11-1. 11-2 corporations: organization, stock transactions, dividends, and retained earnings 11...
TRANSCRIPT
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11-1
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11-2
Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings
11Learning Objectives
Discuss the major characteristics of a corporation.
Explain how to account for the issuance of common and preferred stock.
Explain how to account for treasury stock.3
Explain how to account for cash dividends.
2
1
4
Explain how to account for stock dividends and splits.5
Discuss how stockholders’ equity is reported and analyzed.6
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11-3
An entity separate and distinct from its owners.
Classified by Purpose
Not-for-Profit
For Profit
Classified by Ownership
Publicly held
Privately held
► McDonald’s► Nike► PepsiCo► Google
► Salvation Army► American Cancer
Society
► Cargill Inc.
Alternative TerminologyPrivately held corporationsare also referred to asclosely held corporations.
LO 1
LEARNINGOBJECTIVE
Discuss the major characteristics of a corporation.
1
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11-4
Characteristics that distinguish corporations from
proprietorships and partnerships.
Advantages
Disadvantages
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1
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11-5
Corporation acts under its own name rather than in the name of its stockholders.
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1
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11-6
Limited to their investment.
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1
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11-7
Shareholders may sell their stock.
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1
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11-8
Corporation can obtain capital through the issuance of stock.
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1
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11-9
Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1
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11-10
Separation of ownership and management often reduces an owner’s ability to actively manage the company.
Characteristics that distinguish corporations
from proprietorships and partnerships.
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
LO 1
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11-11
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a Corporation
LO 1
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11-12
Characteristics that distinguish corporations from
proprietorships and partnerships.
Characteristics of a Corporation
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Corporate Management
Government Regulations
Additional Taxes
Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends.
LO 1
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11-13
Stockholders
Chairman and Board of Directors
President andChief Executive
Officer
General Counsel/Secretary
Vice PresidentMarketing
Vice PresidentFinance/Chief
Financial Officer
Vice PresidentOperations
Vice PresidentHuman
Resources
Treasurer Controller
Illustration 11-1 Corporation organization chart
Characteristics of a Corporation
LO 1
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11-14
File application with the Secretary of State.
State grants charter.
Corporation develops by-laws.
Initial Steps:
Companies generally incorporate in a state whose laws are
favorable to the corporate form of business (Delaware, New
Jersey).
Corporations engaged in interstate commerce must obtain a
license from each state in which they do business.
Forming a Corporation
Alternative TerminologyThe charter is oftenreferred to as the articlesof incorporation.
LO 1
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11-15
A Thousand Millionaires!
Traveling to space or embarking on an expedition to excavate lost Mayan ruins are normally the stuff of adventure novels. But for employees of Facebook, these and other lavish dreams moved closer to reality when the world’s No. 1 online social network went public through an initial public offering (IPO) that may have created at least a thousand millionaires. The IPO was the largest in Internet history, valuing Facebook at over $104 billion. With all these riches to be had, why did Mark Zuckerberg, the founder of Facebook, delay taking his company public? Consider that the main motivation for issuing shares to the public is to raise money so you can grow your business. However, unlike a manufacturer or even an online retailer, Facebook doesn’t need major physical resources, it doesn’t have inventory, and it doesn’t really need much money for marketing. So in the past, the company hasn’t had much need for additional cash beyond what it was already generating on its own. Finally, as head of a closely held, nonpublic company, Zuckerberg was subject to far fewer regulations than a public company.
Source: “Status Update: I’m Rich! Facebook Flotation to Create 1,000 Millionaires Among Company’s Rank and File,” Daily Mail Reporter (February 1, 2012).
Accounting Across the Organization
LO 1
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11-16
1. Vote in election of board of
directors and on actions that
require stockholder approval.
2. Share the corporate earnings
through receipt of dividends.
Stockholder Rights
LO 1
Illustration 11-3Ownership rights ofstockholders
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11-17
3. Keep the same percentage ownership when new shares
of stock are issued (preemptive right).
* A number of companies have eliminated the preemptive right.
LO 1
Stockholder Rights
Illustration 11-3Ownership rights ofstockholders
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11-18
4. Share in assets upon liquidation in proportion to their
holdings. This is called a residual claim.
LO 1
Stockholder Rights
Illustration 11-3Ownership rights ofstockholders
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11-19
When a corporation decides to issue stock, it must
resolve a number of basic questions:
1. How many shares should it authorize for sale?
2. How should it issue the stock?
3. What value should the corporation assign to the
stock?
Stock Issue Considerations
LO 1
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11-20
Charter indicates the amount of stock that a corporation
is authorized to sell.
Number of authorized shares is often reported in the
stockholders’ equity section.
No formal accounting entry.
AUTHORIZED STOCK
Stock Issue Considerations
LO 1
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11-21
Name of corporation
Stockholder’s name
Shares
Signature of corporate official
Prenumbered Illustration 11-4
Stock Issue Considerations
LO 1
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11-22
Companies issue common stock directly to investors or
indirectly through an investment banking firm.
Factors in setting price for a new issue of stock:
1. Company’s anticipated future earnings.
2. Expected dividend rate per share.
3. Current financial position.
4. Current state of the economy.
5. Current state of the securities market.
ISSUANCE OF STOCK
Stock Issue Considerations
LO 1
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11-23
Stock of publicly held companies is traded on organized
exchanges.
Interaction between buyers and sellers determines the
prices per share.
Prices tend to follow the trend of a company’s earnings
and dividends.
Factors beyond a company’s control may cause day-to-
day fluctuations in market prices.
MARKET PRICE OF STOCK
Stock Issue Considerations
LO 1
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11-24 LO 1
Investor Insight Nike
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11-25
Years ago, par value determined the legal capital per
share that a company must retain in the business for the
protection of corporate creditors.
Today many states do not require a par value.
No-par value stock is fairly common today.
In many states, the board of directors assigns a stated
value to no-par shares.
PAR AND NO-PAR VALUE STOCK
Stock Issue Considerations
LO 1
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11-26
Question
Which of these statements is false?
a. Ownership of common stock gives the owner a voting right.
b. The stockholders’ equity section begins with paid-in capital.
c. The authorization of capital stock does not result in a formal accounting entry.
d. Legal capital is intended to protect stockholders.
Stock Issue Considerations
LO 1
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11-27
Indicate whether each of the following statements is true or false.
______ 1. Similar to partners in a partnership, stockholders of a
corporation have unlimited liability.
______ 2. It is relatively easy for a corporation to obtain capital
through the issuance of stock.
______ 3. The separation of ownership and management is an
advantage of the corporate form of business.
______ 4. The journal entry to record the authorization of capital stock
includes a credit to the appropriate capital stock account.
______ 5. All states require a par value per share for capital stock.
False
True
False
False
False
LO 1
DO IT! Corporate Organization1a
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11-28
Paid-in CapitalPaid-in Capital
Retained EarningsAccount
Retained EarningsAccount
Paid-in Capital in Excess of Par
Account
Paid-in Capital in Excess of Par
Account
Two Primary Sources of
Equity
Common StockAccount
Common StockAccount
Preferred StockAccount
Preferred StockAccount
Paid-in capital is the total amount of cash and other assets paid in
to the corporation by stockholders in exchange for capital stock.
Corporate Capital
LO 1
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11-29
Paid-in CapitalPaid-in Capital
Retained EarningsAccount
Retained EarningsAccount
Two Primary Sources of
Equity
Common StockAccount
Common StockAccount
Preferred StockAccount
Preferred StockAccount
Retained earnings is net income that a corporation retains for
future use.
Corporate Capital
Paid-in Capital in Excess of Par
Account
Paid-in Capital in Excess of Par
Account
LO 1
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11-30
If Delta Robotics has a balance of $800,000 in common stock
and $130,000 in retained earnings at the end of its first year,
its stockholders’ equity section is as follows.
Corporate Capital
Illustration 11-5Stockholders’ equity section
LO 1
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11-31
Comparison of the owners’ equity (stockholders’ equity)
accounts reported on a balance sheet for a proprietorship and
a corporation.
Corporate Capital
Illustration 11-6Comparison of owners’ equity accounts
LO 1
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11-32
(a) Income Summary 122,000
Retained Earnings 122,000
(b) Stockholders’ equity
Paid-in capital common Stock $750,000
Retained earnings 122,000
Total stockholders’ equity $872,000
LO 1
DO IT! Corporate Capital1b
At the end of its first year of operation, Doral Corporation has
$750,000 of common stock and net income of $122,000. Prepare
(a) the closing entry for net income and (b) the stockholders’ equity
section at year-end.
Solution
Advance slide in slide show to reveal solution.
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11-33 LO 2
Primary Objectives:
1) Identify the specific sources of paid-in capital.
2) Maintain the distinction between paid-in capital and
retained earnings.
Other than consideration received, the issuance of common
stock affects only paid-in capital accounts.
Accounting for Common Stock
LEARNINGOBJECTIVE
Explain how to account for the issuance of common and preferred stock.
2
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11-34
b.
Cash 1,000
Common Stock (1,000 x $1) 1,000
Cash 5,000
Common Stock (1,000 x $1) 1,000
Paid-in Capital in Excess of Par Value 4,000
ISSUING PAR VALUE COMMON STOCK FOR CASH
Accounting for Common Stock
Illustration: Assume that Hydro-Slide, Inc. issues 1,000 shares
of $1 par value common stock. Prepare Hydro-Slide’s journal
entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000
shares are issued for $5 per share.
a.
LO 2
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11-35
Accounting for Common Stock
Alternative TerminologyPaid-in Capital in Excess of Par is also called Premium on Stock.
LO 2
Illustration 11-7Stockholders’ equity—paid-incapital in excess of par
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11-36
Illustration: Assume that instead of $1 par value stock, Hydro-
Slide, Inc. has $5 stated value no-par stock and the company
issues 5,000 shares at $8 per share for cash.
Cash 40,000
Common Stock 25,000
Paid-in Capital in Excess of Stated Value 15,000
ISSUING NO-PAR COMMON STOCK FOR CASH
Accounting for Common Stock
LO 2
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11-37
Illustration: What happens when no-par stock does not have a
stated value?
Cash 40,000
Common Stock 40,000
Accounting for Common Stock
LO 2
ISSUING NO-PAR COMMON STOCK FOR CASH
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11-38
Corporations also may issue stock for:
Services (attorneys or consultants).
Noncash assets (land, buildings, and equipment).
Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable.
Accounting for Common Stock
ISSUING COMMON STOCK FOR SERVICES OR NONCASH ASSETS
LO 2
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11-39
Illustration: Attorneys have helped Jordan Company incorporate.
They have billed the company $5,000 for their services. They agree
to accept 4,000 shares of $1 par value common stock in payment of
their bill. At the time of the exchange, there is no established
market price for the stock. Prepare the journal entry for this
transaction.
Organization Expense 5,000
Common Stock (4,000 x $1) 4,000
Paid-in Capital in Excess of Par 1,000
COMMON STOCK FOR SERVICES
LO 2
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11-40
Illustration: Athletic Research Inc. is an existing publicly held
corporation. Its $5 par value stock is actively traded at $8 per
share. The company issues 10,000 shares of stock to acquire land
recently advertised for sale at $90,000. Prepare the journal entry for
this transaction.
Land 80,000
Common Stock (10,000 x $5) 50,000
Paid-in Capital in Excess of Par 30,000
LO 2
COMMON STOCK FOR NONCASH ASSET
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11-41
Typically, preferred stockholders have a priority as to:
1. Distributions of earnings (dividends).
2. Assets in event of liquidation.
Generally do not have voting rights.
Accounting for preferred stock at issuance is similar to that for
common stock.
Accounting for Stock Transactions
LO 2
Accounting for Preferred Stock
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11-42
Illustration: Stine Corporation issues 10,000 shares of $10
par value preferred stock for $12 cash per share. The journal
entry to record the issuance is:
Preferred stock may have a par value or no-par value.
Accounting for Preferred Stock
Cash 120,000
Preferred Stock (10,000 x $10) 100,000
Paid-in Capital in Excess of Par 20,000
LO 2
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11-43
Paid-in CapitalPaid-in Capital
Retained EarningsAccount
Retained EarningsAccount
Paid-in Capital in Excess of Par
Account
Paid-in Capital in Excess of Par
Account
Less:Treasury Stock
Account
Less:Treasury Stock
Account
Two Primary Sources of
Equity
Common StockAccount
Common StockAccount
Preferred StockAccount
Preferred StockAccount
LO 3
LEARNINGOBJECTIVE
Explain how to account for treasury stock.
3
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11-44
Treasury stock is a corporation’s own stock that it has
reacquired from shareholders but not retired.
Corporations acquire treasury stock for various reasons:
1. To reissue the shares to officers and employees under
bonus and stock compensation plans.
2. To enhance the stock’s market value.
3. To have additional shares available for use in the acquisition
of other companies.
4. To increase earnings per share.
Accounting for Treasury Stock
LO 3
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11-45
Purchase of Treasury Stock
Companies generally use the cost method.
Debit Treasury Stock for the price paid to
reacquire the shares.
Treasury stock is a contra stockholders’ equity
account. Reduces stockholders’ equity.
Accounting for Treasury Stock
Helpful Hint Treasury shares do not have dividend rights or voting rights.
LO 3
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11-46
Treasury Stock (4,000 x $8) 32,000
Cash 32,000
Illustration: On February 1, 2017, Mead acquires 4,000 shares of
its stock at $8 per share.
Purchase of Treasury StockIllustration 11-8Stockholders’ equity with no treasury stock
LO 3
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11-47
Both the number of shares issued (100,000) and the number of shares held as treasury (4,000) are disclosed.
Illustration 11-9Stockholders’ equity with treasury stock
LO 3
Purchase of Treasury Stock
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11-48
Sale of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders’ equity.
Disposal of Treasury Stock
Helpful Hint Treasury stock transactions are classified as capital stock transactions. As in the case when stock is issued, the income statement is not involved.
LO 3
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11-49
Illustration: On July 1, Mead sells for $10 per share 1,000
shares of its treasury stock previously acquired at $8 per share
and makes the following entry.
Cash 10,000
Treasury Stock 8,000
Paid-in Capital from Treasury Stock 2,000
A corporation does not realize a gain or suffer a loss from
stock transactions with its own stockholders.
SALE OF TREASURY STOCK “ABOVE” COST
LO 3
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11-50
Illustration: On Oct. 1, Mead sells an additional 800 shares of
treasury stock at $7 per share and makes the following entry.
Illustration 11-10Treasury stock accounts
SALE OF TREASURY STOCK “BELOW” COST
Cash 5,600
Paid-in Capital from Treasury Stock 800
Treasury Stock 6,400
LO 3
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11-51
Cash 15,400
Paid-in Capital from Treasury Stock 1,200
Retained Earnings 1,000
Treasury Stock 17,600
Illustration: On Dec. 1, assume that Mead, Inc. sells its
remaining 2,200 shares at $7 per share and makes the following
entry.
Limited to balance on hand
LO 3
SALE OF TREASURY STOCK “BELOW” COST
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11-52
Why Did Reebok Buy Its Own Stock?
In a bold (and some would say risky) move, Reebok at one time bought back nearly a third of its shares. This repurchase of shares dramatically reduced Reebok’s available cash. In fact, the company borrowed significant funds to accomplish the repurchase. In a press release, management stated that it was repurchasing the shares because it believed its stock was severely underpriced. The repurchase of so many shares was meant to signal management’s belief in good future earnings. Skeptics, however, suggested that Reebok’s management was repurchasing shares to make it less likely that another company would acquire Reebok (in which case Reebok’s top managers would likely lose their jobs). By depleting its cash, Reebok became a less attractive acquisition target. Acquiring companies like to purchase companies with large cash balances so they can pay off debt used in the acquisition.
Accounting Across the Organization
LO 3
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11-53
July 1 Treasury Stock 180,000
Cash 180,000
Nov. 1 Cash 70,000
Treasury Stock 60,000
Paid-in Capital from Treasury Stock 10,000
LO 3
DO IT! Treasury Stock3
Santa Anita Inc. purchases 3,000 shares of its $50 par value
common stock for $180,000 cash on July 1. It will hold the shares in
the treasury until resold. On November 1, the corporation sells
1,000 shares of treasury stock for cash at $70 per share. Journalize
the treasury stock transactions.
Solution
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11-54
Distribution of cash or stock to stockholders on a pro rata
(proportional to ownership) basis.
Types of Dividends:
1. Cash dividends.
2. Property dividends.
Dividends are generally reported quarterly as a dollar amount
per share.
3. Stock dividends.
4. Scrip (promissory note).
LO 4
LEARNINGOBJECTIVE
Explain how to account for cash dividends.
4
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11-55
For a corporation to pay a cash dividend, it must have:
1. Retained earnings - Payment of cash dividends from
retained earnings is legal in all states.
2. Adequate cash.
3. A declaration of dividends by the Board of Directors.
Cash Dividends
LO 4
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11-56
Three dates are important: Illustration 11-11Key dividend dates
LO 4
Cash Dividends
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11-57
Illustration: On Dec. 1, the directors of Media General declare a 50
cents per share cash dividend on 100,000 shares of $10 par value
common stock. The dividend is payable on Jan. 20 to shareholders of
record on Dec. 22.
Dec. 1 (Declaration Date)
Cash Dividends 50,000
Dividends Payable 50,000
Dec. 22 (Date of Record)
Jan. 20 (Payment Date)
Dividends Payable 50,000
Cash 50,000
No entry
LO 4
Cash Dividends
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11-58
Right to receive dividends before common stockholders.
Per share dividend amount is stated as a percentage of
the preferred stock’s par value or as a specified amount.
Cumulative Dividend
Preferred stockholders must be
paid both current-year
dividends and any unpaid prior-
year dividends before common
stockholders receive dividends.
Dividend Preferences
LO 4
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11-59
CUMULATIVE DIVIDEND
Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par
value, cumulative preferred stock outstanding. Each $100 share
pays a $7 dividend (.07 x $100). The annual dividend is $35,000
(5,000 x $7 per share). If dividends are two years in arrears,
preferred stockholders are entitled to receive the following
dividends in the current year.Illustration 11-12Computation of total dividends to preferred stock
LO 4
Dividend Preferences
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11-60
ALLOCATING CASH DIVIDENDS BETWEEN PREFERRED AND COMMON STOCK
Holders of cumulative preferred stock must be paid any
unpaid prior-year dividends and their current year’s dividend
before common stockholders receive dividends.
LO 4
Dividend Preferences
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11-61
Illustration: On December 31, 2017, IBR Inc. has 1,000 shares
of 8%, $100 par value cumulative preferred stock. It also has
50,000 shares of $10 par value common stock outstanding. At
December 31, 2017, the directors declare a $6,000 cash dividend.
Prepare the entry to record the declaration of the dividend.
Cash Dividends 6,000
Dividends Payable 6,000
Preferred Dividends: 1,000 shares x $100 par x 8% = $8,000
ALLOCATING CASH DIVIDENDS
LO 4
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11-62
2017 2018
Dividends declared 6,000$
Dividends in arrears
Allocation to preferred 6,000
Remainder to common -$
* 1,000 shares x $100 par x 8% = $8,000
*
** 2017 Pfd. dividends $8,000 – declared $6,000 = $2,000
**
Illustration: At December 31, 2018, IBR declares a $50,000
cash dividend. Show the allocation of dividends to each class of
stock.
$ 50,000
2,000
8,000
$ 40,000
LO 4
ALLOCATING CASH DIVIDENDS
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11-63
Illustration: At December 31, 2018, IBR declares a $50,000 cash
dividend. Prepare the entry to record the declaration of the
dividend.
Cash Dividends 50,000
Dividends Payable 50,000
LO 4
ALLOCATING CASH DIVIDENDS
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11-64
Preferred stockholders are paid only this year’s dividend.
Preferred stockholders = $12,000 (2,000 x .06 x $100).
Common stockholders = $48,000 ($60,000 - $12,000).
LO 4
DO IT! Dividends on Preferred and Common Stock4
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2017. At December 31,
2017, the company declared a $60,000 cash dividend. Determine the
dividend paid to preferred stockholders and common stockholders
under each of the following scenarios.
1. The preferred stock is noncumulative, and the company has
not missed any dividends in previous years.
Solution
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11-65
Past unpaid dividends do not have to be paid.
Preferred stockholders = $12,000 (2,000 x .06 x $100).
Common stockholders = $48,000 ($60,000 - $12,000).
LO 4
DO IT! Dividends on Preferred and Common Stock4
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2017. At December 31,
2017, the company declared a $60,000 cash dividend. Determine the
dividend paid to preferred stockholders and common stockholders
under each of the following scenarios.
2. The preferred stock is noncumulative, and the company did
not pay a dividend in each of the two previous years.
Solution
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11-66
Dividends that have been missed (dividends in arrears) must be paid.
Preferred stockholders = $36,000 (3 x 2,000 x .06 x $100).
Common stockholders = $24,000 ($60,000 - $36,000).
LO 4
DO IT! Dividends on Preferred and Common Stock4
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2017. At December 31,
2017, the company declared a $60,000 cash dividend. Determine the
dividend paid to preferred stockholders and common stockholders
under each of the following scenarios.
3. The preferred stock is cumulative, and the company did not
pay a dividend in each of the two previous years.
Solution
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11-67
A pro rata (proportional to ownership) distribution of the
corporation’s own stock to stockholders.
Reasons why corporations issue stock dividends:
1. Satisfy stockholders’ dividend expectations without
spending cash.
2. Increase marketability of the corporation’s stock.
3. Emphasize a portion of stockholders’ equity has been
permanently reinvested in the business.
Stock Dividends
LO 5
LEARNINGOBJECTIVE
Explain how to account for stock dividends and splits.
5
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11-68
Small stock dividend (less than 20–25% of the
corporation’s issued stock, recorded at fair market value)
Large stock dividend (greater than 20–25% of issued
stock, recorded at par value)
* Accounting based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares.
*
Stock Dividends
LO 5
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11-69
Illustration: Medland Corporation declares a 10% stock dividend on
its 50,000 shares of $10 par value common stock. The current fair
market value of its stock is $15 per share. Record the entry on the
declaration date:
Stock Dividends (50,000 x 10% x $15) 75,000
Common Stock Dividends Distributable 50,000
Paid-in Capital in Excess of Par—Common 25,000
Illustration 11-14Statement Presentation
Stock Dividends
LO 5
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11-70
Illustration: Medland Corporation declares a 10% stock dividend on
its 50,000 shares of $10 par value common stock. The current fair
market value of its stock is $15 per share. Record the entry on the
declaration date:
Stock Dividends (50,000 x 10% x $15) 75,000
Common Stock Dividends Distributable 50,000
Paid-in Capital in Excess of Par—Common 25,000
Common Stock Dividends Distributable 50,000
Common Stock 50,000
Record the journal entry when Medland issues the dividend shares.
Stock Dividends
LO 5
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11-71
EFFECTS OF STOCK DIVIDENDSIllustration 11-15
Stock Dividends
LO 5
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11-72
Which of the following statements about small stock dividends
is true?
a. A debit to Stock Dividends for the par value of the shares
issued should be made.
b. A small stock dividend decreases total stockholders’
equity.
c. Market value per share should be assigned to the
dividend shares.
d. A small stock dividend ordinarily will have an effect on par
value per share of stock.
Question
Stock Dividends
LO 5
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11-73
In the stockholders’ equity section, Common Stock Dividends
Distributable is reported as a(n):
a. deduction from total paid-in capital and retained earnings.
b. current liability.
c. deduction from retained earnings.
d. addition to capital stock.
Question
Stock Dividends
LO 5
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11-74
THE MISSING CONTROLIndependent internal verification. The company’s board of directors should haveensured that the awards were properly administered. For example, the date on theminutes from the board meeting could be compared to the dates that were recordedfor the awards. In addition, the dates should again be confirmed upon exercise.
Total take: $1.7 million
ANATOMY OF A FRAUD
The president, chief operating officer, and chief financial officer of SafeNet, a software encryption company, were each awarded employee stock options by the company’s board of directors as part of their compensation package. Stock options enable an employee to buy a company’s stock sometime in the future at the price that existed when the stock option was awarded. For example, suppose that you received stock options today, when the stock price of your company was $30. Three years later, if the stock price rose to $100, you could “exercise” your options and buy the stock for $30 per share, thereby making $70 per share. After being awarded their stock options, the three employees changed the award dates in the company’s records to dates in the past, when the company’s stock was trading at historical lows. For example, using the previous example, they would choose a past date when the stock was selling for $10 per share, rather than the $30 price on the actual award date. In our example, this would increase the profit from exercising the options to $90 per share.
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11-75
Stock Splits
Issuance of additional shares to stockholders according to
their percentage ownership.
Reduction in the par or stated value per share.
Increase in number of shares outstanding.
Reduces the market value of shares.
No journal entry recorded.Helpful Hint A stock split changes the par value per share but does not affect any balances in stockholders’ equity.
LO 5
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11-76
Effect of 4-for-1 stock split for stockholdersIllustration 11-16
Stock Splits
LO 5
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11-77
Effects for Medland Corporation, assuming that it splits its
50,000 shares of common stock on a 2-for-1 basis.Illustration 11-17
Stock Splits
LO 5
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11-78
DO IT! Stock Dividends and Stock Splits5
Sing CD Company has had five years of record earnings. Due to
this success, the market price of its 500,000 shares of $2 par value
common stock has tripled from $15 per share to $45. During this
period, paid-in capital remained the same at $2,000,000. Retained
earnings increased from $1,500,000 to $10,000,000. President Joan
Elbert is considering either a 10% stock dividend or a 2-for-1 stock
split. She asks you to show the before-and-after effects of each
option on retained earnings, total stockholders’ equity, and par value
per share.
LO 5
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11-79
DO IT! Stock Dividends and Stock Splits5
Sing CD Company has had five years of record earnings. Due to
this success, the market price of its 500,000 shares of $2 par value
common stock has tripled from $15 per share to $45. President
Joan Elbert is considering either a 10% stock dividend or a 2-for-1
stock split.
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11-80 LO 6
Retained earnings is net income that a company retains in
the business.
Part of the stockholders’ claim on the total assets of the
corporation.
Debit balance in Retained Earnings is identified as a
deficit.
LEARNINGOBJECTIVE
Discuss how stockholders’ equity is reported and analyzed.
6
Illustration 11-20Stockholders’ equity with deficit
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11-81
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
RETAINED EARNINGS RESTRICTIONS
Retained Earnings
Illustration 11-21Disclosure of restriction
LO 6
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11-82
Correction of an error in previously issued financial
statements.
Result from:
► mathematical mistakes.
► mistakes in application of accounting principles.
► oversight or misuse of facts.
Adjustment made to the beginning balance of retained
earnings.
PRIOR PERIOD ADJUSTMENTS
Retained Earnings
LO 6
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Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$
For the Year Ended December 31, 2017Statement of Retained Earnings
Woods, Inc.
Before issuing the report for the year ended December 31, 2017, you discover a $50,000 error (net of tax) that caused the 2016 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2016. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2017?
RETAINED EARNINGS STATEMENT
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Balance, January 1, as previously reported 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1, as restated 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$
For the Year Ended December 31, 2017Statement of Retained Earnings
Woods, Inc.
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RETAINED EARNINGS STATEMENT
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Debits and Credits to Retained Earnings
Illustration 11-23
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RETAINED EARNINGS STATEMENT
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Illustration 11-24Retained earnings statement
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RETAINED EARNINGS STATEMENT
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All but one of the following is reported in a retained
earnings statement. The exception is:
a. cash and stock dividends.
b. net income and net loss.
c. some disposals of treasury stock below cost.
d. sales of treasury stock above cost.
Question
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RETAINED EARNINGS STATEMENT
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DO IT! Retained Earnings Statement6a
Vega Corporation has retained earnings of $5,130,000 on
January 1, 2017. During the year, Vega earned $2,000,000 of
net income. It declared and paid a $250,000 cash dividend. In
2017, Vega recorded an adjustment of $180,000 due to the
understatement (from a mathematical error) of 2016
depreciation expense. Prepare a retained earnings statement
for 2017.
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Prepare a retained earnings statement for 2017.
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DO IT! Retained Earnings Statement6a
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Statement Presentation and Analysis
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Illustration 11-25Comprehensive stockholders’equity section
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Ratio shows how many dollars of net income the company earned
for each dollar invested by the common stockholders.
Statement Presentation and Analysis
ANALYSIS
To illustrate, Walt Disney Company’s beginning-of-the-year and end-
of-the-year common stockholders’ equity were $31,820 and $30,753
million, respectively. Its net income was $4,687 million, and no
preferred stock was outstanding. Illustration 11-27
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DO IT! Stockholders’ Equity6b
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Illustration 11A-1
When a stockholders’ equity statement is presented, a retained
earnings statement is not necessary.
LEARNINGOBJECTIVE
APPENDIX 11A: Describe the use and content of the stockholders’ equity statement.7
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The equity a common stockholder has in the net assets of
the corporation.
Book Value per Share
Book Value—Another per Share AmountLEARNINGOBJECTIVE
APPENDIX 11B: Compute book value per share.
8
Illustration 11B-1Book value per share formula
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The computation of book value per share involves the following
steps.
1. Compute the preferred stock equity. This equity is equal to
the sum of the call price of preferred stock plus any
cumulative dividends in arrears. If the preferred stock does
not have a call price, the par value of the stock is used.
2. Determine the common stock equity. Subtract the
preferred stock equity from total stockholders’ equity.
3. Determine book value per share. Divide common stock
equity by shares of common stock outstanding.
Book Value—Another per Share AmountBook Value per Share
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Illustration: Using the stockholders’ equity section of Graber
Inc. shown in Illustration 11-25. Graber’s preferred stock is
callable at $120 per share and is cumulative. Assume that
dividends on Graber’s preferred stock were in arrears for one
year, $54,000 (6,000 x $9). The computation of preferred stock
equity (Step 1 in the preceding list) is:Illustration 11B-2
Book Value—Another per Share AmountBook Value per Share
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Computation of book value:
Illustration 11B-2
Illustration 11B-3
Book Value—Another per Share AmountBook Value per Share
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The correlation between book value and the annual range
of a company’s market value per share is often remote.
Illustration 11B-4
Book Value—Another per Share AmountBook Value versus Market Value
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Key Points
Similarities
Aside from the terminology used, the accounting transactions for the issuance of shares and the purchase of treasury stock are similar.
Like GAAP, IFRS does not allow a company to record gains or losses on purchases of its own shares.
The accounting related to prior period adjustment is essentially the same under IFRS and GAAP.
LEARNINGOBJECTIVE
Compare the accounting for stockholders’ equity under GAAP and IFRS.
9
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Key Points
The income statement using IFRS is called the statement of comprehensive income. A statement of comprehensive income is presented in a one- or two-statement format. The single-statement approach includes all items of income and expense, as well as each component of other comprehensive income or loss by its individual characteristic. In the two-statement approach, a traditional income statement is prepared. It is then followed by a statement of comprehensive income, which starts with net income or loss and then adds other comprehensive income or loss items. Regardless of which approach is reported, income tax expense is required to be reported.
The computations related to earnings per share are essentially the same under IFRS and GAAP.
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Key Points
Differences
Under IFRS, the term reserves is used to describe all equity accounts other than those arising from contributed (paid-in) capital. This would include, for example, reserves related to retained earnings, asset revaluations, and fair value differences.
Many countries have a different mix of investor groups than in the United States. For example, in Germany, financial institutions like banks are not only major creditors of corporations but often are the largest corporate stockholders as well. In the United States, Asia, and the United Kingdom, many companies rely on substantial investment from private investors.
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Key Points
There are often terminology differences for equity accounts. The following summarizes some of the common differences in terminology.
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Key Points
A major difference between IFRS and GAAP relates to the account Revaluation Surplus. Revaluation surplus arises under IFRS because companies are permitted to revalue their property, plant, and equipment to fair value under certain circumstances. This account is part of general reserves under IFRS and is not considered contributed capital.
IFRS often uses terms such as retained profits or accumulated profit or loss to describe retained earnings. The term retained earnings is also often used.
Equity is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves, and share holders’ funds.
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Looking to the Future
The 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 stockholders’ equity and its presentation will be examined closely.
Both the IASB and FASB are working toward convergence of any remaining differences related to earnings per share computations.
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Under IFRS, a statement of comprehensive income must
include:
a) accounts payable.
b) income tax expense.
c) retained earnings.
d) preference stock.
IFRS Self-Test Questions
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IFRS Self-Test Questions
Which of the following is true?
a) In the United States, the primary corporate stockholders are
financial institutions.
b) Share capital means total assets under IFRS.
c) The IASB and FASB are presently studying how financial
statement information should be presented.
d) The amount to treasury stock is very different between U.S.
GAAP and IFRS.
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A Look at IFRS
IFRS Self-Test Questions
Under IFRS, the amount of capital received in excess of par
value would be credited to:
a) Retained Earnings.
b) Contributed Capital.
c) Share Premium.
d) Par value is not used under IFRS.
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