Plain Background Power Point Slides Chapter 9 Stockholders Equity682

8/9/2019 Plain Background Power Point Slides Chapter 9 Stockholders Equity682

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

1

Chapter 9

Stockholders¶ Equity




2

Learning Objective 1

Explain the advantages anddisadvantages of a corporation.




3

Characteristics of a Corporation

Separate legal entityContinuous life and transferability

of ownershipLimited liabilitySeparation of ownership and

managementCorporate taxationGovernment regulation




4

Advantages of a Corporation

1. Can raise more capital than aproprietorship or partnership can

2. Continuous life3. Ease of transferring ownership

4. Limited liability of stockholders




5

Disadvantages of a Corporation

1. Separation of ownership

2. Corporate taxation

3. Government regulation




6

Stockholders

Board of Directors

Chairperson of the Board

President

Authority Structure of a

Corporation




7

Vote

Dividends

Liquidation

Preemption

Stockholders¶ Rights




8


Two main components:

1. Paid-in capital (contributedcapital)

2. Retained earnings




9

Capital Stock

Authorized shares

Outstanding shares




10

Capital Stock

Common Stock

Most basic form

of capital stock -

issued by every

corporation

Preferred Stock

Has several

preferences over

common stock




11

Capital Stock

Par Value Stock

An arbitrary

amount assigned

to a share of

stock

Does not have

par value, but

may have

stated value

No-par Stock




12


Measure the effect of issuingstock on a company¶s financial

position.



Common Stock at Par

General Journal

Date Accounts and Explanations PR Debit redit

Jan 8 ash (6,200 x $10) 62,000

Common Stock 62,000

To record issuance of stock

Suppose IHOP¶s common stock has apar value of $10 per share. The

company issues 6,200 shares of common stock at par. What is theentry?




Common Stock at Par

General Journal

Date Accounts and Explanations PR Debit redit

Jul 23 Cash (6,200 x $10) 62,000

Common Stock 62

Paid-in apital in Excess of Par 61,938


Suppose IHOP¶s common stock has apar value of $0.01 per share. The

company issues 6,200 shares of common stock for $10 per share.What is the entry?




Common Stock Above Par

Common Stock, $.01 par;

40,000 shares authorized,6,200 shares issued $ 62

Paid-in capital in excess of par 61,938Total paid-in capital $ 62,000Retained earnings 194,000Total stockholders¶ equity $256,000





Common Stock at Par

Suppose IHOP¶s common stock is nopar value stock. The company issues

6,200 shares of common stock for $20per share. What is the entry?

eneral Journal

ate Accounts and xplanations ebit redit

Jul 23 ash (6,200 x $10) 124,000ommon Stock 124,000





©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren17

Preferred Stock

Accounting for preferred stockfollows the pattern illustrated for

common stock.





Describe how treasury stocktransactions affect a company.




Treasury Stock Transactions

Shares that a company hasissued and later reacquired.

Reasons

Stock purchase plan distribution

Increase net assets Avoidance of a takeover




IHOP Corp. Before Purchase

of Treasury Stock

Common Stock $ 203Paid-in capital in excess of par 69,655Retained earnings 193,632

Total equity $263,490

Stockholder¶s Equity at December 31, 2005(if no treasury stock purchased)



IHOP Corp. Purchase

of Treasury StockDuring 2005, IHOP paid $5,170 topurchase 288 shares of its common

stock as treasury stock.

r l r l

D A l i D i Cr i

N v 1 Tr r y S k 5,170

h 5,170P urchased treasury stock




IHOP Corp. After Purchase

of Treasury Stock

Common Stock $ 203Paid-in capital in excess of par 69,655Retained earnings 193,632

Less: Treasury stock(288 shares at cost) (5,170)Total equity $258,320

Stockholder¶s Equity at December 31, 2005(with treasury stock purchased)




Sale of Treasury Stock

Assume that on July 22, 2006, theshares of treasury stock are sold

for $5,300.

General Journal

Date Accounts and Explanations PR Debit Credit

Jul 22 Cash 5,300

Treasur y Stock 5,170Paid-in Capital f rom Treasur y

Stock Transactions 130

S old treasury stock




IHOP Corp. After Sale of

Treasury Stock

Common Stock $ 203Paid-in capital in excess of par 69,785Retained earnings 193,632Total equity $263,620

Equity before purchase of treasury stocks 263,490

Increase in stockholders¶ equity $ 130

Stockholder¶s Equity at December 31, 2006





Retirement of Stock

Decreases the outstandingstock of the corporation

Retired shares cannot bereissued

There is no gain or loss onretirement




Retained Earnings Account

Balance =

Net income less

-Net losses

-Dividends declared




Dividends and Splits

Dividend - corporation¶s returnto its stockholders of some of

the benefits of earningsStock spl i t - increase in the

number of authorized, issued,and outstanding shares




Dividend Dates

Declaration date

Date of record

Payment date





Account for dividends andmeasure their impact on a

company.



Preferred Stock Dividends

Pinecraft Industries, Inc., has both common stockand 100,000 shares of preferred stock outstanding.Preferred dividends are paid at the annual rate of

$1.50 per share. In 20x9, the company declares anannual dividend of $1,000,000.

Preferred dividend

(100,000 × $1.50 per share) $150,000Common dividend

(remainder: $1,000,000 ± $150,000) 850,000

Total dividend $1,000,000




Preferred Stock Dividends

The preferred stock of Pinecraft is cumulative.Suppose the company passed the 20x6preferred dividend of $150,000. In 20x7, thecompany declares a $500,000 dividend.

Gener Jour nal

Date A ount and Explanat ons PR Debit r edit

Retained Ear nings 500,000

Dividends Payable-Pr ef err ed 300,000*

Dividends Payable- ommon 200,000

Declared a cash dividend

*$150,000 x 2 years





Stock Dividends

Small stock dividends: 25% or less

Large stock dividends: above 25%




Stock Dividend

IHOP declared a 10% stockdividend in 2006. Assume IHOP

had 20,000,000 shares of common stock outstanding. Thestock is trading for $15 per

share. How would this stockdividend be recorded?



Stock Dividend

For a large stock dividend, debit Retained Earnings andcredit Common Stock for the par value of the shares.

eneral Journal n thousands

ate Accounts and xplanations ebit redit

etained arnings

(20,000,000 X 10% X $15) 30,000

ommon Stock(20,000,000 X 10% X $0.01) 20

aid-in Capital in xcess of ar

Common 29,980

Distributed a 10% stock dividend





Stock Splits

Increases number of authorized, issued, and

outstanding shares of stockProportionate reduction in

stock¶s par value

Decreases market price




Stock Splits

The market price of a share of Quaker Oats has beenapproximately $25. Assume that

the company wants to decrease itto $12.50. This 2-for-1 split meansthat the company would have twiceas many shares outstanding after

the split as is had before the split.





Use different stock values indecision making.




Stock Values

Market value

Redemption value

Liquidation value

Book value




Book Value Per Share

Preferred stock =

(Redemption value + Dividends in

arrears) ÷ Number of shares of preferred outstanding

Common stock =

(Total stockholders¶ equity ± Preferredequity) ÷ Number of shares of commonstock outstanding



Book Value

Preferred stock, 6%, $100 par, 5,000 shares

authorized, 400 shares issued,

redemption value $130 per share $ 40,000

Additional paid-in capital in excess of par ±preferred 4,000

Common stock, $10 par, 20,000 shares

authorized, 5,500 shares issued 55,000

Additional paid-in capital in excess of par ±common 72,000

Retained earnings 85,000

Treasury stock ± common, 500 shares at cost ( 15,000)

Total stockholders¶ equity $241,000

S tockholders¶ Equity





Book Value

Suppose that four years¶(including the current year)

cumulative preferred dividendsare in arrears and that preferredstock has a redemption value of

$130 per share.



Book Value

P referred equity:Redemption value (400 shares × 130) $ 52,000

Cumulative dividends ($40,000 × $0.06 × 4 yrs) 9,600

Preferred equity $ 61,600

C ommon equity:Total stockholders¶ equity $241,000

Less preferred equity ± 61,600

Common equity $179,400

Book value per share: $179,400 ÷ 5,000 shares* $ 35.88

*5,500 shares issued minus 500 treasury shares






Evaluate a company¶s return onassets and return on

stockholders¶ equity.




Rate of Return on Total Assets

(Net income + Interest expense)

÷ Average total assets

Measure of a company¶s ability to

generate profits from the use of its assets.




Return on Equity

Rate of return on common stockholders¶ equity

= (Net income ± Preferred dividends)÷ Average common stockholders¶ equity

Measure of income earned from commonstockholders¶ investment in the company.





Report stockholders¶ equitytransactions on the statement of

cash flows.



Reporting Stockholders¶Equity Transactions

Proceeds from issuance of common stock $172,000Purchase of treasury stock (5,170,000)

Net cash used by financing activities $(4,998,000)

During 2003, IHOP issued stock,repurchased stock, but paid no dividends.

Cash flows from financing activities:


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