Ch13 Corporatioin Organization Stock Dividends

Accounting for Stock Splits A A corporation corporation had had 5,000 5,000 shares shares of of $1 $1 par par value value common common stock stock outstanding outstanding before before [r]

18-1 Chapter 13 Corporations: Organization, Stock Transactions, and Dividends 18-2 Learning Objectives Describe the components of shareholders’ equity and explain how they are reported in a statement of shareholders’ equity 18-3 The Nature of Shareholders’ Equity Assets – Liabilities = Shareholders’ Equity Net Assets (Residual Interest) 18-4 Sources of Shareholders’ Equity Amounts invested by shareholders Shareholders’ Equity Paid-in Capital Retained Earnings Amounts earned by corporation Other gains and losses not included in net income 18-5 Fundamental Share Rights Right to vote Right to share in profits when dividends are declared Preemptive right to maintain percentage ownership Right to share in distribution of assets if company is liquidated Authorized, Issued, and Outstanding Capital Stock Authorized Shares The maximum number of shares of capital stock that can be sold to the public is called the authorized number of shares 18-6 Authorized, Issued, and Outstanding Capital Stock Authorized Shares Issued shares are authorized shares of stock that have been sold Unissued shares are authorized shares of stock that have never been sold 18-7 Authorized, Issued, and Outstanding Capital Stock Outstanding shares are issued shares that are owned by shareholders Authorized Shares Issued Shares 18-8 Outstanding Shares Treasury Shares Unissued Shares Treasury shares are issued shares that have been reacquired by the corporation Authorized, Issued, and Outstanding Capital Stock 18-9 Outstanding shares are issued shares that are owned by stockholders Authorized Shares Outstanding Shares Retired Shares Unissued Shares Retired shares assume the same status as authorized but unissued shares Example: Shareholders’ Equity Section of a Balance Sheet 18-10 18-11 Capital Stock Par Par value value stock stock   Designated Designated dollar dollar amount amount per per share share stated stated in in the the corporate corporate charter charter   Par Par value value has has no no relationship relationship to to market market value value No-par No-par stock stock   Dollar Dollar amount amount per per share share not not designated designated in in corporate corporate charter charter   Corporations Corporations can can assign assign aa stated stated value value per per share share (treated (treated as as ifif par par value) value) 18-12 Capital Stock Legal Legal capital capital is is  The The portion portion of of shareholders’ shareholders’ equity equity that that must must be be contributed contributed to to the the firm firm when when stock stock is is issued issued  The The amount amount of of capital, capital, required required by by state state law, law, that that must must remain remain invested invested in in the the business business  Refers Refers to to par par value, value, stated stated value, value, or or full full amount amount paid paid for for no-par no-par stock stock 18-13 Types of Capital Stock Common Preferred 18-14 Common Stock The The basic basic voting voting stock stock of of the the corporation corporation Ranks Ranks after after preferred preferred stock stock for for dividend dividend and and liquidation liquidation distribution distribution Dividends Dividends determined determined by by the the board board of of directors directors 18-15 Preferred Stock Generally Generally does does not not have have voting voting rights rights Usually Usually has has aa par par or or stated stated value value Dividend Dividend and and liquidation liquidation preference preference over over common common stock stock May May be be convertible, convertible, callable, callable, and/or and/or redeemable redeemable 18-16 Preferred Stock Dividends Are Are usually usually stated stated as as aa percentage percentage of of the the par par or or stated stated value value May May be be cumulative cumulative or or noncumulative noncumulative May May be be partially partially participating, participating, fully fully participating, participating, or or nonparticipating nonparticipating 18-17 Classes of Stock LO A corporation has issued the following preferred and common stock: 1,000 shares of $4 cumulative preferred stock, $50 par 4,000 shares of common stock, $15 par The corporation was organized on January 1, 2010, and paid no dividends in 2010 and 2011 In 2012, the corporation paid $22,000 in dividends, of which $12,000 was paid to preferred stockholders and $10,000 was paid to common stockholders (continued) 18-18 Classes of Stock LO Total dividends paid $22,000 Preferred stockholders: 2010 dividends in arrears $4,000 2011 dividends in arrears 4,000 2012 dividends 4,000 Total preferred dividends (12,000) Dividends available to common stockholders $10,000 18-19 Preferred Stock Dividends Preferred Stock Dividends Cumulative Unpaid dividends must be paid in full before any distributions to common stock Dividends in arrears are not liabilities, but the per share and aggregate amounts must be disclosed 18-20 18-21 Learning Objectives Record the issuance of shares when sold for cash, for noncash consideration, and by share purchase contract 18-22 Issuing Stock for Cash 10,000 10,000 shares shares of of $1 $1 par par value value stock stock is is issued issued for for $100,000 $100,000 cash cash 18-23 Issuing Stock for Cash 10,000 10,000 shares shares of of no-par no-par stock stock is is issued issued for for $100,000 $100,000 cash cash 18-24 Issuing Stock for Cash 10,000 10,000 shares shares of of no-par no-par stock, stock, with with aa stated stated value value of of $1 $1 is is issued issued for for $100,000 $100,000 cash cash 18-25 Let’s turn our attention to reacquiring shares 18-26 Share Buybacks A A corporation corporation might might reacquire reacquire shares shares of of its its stock stock to to  Support Support the the market market price price  Increase Increase earnings earnings per per share share  Distribute Distribute in in stock stock option option plans plans  Issue Issue as as aa stock stock dividend dividend  Use Use in in mergers mergers and and acquisitions acquisitions  Thwart Thwart takeover takeover attempts attempts 18-27 Share Buybacks I can account for the reacquired shares by retiring them or by holding them as treasury shares 18-28 Learning Objectives Describe what occurs when shares are retired and how retirement is recorded 18-29 Accounting for Retired Shares When shares are formally retired, we reduce the same capital accounts that were increased when the shares were issued – common or preferred stock, and additional paid-in capital 18-30 Accounting for Retired Shares  Price paid is less than issue price 5,000 5,000 shares shares of of $2 $2 par par value value stock stock that that were were issued issued for for $20 $20 per per share share are are reacquired reacquired for for $17 $17 per per share share 18-31 Accounting for Retired Shares  Price paid is more than issue price 5,000 5,000 shares shares of of $2 $2 par par value value stock stock that that were were issued issued for for $20 $20 per per share share are are reacquired reacquired for for $25 $25 per per share share Reduce Retained Earnings if the Paid-in Capital – Share Repurchase account balance is insufficient 18-32 Learning Objectives Distinguish between accounting for retired shares and for treasury shares 18-33 Treasury Stock Usually does not have:     Voting rights Dividend rights Preemptive rights Liquidation rights Reduces both assets and shareholders’ equity 18-34 Accounting for Treasury Stock On On 5/1/13, 5/1/13, Photos-in-a-Second Photos-in-a-Second reacquired reacquired 3,000 3,000 shares shares of of its its common common stock stock at at $55 $55 per per share share On On 12/3/14, 12/3/14, Photos-in-a-Second Photos-in-a-Second reissued reissued 1,000 1,000 shares shares of of the the stock stock at at $75 $75 per per share share Which Which of of the the following following would would be be included included in in the the 12/3 12/3 entry? entry? 18-35 Accounting for Treasury Stock 18-36 Reporting Treasury Stock   Reported Reported in in Shareholders’ Shareholders’ Equity Equity   Unallocated Unallocated reduction reduction of of total total Shareholders’ Shareholders’ Equity Equity 18-37 Reporting Treasury Stock 18-38 Learning Objectives Explain the basis of corporate dividends, including the similarities and differences between cash and property dividends 18-39 Cash Dividends Dividends must be declared by the board of directors before they can be paid A corporation is not legally required to pay dividends Cash dividends require sufficient cash and retained earnings to cover the dividend When a dividend is declared, a liability is created 18-40 Dividend Dates Declaration date   Board of directors declares the dividend Record a liability GENERAL JOURNAL Date Description Retained Earnings Dividends Payable Post Ref Page 12 Debit Credit XXX XXX 18-41 Dividend Dates Ex-dividend date  The first day the shares trade without the right to receive the declared dividend (No entry) July X 18-42 Dividend Dates Date of record  Stockholders holding shares on this date will receive the dividend (No entry) July X X 18-43 Dividend Dates Date of payment  Record the payment of the dividend to stockholders GENERAL JOURNAL Date Description Dividends Payable Cash Post Ref Page 12 Debit Credit XXX XXX 18-44 Learning Objectives Explain stock dividends and stock splits and how they are accounted for 18-45 Stock Dividends Distribution of additional shares of stock to shareholders No No change change in in total total shareholders’ shareholders’ equity equity All All shareholders shareholders receive receive the the same same percentage percentage increase increase in in shares shares 18-46 Stock Dividends Reasons for stock dividends:  To preserve cash  To decrease market price of stock  To reduce existing balance in retained earnings 18-47 Stock Dividends CarCo declares and distributes a 20% stock dividend on million common shares Par value is $1 and market value is $20 Prepare the required journal entry GENERAL JOURNAL Date Description Post Ref Page 21 Debit Credit 18-48 Stock Dividends CarCo declares and distributes a 20% stock dividend on million common shares Par value is $1 and market value is $20 Prepare the required journal entry GENERAL JOURNAL Date Description Retained Earnings Common Stock Post Ref Page 21 Debit Credit 20,000,000 1,000,000 Paid-in Capital in Excess of Par 19,000,000 18-49 Stock Splits  Decrease par value of stock  Increase number of outstanding shares  No change in total stockholders’ equity  Does not require a journal entry Ice Cream Parlor Banana Splits On Sale Now 18-50 Accounting for Stock Splits A A corporation corporation had had 5,000 5,000 shares shares of of $1 $1 par par value value common common stock stock outstanding outstanding before before aa 2–for–1 2–for–1 stock stock split split Before Split Common Stock Shares 5,000 Par Value per Share $ 1.00 Total Par Value $ 5,000 After Split 18-51 Accounting for Stock Splits A A corporation corporation had had 5,000 5,000 shares shares of of $1 $1 par par value value common common stock stock outstanding outstanding before before aa 2–for–1 2–for–1 stock stock split split Before Split Common Stock Shares 5,000 After Split 10,000 Increase Par Value per Share $ 1.00 $ 0.50 Decrease Total Par Value $ 5,000 $ 5,000 No Change 18-52 Remember     Read the text book Do all examples in text book Do Review Exercise Do homework 18-53 End of Chapter 13