© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Chapter 19 Shareholders’ Equity

© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Chapter 19

Shareholders’ Equity


Slide19-2

The Nature of Shareholders’Equity

Assets – Liabilities = Shareholders’ Equity

Net Assets(Residual Interest)


Slide19-3

Sources of Shareholders’ Equity

Stockholders’ Equity

Paid-in Capital

Retained Earnings

Amounts earnedby corporation

Amounts investedby shareholders


Slide19-4

The Corporate Organization

Advantages:Limited liability.Ease of raising capital.Ease of ownership transfer.Lack of mutual agency.

Disadvantages:Double taxation.Government regulation.

Advantages:Limited liability.Ease of raising capital.Ease of ownership transfer.Lack of mutual agency.

Disadvantages:Double taxation.Government regulation.


Slide19-5

Types of Corporations

Not-for-profit corporations includehospitals, charities, and government

agencies such as FDIC.

Privately-held corporationswhose shares are owned by

only a few individuals.

Publicly-held corporationswhose shares are widely

owned by the general public.


Slide19-6

Hybrid Organizations

S Corporation Limited liability protection of a corporation. Maximum number of owners.

Limited liability company Limited liability protection of a corporation. All owners may be involved in management

without losing limited liability protection. No limit on number of owners.

Limited liability partnership Owners are liable for their own actions but not

entirely liable for actions of other partners.

S Corporation Limited liability protection of a corporation. Maximum number of owners.

Limited liability company Limited liability protection of a corporation. All owners may be involved in management

without losing limited liability protection. No limit on number of owners.

Limited liability partnership Owners are liable for their own actions but not

entirely liable for actions of other partners.

Doubletaxationavoided.


Slide19-7

Formation of a Corporation

Number and classesof shares authorized.

Composition of initialboard of directors.

Nature and locationof business activities.

CorporateCharter


Slide19-8

Formation of a Corporation

Articles of incorporationare filed with the state.

Board of directors elected by

shareholders.

Board of directors appoint officers.

Shares of stock issued.

State issues a corporate charter.


Slide19-9

Fundamental Share Rights

Rightto vote.

Right to sharein distribution of

assets if companyis liquidated.

Right to sharein profits whendividends are

declared.

Preemptiveright to maintain

percentageownership.


Slide19-10

Classification of capital stockAuthorizedIssuedUnissuedTreasury stockOutstandingSubscribed

Concepts and Definitions


Slide19-11

Authorized, Issued, and Outstanding Capital Stock

AuthorizedShares

The maximum number of shares of capital

stock that can be sold to the public is called

the authorized number of shares.


Slide19-12


Issued shares are authorized shares of stock that have been

sold.

Unissued shares are authorized shares of stock that have never been sold.

AuthorizedShares


Slide19-13


UnissuedShares

TreasuryShares

OutstandingShares

Treasury shares are issued shares that have been reacquired by the

corporation.

IssuedShares

Outstanding shares are issued shares that are

owned by stockholders.Authorized

Shares


Slide19-14

Capital Stock

Par value stock Designated dollar

amount per share stated in the corporate charter.

Par value has no relationship to market value.

No-par stock Dollar amount per

share not designated in corporate charter.

Corporations can assign a stated value per share (treated as if par value).


Slide19-15

Legal capital is . . .The portion of stockholders’ equity that must

be contributed to the firm when stock is issued.The amount of capital, required by

state law, that must remain investedin the business.

Refers to par value, stated value,or full amount paid for no-par stock.

Legal capital is . . .The portion of stockholders’ equity that must

be contributed to the firm when stock is issued.The amount of capital, required by

state law, that must remain investedin the business.

Refers to par value, stated value,or full amount paid for no-par stock.

Capital Stock


Slide19-16

Types of Capital Stock

Common Preferred


Slide19-17

The basic voting stock of the corporation.

Ranks after preferred stock for dividend and liquidation distribution.

Dividends determined by the board of directors.

The basic voting stock of the corporation.

Ranks after preferred stock for dividend and liquidation distribution.

Dividends determined by the board of directors.

Common Stock


Slide19-18

Preferred Stock

Dividend andliquidation

preference over common stock.

Dividend andliquidation

preference over common stock.

Generally does nothave voting rights.

Generally does nothave voting rights.

Usually has apar or stated value.

Usually has apar or stated value.

May be convertible,callable, and/or

redeemable.

May be convertible,callable, and/or

redeemable.


Slide19-19

Are usually stated as a percentage of the par or stated value.

May be cumulative or noncumulative.

May be partially participating, fully participating, or nonparticipating.

Are usually stated as a percentage of the par or stated value.

May be cumulative or noncumulative.

May be partially participating, fully participating, or nonparticipating.

Preferred Stock Dividends


Slide19-20

Preferred Stock DividendsCumulative

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.


Slide19-21

Issuing Stock for Cash

10,000 shares of $1 par value stock is issued for $100,000 cash.

10,000 shares of $1 par value stock is issued for $100,000 cash.


Slide19-22


10,000 shares of no-par stock is issued for $100,000 cash.

10,000 shares of no-par stock is issued for $100,000 cash.


Slide19-23


10,000 shares of no-par stock, with a stated value of $1 is issued for $100,000 cash.

10,000 shares of no-par stock, with a stated value of $1 is issued for $100,000 cash.


Slide19-24

Issuing Stock for Noncash Assets

Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly

evident.

If market values cannot be determined, use appraised values.

Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly

evident.

If market values cannot be determined, use appraised values.


Slide19-25 More Than One Security Issued

for a Single Price

Allocate the lump-sum received based on the relative fair values of the two securities.

If only one fair value is known, allocate a portion of the lump-sum received based on that fair value and allocate the remainder to the other security.

Allocate the lump-sum received based on the relative fair values of the two securities.

If only one fair value is known, allocate a portion of the lump-sum received based on that fair value and allocate the remainder to the other security.


Slide19-26

Toys, Inc. issued 5,000 shares of common stock, $10 par value and 3,000 shares of preferred stock, $5 par value for $450,000. The market values of the common stock and preferred stock were $55 and

$75, respectively.

Calculate the paid-in capital in excess of par for each class of stock.

Toys, Inc. issued 5,000 shares of common stock, $10 par value and 3,000 shares of preferred stock, $5 par value for $450,000. The market values of the common stock and preferred stock were $55 and

$75, respectively.

Calculate the paid-in capital in excess of par for each class of stock.

More Than One Security Issued for a Single Price


Slide19-27

Market* % Allocation** Par^ Excess^^Common Stock 275,000$ 55% 247,500$ 50,000$ 197,500$Preferred Stock 225,000 45% 202,500 15,000 187,500

Total 500,000$ 100% 450,000$ 65,000$ 385,000$

* Market Value: ^ Par Value: Common: $55 × 5,000 shares Common: $10 × 5,000 shares Preferred: $75 × 3,000 shares Preferred: $5 × 3,000 shares

**Allocation: ^^Excess: Common: $450,000 × 55% Common: $247,500 - $50,000 par Preferred: $450,000 × 45% Preferred: $202,500 - $15,000 par

Record the journal entry for issuing the stock.



Slide19-28

GENERAL JOURNAL

Page 1

Date Description PR Debit Credit

Cash 450,000 Common Stock, par $10 50,000 Preferred Stock, par $5 15,000 Paid-in Capital in Excess of Par, Common Stock 197,500 Paid-in Capital in Excess of Par, Preferred Stock 187,500

To record issue of stock for cash



Slide19-29

Share Issue Costs

Share issue costs reduce net proceedsfrom selling shares, resulting in a lower

amount of Paid-in Capital in Excess of Par.

Registration fees Underwriter commissions Printing and clerical costs Legal and accounting fees Promotional costs


Slide19-30

Let’s turn ourattention toreacquiring

shares.


Slide19-31

Share Buybacks

A corporation might reacquire shares of its stock to . . . Support the market price. Increase earnings per share.Distribute in stock option plans.Issue as a stock dividend.Use in mergers and acquisitions.Thwart takeover attempts.

A corporation might reacquire shares of its stock to . . . Support the market price. Increase earnings per share.Distribute in stock option plans.Issue as a stock dividend.Use in mergers and acquisitions.Thwart takeover attempts.


Slide19-32

I can account forthe reacquired sharesby retiring them or by

holding them astreasury shares.

Share Buybacks


Slide19-33

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 Paid-in

Capital in Excess of Par.


Slide19-34

5,000 shares of $2 par value stock that were issued for $20 per share are reacquired for $17 per share.


Price paid is less than issue price.



Slide19-35

Price paid is more than issue price.




Reduce Retained Earnings if the Paid-in Capital – Share Repurchase

account balance is insufficient.


Slide19-36

Treasury Stock

Usually does not have:Voting rights.Dividend rights.Preemptive rights.Liquidation rights.

Reduces both assets andstockholders’ equity.


Slide19-37

Accounting for Treasury Stock

(one-transaction concept)

(rarely used, not coveredin this chapter)


Slide19-38

Acquisition of Treasury StockRecorded at cost to acquire.

Resale of Treasury StockTreasury Stock credited for cost.Difference between cost and

issuance price is (generally)recorded in Paid-in Capital –Share Repurchase.

Acquisition of Treasury StockRecorded at cost to acquire.

Resale of Treasury StockTreasury Stock credited for cost.Difference between cost and

issuance price is (generally)recorded in Paid-in Capital –Share Repurchase.



Slide19-39

On 5/1/03, Photos-in-a-Second reacquired 3,000 shares of its common stock at $55 per share. On 12/3/04, Photos-in-a-Second reissued 1,000 shares of the stock at $75 per share. Which of the following would be included in the 12/3 entry?

a. Credit Cash for $165,000.b. Debit Treasury Stock for $75,000.c. Credit Treasury Stock for $55,000.d. Credit Cash for $75,000.





Slide19-40





Solution



Slide19-41



Slide19-42

Reporting Treasury Stock

Reported in Shareholders’ Equity.

Unallocated reductionof total Shareholders’Equity.

Reported in Shareholders’ Equity.

Unallocated reductionof total Shareholders’Equity.


Slide19-43

Retained Earnings

Represents the undistributed earnings of the company since its inception.

Represents the undistributed earnings of the company since its inception.

Balance January 1, 2003 $ 500,000 Net income 25,000 Cash dividends (10,000) Balance December 31, 2003 515,000$


Slide19-44

Retained Earnings

The statement of retained earnings may also contain the correction of an accounting error that occurred in the financial statements of a prior period, calleda prior period adjustment.

Any restrictions on retained earningsmust be disclosed in the notes to the financial statements.

The statement of retained earnings may also contain the correction of an accounting error that occurred in the financial statements of a prior period, calleda prior period adjustment.

Any restrictions on retained earningsmust be disclosed in the notes to the financial statements.


Slide19-45

Let’s change the subject to dividends.


Slide19-46

Cash Dividends

Dividends must bedeclared by the board

of directors beforethey can be paid.

When a dividend isdeclared, a liability

is created.

A corporation is notlegally required to

pay dividends.

Cash dividendsrequire sufficient cashand retained earningsto cover the dividend.


Slide19-47

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


Slide19-48

Dividend Dates

Ex-dividend dateThe latest date for stock purchase that entitles

the stockholder to receive the declared dividend. (No entry)

July

X


Slide19-49

Dividend Dates

Date of recordStockholders holding shares on this date will

receive the dividend. (No entry)

X

July


Slide19-50

Dividend Dates

Date of paymentRecord the payment of the

dividend to stockholders.



Dividends Payable XXX

Cash XXX


Slide19-51

Property Dividends

Distributions of non-cash assets.

Record at fair value of non-cash asset.

Recognize gain or loss for difference between book value and fair value.


Slide19-52

Stock Dividends

All stockholders receive the same

percentage increase in shares.

No change in total stockholders’ equity.

No change in par values.

Distribution of additional shares of stock to stockholders.


Slide19-53

Stock Dividends

Reasons for stock dividends:

To preserve cash.

To decrease market priceof stock.

To reduce existing balance in Retained Earnings.


Slide19-54

Record at currentmarket value

of stock.

Record at currentmarket value

of stock.

Stock dividend < 25%Stock dividend < 25%

Stock Dividends

Stock dividend 25%Stock dividend 25%

Record at par or stated value

of stock.

Record at par or stated value

of stock.

Small Large

>


Slide19-55

Stock Dividends

CarCo declares and distributes a 20% stock dividend on 5 million common shares. Par value is $1 and market

value is $20. Prepare the required journal entry.




Slide19-56

Stock Dividends



Retained Earnings 20,000,000

Common Stock 1,000,000

Paid-in Capital in

Excess of Par 19,000,000

CarCo declares and distributes a 20% stock dividend on 5 million common shares. Par value is $1 and market

value is $20. Prepare the required journal entry.


Slide19-57

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


Slide19-58

Accounting for Stock Splits

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$


Slide19-59

Accounting for Stock Splits

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$


Slide19-60

Chester, would you like to buy some stock

in my internet.com company?

End of Chapter 19

Documents

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Chapter 19 Shareholders’ Equity