Kế toán tài chính - Stockholders’ equity

PREVIEW OF CHAPTER 15Intermediate Accounting16th EditionKieso ● Weygandt ● Warfield Describe the corporate form and the issuance of shares of stock. Describe the accounting and reporting for reacquisition of shares.LEARNING OBJECTIVESUnderstand the accounting and reporting issues related to dividends.Indicate how to present and analyze stockholders’ equity.After studying this chapter, you should be able to:Stockholders’ Equity15LO 1Three primary forms of business organizationCORPORATE CAPITALProprietorshipPartnershipCorporationLO 1Special 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 LawCorporation must submit articles of incorporation to the state in which incorporation is desired.State issues a corporation charter.Advantage to incorporate in a state whose laws favor the corporate form of business organization.DelawareAccounting for stockholder’s equity follows the provisions of each state’s business incorporation act. LO 1CORPORATE CAPITALLO 1Nothing about 1209 North Orange Street hints at the secrets inside. It’s a humdrum office building, a low-slung affair with a faded awning and a view of a parking garage. Hardly worth a second glance, if even a first one. But behind its doors is one of the most remarkable corporate collections in the world: 1209 North Orange, you see, is the legal address of no fewer than 285,000 separate businesses. Its occupants, on paper, include giants like American Airlines, Apple, Bank of America, Berkshire Hathaway, Cargill, Coca-Cola, Ford, General Electric, Google, JPMorgan Chase, and Wal-Mart. These companies do business across the nation and around the world. Here at 1209 North Orange, they simply have a dropbox. What brings these marquee names to 1209 North Orange, and to other Delaware addresses, also attracts less-upstanding corporate citizens. For instance, 1209 North Orange was, until recently, a business address of Timothy S. Durham, known as “the Midwest Madoff.” Recently, Durham was found guilty of bilking 5,000 mostly middle-class and elderly investors out of $207 million. It was also an address of Stanko Subotic, a Serbian businessman and convicted smuggler—just one of many Eastern Europeans drawn to the state. Big corporations, small-time businesses, rogues, scoundrels, and worse—all have turned up at Delaware addresses in hopes of minimizing taxes, skirting regulations, plying friendly courts, or, whenWHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? 1209 NORTH ORANGE STREET(continued)LO 1needed, covering their tracks. Federal authorities worry that, in addition to the legitimate businesses flocking here, drug-traffickers, embezzlers, and money-launderers are increasingly heading to Delaware, too. It’s easy to set up shell companies here, no questions asked. Today, Delaware regularly tops lists of domestic and foreign tax havens because it allows companies to lower their taxes in another state—for instance, the state in which they actually do business or have their headquarters—by shifting royalties and similar revenues to holding companies in Delaware, where they are not taxed. In tax circles, the arrangement is known as “the Delaware loophole.” Over the last decade, the Delaware loophole has enabled corporations to reduce the taxes paid to other states by an estimated $9.5 billion. However, recently some companies are concerned that the environment in Delaware has become more hostile. Among their gripes: a growing tide of shareholder litigation, for which some feel that the state has not done enough to curb. Only time will tell if these developments have soured companies on Delaware as an incorporation target. Yet in the past two years, approximately 85 percent of the companies that went public incorporated in Delaware.WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? 1209 NORTH ORANGE STREETSources: L. Wayne, “How Delaware Thrives as a Corporate Tax Haven,” The New York Times (June 30, 2012); and L. Hoffman, “Dole and Other Companies Sour on Delaware as a Corporate Haven,” Wall Street Journal (August 8, 2015).Capital Stock or Share SystemIn the absence of restrictive provisions, each share carries the following rights:To share proportionately in profits and losses.To share proportionately in management (the right to vote for directors).To share proportionately in assets upon liquidation.To share proportionately in any new issues of stock of the same class—called the preemptive right.LO 1CORPORATE CAPITALVariety of Ownership InterestsCommon stock is the residual corporate interest.Bears ultimate risks of loss.Receives the benefits of success.Not guaranteed dividends nor assets upon dissolution.Preferred stock is a special class of stock created by contract, when stockholders’ sacrifice certain rights in return for other rights or privileges, usually dividend preference.LO 1CORPORATE CAPITALContributed CapitalRetained EarningsAccountAdditional Paid-in CapitalAccountLess:Treasury StockAccountTwo Primary Sources of EquityCommon StockAccountPreferred StockAccountAssets – Liabilities = EquityLO 1CORPORATE CAPITALIssuance of StockAccounting problems: Par value stock.No-par stock.Stock issued in combination with other securities.Stock issued in noncash transactions.Costs of issuing stock.Shares authorized - Shares offered for sale - Shares issuedLO 1CORPORATE CAPITALPar Value StockLow par values help companies avoid a contingent liability. Corporations maintain accounts for:Preferred Stock or Common Stock.Paid-in Capital in Excess of Par (also called Additional Paid-in Capital)LO 1CORPORATE CAPITALIllustration: Blue Diamond Corporation issued 300 shares of $10 par value common stock for $4,500. Prepare the journal entry to record the issuance of the shares.Cash 4,500 Common Stock (300 x $10) 3,000 Paid-in Capital in Excess of Par Value 1,500LO 1CORPORATE CAPITALNo-Par StockReasons for issuance:Avoids contingent liability.Avoids confusion over recording par value versus fair market value.A major disadvantage of no-par stock is that some states levy a high tax on these issues. In addition, in some states the total issue price for no-par stock may be considered legal capital, which could reduce the flexibility in paying dividends. LO 1CORPORATE CAPITALIllustration: Video Electronics Corporation is organized with authorized common stock of 10,000 shares without par value. If Video Electronics issues 500 shares for cash at $10 per share, it makes the following entry.Cash 5,000 Common Stock 5,000LO 1CORPORATE CAPITALIllustration: Some states require that no-par stock have a stated value. If a company issued 1,000 of the shares with a $5 stated value at $15 per share for cash, it makes the following entry.Cash 15,000 Common Stock 5,000 Paid-in Capital in Excess of Stated Value 10,000LO 1CORPORATE CAPITALStock Issued with Other Securities (Lump-Sum)Two methods of allocating proceeds:Proportional method.Incremental method.LO 1CORPORATE CAPITALProportional MethodIllustration: Beveridge Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $13,500. Common stock has a market value of $20 per share, and preferred stock has a market value of $90 per share. LO 1CORPORATE CAPITALLO 1Cash 13,500 Preferred Stock (100 x $50) 5,000 Paid-in Capital in Excess of Par – Preferred 3,100 Common Stock (300 x $10) 3,000 Paid-in Capital in Excess of Par – Common 2,400Prepare the journal entry to record issuance of shares.Proportional MethodCORPORATE CAPITALIllustration: Beveridge Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $13,500. The common stock has a market value of $20 per share, and the value of preferred stock is unknown. Incremental MethodLO 1CORPORATE CAPITALLO 1Cash 13,500 Preferred Stock (100 x $50) 5,000 Paid-in Capital in Excess of Par – Preferred 2,500 Common Stock (300 x $10) 3,000 Paid-in Capital in Excess of Par – Common 3,000Prepare the journal entry to record issuance of shares.Incremental MethodCORPORATE CAPITALStock Issued in Noncash TransactionsThe general rule: Companies should record stock issued for services or property other than cash at the fair value of the stock issued or fair value of the noncash consideration received,whichever is more clearly determinable.LO 1CORPORATE CAPITALIllustration: The following series of transactions illustrates the procedure for recording the issuance of 10,000 shares of $10 par value common stock for a patent for Arganda Company, in various circumstances. 1. Arganda cannot readily determine the fair value of the patent, but it knows the fair value of the stock is $140,000.Patents 140,000 Common Stock 100,000 Paid-in Capital in Excess of Par - Common 40,000LO 1CORPORATE CAPITAL2. Arganda cannot readily determine the fair value of the stock, but it determines the fair value of the patent is $150,000.Patents 150,000 Common Stock 100,000 Paid-in Capital in Excess of Par - Common 50,000LO 1CORPORATE CAPITAL3. Arganda cannot readily determine the fair value of the stock nor the fair value of the patent. An independent consultant values the patent at $125,000 based on discounted expected cash flows.Patents 125,000 Common Stock 100,000 Paid-in Capital in Excess of Par - Common 25,000LO 1CORPORATE CAPITALCosts 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 (Paid-in Capital in Excess of Par).LO 1CORPORATE CAPITALLO 1Sometimes companies issue stock but may not receive cash in return. As a result, a company records a receivable. Controversy existed regarding the presentation of this receivable on the balance sheet. Some argued that the company should report the receivable as an asset similar to other receivables. Others argued that the company should report the receivable as a deduction from stockholders’ equity (similar to the treatment of treasury stock). The SEC settled this issue: It requires companies to use the contra equity approach because the risk of collection in this type of transaction is often very high. This accounting issue surfaced in Enron’s accounting. Starting in early 2000, Enron issued shares of its common stock to four “special-purpose entities” in exchange for which it received a note receivable. Enron then increased its assets (by recording a receivable) and stockholders’ equity, a move the company now calls an accounting error. As a result of this accounting treatment, Enron overstated assets and stockholders’ equity by $172 million in its 2000 audited financial statements and by $828 million inWHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? THE DISAPPEARING RECEIVABLE(continued)LO 1its unaudited 2001 statements. This $1 billion overstatement was 8.5 percent of Enron’s reported stockholders’ equity at that time. As Lynn Turner, a former chief accountant of the SEC, noted, “It is a basic accounting principle that you don’t record equity until you get cash, and a note doesn’t count as cash.” Situations like this led investors, creditors, and suppliers to lose faith in the credibility of Enron, which eventually caused its bankruptcy.Source: Adapted from Jonathan Weil, “Basic Accounting Tripped Up Enron—Financial Statements Didn’t Add Up—Auditors Overlook a Simple Rule,” Wall Street Journal (November 11, 2001), p. C1.WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? THE DISAPPEARING RECEIVABLEFeatures often associated with preferred stock.Preference as to dividends.Preference as to assets in the event of liquidation.Convertible into common stock.Callable at the option of the corporation.Nonvoting.Preferred StockLO 1CumulativeParticipatingConvertibleCallableRedeemablePreferred StockFeatures of Preferred StockA corporation may attach whatever preferences or restrictions, as long as it does not violate itsstate incorporation law.LO 1Illustration: Bishop Co. issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Bishop records the issuance as follows:Preferred StockCash 120,000 Preferred stock 100,000 Paid-in Capital in Excess of Par - Preferred 20,000LO 1LO 1Some companies grant preferences to different shareholders by issuing different classes of common stock. For example, ownership of Dow Jones & Co. was controlled by family members who owned Class B shares, which carry super voting powers. The same is true for the Ford family’s control of Ford Motor Co. Class B shares are often criticized for protecting owners’ interest at the expense of shareholder return. These shares often can determine if a takeover deal gets done, or not. Here are some notable companies with two-tiered shares.For family-controlled companies, issuing newer classes of lower or nonvoting stock effectively creates currency for acquisitions, increases liquidity, or puts a public value on the company without diluting the family’s voting control. This was one of WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? A CLASS (B) ACT(continued)LO 1the main reasons Facebook gave when it created a dual-class share structure. In that IPO, Facebook founder Mark Zuckerberg owns only a quarter of the stock but still holds 57 percent of Facebook’s voting rights.Google has gone even further and created a Class C stock that gives its owners zero votes. That sounds bad. In practice, however, the nonvoting shares won’t be so different from holders of Google’s Class A shares, which get one vote apiece. Both groups are dominated by holders of the only shares that matter: Class B shares with 10 votes each. Most of those are owned by Google’s founders, Larry Page and Sergey Brin.Yet Page and Brin aren’t satisfied with the 55.7 percent majority of votes that they control. As Google issues less-potent Class A shares—to compensate employees or to finance acquisitions—the company’s founders have seen their voting power diluted. But now that the company is issuing the neutered Class C shares, Page and Brin are free to create as many shares as they like without giving up an iota of their grip on Google’s direction.Sources: Adapted from Andy Serwer, “Dual-Listed Companies Aren’t Fair or Balanced,” Fortune (September 20, 2004), p. 83; Alex Halperin, “A Class (B) Act,” Businessweek (May 28, 2007), p. 12; The Big Number, “20 Companies That Went Public in 2011 with Two or More Classes of Stock,” Wall Street Journal (February 8, 2012), p. B5; MoneyWatch, “Facebook’s IPO by the Important Numbers,” www.cbsnews.com (May 17, 2012); and N. Summers, “Why Google Is Issuing a New Kind of Toothless Stock,” Businessweek (April 3, 2014). WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? A CLASS (B) ACTDescribe the corporate form and the issuance of shares of stock. Describe the accounting and reporting for reacquisition of shares.LEARNING OBJECTIVESUnderstand the accounting and reporting issues related to dividends.Indicate how to present and analyze stockholders’ equity.After studying this chapter, you should be able to:Stockholders’ Equity15LO 2Corporations purchase their outstanding stock to:Provide tax-efficient distributions of excess cash to stockholders.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.LO 2REACQUISITION OF SHARESPurchase of Treasury StockTwo acceptable methods: Cost method (more widely used). Par (Stated) value method. Treasury stock reduces stockholders’ equity.LO 2REACQUISITION OF SHARESIllustration: Cripe Company issued 100,000 shares of $1 par value common stock at a price of $10 per share. In addition, it has retained earnings of $300,000. ILLUSTRATION 15-5 Stockholders’ Equity with No Treasury StockLO 2REACQUISITION OF SHARESTreasury Stock 110,000 Cash 110,000LO 2Illustration: Cripe Company issued 100,000 shares of $1 par value common stock at a price of $10 per share. In addition, it has retained earnings of $300,000. On January 20, Cripe acquires 10,000 of its shares at $11 per share. Cripe records the reacquisition as follows.REACQUISITION OF SHARESIllustration: The stockholders’ equity section for Cripe after purchase of the treasury stock.LO 2REACQUISITION OF SHARESILLUSTRATION 15-6Stockholders’ Equity with No Treasury StockSale of Treasury StockAbove Cost Below CostBoth increase total assets and stockholders’ equity. LO 2REACQUISITION OF SHARESSale of Treasury Stock above Cost. Cripe acquired 10,000 treasury share at $11 per share. It now sells 1,000 shares at $15 per share on March 10. Cripe records the entry as follows.Cash 15,000 Treasury Stock 11,000 Paid-in Capital from Treasury Stock 4,000LO 2REACQUISITION OF SHARESSale of Treasury Stock below Cost. Cripe sells an additional 1,000 treasury shares on March 21 at $8 per share, it records the sale as follows.Cash 8,000Paid-in Capital from Treasury Stock 3,000 Treasury Stock 11,000LO 2REACQUISITION OF SHARESIllustration: Assume that Cripe sells an additional 1,000 shares at $8 per share on April 10.ILLUSTRATION 15-7 Treasury Stock Transactions in Paid-in Capital AccountCash 8,000Paid-in Capital from Treasury Stock 1,000Retained Earnings 2,000 Treasury Stock 11,000LO 2REACQUISITION OF SHARESRetiring Treasury StockDecision results in cancellation of the treasury stock and a reduction in the number of shares of issued stock.LO 2REACQUISITION OF SHARESDescribe the corporate form and the issuance of shares of stock. Describe the accounting and reporting for reacquisition of shares.LEARNING OBJECTIVESUnderstand the accounting and reporting issues related to dividends.Indicate how to present and analyze stockholders’ equity.After studying this chapter, you should be able to:Stockholders’ Equity15LO 3DIVIDEND POLICYFew 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.LO 3A company should not pay a dividend unless both the present and future financial position warrant the distribution. The SEC encourages companies to disclose their dividend policy in their annual report, especially those that have earnings but fail to pay dividends, ordo not expect to pay dividends in the foreseeable future. The SEC encourages companies that consistently pay dividends to indicate whether they intend to continue this practice in the future.Financial Condition and Dividend Distributions DIVIDEND POLICYLO 3Cash dividends.Property dividends (dividends in kind). Liquidating dividends.All dividends, except for stock dividends, reduce the total stockholders’ equity in the corporation.Types of DividendsLO 3DIVIDEND POLICYCash DividendsBoard of directors vote on the declaration of cash dividends.A declared cash dividend is a liability.Three dates:Date of declarationDate of recordDate of paymentCompanies do not declare or pay cash dividends on treasury stock.Types of DividendsLO 3Illustration: David Freight Corp. on June 10 declared a cash dividend of 50 cents a share on 1.8 million shares payable July 16 to all stockholders of record June 24.At date of declaration (June 10) Retained Earnings 900,000 Dividends Payable 900,000At date of record (June 24) No entryAt date of payment (July 16) Dividends Payable 900,000 Cash 900,000Cash DividendsLO 3Property DividendsDividends payable in assets other than cash.Restate at fair value the property it will distribute, recognizing any gain or loss.LO 3Types of DividendsIllustration: Hopkins, Inc. transferred to stockholders some of its equity investments costing $1,250,000 by declaring a property dividend on December 28, 2016, to be distributed on January 30, 2017, to stockholders of record on January 15, 2017. At the date of declaration, the securities have a market value of $2,000,000. Hopkins makes the following entries.At date of declaration (December 28, 2016)Equity Investments 750,000 Unrealized Holding Gain or Loss—Income 750,000Retained Earnings 2,000,000 Property Dividends Payable 2,000,000Property DividendsLO 3Property Dividends Payable 2,000,000 Equity Investments 2,000,000LO 3At date of distribution (January 30, 2017)Illustration: Hopkins, Inc. transferred to stockholders some of its equity investments costing $1,250,000 by declaring a property dividend on December 28, 2016, to be distributed on January 30, 2014, to stockholders of record on January 15, 2017. At the date of declaration, the securities have a market value of $2,000,000. Hopkins makes the following entries.Property DividendsLiquidating DividendsAny dividend not based on earnings reduces corporate paid-in capital.The portion of these dividends in excess of accumulated income represents a return of part of the stockholder’s investment.LO 3Types of DividendsIllustration: Horaney Mines Inc. issued a “dividend” to its common stockholders of $1,200,000. The cash dividend announcement noted stockholders should consider $900,000 as income and the remainder a return of capital. Horaney Mines records the dividend as follows.Date of declarationRetained Earnings 900,000Paid-in Capital in Excess of Par-Common 300,000 Dividends Payable 1,200,000Liquidating DividendsLO 3Date of paymentDividends Payable 1,200,000 Cash 1,200,000Stock DividendsIssuance by a company of its own stock to stockholders on a pro rata basis, without receiving any consideration.Used when management wishes to “capitalize” part of earnings.If stock dividend is less than 20–25 percent of the common shares outstanding, company transfers fair market value from retained earnings (small stock dividend).DIVIDEND POLICYLO 3Stock Dividends and Stock SplitsIllustration: Koebele Corporation has outstanding 1,000 shares of $100 par value common stock and retained earnings of $50,000. If Koebele declares a 10 percent stock dividend, it issues 100 additional shares to current stockholders. If the fair value of the stock at the time of the stock dividend is $130 per share, the entry is:Stock DividendsLO 3Date of declarationRetained Earnings 13,000 Common Stock Dividend Distributable 10,000 Paid-in Capital in Excess of Par-Common 3,000Date of distributionCommon Stock Dividend Distributable 10,000 Common Stock 10,000Stock SplitsTo reduce the market value of shares.No entry recorded for a stock split.Decrease par value and increase number of shares.DIVIDEND POLICYLO 3ILLUSTRATION 15-14Effects of a Stock SplitLO 3Is it time for a stock split? Starbucks and Kroger recently announced 2-for-1 splits, and Netflix announced a 7-for-1 split. The nine splits announced in the first part of 2015 indicate that the year will surpass 2014’s stock split total of 11 and may even beat the highest level achieved in 2007— 28 splits. Guessing which companies might be next to split their shares is a hobby of investors. When companies’ per share prices get high, some look to lower their per share prices to make them more attractive to individual investors. It’s a bit of an old-fashioned development, but one that investors are still conditioned to monitor. There’s no question that stocks with the highest per share prices would be the logical place to consider for possible splits. The table below lists the S&P 500 stocks with the highest per share prices.WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? SPLITSVILLE(continued)LO 3Some companies are considering reverse stock splits in which, say, five shares are consolidated into one. Thus, a stock previously trading at $5 per share would be part of an unsplit share trading at $25. Unsplitting might thus avoid some of the negative consequences of a low trading price. The downside to this strategy is that analysts might view reverse splits as additional bad news about the direction of the stock price. For example, Webvan, a failed Internet grocer, did a 1-for-25 reverse split just before it entered bankruptcy. And struggling Tenet Healthcare executed a 1-for-4 reverse split in combination with a debt restructuring, in order to get its stock price into a more favorable trading range.Sources: M. Murphy, “Tenet CFO Says Reverse Split Could Help Land New Business,” Wall Street Journal (October 2, 2012); and M. Krantz, “Starbucks Splits Stock. Who’s Next?” USA TODAY (March 18, 2015).WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? SPLITSVILLEDIVIDEND POLICYStock Split and Stock Dividend DifferentiatedLarge Stock Dividend - 20–25 percent of the number of shares previously outstanding.Same effect on market price as a stock split.Par value transferred from retained earnings to capital stock.LO 3Illustration: Luna Steel, Inc. declared a 30 percent share dividend on November 20, payable December 29 to stockholders of record December 12. At the date of declaration, 1,000,000 shares, par value $10, are outstanding and with a fair value of $200 per share. The entries are:Dividend PolicyLO 3ILLUSTRATION 15-15Stock Dividend EntriesLO 3As the economy recovered from the financial crisis, a number of U.S. companies increased their dividend payout in a sign of growing confidence and rising cash balances. In such a slow growth environment, with interest rates persistently low and the tax treatment of dividends still favorable, an investment strategy focusing on stocks with the potential of increasing dividends may be particularly timely. Said one market watcher, “Investors too often overlook the importance of dividends, particularly the contribution to total return from reinvested dividends. . . . Dividends also can provide a good hedge against inflation in the form of a growing stream of income.” A recent study indicates the importance of dividends. Companies that raised their dividends are classified as dividend growers and initiators, as opposed to other companies that are classified as dividend cutters and eliminators. The study also identified companies with no change in dividend policy. WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? DIVIDENDS UP, DIVIDENDS DOWN(continued)LO 3The table in the next column supports the advice to keep an eye on dividend growth. What the table tells us is that companies that grew or initiated a dividend have experienced the highest returns relative to other stocks since 1972. Over that time span, an investment of $100 would have grown to $4,169, while dividend non-payers only increased to $193. In addition, the higher performers offered lower volatility of returns in all market environments. Thus, companies that grow dividends are signaling confidence about future earnings and are most likely to perform well throughout market cycles—this makes them good candidates for long-term growth.WHAT’S YOUR PRINCIPLEWHAT DO THE NUMBERS MEAN? DIVIDENDS UP, DIVIDENDS DOWNSources: “Dividend Growth Stocks May Be Timely as the Economy Sputters,” T. Rowe Price Report (Fall 2011); and Hartford Funds, “The Power of Dividends: Past, Present, and Future,” Second Quarter 2014 White Paper (2014).Describe the corporate form and the issuance of shares of stock. Describe the accounting and reporting for reacquisition of shares.LEARNING OBJECTIVESUnderstand the accounting and reporting issues related to dividends.Indicate how to present and analyze stockholders’ equity.After studying this chapter, you should be able to:Stockholders’ Equity15LO 4PRESENTATION OF EQUITYILLUSTRATION 15-17Comprehensive Stockholders’ Equity PresentationLO 4Restrictions are best disclosed by note.Restrictions may be based on the retention of a certain retained earnings balance, the ability to maintain certain working capital requirements, additional borrowing, and other considerations. LO 4Disclosure of Restrictions on Retained EarningsILLUSTRATION 15-18Disclosure of Restrictions on Retained Earnings and DividendsPRESENTATION OF EQUITYStatement of Stockholders’ EquityLO 4ILLUSTRATION 15-19Columnar Format for Statement of Common Stockholders’ EquityPRESENTATION OF EQUITYAnalysts use stockholders’ equity ratios to evaluate a company’s profitability and long-term solvency. Three ratios:Rate of return on common stock equity.Payout ratio.Book value per share.ANALYSIS OF EQUITYLO 4Illustration: Marshall's Inc. had net income of $360,000, declared and paid preferred dividends of $54,000, and average common stockholders’ equity of $2,550,000.AnalysisRate of Return on Common Stockholders’ EquityRatio shows how many dollars of net income the company earned for each dollar invested by the owners.LO 4ILLUSTRATION 15-20Computation of Return on Common Stockholders’ EquityIllustration: Midgley Co. has cash dividends of $100,000 and net income of $500,000, and no preferred stock outstanding.AnalysisIn the fourth quarter of 2014, 36 percent of the earnings of the S&P 500 was distributed via dividends.Payout RatioLO 4ILLUSTRATION 15-21Computation of Payout RatioIllustration: Uretz Corporation’s common stockholders’ equity is $1,000,000 and it has 100,000 shares of common stock outstandingAnalysisAmount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet.Book Value per ShareLO 4ILLUSTRATION 15-22Computation of Book Value per ShareDividend PreferencesIllustration: In 2017, Mason Company is to distribute $50,000 as cash dividends, its outstanding common stock have a par value of $400,000, and its 6 percent preferred stock have a par value of $100,000.1. If the preferred stock are noncumulative and nonparticipating:ILLUSTRATION 15A-1LO 5 Explain the different types of preferred stock dividends and their effect on book value per share.APPENDIX 15ADIVIDEND PREFERENCES AND BOOK VALUE PER SHAREIllustration: In 2017, Mason Company is to distribute $50,000 as cash dividends, its outstanding common stock has a par value of $400,000, and its 6 percent preferred stock has a par value of $100,000.If the preferred stock is cumulative and non-participating, and Mason Company did not pay dividends on the preferred stock in the preceding two years:ILLUSTRATION 15A-2LO 5DIVIDEND PREFERENCES AND BOOK VALUE PER SHAREAPPENDIX 15AIf the preferred stock is noncumulative and is fully participating:ILLUSTRATION 15A-3LO 5DIVIDEND PREFERENCES AND BOOK VALUE PER SHAREAPPENDIX 15AILLUSTRATION 15A-44. If the preferred stock is cumulative and fully participating, and Mason Company did not pay dividends on the preferred stock in the preceding two years:Illustration: In 2017, Mason Company is to distribute $50,000 as cash dividends, its outstanding common stock has a par value of $400,000, and its 6 percent preferred stock has a par value of $100,000.LO 5DIVIDEND PREFERENCES AND BOOK VALUE PER SHAREAPPENDIX 15ABook Value Per ShareBook value per share is computed as net assets divided by outstanding stock at the end of the year. The computation becomes more complicated if a company has preferred stock.ILLUSTRATION 15A-5LO 5DIVIDEND PREFERENCES AND BOOK VALUE PER SHAREAPPENDIX 15AAssume that the same facts exist except that the 5 percent preferred stock is cumulative, participating up to 8 percent, and that dividends for three years before the current year are in arrears.ILLUSTRATION 15A-6LO 5DIVIDEND PREFERENCES AND BOOK VALUE PER SHAREAPPENDIX 15ALO 6 Compare the procedures for accounting for stockholders’ equity under GAAP and IFRS.RELEVANT FACTS - SimilaritiesThe accounting for the issuance of shares and purchase of treasury stock are similar under both IFRS and GAAP.The accounting for declaration and payment of dividends and the accounting for stock splits are similar under both IFRS and GAAP.RELEVANT FACTS - DifferencesMajor differences relate to terminology used, introduction of concepts such as revaluation surplus, and presentation of stockholders’ equity information. Many countries have different investor groups than the United States. For example, in Germany, financial institutions like banks are not only the major creditors but often are the largest shareholders as well. The accounting for treasury share retirements differs between IFRS and GAAP. Under GAAP, a company has three options: (1) charge the excess of the cost of treasury shares over par value to retained earnings, (2) allocate the difference between paid-in capital and retained earnings, or (3) charge the entire amount to paid-in capital. Under IFRS, the excess may have to be charged to paid-in capital, depending on the original transaction related to the issuance of the shares.LO 6RELEVANT FACTS - DifferencesThe statement of changes in equity is usually referred to as the statement of stockholders’ equity (or shareholders’ equity) under GAAP.Both IFRS and GAAP use the term retained earnings. However, IFRS relies on the term “reserve” as a dumping ground for other types of equity transactions, such as other comprehensive income items as well as various types of unusual transactions related to convertible debt and share option contracts. GAAP relies on the account Accumulated Other Comprehensive Income (Loss). Under IFRS, it is common to report “revaluation surplus” related to increases or decreases in items such as property, plant, and equipment; mineral resources; and intangible assets. The term surplus is generally not used in GAAP. In addition, unrealized gains on the above items are not reported in the financial statements under GAAP.LO 6ON THE HORIZONThe IASB and the FASB are currently working on a project related to financial statement presentation. An important part of this study is to determine whether certain line items, subtotals, and totals should be clearly defined and required to be displayed in the financial statements. For example, it is likely that the statement of changes in equity and its presentation will be examined closely. In addition, the options of how to present other comprehensive income under GAAP will change in any converged standard.LO 6Under IFRS, the amount of capital received in excess of par value would be credited to:Retained Earnings.Contributed Capital.Share Premium.Par value is not used under IFRS.IFRS SELF-TEST QUESTIONLO 6The term reserves is used under IFRS with reference to all of the following except:gains and losses on revaluation of property, plant, and equipment.capital received in excess of the par value of issued shares.retained earnings.fair value differences.IFRS SELF-TEST QUESTIONLO 6IFRS SELF-TEST QUESTIONLO 6Under IFRS, a purchase by a company of its own shares results in:an increase in treasury shares.a decrease in assets.a decrease in equity.All of the above.“Copyright © 2016 John Wiley & Sons, Inc. All rights reserved. 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