libby, libby, short chaper 11 - · pdf filemcgraw-hill/irwin slide 3 simple to become an owner...

Chapter 11

McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Slide 3

Simple to

become an

owner

Easy to

transfer

ownership

Provides

limited

liability

Advantages of a corporation

Because a corporation is a separate legal entity, it can . . .

Own assets.

Sue and be sued.

Incur liabilities.

Enter into contracts.


Voting (in person

or by proxy).

Proportionate

distributions of

profits.

Proportionate

distributions of

assets in a

liquidation.

Rights Stockholders’


Vice President

(Production)

Vice President

(Marketing)

Vice President

(Finance)

Vice President

(Controller)

President

Board of Directors

Internal (managers) and

External (non-managers)

Stockholders

(Owners of voting shares)

Elected by

shareholders

Appointed

by directors


Issued

shares are

authorized

shares of

stock that

have been

sold.

Unissued

shares are

authorized

shares of

stock that

never have

been sold.

Authorized shares are the maximum

number of shares of capital stock that

can be sold to the public.


Unissued

Shares

Treasury

Shares

Outstanding

Shares Issued

Shares

Treasury shares are issued shares that have been reacquired by the

corporation.

Outstanding shares are issued shares that are

owned by stockholders.


Sonic’s income for 2006 is $78,705,000 and the

average number of shares outstanding is 86,260,000.

Earnings per share is probably the single

most widely watched financial ratio.

$78,705,000

86,260,000 Shares EPS = = $0.91 per share

*If there are preferred dividends, the amount is subtracted from net income.

Net Income*

Average Number of Shares

Outstanding for the Period

EPS =


2004 2005 2006

$0.65 $0.78 $0.91

Sonic's EPS Comparisons Over Time

Sonic Jack in the Box Wendy's

$0.91 $3.34 $1.10

2006 EPS Comparison With Competitors


Dividend set by board

of directors

Basic

voting

stock

Ranks after preferred

stock


Legal capital is the amount of capital, required by the state,

that must remain invested in the business.

Par Value

Nominal

value

Legal

capital

Par

Value

Market

Value

Some states do

not require that a

par value be

stated in the

charter.

Some states do not

require a par value to be

stated in the charter.


Two primary sources of

stockholders’ equity

Retained

earnings

Contributed

capital

Common

stock, par

value

Capital in

excess of

par value


Initial public offering

(IPO)

Seasoned new issue

The first time a

corporation sells

stock to the public.

Subsequent sales of

new stock to the

public.

Sonic

issues new

stock.


On July 6, Sonic issued 100,000 shares of $0.01

par value common stock for $20 per share.

Date Description Debit Credit

July 6 Cash (+A) 2,000,000

Common stock (+SE) 1,000

Capital In excess of par value (+SE) 1,999,000

GENERAL JOURNAL

100,000 shares × $20 per share = $2,000,000

100,000 shares × $0.01 par value = $1,000

Prepare the journal entry to

record this transaction.


Transactions between two investors that do not affect the corporation’s

accounting records.

I’d like to buy

some of your

Sonic stock.

I’d like to sell

some of my

Sonic stock.

McGraw-Hill/Irwin Slide 22 Employees

If Sonic does not have new

stock to issue when the stock

options are exercised, then . .

Employee

compensation

package includes

salary and stock

options.

Stock options allow

employees to purchase

stock from the corporation

at a predetermined, fixed

price.


Sonic buys

its own stock in

the secondary market.

(Treasury stock) Stockholders

Management

Stock options allow

employees to purchase

stock from the corporation

at a predetermined, fixed

price.

Management

compensation

package includes

salary and stock

options.



May 1 Treasury stock (+XSE, -SE) 2,000,000

Cash (-A) 2,000,000

100,000 shares × $20 = $2,000,000

GENERAL JOURNAL

On May 1, Sonic reacquired 100,000

shares of its common stock at $20 per share.

The journal entry for May 1 is . . . .

When stock is reacquired, the corporation records the treasury

stock at cost. Treasury stock has no voting or dividend rights.

Treasury stock is not an asset. It is a contra equity account.



Dec. 3 Cash (+A) 300,000

Treasury stock (-XSE, +SE) 200,000

Capital in excess of par value (+SE) 100,000

GENERAL JOURNAL10,000 shares × $30 = $300,000

10,000 shares × $20 cost = $200,000

On December 3, Sonic reissued 10,000 shares of the treasury

stock at $30 per share.

The journal entry for December 3 is . . .


Declared by board of

directors.

Not legally

required.

Creates liability at

declaration.

Requires sufficient

Retained Earnings and

Cash.

Declaration date

• Board of directors declares the dividend.

• Record a liability.


Retained earnings (-SE) XXX

Dividends payable (+L) XXX

GENERAL JOURNAL

Date of Record

• Stockholders holding shares on this date will

receive the dividend. (No entry)

Date of Payment

• Record the dividend payment to stockholders.


Dividends payable (-L) XXX

Cash (-A) XXX

GENERAL JOURNAL


Dividend

Yield

Dividends Per Share

Market Price Per Share =

Sonic does not pay cash dividends.

This ratio is often used to compare the dividend-paying

performance of different investment alternatives.

Sonic Jack in the Box Wendy's

0.0% 0.0% 1.5%

2006 Dividend Yield Comparison With Competitors


Distribution of additional shares of stock to owners.

No change in total

stockholders’ equity.

All stockholders retain same

percentage ownership.

No change in par values.

Stock dividend < 20-25%

Record at current market

value of stock.

Small

Stock dividend > 20-25%

Record at par value

of stock.

Large

McGraw-Hill/Irwin Slide 30 © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren

9B-30

If the market value of the company’s common stock is $16 per share,

the following entries illustrate the accounting if the dividend is large (a

50% dividend) or small (a 10% dividend):

Large Stock Dividend - 50% (Accounted for at par value)

Retained Earnings 100,000

Common Stock (20,000 shares x .50 x $10 par) 100,000

Small Stock Dividend - 10% (Accounted for at market value)

Retained Earnings (20,000 x .10 x $16 market) 32,000

Common Stock (20,000 x .10 x $10 par) 20,000

Paid-in Capital in Excess of Par 12,000

STOCK DIVIDENDS


Stock splits change the par value per share,

but the total par value is unchanged.

Assume that a corporation had 3,000

shares of $2 par value common stock

outstanding before a 2–for–1 stock split.

Increase

Decrease

No

Change

Before

Split

After

Split

Common Stock Shares 3,000 6,000

Par Value per Share 2.00$ 1.00$

Total Par Value 6,000$ 6,000$


Preference over common

stock

Usually has no voting

rights

Usually has a fixed dividend

rate

Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.

Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

If the preferred stock is noncumulative, any dividends

not declared in previous years are lost permanently.

Kites, Inc. has the following stock outstanding:

Common stock: $1 par, 100,000 shares

Preferred stock: 3%, $100 par, cumulative, 5,000

shares

Preferred stock: 6%, $50 par, noncumulative, 3,000

shares

Dividends were not paid last year. In the current

year, the board of directors declared dividends of

$50,000.

How much will each class of stock receive?


Total dividend declared 50,000$

Preferred stock (cumulative)

Arrearage ($100 par × 3% × 5,000 shares) 15,000$

Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000

Remainder 20,000$

Preferred stock (noncumulative)

Current Yr. ($50 par × 6% × 3,000 shares) 9,000

Remainder 11,000$

Common stock

Current Yr. ($11,000 Remainder) 11,000

Remainder 0$


On June 1, 2008, a corporation’s board of

directors declared a dividend for the 2,500 shares

of its $100 par value, 8% preferred stock. The

dividend will be paid on July 15. Which of the

following will be included in the July 15 entry?

a. Debit Retained Earnings $20,000.

b. Debit Dividends Payable $20,000.

c. Credit Dividends Payable $20,000.

d. Credit Preferred Stock $20,000.


July 15 Dividends payable (-L) 20,000

Cash (-A) 20,000

GENERAL JOURNAL

$100 × 8% = $8 dividend per share

$8 × 2,500 = $20,000 total dividend


If I loan you $150,000, I will

want you to restrict your

retained earnings.

Why would you

want me to do that,

Sport?

libby, libby, short chaper 11 - · pdf filemcgraw-hill/irwin slide 3 simple to become an owner...

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