Post on 30-Dec-2015
Equity FinancingEquity Financing
C H A P T E R 12
Learning Objective 1
Distinguish between debt and equity financing and describe the advantages and disadvantages of organizing a business as a proprietorship or a partnership.
Describe the Time Line ofBusiness Issues
Differentiate Between Debt and Equity
Debt Financing Equity Financing
Define Proprietorships and Partnerships
Proprietorship
Partnership
Ease of Formation
Limited Life
Unlimited Liability
List Characteristics Shared by Proprietorships and
Partnerships
Learning Objective 2
Describe the basic characteristics of a corporation and the nature of common and preferred stock.
What is a Corporation?
List Characteristics of a Corporation
Corporation
What are the Steps to Starting a Corporation?
Common Stock
List basic rights inherent in common stock ownership:
Preferred StockDefine the following terms.
Preferred Stock
Convertible Preferred Stock
Learning Objective 3
Account for the issuance and repurchase of common and preferred stock.
Issuing Stock
Par ValueNominal value assigned to and printed on the face of each share of a corporation’s stock.
Contributed CapitalThe portion of owners’ equity contributed by investors (the owners) in exchange for shares of stock.
Example: Issuing Stock
The Angelfish Corporation issued 5,000 shares of $20 par common stock for $40 per share. Record the transaction.
Example: Issuing Stock
The Angelfish Corporation issued 5,000 shares of $20 no-par common stock for $40 per share. Record the transaction.
Example: Issuing Stock
The Angelfish Corporation exchanged 2,000 shares of $20 par common stock for land. Market value of the stock is $40 per share. Record the transaction.
What is Treasury Stock?
Why purchase treasury stock?
Treasury Stock
Example: Reissuing Treasury Stock
The Goldfish Company purchased 1,000 shares of its own $20 par common stock for $30 per share. Record the transaction.
Treasury Stock
TreasuryStock
Resoldbelow cost
Paid-In Capital, Treasury Stock
Resoldabove cost
Debit Paid-In Capital,Treasury Stock If it Exists,
Otherwise Debit Retained Earnings
Example: Reissuing Treasury Stock
The Goldfish Company reissued 500 shares of treasury stock for $35 per share. Record the transaction.
Example: Reissuing Treasury Stock
The Goldfish Company reissued 300 shares of treasury stock (originally issued for $30 per share) for $25 per share. Record the transaction.
Example: Reissuing Treasury Stock
The Goldfish Company reissued 150 shares of treasury stock (originally issued for $30 per share) for $22 per share. Record the transaction.
Learning Objective 4
Understand the factors that affect retained earnings, describe the factors determining whether a company can and should pay cash dividends, and account for cash dividends.
Retained Earnings and Dividends
The portion of a corporation’s owners’ equity that has been earned from profitable operations and not distributed to stockholders.
Distributions to the owners (stockholders) of a corporation.
Cash distribution of earnings to stockholders.
Cash Dividends
Dividends
Retained Earnings
RetainedEarnings
Accounting forRetained Earnings
Net Income
LossesDividends
Match Important Dividend Dates
The date the corporation’s board of directors formally decides to pay a dividend to stockholders.
The date selected by a corporation’s board of directors on which the stockholders of record are identified as those who will receive dividends.
The date on which a corporation pays dividends to its stockholders.
Declaration Date
Payment Date
Date of Record
Example: Cash Dividend
The Dolphin Company declared a $0.50 dividend on January 1, 2003; 4,000 shares are outstanding. Record the appropriate journal entries.
Discuss Dividend Preferences
Current-Dividend Preference
Cumulative-Dividend Preference
Define Dividend Preferences
Dividends in Arrears
Example: Preferred Dividend
Lobster Company did not pay dividends last year, but it has declared a $5,000 dividend in the current year. Outstanding stock includes the following. Calculate the dividend.
Preferred, 5% Cumulative, $20 par 2,000 sharesCommon, $5 par 5,000 shares
Example: Preferred DividendLobster Company did not pay dividends last year, but it has declared a $5,000 dividend in the current year. Outstanding stock was previously listed. Given this calculation, provide the appropriate journal entries.
Learning Objective 5
Describe the purpose of reporting comprehensive income in the equity section of the balance sheet and prepare a statement of stockholders’ equity.
Define These Other Equity Terms
Accumulated Other Comprehensive Income
Statement of Comprehensive Income
Statement of Stockholders’ Equity
Comprehensive Income in the Balance Sheet
Killer Whale Corp. has the following comprehensive income items in the current year:1. Investment securities increased in value by $600 during the current year.2. Assets owned by Killer Whale’s British subsidiary decreased in value by $350 due to a decline in the strength of the British Pound.How would this information appear in the equity section of the balance sheet?
Comprehensive Income in the Balance Sheet
Killer Whale Corp.
Expanded MaterialLearning Objective 6
Account for stock dividends and distinguish them from stock splits.
Match Accounting for Stock Dividends
A pro rata distribution of additional shares of stock to stockholders.
Less than 25 percent.
Greater than 25 percent.
Small Stock
Dividend
Large Stock
Dividend
Stock Dividen
d
Stock Dividends
If the stock dividend is 25 percent or more of the outstanding company stock, the journal entry requires that retained earnings be debited only for par value.
OutstandingStock
25%
75%
If the stock dividend is less than 25 percent of the outstanding company stock, the journal entry requires the use of the market value of the stock.
Example: Accounting for Stock Dividends
Oyster Corporation declares a 20 percent stock dividend. The company has 2,000 shares of common stock ($5 par) outstanding. What is the necessary entry if the stock price is $15 when the dividends are declared and issued?
Example: Accounting for Stock Dividends
Oyster Corporation declares a 30 percent stock dividend. The company has 2,000 shares of common stock ($5 par) outstanding. What is the necessary entry if the stock price is $15 when the dividends are declared and issued?
Define Stock Split
Differentiate Between aStock Split vs.
a Stock Dividend
Stock
Stock
Expanded MaterialLearning Objective 7
Explain prior-period adjustments and prepare a statement of retained earnings.
Define Prior-Period Adjustmentsand the Statement of Retained
Earnings
Prior-Period Adjustments
Statement of Retained Earnings
Retained earnings, January 1, 2003. . . . . . . . . . $300,000 Prior-period adjustment:Deduct adjustment for 2002 inventory correction. (25,000)Balance as restated. . . . . . . . . . . . . . . . . . . . . . . $275,000 Net income for 2003 . . . . . . . . . . . . . . . . . . . . . . 50,000 Less dividends declared in 2003:Preferred stock . . . . . . . . . . . . . . . . . . . . . $10,000Common stock. . . . . . . . . . . . . . . . . . . . . . 12,000
(22,000)
Retained earnings, December 31, 2003 . . . . . . . $303,000
Statement of Retained Earnings
Oyster CorporationStatement of Retained Earnings
For the Year Ended December 31, 2003
Chapter 12 is Complete