Kế toán tài chính 2 - Chapter 13: Stockholders’ equity

CHAPTER 13STOCKHOLDERS’ EQUITYINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso 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.Learning ObjectivesIssuance of stockReacquisition of sharesThe Corporate FormCorporate CapitalPreferred StockDividend PolicyPresentation and AnalysisState corporate lawCapital stock or share systemVariety of ownership interestsFeaturesAccounting for and reporting preferred stockFinancial condition and dividend distributionsTypes of dividendsStock splitDisclosure of restrictionsPresentationAnalysisStockholders’ EquityThree primary forms of business organizationThe Corporate Form of OrganizationProprietorshipPartnershipCorporationLO 1 Discuss the characteristics of the corporate form of organization.Special characteristics of the corporate form:Influence of state corporate law.Use of capital stock or share system.Development of a variety of ownership interests.State Corporate LawThe Corporate Form of OrganizationLO 1 Discuss the characteristics of the corporate form of organization.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.Capital Stock or Share SystemThe Corporate Form of OrganizationLO 1 Discuss the characteristics of the corporate form of organization.In the absence of restrictive provisions, each share carries the right to share proportionately in:Profits and losses.Management (the right to vote for directors).Assets upon liquidation.Any new issues of stock of the same class—called the preemptive right.Variety of Ownership InterestsThe Corporate Form of OrganizationLO 1 Discuss the characteristics of the corporate form of organization.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. Contributed CapitalRetained EarningsAccountAdditional Paid-in CapitalAccountLess:Treasury StockAccountTwo Primary Sources of EquityCorporate CapitalLO 2 Identify the key components of stockholders’ equity.Common StockAccountPreferred StockAccountAssets – Liabilities = EquityIssuance of StockAccounting problems: Par value stock.No-par stock.Stock issued with other securities.Stock issued in noncash transactions.Costs of issuing stock.LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalShares authorized - Shares sold - Shares issuedPar Value StockLow par values help companies avoid a contingent liability. Corporations maintain accounts for:Preferred Stock or Common Stock.Additional Paid-in CapitalLO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalExercise: Lost Vikings Corporation issued 300 shares of $10 par value common stock for $4,100. Prepare Lost Vikings’ journal entry.Cash 4,100 Common stock (300 x $10) 3,000Journal entry: Additional Paid-in Capital 1,100LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalNo-Par StockReasons for issuance:Avoids contingent liability.Avoids confusion over recording par value versus fair market value.LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalSome states require that no-par stock have a stated value. Exercise: Shinobi Corporation issued 600 shares of no-par common stock for $10,200. Prepare Shinobi’s journal entry if (a) the stock has no stated value, and (b) the stock has a stated value of $2 per share.Cash 10,200 Common Stock 10,200Journal entry:LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalCash 10,200 Common Stock (600 x $2) 1,200 Additional Paid-in Capital 9,000a.b.Stock Issued with Other SecuritiesTwo methods of allocating proceeds:The proportional method andThe incremental method.LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalExercise: Primal Rage Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $14,200. The common stock has a market value of $20 per share, and the preferred stock has a market value of $90 per share. LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalProportional MethodExercise: Primal Rage Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $14,200. The common stock has a market value of $20 per share, and the preferred stock has a market value of $90 per share. LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalCash 14,200 Preferred Stock (100 x $50) 5,000Journal entry (Proportional): Additional Paid-in Capital-Preferred 3,520 Common Stock (300 x $10) 3,000 Additional Paid-in Capital-Common 2,680Exercise: (Variation) Primal Rage Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $14,200. The common stock has a market value of $20 per share, and the value of the preferred stock is unknown. LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalIncremental MethodLO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalCash 14,200 Preferred Stock (100 x $50) 5,000Journal entry (Incremental): Additional Paid-in Capital-Preferred 3,200 Common Stock (300 x $10) 3,000 Additional Paid-in Capital-Common 3,000Exercise: (Variation) Primal Rage Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $14,200. The common stock has a market value of $20 per share, and the value of the preferred stock is unknown. Stock Issued in Noncash TransactionsThe general rule: Companies should record stock issued for services or property other than cash at either the: Fair value of the stock issued or Fair value of the noncash consideration received, whichever is more clearly determinable.LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalLO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalLand 80,000 Common Stock (24,000 x $1) 24,000April 1 Issued 24,000 shares of common stock for land. The asking price of the land was $90,000; the fair market value of the land was $80,000. Additional Paid-in Capital-Common 56,000Exercise: Kathleen Battle Corporation was organized on January 1, 2008. It is authorized to issue 500,000 shares of no par common stock with a stated value of $1 per share. Prepare the journal entry to record the following.LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalOrganization expense 50,000 Common stock (10,000 x $1) 10,000Aug. 1 Issued 10,000 shares of common stock to attorneys in payment of their bill of $50,000 for services rendered in helping the company organize. Additional paid-in capital 40,000Exercise: Kathleen Battle Corporation was organized on January 1, 2008. It is authorized to issue 500,000 shares of no par common stock with a stated value of $1 per share. Prepare the journal entry to record the following.Costs of Issuing StockDirect costs incurred to sell stock, such as Underwriting costs, Accounting and legal fees, Printing costs, andTaxes, should be reported as a reduction of the amounts paid in (additional paid-in capital).LO 3 Explain the accounting procedures for issuing shares of stock.Corporate CapitalReacquisition of SharesLO 4 Describe the accounting for treasury stock.Corporations purchase their outstanding stock to:Provide tax-efficient distributions of excess cash to shareholders.Increase earnings per share and return on equity.Provide stock for employee stock compensation contracts or to meet potential merger needs.Thwart takeover attempts or to reduce the number of stockholders.Make a market in the stock.Corporate CapitalPurchase of Treasury StockTwo acceptable methods: Cost method (more widely used). Par or Stated value method. Treasury stock, reduces stockholders’ equity.Corporate CapitalLO 4 Describe the accounting for treasury stock.Corporate CapitalTreasury Stock (1,000 x $28) 28,000 Cash 28,000Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction:April 1st the company re-acquired 1,000 shares for $28 per share.LO 4 Describe the accounting for treasury stock.Sale of Treasury StockAbove Cost Below CostBoth increase total assets and stockholders’ equity. Corporate CapitalLO 4 Describe the accounting for treasury stock.Corporate CapitalCash (500 x $30) 15,000 Treasury Stock (500 x $28) 14,000Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction:June 1st Sold 500 shares of its treasury stock for $30 per share. Paid-in Capital Treasury Stock 1,000LO 4 Describe the accounting for treasury stock.Corporate CapitalCash (300 x $9) 2,700 Treasury Stock (300 x $28) 8,400Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction:Oct. 15th Sold 300 shares of its treasury stock for $9 per share.Paid-in Capital Treasury Stock 1,000Retained Earnings 4,700Limited to balance on handLO 4 Describe the accounting for treasury stock.Corporate CapitalCash (100 x $11) 1,100 Treasury Stock (100 x $28) 2,800Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction:Oct. 30th Sold 100 shares of its treasury stock for $11 per share.Retained Earnings 1,700LO 4 Describe the accounting for treasury stock.Corporate CapitalCommon Stock (100 x $1) 100Add Paid-in Capital-Comm (100 x $24) 2,400Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction:Nov. 10th Retired remaining 100 shares of its treasury stock. Treasury Stock (100 x $28) 2,800Retained Earnings 300LO 4 Describe the accounting for treasury stock.Corporate CapitalIllustration 13-4 Stockholders’ Equity with No Treasury StockLO 4 Describe the accounting for treasury stock.Corporate CapitalIllustration 13-5 Stockholders’ Equity with Treasury StockLO 4 Describe the accounting for treasury stock.Features often associated with preferred stock.Preference as to dividends.Preference as to assets in liquidation.Convertible into common stock.Callable at the option of the corporation.Nonvoting.LO 5 Explain the accounting for and reporting of preferred stock.Preferred StockCumulativeParticipatingConvertibleCallableRedeemableLO 5 Explain the accounting for and reporting of preferred stock.Preferred StockSpecific Features of Preferred StockA corporation may attach whatever preferences or restrictions, as long as it does not violate its state incorporation law.Accounting for preferred stock at issuance is similar to that for common stock.LO 6 Describe the policies used in distributing dividends.Dividend PolicyDividend distributions generally are based on accumulated profits (retained earnings).Few companies pay dividends in amounts equal to their legally available retained earnings. Why?Maintain agreements with creditors.Meet state incorporation requirements.To finance growth or expansion.To smooth out dividend payments.To build up a cushion against possible losses.Cash dividends.Property dividends.LO 7 Identify the various forms of dividend distributions.Types of DividendsDividends require information concerning three dates:Date of declarationDate of recordDate of paymentLiquidating dividends.Stock dividends.Cash DividendsBoard of directors vote on the declaration of cash dividends.A declared cash dividend is a liability.Companies do not declare or pay cash dividends on treasury stock.LO 7 Identify the various forms of dividend distributions.Types of DividendsIllustration: What would be the journal entries made by a corporation that declared a $50,000 cash dividend on March 10, payable on April 6 to shareholders of record on March 25?March 10 (Declaration Date)Retained Earnings50,000Dividends Payable50,000March 25 (Date of Record) No entryApril 6 (Payment Date)Dividends Payable50,000Cash50,000DebitCreditLO 7 Identify the various forms of dividend distributions.Cash DividendProperty DividendsDividends payable in assets other than cash.Restate at fair value the property it will distribute, recognizing any gain or loss.LO 7 Identify the various forms of dividend distributions.Types of DividendsIllustration: A dividend is declared Jan. 5th and paid Jan. 25th, in bonds held as an investment; the bonds have a book value of $100,000 and a fair market value of $135,000.Date of DeclarationInvestment in Bonds 35,000Gain on Investment35,000andDate of IssuanceProperty Dividend Payable135,000Investment in Bonds135,000DebitCreditRetained Earnings135,000Property Dividend Payable135,000LO 7 Identify the various forms of dividend distributions.Property DividendLiquidating DividendsAny dividend not based on earnings reduces corporate paid-in capital.LO 7 Identify the various forms of dividend distributions.Types of DividendsJune 1 (Payment Date)April 20 (Declaration Date)Retained Earnings 575,000Additional Paid-in Capital125,000DebitCreditDividends Payable700,000Dividends Payable 700,000Cash700,000Exercise: Radical Rex Mining Company declared, on April 20, a dividend of $700,000 payable on June 1. Of this amount, $125,000 is a return of capital. Prepare the April 20 and June 1 entries for Radical Rex.LO 7 Identify the various forms of dividend distributions.Liquidating DividendStock DividendsIssuance of own stock to stockholders on a pro rata basis, without receiving any consideration.When stock dividend is less than 20–25 percent of the common shares outstanding, company transfers fair market value from retained earnings (small stock dividend).LO 8 Explain the accounting for small and large stock dividends, and for stock splits.Types of Dividends10% stock dividend is declaredRetained Earnings 20,000Common Stock Dividend Distributable500DebitCreditAdditional Paid-in Capital19,500Stock issuedCommon Stock Div. Distributable 500Common Stock500Illustration: HH Inc. has 5,000 shares issued and outstanding. The per share par value is $1, book value $32 and market value is $40.Stock DividendLO 8 Explain the accounting for small and large stock dividends, and for stock splits.Stock SplitTo reduce the market value of shares.No entry recorded for a stock split.Decrease par value and increased number of shares.Types of DividendsLO 8 Explain the accounting for small and large stock dividends, and for stock splits.2 for 1 Stock SplitNo Entry -- Disclosure that par is now $.50 and shares outstanding are 10,000.Stock DividendIllustration: HH Inc. has 5,000 shares issued and outstanding. The per share par value is $1, book value $32 and market value is $40.LO 8 Explain the accounting for small and large stock dividends, and for stock splits.Stock Split and Stock Dividend DifferentiatedIf the stock dividend is large, it has the same effect on market price as a stock split.A stock dividend of more than 20–25 percent of the number of shares previously outstanding is called a large stock dividend.With a large stock dividend, transfer from retained earnings to capital stock the par value of the stock issued.Types of DividendsLO 8 Explain the accounting for small and large stock dividends, and for stock splits.Illustration: HH Inc. has 5,000 shares issued and outstanding. The per share par value is $1, book value $32 and market value is $40.50% stock dividend is declaredRetained Earnings 2,500Common Stock Dividend Distributable2,500DebitCreditStock issuedCommon Stock Dividend Distributable 2,500Common Stock2,500Stock DividendLO 8 Explain the accounting for small and large stock dividends, and for stock splits.LO 9 Indicate how to present and analyze stockholders’ equity.Presentation and Analysis of Stockholders’ EquityBalance SheetIllustration 13-13LO 9 Indicate how to present and analyze stockholders’ equity.Presentation and Analysis of Stockholders’ EquityIllustration 13-14Statement of Stockholders’ EquityRatio shows how many dollars of net income the company earned for each dollar invested by the owners.AnalysisNet income – Preferred dividendsAverage common stockholders’ equity Rate of Return on Common Stock Equity =Presentation and Analysis of Stockholders’ EquityLO 9 Indicate how to present and analyze stockholders’ equity.It is important to some investors that the payout be sufficiently high to provide a good yield on the stock.AnalysisCash dividendsPayout Ratio =Presentation and Analysis of Stockholders’ EquityLO 9 Indicate how to present and analyze stockholders’ equity.Net income – Preferred dividendsThe amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet.AnalysisCommon stockholders’ equityBook Value Per Share =Presentation and Analysis of Stockholders’ EquityLO 9 Indicate how to present and analyze stockholders’ equity.Outstanding sharesCopyright © 2008 John Wiley & Sons, Inc. 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