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Slide 13-1
Chapter 11Corporations: Corporations:
Organization, Stock Organization, Stock Transactions, Dividends, and Transactions, Dividends, and
Retained EarningsRetained Earnings
Financial Accounting, Seventh Edition
Slide 13-2
CHAPTER 11 - Part 1CHAPTER 11 - Part 1CHAPTER 11 - Part 1CHAPTER 11 - Part 1
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Major Characteristics of a corporation
Forming a corporation
Stockholders’ Rights
Slide 13-3
1. Identify the major characteristics of a corporation.
2. Record the issuance of common stock.
3. Explain the accounting for treasury stock.
4. Differentiate preferred stock from common stock.
5. Prepare the entries for cash dividends and stock
dividends.
6. Identify the items that are reported in a retained
earnings statement.
7. Prepare and analyze a comprehensive stockholders’
equity section.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
Slide 13-4
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 and
Not-for-Profit
For Profit
Classified by Ownership
Publicly held
Privately held
Wendy’s Ford Motor Company Coke Amazon
Hopelink Susan B Komen Bill & Melinda
Gates Foundation
Mars (the Snickers Co.
Slide 13-5
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional TaxesSO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a
corporation.corporation.
Advantages
Disadvantages
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
Characteristics that distinguish corporations from proprietorships and partnerships.
Slide 13-6
______________________________________________
The Stockholders
Separate Legal Existence - AdvSeparate Legal Existence - Adv
Stockholders are separate from the company. The
word “corporation”
comes from the root work
“corpus” or body. A corporation is a separate legal
entity.
Slide 13-7
The Corporation
______________________________________________
The Stockholders –$$$$$$$$$$$$$$$$$$$
BUT: The stockholders’ personal assets are
NOT at risk.
LimitedLimited Liability of StockholdersLiability of Stockholders - Adv LimitedLimited Liability of StockholdersLiability of Stockholders - Adv
Stockholder are at risk ONLY to
the extent of their investment. In other words, a
stockholder can either make
money on his/her stock (if the price rises) or….worst
case scenario, LOSE IT ALL. But no more.
Slide 13-8
Easy to buy/sell stock – the transactions are public, not
personal, and do not require the consensus of other
owners.
Transferable Ownership RightsTransferable Ownership Rights - Adv Transferable Ownership RightsTransferable Ownership Rights - Adv
Stockholder are can sell their
stock without consent of other owners. And…changing owners does NOT affect the company’s
day-to day operations.
Slide 13-9
It is easy to obtain capital through the stock market and
investors can be BIG or small….
Ability to Acquire CapitalAbility to Acquire Capital - AdvAbility to Acquire CapitalAbility to Acquire Capital - Adv
It is easy to obtain capital through the stock market and
investors can be BIG or small….Investors can
buy stock… a lot or a little with
ease.
Slide 13-10
A corporation’s life is not limited by the lifetime of its
owners
Continuous Life–ADVContinuous Life–ADV
The corporate charter (read ahead
for forming a corporation and
writing a charter) can limit its life, but most corporations
live on indefinitely, not limited by its
owner’s lives.
Slide 13-11
Having professional managers is an advantage.
Having professional managers who are not owners….might
be a disadvantage.
Corporate Management Corporate Management - AdvCorporate Management Corporate Management - Adv
Stockholders elect the Board of Directors, who elect the CEO, who hires
the managers.
Question: Should the managers own stock?
Would owning stock make them more invested in the
company?
Slide 13-12
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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
Slide 13-13
Many requirements: reports, federal laws, state laws, SEC
rules, stock exchange requirements (NYSE, NASDAC,
ASE…)
Government RegulationsGovernment Regulations – DIS ADVGovernment RegulationsGovernment Regulations – DIS ADV
Slide 13-14
Double Taxation. The stockholders are taxed on their
dividend earnings AND the corporation is taxed on its
earnings.
AND, the corporation CANNOT deduct dividend payments!
Additional TaxesAdditional Taxes– DIS ADVAdditional TaxesAdditional Taxes– DIS ADV
Slide 13-16
File application with the Secretary of State.
State grants charter.
Corporation develops by-laws.
Initial Steps:
Forming a CorporationForming a CorporationForming a CorporationForming a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey).
Corporations expense organization costs as incurred.
Slide 13-17
1. Vote in election of board of directors and on actions that require stockholder approval.
Stockholders have the right to:
Stockholders’ Rights Stockholders’ Rights Stockholders’ Rights Stockholders’ Rights
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
2. Share the corporate earnings through receipt of dividends.
Illustration 11-3
Slide 13-18
3. Keep the same percentage ownership when new shares of stock are issued (preemptive right*).
Stockholders have the right to:
Stockholders’ Rights Stockholders’ Rights Stockholders’ Rights Stockholders’ Rights
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
* A number of companies have eliminated the preemptive right.
Illustration 11-3
Slide 13-19
4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.
Stockholders have the right to:
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Illustration 11-3
Slide 13-20
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
Class A COMMON STOCK
Class A COMMON STOCK
PAR VALUE $1 PER SHARE
PAR VALUE $1 PER SHARE
Stock Certificate
Stock Certificate
Name of corporation
Stockholder’s name
Class
Shares
Signature of corporate official
PrenumberedIllustration 11-4
Slide 13-21
PracticePracticePracticePractice
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Practice: Do Self Study Questions: 1,2,3
See solution at the end of the chapter
Slide 13-22
CHAPTER 11 - Part 2CHAPTER 11 - Part 2CHAPTER 11 - Part 2CHAPTER 11 - Part 2
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Common Stock
Treasury Stock
Preferred Stock
Slide 13-23
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.
Note: the number of authorized shares does NOT
mean there are the SAME number of investors in
the company. These are just the number of
shares the company would EVER be authorized
to sell.
Authorized Stock
Slide 13-24
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Corporation can issue common stock directly to investors or indirectly through an investment banking firm.
How does a company set the price for a new issue of stock?
1. the company’s anticipated future earnings
2. its expected dividend rate per share
3. its current financial position
4. the current state of the economy
5. the current state of the securities market
Issuance of Stock
Note: Ultimately,
it is the market
demand that will set the
current selling price.
Slide 13-25
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
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.
Market Value of Stock
After the Company has sold a share of
stock, any subsequent sale
(at profit or loss), does NOT impact the company.
Slide 13-26
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
The Chocolate Company sells 1
share of stock at $30 to Joseph Blow.
One year later, Joseph sells it for
$40.
There is a $10 profit.
Who receives it? The company or
Joseph?
For example…
Chocolate!
First, answer this on YOUR OWN and then go to next
slide
Slide 13-27
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
Joseph earns the $10
profit.
However… The
Chocolate Company
gets the prestige of its
rising prices.
For example…
Slide 13-29
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
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 Stock
Slide 13-30
CapitalCapitalCapitalCapital
Assets = Liabilities + Stockholders’ Equity
Remember the Accounting Equation?
Assets = The Company’s Resources
Liabilities & Stockholders’ Equity = How the
Company financed these resources. The Choices
are:
DEBT
EQUITY (owners)
Slide 13-31
Capital Capital ((EQUITY) HAS TWO SOURCES:EQUITY) HAS TWO SOURCES:Capital Capital ((EQUITY) HAS TWO SOURCES:EQUITY) HAS TWO SOURCES:
PAID IN CAPITAL
EARNED CAPITAL
Common Stock
PIC, in Excess of Par Value, Common
Stock
Preferred Stock
PIC, in Excess of Par Value, Preferred
Stock
Retained Earnings
Paid in Capital is the total amount of cash and other
assets paid into the corporation by stockholders in exchange
for capital stock.
Retained Earnings – the net income (less
dividends paid out) that a corporation retains for
future use.
Slide 13-32
Primary objectives:
1) Identify the specific sources of paid-in capital.
2) Maintain the distinction between paid-in capital and retained earnings.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
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.
Slide 13-33
IllustrationIllustration: : Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.
a.
b.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Issuing Par Value Common Stock for Cash
Stop: Try these Journal Entries in your Course Pack
Slide 13-34
IllustrationIllustration: : Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.
Cash 1,000
Common stock (1,000 x $1)
1,000Cash 5,000
Common stock (1,000 x $1)
1,000Paid-in capital in excess of par value
4,000
a.
b.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Issuing Par Value Common Stock for Cash
Note these Journal Entries in your Course Pack
Slide 13-35
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Illustration 11-7
Slide 13-36
IllustrationIllustration: : Assume that Hydro-Slide, Inc. issues 5,000 shares of $5 stated value no-par common stock for $8 per share. The entry is:
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Issuing No-Par Common Stock for Cash
Prepare the entry assuming there is no stated value?
Stop: Try these Journal Entries in your Course Pack
Slide 13-37
IllustrationIllustration: : Assume that Hydro-Slide, Inc. issues 5,000 shares of $5 stated value no-par common stock for $8 per share. The entry is:
Cash 40,000
Common stock (5,000 x $5)
25,000Paid-in capital in excess of stated value
15,000
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Issuing No-Par Common Stock for Cash
Prepare the entry assuming there is no stated value?
Cash 40,000
Common stock
40,000
Note these Journal Entries in your Course Pack
Slide 13-38
Issuing Common Stock for Services orNoncash Assets
Corporations also may issue stock for:
Services (attorneys or consultants).
Noncash assets (land, buildings, and equipment).
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
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.
Slide 13-39
Illustration: Assume that attorneys have helped Jordan Company incorporate. They have billed the company $5,000 for their services. They agree to accept 4,000 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.
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
Stop: Try these Journal Entries in your Course Pack
Slide 13-40
Illustration: Assume that attorneys have helped Jordan Company incorporate. They have billed the company $5,000 for their services. They agree to accept 4,000 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.
Organizational expense 5,000
Common stock (4,000 x $1)
4,000Paid-in capital in excess of par
1,000
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
Slide 13-41
Illustration: Assume that Athletic Research Inc. is an existing publicly held corporation. Its $5 par value stock is actively traded at $8 per share. The company issues 10,000 shares of stock to acquire land recently advertised for sale at $90,000. Prepare the journal entry for this transaction.
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
Stop: Try these Journal Entries in your Course Pack
Slide 13-42
Illustration: Assume that Athletic Research Inc. is an existing publicly held corporation. Its $5 par value stock is actively traded at $8 per share. The company issues 10,000 shares of stock to acquire land recently advertised for sale at $90,000. Prepare the journal entry for this transaction.
Land (10,000 x $8) 80,000
Common stock (10,000 x $5)
50,000Paid-in capital in excess of par
30,000
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
Slide 13-43
Practice: Do Problem 11-1B
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues
See solution at the end of the Powerpoint slides
Slide 13-44
TREASURY STOCKTREASURY STOCKTREASURY STOCKTREASURY STOCK
PAID IN CAPITAL
EARNED CAPITAL
Common Stock
PIC, in Excess of Par
Value, Common
Stock
Preferred Stock
PIC, in Excess of Par
Value, Preferred
Stock
Retained Earnings
Paid in Capital is the total amount of cash and other assets paid into the corporation by stockholders in exchange for capital
stock.
Retained Earnings – the net income (less dividends paid out)
that a corporation retains for future use.
LESS: Treasury Stock
Slide 13-45
Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired.
Corporations purchase their outstanding stock:
1. To reissue the shares to officers and employees under
bonus and stock compensation plans.
2. To enhance the stock’s market value.
3. To have additional shares available for use in the
acquisition of other companies.
4. To increase earnings per share.
5. To rid the company of disgruntled investors, perhaps to
avoid a takeover.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Slide 13-46
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.
* Debit T-Stock at Cost (note-there are alternative ways to record T-Stock,
but not learned until more advanced courses)
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
Slide 13-47
Treasury stock (4,000 x $8) 32,000
Cash
32,000
Illustration: On February 1, 2011, Mead acquires 4,000 shares of its stock at $8 per share.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Illustration 11-8
Slide 13-48
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting 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 11-9
Slide 13-49
What is the relationship between…What is the relationship between…
AuthorizedAuthorized IssuedIssued OutstandingOutstanding Treasury StockTreasury Stock
Assume: 1,000,000 shares are authorized.Assume: 1,000,000 shares are authorized.
400,000 shared issued and 15,000 shares in 400,000 shared issued and 15,000 shares in treasury stock. How many are outstanding?treasury stock. How many are outstanding?
Slide 13-50
What is the relationship between…What is the relationship between…
Authorized = 1,000,000Authorized = 1,000,000 Issued = 400,000Issued = 400,000 Outstanding = Outstanding = 385,000385,000 Treasury Stock = 15,000Treasury Stock = 15,000
--Total Issued Shares = 400,000 ----Total Issued Shares = 400,000 --
-------------Total Authorized Shares = 1,000,000 ------------------------Total Authorized Shares = 1,000,000 -----------
Assume: 1,000,000 shares are authorized.Assume: 1,000,000 shares are authorized.
400,000 shared issued and 15,000 shares in treasury stock. How many are outstanding?400,000 shared issued and 15,000 shares in treasury stock. How many are outstanding?
385,00015,000
Slide 13-51
What about the unissued shares?What about the unissued shares?
Authorized = 1,000,000Authorized = 1,000,000 Issued = 400,000Issued = 400,000 Outstanding = Outstanding = 385,000385,000 Treasury Stock = 15,000Treasury Stock = 15,000
--Total Issued Shares = 400,000 ----Total Issued Shares = 400,000 --
-------------Total Authorized Shares = 1,000,000 ------------------------Total Authorized Shares = 1,000,000 -----------
Unissued shares have no value. They are just the maximum number of additional shares that Unissued shares have no value. They are just the maximum number of additional shares that the company can issue (without revising the corporate charter).the company can issue (without revising the corporate charter).
385,000 Unissued Shares = ????15,000
Slide 13-52
What about the unissued shares?What about the unissued shares?
Authorized = 1,000,000Authorized = 1,000,000 Issued = 400,000Issued = 400,000 Outstanding = Outstanding = 385,000385,000 Treasury Stock = 15,000Treasury Stock = 15,000 Unissued = Unissued = 600,000600,000--Total Issued Shares = 400,000 ----Total Issued Shares = 400,000 --
-------------Total Authorized Shares = 1,000,000 ------------------------Total Authorized Shares = 1,000,000 -----------
Unissued shares have Unissued shares have no value. no value. They are just the maximum number of additional shares that They are just the maximum number of additional shares that the company can issue (without revising the corporate charter).the company can issue (without revising the corporate charter).
385,000 Unissued Shares = 600,00015,000
Slide 13-54
Disposal of Treasury Stock
Above Cost
Below Cost
Both increase total assets (Cash) and stockholders’ equity (reducing/eliminating the contra account (T-Stock).
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Slide 13-55
Treasury stock (1,000 x $8)
8,000
Illustration: On February 1, 2011, Mead acquired 4,000 shares of its stock at $8 per share.
On July 1, Mead sells for $10 per share 1,000 shares of its treasury stock, previously acquired at $8 per share.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Above Cost
July 1
Paid-in capital treasury stock
2,000
Cash 10,000
A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.
Note this Journal Entries in your Course Pack
Slide 13-56
Paid-in capital treasury stock 800
Illustration: On February 1, 2011, Mead acquired 4,000 shares of its stock at $8 per share.
On Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Oct. 1
Treasury stock (800 x $8)
6,400
Cash 5,600
Mead uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares.
Below Cost
Note this Journal Entries in your Course Pack
Slide 13-57
Paid-in capital treasury stock 1,200
Illustration: On February 1, 2011, Mead acquired 4,000 shares of its stock at $8 per share.
On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Dec. 1
Retained earnings 1,000
Cash 15,400
Treasury stock (2,200 x $8)
17,600
Below Cost
Limited to
balance on hand
Note this Journal Entries in your Course Pack
Slide 13-58
Practice: Do Problem 11-2B
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Accounting for Treasury Stock Accounting for Treasury Stock Accounting for Treasury Stock Accounting for Treasury Stock
See solution at the end of the Powerpoint slides
Slide 13-59
Features often associated with preferred stock.
1. Preference as to dividends.
2. Preference as to assets in liquidation.
3. Nonvoting.
SO 4 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
Accounting for preferred stock at issuance is similar to that for common stock.
Slide 13-60
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.
Note this Journal Entries in your Course Pack
Slide 13-61
CHAPTER 11 - Part 3CHAPTER 11 - Part 3CHAPTER 11 - Part 3CHAPTER 11 - Part 3
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Cash Dividends
Stock Dividends
Stock Splits
Retained Earnings
Slide 13-62
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.
SO 4 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
Slide 13-63
Preferred Stock Dividends - examplePreferred Stock Dividends - example
oPreferred Stock Dividends are usually expressed as a % of par, for example:
o 10%, $100 par value Preferred Stock
o= $10.00 Preferred Dividend per share
Slide 13-64
A distribution of cash or stock to stockholders on a pro rata (proportional) basis.
Types of Dividends:
DividendsDividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
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. Scrip (note)
4. Stock dividends.
Slide 13-65
Declaration Date - The Board of directors announces a dividend
Record Date -The date ownership is determined. Current
stockholder on this date receives the dividend
Payment Date The date the dividend is paid to the stockholder of
record on the Record Date.
Accounting for DividendsAccounting for DividendsAccounting for DividendsAccounting for Dividends
Liability Recorded
No journal entry made
Liability paid
Slide 13-66
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. A declaration of dividends by the Board of
Directors.
Cash DividendsCash Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-67
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 (Date of Record)
January 20 (Payment Date)
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Dividends payable 50,000
Cash 50,000
No entry
Cash DividendsCash Dividends
Note these Journal Entries in your Course Pack
Slide 13-68
Allocating Cash Dividends Between Preferred and Common Stock
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends.
Cash DividendsCash Dividends
Slide 13-69 SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock
dividends.dividends.
Illustration: On December 31, 2011, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock. It also has 50,000 shares of $10 par value common stock outstanding. At December 31, 2011, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend.
Cash Dividends - AllocationsCash Dividends - Allocations
Stop: Try these Journal Entries in your Course Pack
Even though the Preferred
Shareholders have an 8%
dividend feature, IBR can only pay
them $6,000
Slide 13-70 SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock
dividends.dividends.
Illustration: On December 31, 2011, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock. It also has 50,000 shares of $10 par value common stock outstanding. At December 31, 2011, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend.
Cash Dividends 6,000
Dividends payable
6,000Pfd Dividends: 1,000 shares x $100 par x 8% = $8,000
Cash Dividends – Watch the DatesCash Dividends – Watch the Dates
Note these Journal Entries in your Course Pack
Slide 13-71 SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock
dividends.dividends.
2011 2012
Dividends declared 6,000$
Dividends in arrears
Allocation to Pref erred 6,000
Remainder to Common -$
* 1,000 shares x $100 par x 8% = $8,000
*
** 2010 Pfd. dividends $8,000 – declared $6,000 = $2,000
**
Illustration: At December 31, 2012, IBR declares a $50,000 cash dividend. Show the allocation of dividends to each class of stock.
$ 50,0002,000
8,000
$ 40,000
Cash DividendsCash Dividends
Slide 13-72
Dividends in Arrears - PracticeDividends in Arrears - Practice
YEAR DIVIDENDs PAID BALANCE IN ARREARS
19X1 15,000 15,000 019X219X3
PREFERRED STOCK, CUMULATIVE DIVIDENDS: Source: Rigos CPA review materials, 2002
At 12/31 19x2, and 19x3, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, 19x1.
•Apex did NOT declare a dividend during 19x2.•During 19x3, Apex paid a cash dividend of $10,000 on its preferred stock.
Apex should report dividends in arrears in its 19x3 financial statements as a (an)a. Accrued Liability of $15,000b. Disclosure of $15,000c. Accrued liability of $20,000d. Disclosure of $20,000
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slides
Slide 13-74
Stock Dividends
Pro rata distribution of the corporation’s own stock.
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Results in decrease in retained earnings and increase in paid-in capital. But no change in total Stockholders’ Equity
Illustration 11-14
Slide 13-75
Stock Dividends
Reasons why corporations issue stock
dividends:
1. To satisfy stockholders’ dividend
expectations without spending
cash.
2. To increase the marketability of the
corporation’s stock.
3. To emphasize that a portion of
stockholders’ equity has been
permanently reinvested in the
business.
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-76
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)
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
* This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares.
*
Slide 13-77
10% stock dividend is declared
Stock Dividend (50,000 x 10% x $15) 75,000
Common stock dividends distributable 50,000
Paid-in capital in excess of par value
25,000
Stock issued
Common stock dividends distributable
50,000
Common stock 50,000
Illustration: Medland Corp. has 50,000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share.
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-78
Stockholders' equityPaid-in capital
Common stock 500,000$ Common stock dividends distributable 50,000
Total stockholders' equity 550,000$
Medland CorporationBalance Sheet (partial)
Stockholders’ Equity with Dividends Distributable
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Illustration 11-15
Slide 13-79
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Effects of Stock DividendsIllustration 11-16
Note: total Stockholders’ Equity is the same
Slide 13-80
Which of the following statements about small stock dividends is true?
a. A debit to Retained Earnings for the par value of the shares issued should be made.
b. A small stock dividend decreases total stockholders’ equity.
c. Market value per share should be assigned to the dividend shares.
d. A small stock dividend ordinarily will have no effect on book value per share of stock.
Question
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-81
Which of the following statements about small stock dividends is true?
a. A debit to Retained Earnings for the par value of the shares issued should be made.
b. A small stock dividend decreases total stockholders’ equity.
c. Market value per share should be assigned to the dividend shares.
d. A small stock dividend ordinarily will have no effect on book value per share of stock.
Question
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-82
In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n):
a. deduction from total paid-in capital and retained earnings.
b. current liability.
c. deduction from retained earnings.
d. addition to capital stock.
Question
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-83
In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n):
a. deduction from total paid-in capital and retained earnings.
b. current liability.
c. deduction from retained earnings.
d. addition to capital stock.
Question
Stock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Slide 13-84
Stock Split
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of
shares.
Stock SplitsStock Splits
Slide 13-85
Illustration: Assume Medland 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.
Stock SplitsStock Splits
Before Split:Common Stock (50,000 shares outstanding, $10 par value) $500,000Paid in capital in excess of par value 0Total Paid in Capital $500,000
Retained Earnings $300,000
Total Stockholders’ Equity $800,000
Outstanding Shares 50,000
Slide 13-86
Illustration: Assume Medland 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.
Stock SplitsStock Splits
AFTER Split:Common Stock (100,000 shares outstanding, $5 par value) $500,000Paid in capital in excess of par value 0Total Paid in Capital $500,000
Retained Earnings $300,000
Total Stockholders’ Equity $800,000
Outstanding Shares 100,000
Slide 13-87
So what is the value in a stock split???
Stock SplitsStock Splits
When stock is split, the market responds. Let’s say the Medland stock was trading at $80 in the market.
After the split, the market will adjust its price to match the split and move to $40. (This will not affect the stockholder, who know owns 2 shares of stock with a total value of $80)
Often, lowering the price of a share of stock, will stimulate trades.
More trades mean more demand, which often drives the stock price UP.
Slide 13-88
Stock splits can be structure any way….
Stock Splits – other typesStock Splits – other types
For example, they can be 3 shares issued for every 2 shares owned:
Before: Outstanding Shares of 10,000 at a $6 par value $60,000
After:Outstanding Shares of 15,000 at a $4 par value $60,000
Slide 13-89
Retained earnings is net income that a
company retains for use in the business.
Net income increases Retained Earnings and a
net loss decreases Retained Earnings.
Retained earnings is part of the stockholders’
claim on the total assets of the corporation.
A debit balance in Retained Earnings is identified
as a deficit.
Retained EarningsRetained Earnings
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Slide 13-90
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Retained Earnings RestrictionsRetained Earnings Restrictions
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Illustration 11-22
Slide 13-91
Corrections of Errors
Result from: mathematical mistakes mistakes in application of accounting
principles oversight or misuse of facts
Corrections treated as prior period
adjustments
Adjustment made to the beginning balance of
Retained Earnings
Prior Period AdjustmentsPrior Period Adjustments
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Slide 13-92
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2011
Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$
Before issuing the report for the year ended December 31, 2011, you discover a $50,000 error (net of tax) that caused the 2010 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2010. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2011?
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Prior Period AdjustmentsPrior Period Adjustments
Slide 13-93
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2011
Balance, January 1, as previously reported 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1, as restated 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Prior Period AdjustmentsPrior Period Adjustments
Slide 13-94
Retained Earnings StatementRetained Earnings Statement
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
The company prepares the statement from the Retained Earnings account.
Illustration 11-24
Slide 13-95
Retained Earnings StatementRetained Earnings Statement
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Illustration 11-25
Slide 13-96
All but one of the following is reported in a retained earnings statement. The exception is:
a. cash and stock dividends.
b. net income and net loss.
c. some disposals of treasury stock below cost.
d. sales of treasury stock above cost.
Question
Retained Earnings StatementRetained Earnings Statement
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Slide 13-97
SO 7
Statement Presentation and AnalysisStatement Presentation and Analysis
Illustration 11-26
Slide 13-98
Analysis
Net Income Available to Common Stockholders
Return on Common
Stockholders’ Equity
= Average Common
Stockholders’ Equity
SO 7 Prepare and analyze a comprehensive stockholders’ equity section.
Statement Analysis and PresentationStatement Analysis and Presentation
This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders.
Slide 13-99
Analysis
SO 7 Prepare and analyze a comprehensive stockholders’ equity section.
Statement Analysis and PresentationStatement Analysis and Presentation
Illustration: Kellogg Company’s beginning-of-the-year and end-of-the-year common stockholders’ equity were $2,526 and $1,448 million, respectively. Its net income was $1,148 million, and no preferred stock was outstanding. The return on common stockholders’ equity ratio is computed as follows.
Solution on notes page
Illustration 11-28
Slide 13-100
Home-equity loans are now difficult to get. The reasons are that banks are not making the loans, and sinking home prices give homeowners less equity to borrow against.
Four major reasons why many individuals employ home-equity loans are: (1) to invest, (2) to get a tax deduction, (3) to defer other debt, or (4) to buy from a wish list.
Home-Equity Loans
Slide 13-101
Good Bye and Good Luck!
Solutions to problems next
End of Chapter 11End of Chapter 11End of Chapter 11End of Chapter 11
Slide 13-102
(a) Jan. 10 Cash (80,000 X $4) 320,000Common Stock (80,000 X $3) 240,000Paid-in Capital in Excess of Stated Value—Common Stock (80,000 X $1) 80,000
Mar. 1 Cash (5,000 X $105) 525,000Preferred Stock (5,000 X $100) 500,000Paid-in Capital in Excess of Par Value—Preferred Stock (5,000 X $5) 25,000
Apr. 1 Land 85,000Common Stock (24,000 X $3) 72,000Paid-in Capital in Excess of Stated Value—Common Stock ($85,000 – $72,000) 13,000
May 1 Cash (80,000 X $4.50) 360,000Common Stock (80,000 X $3) 240,000Paid-in Capital in Excess of Stated Value—Common Stock (80,000 X $1.50) 120,000
Aug. 1 Organization Expense 40,000Common Stock (10,000 X $3) 30,000Paid-in Capital in Excess of Stated Value—Common Stock ($40,000 – $30,000) 10,000
Sept. 1 Cash (10,000 X $5) 50,000Common Stock (10,000 X $3) 30,000Paid-in Capital in Excess of Stated Value—Common Stock (10,000 X $2) 20,000
Prob 11-1B
Slide 13-103
Prob 11-1B
PROBLEM 11-1B (Continued)(c) KEELER CORPORATION
Stockholders’ equityPaid-in capital
Capital stock8% Preferred stock, $100 par value, 10,000 shares authorized, 6,000 shares issued $ 600,000Common stock, no par, $3 stated value, 500,000 shares authorized, 204,000 shares issued 612,000
Total capital stock 1,212,000Additional paid-in capital
In excess of par value— preferred stock $ 34,000In excess of stated value— common stock 243,000
Total additional paid-in capital 277,000Total paid-in capital $1,489,000
Slide 13-104
(a) Mar. 1 Treasury Stock (5,000 X $8) 40,000Cash 40,000
June 1 Cash (1,000 X $12) 12,000Treasury Stock (1,000 X $8) 8,000Paid-in Capital from Treasury Stock (1,000 X $4) 4,000
Sept. 1 Cash (2,000 X $10) 20,000Treasury Stock (2,000 X $8) 16,000Paid-in Capital from Treasury Stock (2,000 X $2) 4,000
Dec. 1 Cash (1,000 X $6) 6,000Paid-in Capital from Treasury Stock (1,000 X $2) 2,000
Treasury Stock (1,000 X $8) 8,00031 Income Summary 40,000
Retained Earnings 40,000
Prob 11-2B
Slide 13-105
Prob 11-2B
(c) GOLDBERG CORPORATIONStockholders’ equity
Paid-in capitalCapital stock
Common stock, $5 par, 100,000 shares issued and 99,000 outstanding $500,000
Additional paid-in capitalIn excess of par value $200,000From treasury stock 6,000
Total additional paid-in capital 206,000Total paid-in capital 706,000
Retained earnings 140,000Total paid-in capital and retained earnings 846,000
Less: Treasury stock (1,000 commonshares, at cost) (8,000)
Total stockholders’ equity $838,000
Slide 13-106
Prob 11-3B
(a) Feb. 1 Cash 100,000Common Stock (25,000 X $1) 25,000Paid-in Capital in Excess of Stated Value—Common Stock ($100,000 – $25,000) 75,000
Apr. 14 Cash 33,000Treasury Stock—Common (6,000 X $4) 24,000Paid-in Capital from Treasury Stock-Common ($33,000 – $24,000) 9,000
Sept. 3 Patent 30,000Common Stock (5,000 X $1) 5,000Paid-in Capital in Excess of Stated Value—Common Stock ($30,000 – $5,000) 25,000
Nov. 10 Treasury Stock—Common 6,000Cash 6,000
Dec. 31 Income Summary 452,000Retained Earnings 452,000
Slide 13-107
Prob 11-3B
(c) PORT CORPORATIONStockholders’ equity
Paid-in capitalCapital stock 8% Preferred stock, $50 par value, cumulative, 10,000 shares authorized,
8,000 shares issued and outstanding $ 400,000 Common stock, no par, $1 stated value,
2,000,000 shares authorized, 1,030,000 shares issued
and 1,025,000 shares outstanding 1,030,000 Total capital stock 1,430,000Additional paid-in capital
In excess of par value— preferred stock $ 100,000
In excess of stated value— common stock 1,550,000
From common treasury
stock 9,000 Total additional paid-in capital 1,659,000
Total paid-in capital 3,089,000Retained earnings (see Note X) 2,268,000
Total paid-in capital and retained earnings 5,357,000
Less: Treasury stock (5,000 commonshares) (22,000)
Total stockholders’ equity $5,335,000
Note X: Dividends on preferred stock totaling $32,000 [8,000 X (8% X$50)] are in arrears.
Slide 13-108
Dividends in Arrears – Practice – SolutionDividends in Arrears – Practice – Solution
YEAR DIVIDENDs PAID BALANCE IN ARREARS
19X1 15,000 15,000 019X2 15,000 0 15,00019X3 15,000 10,000 25,000
PREFERRED STOCK, CUMULATIVE DIVIDENDS: Source: Rigos CPA review materials, 2002
At 12/31 19x2, and 19x3, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, 19x1.
•Apex did NOT declare a dividend during 19x2.•During 19x3, Apex paid a cash dividend of $10,000 on its preferred stock.
Apex should report dividends in arrears in its 19x3 financial statements as a (an)a. Accrued Liability of $15,000b. Disclosure of $15,000c. Accrued liability of $20,000d. Disclosure of $20,000
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