dollar of common stockholders’ equity.
Illustration 11-20
Earnings Performance
Illustration: The following is the calculation of Nike’s return on common stockholders’ equity ratios for 2009 and 2008.
11-67
Debt Versus Equity Decision
Measuring Corporate PerformanceMeasuring Corporate PerformanceMeasuring Corporate PerformanceMeasuring Corporate Performance
SO 8 Evaluate a corporation’s dividend and earnings SO 8 Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective.performance from a stockholder’s perspective.
Illustration 11-21
11-68
Debt Versus Equity Decision
Measuring Corporate PerformanceMeasuring Corporate PerformanceMeasuring Corporate PerformanceMeasuring Corporate Performance
SO 8 Evaluate a corporation’s dividend and earnings SO 8 Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective.performance from a stockholder’s perspective.
Illustration 11-22
11-69
Measuring Corporate PerformanceMeasuring Corporate PerformanceMeasuring Corporate PerformanceMeasuring Corporate Performance
SO 8SO 8
Illustration: Microsystems Inc. currently has 100,000 shares ofcommon stock outstanding issued at $25 per share and no debt. It is considering two alternatives for raising an additional $5 million: Plan A involves issuing 200,000 shares of common stock at the current market price of $25 per share. Plan B involves issuing $5 million of 12% bonds at face value. Income before interest andtaxes will be $1.5 million; income taxes are expected to be 30%.
Illustration 11-23
11-70
Illustration: Medland Corporation declares a 10% stock dividend on its
50,000 shares of $10 par value common stock. The current fair market
value of its stock is $15 per share. Record the entry on the declaration
date:
Retained earnings (50,000 x 10% x $15) 75,000
Common stock dividends distributable 50,000
Paid-in capital in excess of par 25,000
SO 9 Prepare entries for stock dividends.SO 9 Prepare entries for stock dividends.
Illustration 11A-1
appendix 11A Entries for Stock Dividends
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Common stock dividends distributable 50,000
Common stock 50,000
SO 9 Prepare entries for stock dividends.SO 9 Prepare entries for stock dividends.
appendix 11A Entries for Stock Dividends
Illustration: Record the journal entry when Medland issues the
dividend shares.
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Key Points
Under IFRS, the term reserves is used to describe all equity accounts other than those arising from contributed capital. This would include, for example, reserves related to retained earnings, asset revaluations, and fair value differences.
Many countries have a different mix of investor groups than in the United States. For example, in Germany, financial institutions like banks are not only major creditors of corporations but often are the largest corporate stockholders as well. In the United States, Asia, and the United Kingdom, many companies rely on substantial investment from private investors.
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Key Points
There are often terminology differences for equity accounts. The following summarizes some of the common differences in terminology.
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Key Points
The accounting for treasury stock differs somewhat between IFRS and GAAP. (However, many of the differences are beyond the scope of this course.) Like GAAP, IFRS does not allow a company to record gains or losses on purchases of its own shares. One difference worth noting is that, when a company purchases its own shares, IFRS treats it as a reduction of stockholders’ equity, but it does not specify which particular stockholders’ equity accounts are to be affected. Therefore, it could be shown as an increase to a contra equity account (Treasury Stock) or a decrease to retained earnings or share capital. IFRS requires that the number of treasury shares held be disclosed.
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Key Points
A major difference between IFRS and GAAP relates to the account Revaluation Surplus. Revaluation surplus arises under IFRS because companies are permitted to revalue their property, plant, and equipment to fair value under certain circumstances. This account is part of general reserves under IFRS and is not considered contributed capital.
As indicated earlier, the term reserves is used in IFRS to indicate all noncontributed (non–paid-in) capital. Reserves include retained earnings and other comprehensive income items, such as revaluation surplus and unrealized gains or losses on available-for-sale securities.
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Key Points
IFRS often uses terms such as retained profits or accumulated profit or loss to describe retained earnings. The term retained earnings is also often used.
The accounting related to prior period adjustments is essentially the same under IFRS and GAAP.
Equity is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves, and shareholders’ funds.
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Looking into the Future
The IASB and the FASB are currently working on a project related
to financial statement presentation. An important part of this study
is to determine whether certain line items, subtotals, and totals
should be clearly defined and required to be displayed in the
financial statements. The options of how to present other
comprehensive income under GAAP will change in any converged
standard. Also, the FASB has been working on a standard that will
likely converge to IFRS in the area of hybrid financial instruments,
such as bonds that are convertible to common stock.
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Under IFRS, a purchase by a company of its own shares
is recorded by:
a) an increase in Treasury Stock.
b) a decrease in contributed capital.
c) a decrease in share capital.
d) All of these are acceptable treatments.
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The term reserves is used under IFRS with reference to all
of the following except:
a) gains and losses on revaluation of property, plant,
and equipment.
b) capital received in excess of the par value of issued
shares.
c) retained earnings.
d) fair value differences.
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Under IFRS, the amount of capital received in excess of
par value would be credited to:
a) Retained Earnings.
b) Contributed Capital.
c) Share Premium.
d) Par value is not used under IFRS.
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