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Stockholders’ EquityStockholders’ Equity
Presentations for Chapter 12 by Glenn Owen
Key PointsKey Points The three forms of financing and their relative importance to major U.S.
Corporations. Distinctions between debt and equity. Economic consequences associated with the methods used to account for
stockholders’ equity. Rights associated with preferred and common stock and the methods used to
account for stock issuances. Distinctions among the market value, book value, and par (stated) value of a share
of common stock. Treasury stock. Cash dividends and dividend strategies
followed by corporations. Stock dividends and stock splits.
Liabilities as a Percentage Liabilities as a Percentage of Total Assetsof Total Assets
Company (Industry)
Liabilities /Total Assets
General Electric (Manufacturing) .88
Chevron Oil (Oil drilling and refining) .52
Super Value (Grocery) .73
Tommy Hilfiger (Clothing) .46
Yahoo (Internet search engine) .16
Cisco (Internet systems) .19
SBC Communications (Telcom services) .69
Wendy’s (Restaurant services) .43
Bank of America (Banking services) .93
Merrill Lynch (Investment services) .95
Contributed Capital as a Percentage Contributed Capital as a Percentage of Total Assetsof Total Assets
Company (Industry)
Capital /Total Assets
General Electric (Manufacturing) -.02
Chevron Oil (Oil drilling and refining) -.03
Super Value (Grocery) -.05
Tommy Hilfiger (Clothing) .25
Yahoo (Internet search engine) .82
Cisco (Internet systems) .55
SBC Communications (Telcom services) .12
Wendy’s (Restaurant services) .04
Bank of America (Banking services) .01
Merrill Lynch (Investment services) .01
Retained Earnings as a Percentage Retained Earnings as a Percentage of Total Assetsof Total Assets
Company (Industry)
Retained Earnings /Total Assets
General Electric (Manufacturing) .14
Chevron Oil (Oil drilling and refining) .51
Super Value (Grocery) .28
Tommy Hilfiger (Clothing) .29
Yahoo (Internet search engine) .02
Cisco (Internet systems) .25
SBC Communications (Telcom services) .19
Wendy’s (Restaurant services) .62
Bank of America (Banking services) .06
Merrill Lynch (Investment services) .04
Debt vs. EquityDebt vs. EquityDebtDebt EquityEquity
Formal legal contract No legal contract
Fixed maturity date No fixed maturity date
Fixed periodic payments Discretionary dividends
Security in case of default Residual asset interest
No voice in management Vote - board of directors
Interest expense Dividends reduce RE
Distinctions Between Distinctions Between Debt and EquityDebt and Equity
Interested Party Debt Equity
Investors / Creditors
Lower investment risk Higher investment risk
Management
Fixed cash receipts Variable cash receipts
Contractual future cash payments
Dividends are discretionary
Effects on credit rating
Effects of dilution/ takeover
Interest is tax deductible
Dividends are not tax deductible
Accountants/Auditors
Liabilities section of the balance sheet
Stockholders’ equity of the balance sheet
Income statement effects from debt
No income statement effects from equity
Accounting for Accounting for Stockholders’ EquityStockholders’ Equity
Preferred stock Common stock Treasury stock Stock options Dividends
Preferred StockPreferred Stock Authorized, issued, and outstanding preferred
shares Preferred dividend payments Cumulative preferred stock Participating preferred stock Debt or equity?
Common StockCommon Stock Market value Book value Par value Accounting for issuances
Treasury StockTreasury Stock Why companies purchase treasury stock Purchasing treasury stock Reissuing treasury stock for more than acquisition
cost Reissuing treasury stock for less than acquisition
cost The magnitude of the treasury
stock account
Stock OptionsStock Options Stock options as a means of compensation Methods used to account for stock options Are stock options compensation expense?
DividendsDividends Dividend strategy Accounting for cash dividends Stock splits Stock dividends Retained earnings appropriations
Review Problem - 2001Review Problem - 2001
The company issued 1,000 shares of $1 par value stock for $70 per share.
Cash (+A) 70,000Common Stock (+SE) 1,000Additional Paid-In Capital (+SE) 69,000
Issued common stock.
Cash (+A) 70,000Common Stock (+SE) 1,000Additional Paid-In Capital (+SE) 69,000
Issued common stock.
The company issued 500 shares of no par value, $5, cumulative preferred stock for $50 per share.
Cash (+A) 25,000Preferred Stock (+SE) 25,000
Issued preferred stock.
Cash (+A) 25,000Preferred Stock (+SE) 25,000
Issued preferred stock.
Review Problem - 2001Review Problem - 2001
Net income during the year = $2,000 Dividends = $0
No entryNo entry
Review Problem - 2001Review Problem - 2001
Pike Place CorporationBalance SheetDecember 31, 2001
Stockholders’ EquityPreferred stock (500 sh., no par value) $25,000Common stock (1,000 sh. @ $1 par value) 1,000Additional paid-in capital (C/S) 69,000Retained earnings 2,000Total stockholders’ equity $97,000
Review Problem - 2001Review Problem - 2001
Note: Dividends in arrears on cumulative preferred stock = $2,500 (500 sh. x $5/sh.)
The company purchased 200 treasury (common) shares for $60 per share.
Treasury Stock (-SE) 12,000Cash (-A)12,000
Acquired treasury stock.
Treasury Stock (-SE) 12,000Cash (-A)12,000
Acquired treasury stock.
Review Problem - 2002Review Problem - 2002
Net income for the year = $20,000.Dividends = $6,600:
$5,000 for preferred shareholders [$2,500 dividends in arrears and $2,500 (500 sh. x $5/sh.)], and $1,600 for the common stockholders (800 outstanding sh. x $2/sh.). The dividends were declared and paid.
Preferred Dividends (-SE) 5,000Common Dividends (-SE) 1,600
Dividends Payable (+L) 6,600Declared dividends.
Dividends Payable (-L) 6,600Cash (-A) 6,600
Paid dividends.
Preferred Dividends (-SE) 5,000Common Dividends (-SE) 1,600
Dividends Payable (+L) 6,600Declared dividends.
Dividends Payable (-L) 6,600Cash (-A) 6,600
Paid dividends.
Review Problem - 2002Review Problem - 2002
Pike Place CorporationBalance SheetDecember 31, 2002
Stockholders’ EquityPreferred stock (500 sh, no par value) $25,000Common stock (1,000 sh. @ $1 par value) 1,000Additional paid-in capital (C/S) 69,000Retained earnings 15,400Less: Treasury stock (200 sh. x $60/sh.) (12,000)
Total stockholders’ equity $98,400
* $2,000 + $20,000 - $6,600
*
Review Problem - 2002Review Problem - 2002
The company reissued 100 treasury shares for $65 each.
Cash (+A) 6,500Treasury Stock (+SE) 6,000Additional Paid-In Capital, T/S (+SE) 500
Reissued treasury stock.
Cash (+A) 6,500Treasury Stock (+SE) 6,000Additional Paid-In Capital, T/S (+SE) 500
Reissued treasury stock.
Review Problem - 2003Review Problem - 2003
The company reissued 50 treasury shares for $40 each.
Cash (+A) 2,000Additional Paid-In Capital, T/S (-SE) 500Retained Earnings (-SE) 500
Treasury Stock (+SE) 3,000Reissued treasury stock.
Cash (+A) 2,000Additional Paid-In Capital, T/S (-SE) 500Retained Earnings (-SE) 500
Treasury Stock (+SE) 3,000Reissued treasury stock.
Review Problem - 2003Review Problem - 2003
The company declared a 10 percent stock dividend. There were 950 common shares outstanding at the time of the dividend, each with a fair value of $5.
Stock Dividend (-SE) 475Common Stock (+SE) 95Additional Paid-In Capital (+SE) 380
Declared stock dividend.
Stock Dividend (-SE) 475Common Stock (+SE) 95Additional Paid-In Capital (+SE) 380
Declared stock dividend.
Review Problem - 2003Review Problem - 2003
Net income for the year = $35,000Dividends = $4,690: $2,500 to preferred shareholders
and $2,190 to common shareholders (1,095 sh. outstanding x $2/sh.).
The dividends were declared but unpaid at year-end.
Preferred Dividends (-SE) 2,500Common Dividends (-SE) 2,190
Dividends Payable(+L) 4,690Declared dividends.
Preferred Dividends (-SE) 2,500Common Dividends (-SE) 2,190
Dividends Payable(+L) 4,690Declared dividends.
Review Problem - 2003Review Problem - 2003
Pike Place CorporationBalance SheetDecember 31, 2003
Stockholders’ EquityPreferred stock (500 sh. no par value) $ 25,000 Common stock (1,095 sh. @ $1 par value) 1,095
Review Problem - 2003Review Problem - 2003
*
* $1,000 + $95
Pike Place CorporationBalance SheetDecember 31, 2003
Stockholders’ EquityPreferred stock (500 sh. no par value) $ 25,000 Common stock (1,095 sh. @ $1 par value) 1,095 Additional paid-in capital 69,380
Review Problem - 2003Review Problem - 2003
*
* $69,000 + $500 - $500 + $380
Pike Place CorporationBalance SheetDecember 31, 2003
Stockholders’ EquityPreferred stock (500 sh. no par value) $ 25,000 Common stock (1,095 sh. @ $1 par value) 1,095 Additional paid-in capital 69,380 Retained earnings:
Restricted $30,000Unrestricted 14,735 44,735
Review Problem - 2003Review Problem - 2003
*
$15,400 - $500 - $475 + $35,000 - $4,690
Pike Place CorporationBalance SheetDecember 31, 2003
Stockholders’ EquityPreferred stock (500 sh. no par value) $ 25,000 Common stock (1,095 sh. @ $1 par value) 1,095 Additional paid-in capital 69,380 Retained earnings:
Restricted $30,000Unrestricted 14,735 44,735
Less: Treasury stock (3,000)Total stockholders’ equity $137,210
* 50 sh. x $60/sh. or $12,000 - $6,000 - $3,000
*
Review Problem - 2003Review Problem - 2003
C O P Y R I G H T
C o p y r i g h t © 2 0 0 3 , J o h n W i l e y & S o n s , I n c . A l l r i g h t s r e s e r v e d .R e p r o d u c t i o n o r t r a n s l a t i o n o f t h i s w o r k b e y o n d t h a t p e r m i t t e d i n S e c t i o n 1 1 7 o f t h e 1 9 7 6 U n i t e d S t a t e s C o p y r i g h t A c t w i t h o u t t h ee x p r e s s w r i t t e n p e r m i s s i o n o f t h e c o p y r i g h t o w n e r i s u n l a w f u l . R e q u e s t f o r f u r t h e r i n f o r m a t i o n s h o u l d b e a d d r e s s e d t o t h e P e r m i s s i o n s D e p a r t m e n t , J o h n W i l e y & S o n s , I n c . T h e p u r c h a s e r m a y m a k e b a c k - u p c o p i e s f o r h i s / h e r o w n u s e o n l y a n d n o t f o r d i s t r i b u t i o n o r r e s a l e . T h e P u b l i s h e r a s s u m e s n o r e s p o n s i b i l i t yf o r e r r o r s , o m i s s i o n s , o r d a m a g e s , c a u s e d b y t h e u s e o f t h e s e p r o g r a m s o r f r o m t h e u s e o f t h e i n f o r m a t i o n c o n t a i n e d h e r e i n .