Post on 30-Dec-2015
1
Chapter 11
Reporting and Interpreting Owners’ Equity
Acct 2301 Fall 09
2
Topics on owners’ equity
• Terminology • Authorized, issued, and outstanding shares
• (additional) Paid-in capital (APIC)
• Preferred stock, common stock, treasury stock
• Sale of stock
• Purchase of stock
• Dividends
• Stock dividend and stock split
3
Equity in Corporations
The equity section for a corporation is divided into two parts:• Retained Earnings -- earnings (net
income) the company has earned since it was founded, less any dividends paid
• Contributed Capital --amount that owners have contributed
4
Presentation of Stockholders’ Equity in Corporations
Preferred stock, $10 par value, 100,000 shares authorized, 2,000 shares issued $20,000
Common stock, $1 par value, 1,000,000 shares authorized, 100,000 shares issued
100,000Paid-in capital (common) 985,000Less: treasury stock (common)
at cost, 5,000 shares (105,000)Retained earnings 670,000Other comprehensive income 50,000
Total Stockholders’ Equity $ 1,720,000
5
Capital Stock
• Common Stock• Preferred Stock• Treasury Stock
– Shares, either common stock or preferred stock, repurchased by the corporation
6
Capital Stock• Authorized Shares: The maximum number of shares of capital stock that can be sold to the public is called the authorized number of shares.
• Issued Shares -- shares sold • Unissued shares -- shares have never been sold
• Outstanding shares -- number of shares issued and not retained by the company.
• Shares in Treasury (treasury shares) -- shares repurchased by the corporation
Authorized shares = Issued shares + Unissued shares
Issued shares = Outstanding shares + Shares in Treasury
7
Capital Stock
Par value: the nominal value per share of capital stock• Has no relationship to market value.• Serves as the basis for legal capital
No-par value is capital stock that does not have an amount per share
APIC: Additional Paid-in CapitalAlso called Paid-in capital or Capital in
excess of par
8
Accounting for Sale of Stock
Balancing amount is Additional paid-in capital (APIC)
Debit Credit
Cash $3,600
ABC Co. issued 300 shares of $1 par common stock for $12 per share.
Common Stock 300APIC 3,300
9
Treasury Stock
Outstanding (common or preferred) stock that was subsequently reacquired and is still being held by that corporation.
Why would a corporation reacquire its own stock?
1010
More on Treasury Stock
• Treasury Stock:• is considered issued stock but not
outstanding stock• has no voting or dividend rights• is a contra-equity account on the
Balance Sheet• is recorded at cost• Can be subsequently resold
• NO gains or losses are recorded on treasury stock
1111
Treasury Stock Example
ABC Inc. purchased 120 shares of its own common stock from the stock market at $10 per share
Debit Credit
Treasury Stock$1,200 Cash $1,200
12
Treasury Stock Example
Scenario One: Sold 100 shares of Treasury Stock at $13 per share.
Cash 1,300 APIC 300
Treasury Stock 1,000
Scenario Two: Sold 100 shares of Treasury Stock at $9 per share.
Cash 900APIC 100
Treasury Stock 1,000
The treasury stock was resold laterDebit Credit
13
Dividends
• Dividends are declared by board of directors • Dividends (both cash and stock) are
distributions of earnings to the shareholders – not an expense– based only on shares outstanding
• Once a dividend is declared, a liability is created
• Cash dividends require sufficient cash and positive retained earnings (past earnings)
14
Dividend dates
• Declaration date– Board declares dividend (charge Retained
Earnings)– Creates a legal liability (Dividend Payable)
• Date of Record: who will receive dividend• Payment Date
15
Dividend Dates Journal Entries
Declaration date: Dr. Retained Earnings
Cr. Dividends payable Record date: No entry
Payment date: Dr. Dividends payable Cr. Cash
16
Dividends on Preferred Stock
• Current preferred dividends must be paid before paying any dividends to common stock.
• If a preferred dividend is not paid, the unpaid amount is either cumulative (a dividend in arrears) or non-cumulative. – Cumulative: Unpaid dividends must be paid before
common dividends.
– Non-cumulative: Unpaid dividends are lost.
17
Stock Dividends
• Stock dividends are distributions to stockholders of additional shares of stock.
• All stockholders receive the same percentage increase in the number of shares they own (pro rata basis).– No change in total stockholders’ equity.– No change in par values.
Why issue a stock dividend?
18
ABC Co. declared a 10% stock dividend on its 200 shares of $1 par common stock. The market value is $20 per share.
Retained earnings $400
Common stock 20
Additional paid in capital 380
• Income Statement: No effect on Income• Statement of Changes in Equity: No effect on
equity• Statement of Cash Flows: No effect on cash flow
Accounting for Stock Dividends
debit credit
19
2:1 Stock Split
1 share of stock $10 par value
Before stock split
2 shares of stock $5 par value
After stock split
20
Accounting for Stock Splits
• Distributions of 100% or more of stock to stockholders
• Decrease par value of stock• Increase number of outstanding shares• No change in total stockholders’ equity
Thus, no journal entry is needed!