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CHAPTER 8

Accounting for and Presentationof Owners Equity

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Nature of Owners Equity

RetainedRetained

EarningsEarnings

Par orPar orStatedStatedValueValue

AdditionalAdditionalPaidPaid--InInCapitalCapital

Par orPar orStatedStatedValueValue

AdditionalAdditionalPaidPaid--InInCapitalCapital

TreasuryStock

Less Total Owners Equity

PaidPaid--in Capitalin Capital

PreferredPreferredStockStock

CommonCommonStockStock

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Owners Equity Section

Paid-in capital

Common stock $1 par, 100,000 shares

issued and 95,000 outstanding 100,000$

Additional paid-in capital 2,800,000Total paid-in capital 2,900,000

Retained earnings 1,400,000

Total paid-in capital and retained earnings 4,300,000

Less: cost of treasury stock (5,000 shares) (150,000)

Total owners' equity 4,150,000$

Owners' Equity

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Paid-in Capital

Common StockCommon StockOn January 01, 2008, Matrix, Inc. issued 100,000 of its $3 par valuecommon stock for $14 per share. The following entry is recorded:

Assets = Liabilities +

Owners'

Equity

Net

income = Revenues - Expenses

Cash

+1,400,000

Common

Stock

+300,000

Additional

Paid-in

Capital

+1,100,000

Balance Sheet Income Statement

This transaction has the following effect on the financial statements of Matrix:

L O 1

Debit Credit2008

Jan. 1 Cash 1,400,000Common stock 300,000

Additional-paid-in-capital 1,100,000

Date Account Titles and Explanation

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Common Stock

t t n n

Un

A tho zA tho zShSh

Issued shares thatare owned bystockholders.

Issued sharesthat have been

reacquired.

Issued sharesinclude outstanding

and treasuryshares.

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Preferred Stock

Normally no votingNormally no votingrights, but dividendrights, but dividend

payment haspayment haspreference overpreference overcommon stock.common stock.

Has a par or statedHas a par or statedvalue with dividendvalue with dividend

expressed as aexpressed as apercent of par.percent of par.

IfIfcallablecallable,,

may be retired.may be retired.IfIfconvertibleconvertible, may be, may be

exchanged forexchanged forcommon shares.common shares.

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Preferred Stock

Normally, preferred stock isNormally, preferred stock is cumulativecumulative meaning that allmeaning that alldividends must be paid before any dividends can bedividends must be paid before any dividends can be

paid to common shareholders.paid to common shareholders.

Preferred may bePreferred may be noncumulativenoncumulative. If dividends are not. If dividends are notpaid, the company is not required to makepaid, the company is not required to make--up theup the

missed dividends.missed dividends.

Matrix, Inc. has 50,000, $100 par value, 6%, cumulative preferred

stock outstanding. Calculate the annual dividend on the stock.

50,00050,000 $100 = $5,000,000 total par$100 = $5,000,000 total par 6% = $300,000 dividend6% = $300,000 dividend

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Preferred Stock Versus Bonds

Preferred Stock Bonds Payable

Dividend is usually fixed

claim to income

Interest is fixed claim to

income

Redemption value is fixed

claim to assets

Maturity value is a fixed claim

to assetsIs usually callable and may be

convertible

Is usually callable and may be

convertible

Dividend may be skipped,

even if it must be caught up

before payments to common

Interest must be paid or firm

faces bankruptcy

No maturity datePrincipal must be paid at

maturity

Dividends are not an

expense and are not tax

deductible

Interest is a tax deductible

expense

Comparison of Preferred Stock and Bonds Payable

Similarities

Differences

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Additional Paid-in Capital

Represents the excess of the amountRepresents the excess of the amountreceived from the sale of preferred orreceived from the sale of preferred or

common stock over par (or stated) valuecommon stock over par (or stated) value

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Retained Earnings

Represents the cumulative earnings of aRepresents the cumulative earnings of acorporation less the cumulative dividends paidcorporation less the cumulative dividends paid

since the business started operations.since the business started operations.

Retained earningsRetained earnings

isis NOTNOTcash.cash.

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Cash Dividends

Dividends must beDividends must bedeclareddeclared by the boardby the board

of directors beforeof directors before

they can be legally paid.they can be legally paid.

The company is notThe company is notlegally required tolegally required to

pay dividends, butpay dividends, butonce declared aonce declared a

legal liabilitylegal liabilityis createdis created

The company must haveThe company must havesufficient cashsufficient cash andandretained earningsretained earnings

to pay the dividend.to pay the dividend.

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Cash Dividend

On January 5, 2008, the Board of Directors of Matrix,On January 5, 2008, the Board of Directors of Matrix,Inc. declares a cash dividend of $1 per share on theInc. declares a cash dividend of $1 per share on the500,000 shares of common stock outstanding. The500,000 shares of common stock outstanding. The

dividend is payable to stockholders of record ondividend is payable to stockholders of record onFebruary 5, and will be paid on March 5.February 5, and will be paid on March 5.

Date of declaration Jan. 5

Assets = Liabilities +

Owners'

Equity

Net

income = Revenues - Expenses

Dividends

payable

+500,000

Retained

earnings

500,000

Balance Sheet Income Statement

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D e b it Cre d i t2008

Ja n . 5 R e ta in e d e a rn in g s 500,000

D iv id e n d s p a ya b le 500,000

D a te A cco un t Ti tle s a n d Ex p la n a tio n

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Cash Dividend

On January 5, 2008, the Board of Directors of Matrix,On January 5, 2008, the Board of Directors of Matrix,Inc. declares a cash dividend of $1 per share on theInc. declares a cash dividend of $1 per share on the500,000 shares of common stock outstanding. The500,000 shares of common stock outstanding. The

dividend is payable to stockholders of record ondividend is payable to stockholders of record onFebruary 5, and will be paid on March 5.February 5, and will be paid on March 5.

Date of record Feb. 5

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Cash Dividend

On January 5, the Board of Directors of Matrix, Inc.On January 5, the Board of Directors of Matrix, Inc.declares a cash dividend of $1 per share on the 500,000declares a cash dividend of $1 per share on the 500,000

shares of common stock outstanding. The dividend isshares of common stock outstanding. The dividend ispayable to stockholders of record on February 5, and willpayable to stockholders of record on February 5, and will

be paid on March 5.be paid on March 5.

Date of payment Mar. 5

Assets = Liabilities +

Owners'

Equity

Net

income = Revenues - Expenses

ash

500,000

Dividends

payable

500,000

Balance Sheet Income Statement

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D e b it re d i t00

Ma r 5 Divid e n d s p a ya b le 500,000

a sh 500,000

D a te A cco un t i tle s a n d Ex p la n a tio n

EN ER A L O RN A L

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Stock Dividends

NoNo change in par valuechange in par valueof stock or in totalof stock or in total

stockholders equity.stockholders equity.

Stockholders retain percentageStockholders retain percentageownership in the companyownership in the company

(preemptive right)(preemptive right)

Distribution of additional shares of stock toDistribution of additional shares of stock tostockholders.stockholders.

Reasons for stock dividends:Reasons for stock dividends:Preserve cash.Preserve cash.Decrease market price of stock.Decrease market price of stock.Reduce retained earnings.Reduce retained earnings.

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Stock Dividend

Record at currentRecord at currentmarket valuemarket value of stock.of stock.

Small Stock DividendStock dividend less thanStock dividend less than

25% of outstanding25% of outstanding

shares.shares.

Record atRecord at parparororstatedstatedvaluevalue of stock.of stock.

Stock dividend more thanStock dividend more than25% or the outstanding25% or the outstanding

shares.shares.

Large Stock Dividend

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Stock Dividend

On May 10, 2008, Matrix, Inc. declares and distributes aOn May 10, 2008, Matrix, Inc. declares and distributes a 2% stock2% stockdividenddividend on its 500,000 common shares outstanding. Par value is $1.00on its 500,000 common shares outstanding. Par value is $1.00

per share and the current market value is $17 per share.per share and the current market value is $17 per share.

Common shares outstanding 500,000

Dividend rate 2%New shares issued 10,000

Market price per share 17$

Value of dividend 170,000$

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D e bi t C re d i t2 0 0 8M a y 1 0 Re ta i n e d e a rn in g s 1 7 0 ,0 0 0

C o m m o n sto c k 1 0 ,0 0 0

Ad d i tio n a l p a i d -in -c a p i ta l 1 60 , 0 0 0

D a te Ac co u n t Ti tl e s a n d Exp la n a t io n

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Stock Dividend

On May 10, 2008, Matrix, Inc. declares and distributes aOn May 10, 2008, Matrix, Inc. declares and distributes a 2% stock2% stockdividenddividend on its 500,000 common shares outstanding. Par value is $1.00on its 500,000 common shares outstanding. Par value is $1.00

per share and the current market value is $17 per share.per share and the current market value is $17 per share.

Assets = t es +

ers'

Equity

Net

income = Revenues - Expenses

Ret ined

earnings17

Common

stock

+1

Additional

paid-in

capital

+16

Balance Sheet ncome Statement

L O 4

e bit Cre dit8

ay 1 Re tained ea rnings 17

Common stock 1

Additional paid-in-capita l 16

a te Account Titles and Explana tio n

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Stock Split

No change toNo change tototaltotal

stockholdersstockholdersequity.equity.

No journal entry required.No journal entry required.

Decrease the parDecrease the parvalue per share.value per share.

Increase theIncrease thenumber of sharesnumber of shares

outstanding.outstanding.

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Stock Split

Matrix, Inc. has 300,000 shares of $1 parMatrix, Inc. has 300,000 shares of $1 parvalue common stock outstanding before avalue common stock outstanding before a

22forfor1 stock split.1 stock split.

efore Split fter Split

ommon Shares 300,000 00,000

ar alue per Share 1.00$ 0. 0$otal ar alue 300,000$ 300,000$

2

2

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Other Comprehensive Income

A new category in owners equity calledA new category in owners equity calledaccumulated other comprehensive incomeaccumulated other comprehensive income

(loss) includes the following unrealized(loss) includes the following unrealized

changes to owners equity:changes to owners equity:1.1. Cumulative foreign currency translationCumulative foreign currency translation

adjustments,adjustments,

2.2. nrealized gains or losses on availablenrealized gains or losses on available--forfor--salesaleinvestments, net of related income taxes,investments, net of related income taxes,

3.3. Additional minimum pension liabilityAdditional minimum pension liabilityadjustments, net of related income taxes.adjustments, net of related income taxes.

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Treasury Stock

On July 25, 2008, Matrix, Inc. repurchases 5,000 of itsOn July 25, 2008, Matrix, Inc. repurchases 5,000 of itscommon shares in the open market for $30 per share.common shares in the open market for $30 per share.

A t = i iliti +

Ow r '

ity

N t

i = R

C150,000

r ry

t150,000

B l t I t t t

Contra owners equity accountContra owners equity account

L O 6

Deb edit2008J y 25 T easury stock 150,000

Cash 150,000

Date Account Titles and Ex lanation

GE ERALJOUR AL

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Treasury StockOn Aug. 30, 2008, Matrix, Inc. resells 2,000 of itsOn Aug. 30, 2008, Matrix, Inc. resells 2,000 of its

treasury stock in the open market for $35 per share.treasury stock in the open market for $35 per share.

Assets = Liabilities +

Owners'

Equity

Net

income = Revenues - Expenses

Cash

+70,000

Treasury

stock

+60,000

Additional

paid-in

capital

+10,000

Balance Sheet Income Statement

2,0002,000 $30 cost per share$30 cost per share2,0002,000 $30 cost per share$30 cost per share

L O 6

Debi re i2008A . 30 as 70,000

Treas r y s ck 60,000

A i i al pai -i capi al 10,000

Da e Acc Ti les a Expla a i

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Proprietorships and Partnerships

Proprietorships (single owner) and partnerships (twoProprietorships (single owner) and partnerships (twoor more owners) do not issue stock.or more owners) do not issue stock.

Owners equity:

John Jones, Capital 562,500$

John Jones, rawing (41,200)

Owners equity: 521,300$

Owners' equity

John Jones, Capital 125,000$

John Jones, rawing (12,000)

Ralph Smith, Capital 125,000

Ralph Smith, rawing (12,000)

Mary West, Capital 250,000

Mary West, rawings (20,000)

Owners' equity: 456,000$

ProprietorshipProprietorship PartnershipPartnership

Drawing accounts areDrawing accounts aredistributions to ownersdistributions to owners

similar to dividends.similar to dividends.

Net income and drawing accounts are transferredNet income and drawing accounts are transferredto capital accounts at the end of the period.to capital accounts at the end of the period.

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Not-for-Profit Organizations

Owners equity in notOwners equity in not--forfor--profit andprofit andgovernmental organizations are referredgovernmental organizations are referredto as fund balances. Individual resourceto as fund balances. Individual resource

providers do not have specific claimsproviders do not have specific claimsagainst an organizations assets.against an organizations assets.

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End of Chapter 8