© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-2
The Nature of Shareholders’Equity
Assets – Liabilities = Shareholders’ Equity
Net Assets(Residual Interest)
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-3
Sources of Shareholders’ Equity
Stockholders’ Equity
Paid-in Capital
Retained Earnings
Amounts earnedby corporation
Amounts investedby shareholders
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-7
Formation of a Corporation
Number and classesof shares authorized.
Composition of initialboard of directors.
Nature and locationof business activities.
CorporateCharter
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-10
Classification of capital stockAuthorizedIssuedUnissuedTreasury stockOutstandingSubscribed
Concepts and Definitions
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-12
Authorized, Issued, and Outstanding Capital Stock
Issued shares are authorized shares of stock that have been
sold.
Unissued shares are authorized shares of stock that have never been sold.
AuthorizedShares
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-13
Authorized, Issued, and Outstanding Capital Stock
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
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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).
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-16
Types of Capital Stock
Common Preferred
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
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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
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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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-22
Issuing Stock for Cash
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-23
Issuing Stock for Cash
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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
$75, respectively.
Calculate the paid-in capital in excess of par for each class of stock.
More Than One Security Issued for a Single Price
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-27
Market* % Allocation** Par^ Excess^^Common Stock 275,000$ 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.
More Than One Security Issued for a Single Price
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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
More Than One Security Issued for a Single Price
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-30
Let’s turn ourattention toreacquiring
shares.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-32
I can account forthe reacquired sharesby retiring them or by
holding them astreasury shares.
Share Buybacks
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-34
5,000 shares of $2 par value stock that were issued for $20 per share are reacquired for $17 per share.
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.
Accounting for Retired Shares
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-35
Price paid is more than issue price.
5,000 shares of $2 par value stock that were issued for $20 per share are reacquired for $25 per share.
5,000 shares of $2 par value stock that were issued for $20 per share are reacquired for $25 per share.
Accounting for Retired Shares
Reduce Retained Earnings if the Paid-in Capital – Share Repurchase
account balance is insufficient.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-36
Treasury Stock
Usually does not have:Voting rights.Dividend rights.Preemptive rights.Liquidation rights.
Reduces both assets andstockholders’ equity.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-37
Accounting for Treasury Stock
(one-transaction concept)
(rarely used, not coveredin this chapter)
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
Accounting for Treasury Stock
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
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.
Accounting for Treasury Stock
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-40
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.
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.
Solution
Accounting for Treasury Stock
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-42
Reporting Treasury Stock
Reported in Shareholders’ Equity.
Unallocated reductionof total Shareholders’Equity.
Reported in Shareholders’ Equity.
Unallocated reductionof total Shareholders’Equity.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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$
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide19-45
Let’s change the subject to dividends.
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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.
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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
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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
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Slide19-49
Dividend Dates
Date of recordStockholders holding shares on this date will
receive the dividend. (No entry)
X
July
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Slide19-50
Dividend Dates
Date of paymentRecord the payment of the
dividend to stockholders.
GENERAL JOURNAL Page 12
Date DescriptionPost. Ref. Debit Credit
Dividends Payable XXX
Cash XXX
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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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
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Slide19-53
Stock Dividends
Reasons for stock dividends:
To preserve cash.
To decrease market priceof stock.
To reduce existing balance in Retained Earnings.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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
>
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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.
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
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Slide19-56
Stock Dividends
GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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$
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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$