© The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Chapter 11 Reporting and Interpreting...
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Transcript of © The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill Chapter 11 Reporting and Interpreting...
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Chapter 11
Reporting and Interpreting Owners’ Equity
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Business Background
Advantages of a corporation
Simple to become an
owner
Easy to transfer
ownership
Provides limited liability
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Business Background
Because a corporation is a separate legal entity, it can . . .
Own assets.
Sue and be sued.
Incur liabilities.
Enter into contracts.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Ownership of a Corporation
Rights
Voting (in person or by proxy).
Proportionate distributions of
profits.
Proportionate distributions of
assets in a liquidation.
Stockholders
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Ownership of a Corporation
Vice President(Production)
V ice President(Ma rketing)
V ice President(F ina nce)
V ice President(C ontro ller)
President
B oa rd of D irectorsInterna l (m a na gers) a ndExterna l (non-m a na gers)
Stockholders(O w ners of voting sha res)
Elected byshareholders
Appointedby directors
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Authorized, Issued, and Outstanding Capital Stock
The maximum number of shares of capital
stock that can be sold to the public.
AuthorizedShares
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Authorized, Issued, and Outstanding Capital Stock
AuthorizedShares
Issued shares are authorized shares of stock that have been
sold.
Unissued shares are authorized shares of stock that
never have been sold.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Authorized, Issued, and Outstanding Capital Stock
AuthorizedShares
UnissuedShares
TreasuryShares
OutstandingSharesIssued
SharesTreasury shares are
issued shares that have been reacquired by the
corporation.
Outstanding shares are issued shares that are
owned by stockholders.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Types of Capital Stock
Common Stock
Preferred Stock
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Common Stock
Basic voting stock
Ranks after preferred
stock
Dividend set by board of
directors
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Par Value and No-par Value Stock
Legal capital is the amount of capital, required by the state, that must remain
invested in the business.
Par Value
Nominal value
Legal capital
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Preferred Stock
Preference over common
stock
Usually hasno voting
rights
Usually has a fixed dividend
rate
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Special Features of Preferred Stock
Convertible preferred stock may be exchanged for common stock.
Convertible preferred stock may be exchanged for common stock.
Callable preferred stock may be repurchased by the corporation at a
predetermined price.
Callable preferred stock may be repurchased by the corporation at a
predetermined price.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Accounting for Capital Stock
Two primary sources of stockholders’ equity
Retained earnings
Contributed capital
Parvalue
Additional paid-in capital
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Sale and Issuance of Capital Stock
Initial public offering (IPO)
Seasoned new issue
The first time a corporation sells
stock to the public.
Subsequent sales of new stock to the
public.
Wal-Mart
issues new stock.
Wal-Mart
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Secondary Markets
Transactions between two investors that do not affect the corporation’s accounting records.(Like when you
buy and sell stock) I’d like to sell some of my
Wal-Mart stock.
I’d like to buy some of your
Wal-Mart stock.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
GENERAL JOURNAL Page 34Date Description Debit Credit
July 6
Sale and Issuance of Capital Stock
On July 6, Wal-Mart issued 100,000 shares of $0.10 par value common
stock for $22 per share.
Prepare the journal entry to record this transaction.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
GENERAL JOURNAL Page 34Date Description Debit Credit
July 6 Cash 2,200,000
Common Stock 10,000
Capital In Excess of Par Value 2,190,000
Sale and Issuance of Capital Stock
100,000 shares × $22 per share = $2,200,000
100,000 shares × $0.10 par value = $10,000
On July 6, Wal-Mart issued 100,000 shares of $0.10 par value common
stock for $22 per share.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Treasury Stock
Wal-Mart buysits own stock in
the secondary market.
(Treasury stock) Stockholders
Management
Management compensation
package includes salary and stock
options.
Stock options allow management to purchase
stock from the corporation at a fraction of the stock’s
value in the secondary market.
Wal-Mart
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Treasury Stock
No voting or
dividend rights
Contra equity
account
When stock is reacquired, the corporation records the treasury stock at cost.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Treasury Stock
GENERAL JOURNAL Page 27Date Description Debit Credit
May 1 Treasury Stock 2,200,000
Cash 2,200,000
100,000 shares × $22 = $2,200,000
On May 1, Wal-Mart reacquired 100,000 shares of its common stock at $22 per share.
The journal entry for May 1 is . . . .
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
GENERAL JOURNAL Page 68Date Description Debit Credit
Dec. 3 Cash 300,000
Treasury Stock 220,000
Contributed Capital from
Treasury Stock Transactions 80,000
Treasury Stock
10,000 shares × $30 = $300,000
10,000 shares × $22 cost = $220,000
On December 3, Wal-Mart reissued 10,000 shares of the treasury stock at $30 per share.
The journal entry for December 3 is . . .
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Accounting for Cash Dividends
Declared by board of directors.
Not legally required.
Creates liability at declaration.
Requires sufficient Retained Earnings
and Cash.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Dividend Dates
Declaration dateBoard of directors declares the dividend.Record a liability.
GENERAL JOURNAL Page 12
Date DescriptionPost. Ref. Debit Credit
Retained Earnings XXX
Dividends Payable XXX
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Dividend Dates
Date of RecordStockholders holding shares on this date
will receive the dividend. (No entry)
X
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Dividend Dates
Date of PaymentRecord the payment of the dividend to
stockholders.
GENERAL JOURNAL Page 12
Date DescriptionPost. Ref. Debit Credit
Dividends Payable XXX
Cash XXX
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Dividends on Preferred Stock
Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.
Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.
Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.
Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Dividends on Preferred Stock
If the preferred stock is noncumulative, any dividends not declared in previous years
are lost permanently.
If the preferred stock is noncumulative, any dividends not declared in previous years
are lost permanently.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Dividends on Preferred Stock
Kites, Inc. has the following stock outstanding:
Common stock: $1 par, 100,000 shares
Preferred stock: 3%, $100 par, cumulative, 5,000 shares
Preferred stock: 6%, $50 par, noncumulative, 3,000 shares
Dividends were not paid last year. In the current year, the board of directors
declared dividends of $50,000.
How much will each class of stock receive?
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Dividends on Preferred StockTotal dividend declared 50,000$
Preferred stock (cumulative)Arrearage ($100 par × 3% × 5,000 shares) 15,000$ Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000
Remainder 20,000$
Preferred stock (noncumulative)
Remainder
Common stock
Remainder
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Dividends on Preferred StockTotal dividend declared 50,000$
Preferred stock (cumulative)Arrearage ($100 par × 3% × 5,000 shares) 15,000$ Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000
Remainder 20,000$
Preferred stock (noncumulative)Current Yr. ($50 par × 6% × 3,000 shares) 9,000
Remainder 11,000$
Common stock
Remainder
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Dividends on Preferred StockTotal dividend declared 50,000$
Preferred stock (cumulative)Arrearage ($100 par × 3% × 5,000 shares) 15,000$ Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000
Remainder 20,000$
Preferred stock (noncumulative)Current Yr. ($50 par × 6% × 3,000 shares) 9,000
Remainder 11,000$
Common stockCurrent Yr. ($11,000 Remainder) 11,000
Remainder 0$
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Accounting for Stock Dividends (Saving cash)
Distribution of additional sharesof stock to stockholders(less than 25%).
No change in total stockholders’ equity.
All stockholders retain same percentage
ownership.
No change in par values.
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Stock Splits
Distributions of 25% or more of
stock to stockholders.
Ice Cream Parlor
Banana Splits On Sale Now
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Stock Splits
Assume that a corporation had 5,000 shares of $1 par value common stock outstanding
before a 2–for–1 stock split.
Before Split
After Split
Common Stock Shares 5,000
Par Value per Share 1.00$
Total Par Value 5,000$
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Stock Splits
Assume that a corporation had 5,000 shares of $1 par value common stock outstanding
before a 2–for–1 stock split.
Increase
Decrease
No Change
Before Split
After Split
Common Stock Shares 5,000 10,000
Par Value per Share 1.00$ 0.50$
Total Par Value 5,000$ 5,000$
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Restrictions on Retained Earnings
If I loan you $150,000, I will want you to restrict your
retained earnings. Why would youwant to do that?
© The McGraw-Hill Companies, Inc., 2001Irwin/McGraw-Hill
Restrictions on Retained Earnings
Because I want to restrict the amount you can pay out
in dividends.