After completing this chapter you should be able to: 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...and other contents.
Chapter 15-1 CHAPTER 15 STOCKHOLDERS’ EQUITY Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 15-2 Learning Objectives Learning 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 15-3 Stockholders’ Equity Stockholders’ Equity The Corporate Form State corporate law Capital stock or share system Variety of ownership interests Chapter 15-4 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 Corporate Form of Organization The Corporate Form of Organization Three primary forms of business organization Proprietorship Partnership Corporation Special characteristics of the corporate form: Chapter 15-5 Influence of state corporate law Use of capital stock or share system Development of a variety of ownership interests LO 1 Discuss the characteristics of the corporate form of organization The Corporate Form of Organization The Corporate Form of 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 15-6 LO 1 Discuss the characteristics of the corporate form of organization The Corporate Form of Organization The Corporate Form of 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 15-7 LO 1 Discuss the characteristics of the corporate form of organization The Corporate Form of Organization The Corporate Form of 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 15-8 LO 1 Discuss the characteristics of the corporate form of organization Corporate Capital Corporate Capital Common Stock Common Stock Contributed Capital Contributed Capital Account Account Preferred Stock Preferred Stock Additional Paidin Additional Paidin Capital Capital Account Account Account Account Two Primary Sources of Equity Retained Earnings Retained Earnings Account Account Less: Less: Treasury Stock Treasury Stock Assets – Liabilities = Equity Account Account Chapter 15-9 LO 2 Identify the key components of stockholders’ equity Corporate Capital Corporate Capital Issuance of Stock Shares authorized Shares sold Shares issued Accounting problems: Par value stock Nopar stock Stock issued with other securities Stock issued in noncash transactions Costs of issuing stock Chapter 15-10 LO 3 Explain the accounting procedures for issuing shares of stock Presentation and Analysis of Stockholders’ Equity Presentation and Analysis of Stockholders’ 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 15-53 LO 9 Indicate how to present and analyze stockholders’ equity Presentation and Analysis of Stockholders’ Equity Presentation and Analysis of Stockholders’ Equity Illustration: Gerber’s Inc. had net income of $360,000, declared and paid preferred dividends of $54,000, and average common stockholders’ equity of $2,550,000 Illustration 1515 Chapter 15-54 Solutions on notes page LO 9 Indicate how to present and analyze stockholders’ equity Presentation and Analysis of Stockholders’ Equity Presentation and Analysis of Stockholders’ 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 15-55 LO 9 Indicate how to present and analyze stockholders’ equity Presentation and Analysis of Stockholders’ Equity Presentation and Analysis of Stockholders’ Equity Illustration: Troy Co. has cash dividends of $100,000 and net income of $500,000, and no preferred stock outstanding Illustration 1516 Chapter 15-56 Solutions on notes page LO 9 Indicate how to present and analyze stockholders’ equity Presentation and Analysis of Stockholders’ Equity Presentation and Analysis of Stockholders’ 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 15-57 LO 9 Indicate how to present and analyze stockholders’ equity Presentation and Analysis of Stockholders’ Equity Presentation and Analysis of Stockholders’ Equity Illustration: Chen Corporation’s common stockholders’ equity is $1,000,000 and it has 100,000 shares of common stock outstanding Illustration 1517 Chapter 15-58 Solutions on notes page LO 9 Indicate how to present and analyze stockholders’ equity Many countries have different investor groups than the United States. For example, in Germany, financial institutions like banks are not only the major creditors but often are the largest stockholders as well The accounting for treasury stock retirements differs between iGAAP and U.S. GAAP A major difference between iGAAP and U.S. GAAP relates to the account Revaluation Surplus. Revaluation surplus arises under iGAAP because companies are permitted to revalue their property, plant, and equipment to fair value under certain circumstances Chapter 15-59 Chapter 15-60 Both iGAAP and U.S. GAAP consider the statement of stockholders’ equity a primary financial statement. However, under iGAAP a company has the option of preparing a statement of stockholders’ equity similar to U.S. GAAP or preparing a statement of recognized income and expense (SoRIE). The SoRIE reports the items that were charged directly to equity such as revaluation surplus and then adds the net income for the period to arrive at total recognized income and expense. In this situation, additional note disclosure is required to provide reconciliations of other equity items Dividend Preferences Illustration: Assume that in 2010, Mason Company is to distribute $50,000 as cash dividends, its outstanding common stock has a par value of $400,000, and its 6 percent preferred stock has a par value of $100,000. 1. If the preferred stock is noncumulative and nonparticipating: Illustration 15A1 Chapter 15-61 Solutions on notes page LO 10 Explain the different types of preferred stock dividends and their effect on book value per share Illustration: Assume that in 2010, Mason Company is to distribute $50,000 as cash dividends, its outstanding common stock has a par value of $400,000, and its 6 percent preferred stock has a par value of $100,000. 2. If the preferred stock is cumulative and nonparticipating, and Mason Company did not pay dividends on the preferred stock in the preceding two years: Illustration 15A2 Chapter 15-62 Solutions on notes page LO 10 Explain the different types of preferred stock dividends and their effect on book value per share 3. If the preferred stock is noncumulative and is fully participating: Illustration 15A3 Chapter 15-63 Solutions on notes page LO 10 Explain the different types of preferred stock dividends and their effect on book value per share Illustration: Assume that in 2010, Mason Company is to distribute $50,000 as cash dividends, its outstanding common stock has a par value of $400,000, and its 6 percent preferred stock has a par value of $100,000. If the preferred stock is cumulative and is fully participating, and Mason Company did not pay dividends on the preferred stock in the preceding two years: Illustration 15A4 Chapter 15-64 Solutions on notes page LO 10 Explain the different types of preferred stock dividends and their effect on book value per share Book Value Per Share Book value per share is computed as net assets divided by outstanding shares at the end of the year. The computation becomes more complicated if a company has preferred stock Illustration 15A5 Chapter 15-65 LO 10 Explain the different types of preferred stock dividends and their effect on book value per share Assume that the same facts exist except that the 5 percent preferred is cumulative, participating up to 8 percent, and that dividends for three years before the current year are in arrears Illustration 15A6 Chapter 15-66 LO 10 Explain the different types of preferred stock dividends and their effect on book value per share Copyright Copyright Copyright © 2009 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 backup 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 15-67 ... Explain the? ?accounting? ?for small and large stock dividends, and for stock splits Indicate how to present and analyze? ?stockholders’? ?equity Chapter 1 5-3 Stockholders’? ?Equity Stockholders’? ?Equity The.. .CHAPTER 15 STOCKHOLDERS’ EQUITY Intermediate? ?Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 1 5-2 Learning Objectives Learning Objectives... Presentation and Analysis of ? ?Stockholders’? ?Equity Illustration 1513 Presentation Balance Sheet Chapter 1 5-5 1 LO 9 Indicate how to present and analyze? ?stockholders’? ?equity