Stockholders’ Stockholders’ Equity Equity Chapter 15 Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield Chapter 15-1 Prepared by Coby Harmon, University of California, Santa Barbara Learning Learning Objectives Objectives Discuss the characteristics of the corporate form of organization Identify the key components of stockholders’ equity Explain the accounting procedures for issuing shares of stock Describe the accounting for treasury stock Explain the accounting for and reporting of preferred stock Describe the policies used in distributing dividends Identify the various forms of dividend distributions Explain the accounting for small and large stock dividends, and for stock splits Indicate how to present and analyze stockholders’ equity Chapter 15-2 Stockholders’ Stockholders’ Equity Equity The Corporate Form State corporate law Capital stock or share system Variety of ownership interests Chapter 15-3 Corporate Capital Preferred Stock Dividend Policy Presentation and Analysis Issuance of stock Reacquisition of shares Features Accounting for and reporting preferred stock Financial condition and dividend distributions Types of dividends Stock split Presentation Analysis Disclosure of restrictions The The Corporate Corporate Form Form of of Organization Organization Three primary forms of business organization Proprietorship Partnership Corporation Special characteristics of the corporate form: Influence of state corporate law Use of capital stock or share system Development of a variety of ownership interests Chapter 15-4 LO Discuss the characteristics of the corporate form of organization The The Corporate Corporate Form Form of of Organization Organization State Corporate Law Corporation must submit articles of incorporation to the state in which incorporation is desired General Motors - incorporated in Delaware U.S Steel - incorporated in New Jersey Accounting for stockholders’ equity follows the provisions of each states business incorporation act Chapter 15-5 LO Discuss the characteristics of the corporate form of organization The The Corporate Corporate Form Form of of Organization Organization Capital Stock or Share System In the absence of restrictive provisions, each share carries the following rights: To share proportionately in profits and losses To share proportionately in management (the right to vote for directors) To share proportionately in assets upon liquidation To share proportionately in any new issues of stock of the same class—called the preemptive right Chapter 15-6 LO Discuss the characteristics of the corporate form of organization The The Corporate Corporate Form Form of of Organization Organization Variety of Ownership Interests Common stock represents basic ownership interest Bears ultimate risks of loss Receives the benefits of success Not guaranteed dividends nor assets upon dissolution Preferred stock is created by contract, when stockholders’ sacrifice certain rights in return for other rights or privileges, usually dividend preference Chapter 15-7 LO Discuss the characteristics of the corporate form of organization Corporate Corporate Capital Capital Contributed Contributed Capital Capital Common CommonStock Stock Account Account Preferred PreferredStock Stock Additional AdditionalPaidPaidininCapital Capital Account Account Account Account Two Primary Sources of Equity Retained RetainedEarnings Earnings Account Account Less: Less: Treasury TreasuryStock Stock Assets – Liabilities = Equity Account Account Chapter 15-8 LO Identify the key components of stockholders’ equity Corporate Corporate Capital Capital Issuance of Stock Shares authorized - Shares sold - Shares issued Accounting problems: Par value stock No-par stock Stock issued with other securities Stock issued in noncash transactions Costs of issuing stock Chapter 15-9 LO Explain the accounting procedures for issuing shares of stock Corporate Corporate Capital Capital Par Value Stock Low par values help companies avoid a contingent liability Corporations maintain accounts for: Preferred Stock or Common Stock Additional Paid-in Capital Chapter 15-10 LO Explain the accounting procedures for issuing shares of stock Property Property Dividend Dividend Illustration A dividend is declared Jan 5th and paid Jan 25th, in bonds held as an investment; the bonds have a book value of $100,000 and a fair market value of $135,000 Debit Date of Declaration Investment in bonds Gain on investment 35,000 and Retained earnings Property dividend payable 135,000 Credit 35,000 135,000 Date of Issuance Chapter 15-40 Property dividend payable Investment in bonds 135,000 135,000 LO Identify the various forms of dividend distributions Types Types of of Dividends Dividends Liquidating Dividends Any dividend not based on earnings reduces corporate paid-in capital Chapter 15-41 LO Identify the various forms of dividend distributions Liquidating Liquidating Dividend Dividend BE15-12 Radical Rex Mining Company declared, on April 20, a dividend of $700,000 payable on June Of this amount, $125,000 is a return of capital Prepare the April 20 and June entries for Radical Rex April 20 (Declaration Date) Retained earnings Additional paid-in capital Dividends payable Debit Credit 575,000 125,000 700,000 June (Payment Date) Dividends payable Cash Chapter 15-42 700,000 700,000 LO Identify the various forms of dividend distributions Types Types of of Dividends Dividends Stock Dividends Issuance of own stock to stockholders on a pro rata basis, without receiving any consideration When stock dividend is less than 20–25 percent of the common shares outstanding, company transfers fair market value from retained earnings (small stock dividend) Chapter 15-43 LO Explain the accounting for small and large stock dividends, and for stock splits Stock Stock Dividend Dividend Illustration HH Inc has 5,000 shares issued and outstanding The per share par value is $1, book value $32 and market value is $40 10% stock dividend is declared Debit Retained earnings 20,000 Common stock dividend distributable Additional paid-in capital Credit 500 19,500 Stock issued Common stock div distributable Common stock Chapter 15-44 500 500 LO Explain the accounting for small and large stock dividends, and for stock splits Types Types of of Dividends Dividends Stock Split To reduce the market value of shares No entry recorded for a stock split Decrease par value and increased number of shares Chapter 15-45 LO Explain the accounting for small and large stock dividends, and for stock splits Stock Stock Dividend Dividend Illustration HH Inc has 5,000 shares issued and outstanding The per share par value is $1, book value $32 and market value is $40 for Stock Split No Entry Disclosure that par is now $.50 and shares outstanding are 10,000 Chapter 15-46 LO Explain the accounting for small and large stock dividends, and for stock splits Types Types of of Dividends Dividends Stock Split and Stock Dividend Differentiated If the stock dividend is large, it has the same effect on market price as a stock split A stock dividend of more than 20–25 percent of the number of shares previously outstanding is called a large stock dividend With a large stock dividend, transfer from retained earnings to capital stock the par value of the stock issued Chapter 15-47 LO Explain the accounting for small and large stock dividends, and for stock splits Stock Stock Dividend Dividend Illustration HH Inc has 5,000 shares issued and outstanding The per share par value is $1, book value $32 and market value is $40 50% stock dividend is declared Debit Retained earnings 2,500 Common stock dividend distributable Credit 2,500 Stock issued Common stock dividend distributable Common stock Chapter 15-48 2,500 2,500 LO Explain the accounting for small and large stock dividends, and for stock splits Presentation Presentation and and Analysis Analysis of of Stockholders’ Stockholders’ Equity Equity Presentation Illustration 15-13 Balance Sheet Chapter 15-49 LO Indicate how to present and analyze stockholders’ equity Presentation Presentation and and Analysis Analysis of of Stockholders’ Stockholders’ Equity Equity Presentation Statement of Stockholders’ Equity Chapter 15-50 Illustration 15-14 LO Indicate how to present and analyze stockholders’ equity Presentation Presentation and and Analysis Analysis of of Stockholders’ Stockholders’ Equity Equity Analysis Rate of Return on Common Stock Equity = Net income – Preferred dividends Average common stockholders’ equity Ratio shows how many dollars of net income the company earned for each dollar invested by the owners Chapter 15-51 LO Indicate how to present and analyze stockholders’ equity Presentation Presentation and and Analysis Analysis of of Stockholders’ Stockholders’ Equity Equity Analysis Payout Ratio = Cash dividends Net income – Preferred dividends It is important to some investors that the payout be sufficiently high to provide a good yield on the stock Chapter 15-52 LO Indicate how to present and analyze stockholders’ equity Presentation Presentation and and Analysis Analysis of of Stockholders’ Stockholders’ Equity Equity Analysis Book Value Per Share = Common stockholders’ equity Outstanding shares The amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet Chapter 15-53 LO Indicate how to present and analyze stockholders’ equity Copyright Copyright Copyright © 2007 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 15-54 ... earnings Chapter 15- 30 2,800 300 LO Describe the accounting for treasury stock Corporate Corporate Capital Capital Illustration 15- 4 Stockholders’ Equity with No Treasury Stock Chapter 15- 31 LO... that no-par stock have a stated value Chapter 15- 12 LO Explain the accounting procedures for issuing shares of stock Corporate Corporate Capital Capital BE15-2: Shinobi Corporation issued 600... proportional method and the incremental method Chapter 15- 14 LO Explain the accounting procedures for issuing shares of stock Corporate Corporate Capital Capital BE15-4: Primal Rage Corporation issued