Financial Accounting and Accounting Standards

1
Chapter 11
Corporations Organization, Stock
Transactions, Dividends, and Retained Earnings
Financial Accounting, Seventh Edition
2
CHAPTER 11 - Part 1
Major Characteristics of a corporation Forming a
corporation Stockholders Rights
SO 1 Identify the major characteristics of a
corporation.
3
Learning Objectives

1. Identify the major characteristics of a
   corporation.
2. Record the issuance of common stock.
3. Explain the accounting for treasury stock.
4. Differentiate preferred stock from common stock.
5. Prepare the entries for cash dividends and stock
   dividends.
6. Identify the items that are reported in a
   retained earnings statement.
7. Prepare and analyze a comprehensive stockholders
   equity section.

4
The Corporate Form of Organization
An entity separate and distinct from its owners.

• Classified by Ownership
• Publicly held
• Privately held

• Classified by Purpose and
• Not-for-Profit
• For Profit

• Wendys
• Ford Motor Company
• Coke
• Amazon

• Hopelink
• Susan B Komen
• Bill Melinda Gates Foundation

• Mars (the Snickers Co.

5
The Corporate Form of Organization
Characteristics that distinguish corporations
from proprietorships and partnerships.

• Separate Legal Existence
• Limited Liability of Stockholders
• Transferable Ownership Rights
• Ability to Acquire Capital
• Continuous Life
• Corporate Management
• Government Regulations
• Additional Taxes

Advantages
Disadvantages
SO 1 Identify the major characteristics of a
corporation.
6
Separate Legal Existence - Adv

• ______________________________________________
• The Stockholders

Stockholders are separate from the company. The
word corporation comes from the root work
corpus or body. A corporation is a separate
legal entity.
7
Limited Liability of Stockholders - Adv

• The Corporation
• ______________________________________________
• The Stockholders
• BUT The stockholders personal assets are
• NOT at risk.

Stockholder are at risk ONLY to the extent of
their investment. In other words, a stockholder
can either make money on his/her stock (if the
price rises) or.worst case scenario, LOSE IT
ALL. But no more.
8
Transferable Ownership Rights - Adv

• Easy to buy/sell stock the transactions are
  public, not personal, and do not require the
  consensus of other owners.

Stockholder are can sell their stock without
consent of other owners. Andchanging owners
does NOT affect the companys day-to day
operations.
9
Ability to Acquire Capital - Adv

• It is easy to obtain capital through the stock
  market and investors can be BIG or small.

It is easy to obtain capital through the stock
market and investors can be BIG or small.
Investors can buy stock a lot or a little with
ease.
10
Continuous LifeADV

• A corporations life is not limited by the
  lifetime of its owners

The corporate charter (read ahead for forming a
corporation and writing a charter) can limit its
life, but most corporations live on indefinitely,
not limited by its owners lives.
11
Corporate Management - Adv

• Having professional managers is an advantage.
• Having professional managers who are not
  owners.might be a disadvantage.

Stockholders elect the Board of Directors, who
elect the CEO, who hires the managers. Question
Should the managers own stock? Would owning
stock make them more invested in the company?
12
Characteristics of a Corporation
Stockholders
Illustration 11-1 Corporation organization chart
Chairman and Board of Directors
President and Chief Executive Officer
General Counsel and Secretary
Vice President Marketing
Vice President Finance/Chief Financial Officer
Vice President Operations
Vice President Human Resources
Treasurer
Controller
SO 1 Identify the major characteristics of a
corporation.
13
Government Regulations DIS ADV

• Many requirements reports, federal laws, state
  laws, SEC rules, stock exchange requirements
  (NYSE, NASDAC, ASE)

14
Additional Taxes DIS ADV

• Double Taxation. The stockholders are taxed on
  their dividend earnings AND the corporation is
  taxed on its earnings.
• AND, the corporation CANNOT deduct dividend
  payments!

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16
Forming a Corporation
Initial Steps

• File application with the Secretary of State.
• State grants charter.
• Corporation develops by-laws.

Companies generally incorporate in a state whose
laws are favorable to the corporate form of
business (Delaware, New Jersey). Corporations
expense organization costs as incurred.
SO 1 Identify the major characteristics of a
corporation.
17
Stockholders Rights
Stockholders have the right to
Illustration 11-3
1. Vote in election of board of directors and on
actions that require stockholder approval.
2. Share the corporate earnings through receipt
of dividends.
SO 1 Identify the major characteristics of a
corporation.
18
Stockholders Rights
Stockholders have the right to
Illustration 11-3
3. Keep the same percentage ownership when new
shares of stock are issued (preemptive right).
A number of companies have eliminated the
preemptive right.
SO 1 Identify the major characteristics of a
corporation.
19
Ownership Rights of Stockholders
Stockholders have the right to
Illustration 11-3
4. Share in assets upon liquidation in proportion
to their holdings. This is called a residual
claim.
SO 1 Identify the major characteristics of a
corporation.
20
Ownership Rights of Stockholders
Illustration 11-4
Prenumbered
Class A COMMON STOCK
Class A COMMON STOCK
Class
PAR VALUE 1 PER SHARE
PAR VALUE 1 PER SHARE
Name of corporation
Stockholders name
Shares
Stock Certificate
Signature of corporate official
21
Practice

• Practice Do Self Study Questions 1,2,3
• See solution at the end of the chapter

SO 1 Identify the major characteristics of a
corporation.
22
CHAPTER 11 - Part 2
Common Stock Treasury Stock Preferred Stock
SO 1 Identify the major characteristics of a
corporation.
23
Stock Issue Considerations
Authorized Stock

• 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.
• Note the number of authorized shares does NOT
  mean there are the SAME number of investors in
  the company. These are just the number of shares
  the company would EVER be authorized to sell.

24
Stock Issue Considerations
Issuance of Stock

• Corporation can issue common stock directly to
  investors or indirectly through an investment
  banking firm.
• How does a company set the price for a new issue
  of stock?
• the companys anticipated future earnings
• its expected dividend rate per share
• its current financial position
• the current state of the economy
• the current state of the securities market

Note Ultimately, it is the market demand that
will set the current selling price.
25
Stock Issue Considerations
Market Value of Stock

• Stock of publicly held companies is traded on
  organized exchanges.
• Interaction between buyers and sellers determines
  the prices per share.
• Prices set by the marketplace tend to follow the
  trend of a companys earnings and dividends.
• Factors beyond a companys control, may cause
  day-to-day fluctuations in market prices.

After the Company has sold a share of stock, any
subsequent sale (at profit or loss), does NOT
impact the company.
26
Stock Issue Considerations
For example

• The Chocolate Company sells 1
• share of stock at 30 to Joseph Blow.
• One year later, Joseph sells it for 40.
• There is a 10 profit.
• Who receives it? The company or Joseph?

Chocolate!
First, answer this on YOUR OWN and then go to
next slide
27
Stock Issue Considerations
For example

• Joseph earns the 10 profit.
• However The Chocolate Company gets the prestige
  of its rising prices.

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Stock Issue Considerations
Par and No-Par Value Stock

• 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 quite common today.
• In many states the board of directors assigns a
  stated value to no-par shares.

30
Capital
Remember the Accounting Equation?

• Assets Liabilities Stockholders Equity

• Assets The Companys Resources

• Liabilities Stockholders Equity How the
  Company financed these resources. The Choices
  are
• DEBT
• EQUITY (owners)

31
Capital (EQUITY) HAS TWO SOURCES

• PAID IN CAPITAL

Paid in Capital is the total amount of cash and
other assets paid into the corporation by
stockholders in exchange for capital stock.
Common Stock
Preferred Stock
PIC, in Excess of Par Value, Common Stock
PIC, in Excess of Par Value, Preferred Stock

• EARNED CAPITAL

Retained Earnings the net income (less
dividends paid out) that a corporation retains
for future use.
Retained Earnings
32
Accounting for Common Stock Issues

• Primary objectives
• Identify the specific sources of paid-in capital.
  
• 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.
SO 2 Record the issuance of common stock.
33
Accounting for Common Stock Issues
Issuing Par Value Common Stock for Cash
Illustration Assume that Hydro-Slide, Inc.
issues 2,000 shares of 1 par value common stock.
Prepare Hydro-Slides 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.
Stop Try these Journal Entries in your Course
Pack
b.
SO 2 Record the issuance of common stock.
34
Accounting for Common Stock Issues
Issuing Par Value Common Stock for Cash
Illustration Assume that Hydro-Slide, Inc.
issues 2,000 shares of 1 par value common stock.
Prepare Hydro-Slides journal entry if (a) 1,000
share are issued for 1 per share, and (b) 1,000
shares are issued for 5 per share.
Note these Journal Entries in your Course Pack
a.
Cash 1,000
Common stock (1,000 x 1) 1,000
b.
Cash 5,000
Common stock (1,000 x 1) 1,000
Paid-in capital in excess of par value 4,000
SO 2 Record the issuance of common stock.
35
Accounting for Common Stock Issues
Illustration 11-7
SO 2 Record the issuance of common stock.
36
Accounting for Common Stock Issues
Issuing No-Par Common Stock for Cash
Illustration Assume that Hydro-Slide, Inc.
issues 5,000 shares of 5 stated value no-par
common stock for 8 per share. The entry is
Stop Try these Journal Entries in your Course
Pack
Prepare the entry assuming there is no stated
value?
SO 2 Record the issuance of common stock.
37
Accounting for Common Stock Issues
Issuing No-Par Common Stock for Cash
Illustration Assume that Hydro-Slide, Inc.
issues 5,000 shares of 5 stated value no-par
common stock for 8 per share. The entry is
Note these Journal Entries in your Course Pack
Cash 40,000
Common stock (5,000 x 5) 25,000
Paid-in capital in excess of stated value 15,000
Prepare the entry assuming there is no stated
value?
Cash 40,000
Common stock 40,000
SO 2 Record the issuance of common stock.
38
Accounting for Common Stock Issues
Issuing Common Stock for Services or Noncash
Assets

• 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.
SO 2 Record the issuance of common stock.
39
Accounting for Common Stock Issues
Illustration Assume that 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.
Stop Try these Journal Entries in your Course
Pack
SO 2 Record the issuance of common stock.
40
Accounting for Common Stock Issues
Illustration Assume that 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.
Organizational expense 5,000
Common stock (4,000 x 1) 4,000
Paid-in capital in excess of par 1,000
SO 2 Record the issuance of common stock.
41
Accounting for Common Stock Issues
Illustration Assume that 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.
Stop Try these Journal Entries in your Course
Pack
SO 2 Record the issuance of common stock.
42
Accounting for Common Stock Issues
Illustration Assume that 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 (10,000 x 8) 80,000
Common stock (10,000 x 5) 50,000
Paid-in capital in excess of par 30,000
SO 2 Record the issuance of common stock.
43
Accounting for Common Stock Issues

• Practice Do Problem 11-1B

See solution at the end of the Powerpoint slides
SO 2 Record the issuance of common stock.
44
TREASURY STOCK

• PAID IN CAPITAL

Paid in Capital is the total amount of cash and
other assets paid into the corporation by
stockholders in exchange for capital stock.
Common Stock
Preferred Stock
PIC, in Excess of Par Value, Preferred Stock
PIC, in Excess of Par Value, Common Stock

• EARNED CAPITAL

Retained Earnings
Retained Earnings the net income (less
dividends paid out) that a corporation retains
for future use.
LESS Treasury Stock
45
Accounting for Treasury Stock
Treasury stock - corporations own stock that it
has reacquired from shareholders, but not retired.

• Corporations purchase their outstanding stock
• To reissue the shares to officers and employees
  under bonus and stock compensation plans.
• To enhance the stocks market value.
• To have additional shares available for use in
  the acquisition of other companies.
• To increase earnings per share.
• To rid the company of disgruntled investors,
  perhaps to avoid a takeover.

SO 3 Explain the accounting for treasury stock.
46
Accounting for Treasury Stock
Purchase of Treasury Stock

• Debit Treasury Stock for the price paid to
  reacquire the shares.
• Treasury stock is a contra stockholders equity
  account, not an asset.
• Purchase of treasury stock reduces stockholders
  equity.
• Debit T-Stock at Cost (note-there are
  alternative ways to record T-Stock, but not
  learned until more advanced courses)

47
Accounting for Treasury Stock
Illustration 11-8
Illustration On February 1, 2011, Mead acquires
4,000 shares of its stock at 8 per share.
Treasury stock (4,000 x 8) 32,000
Cash 32,000
SO 3 Explain the accounting for treasury stock.
48
Accounting for Treasury Stock
Stockholders Equity with Treasury stock
Illustration 11-9
Both the number of shares issued (100,000),
outstanding (96,000), and the number of shares
held as treasury (4,000) are disclosed.
SO 3 Explain the accounting for treasury stock.
49
What is the relationship between

• Authorized
• Issued
• Outstanding
• Treasury Stock
• Assume 1,000,000 shares are authorized.
• 400,000 shared issued and 15,000 shares in
  treasury stock. How many are outstanding?

50
What is the relationship between

• Authorized 1,000,000
• Issued 400,000
• Outstanding 385,000
• Treasury Stock 15,000
• ?--Total Issued Shares 400,000 --?
• ?-------------Total Authorized Shares 1,000,000
  -----------?
• Assume 1,000,000 shares are authorized.
• 400,000 shared issued and 15,000 shares in
  treasury stock. How many are outstanding?

385,000
15,000
51
What about the unissued shares?

• Authorized 1,000,000
• Issued 400,000
• Outstanding 385,000
• Treasury Stock 15,000
• ?--Total Issued Shares 400,000 --?
• ?-------------Total Authorized Shares 1,000,000
  -----------?
• Unissued shares have no value. They are just the
  maximum number of additional shares that the
  company can issue (without revising the corporate
  charter).

385,000
Unissued Shares ????
15,000
52
What about the unissued shares?

• Authorized 1,000,000
• Issued 400,000
• Outstanding 385,000
• Treasury Stock 15,000
• Unissued 600,000
• ?--Total Issued Shares 400,000 --?
• ?-------------Total Authorized Shares 1,000,000
  -----------?
• Unissued shares have no value. They are just the
  maximum number of additional shares that the
  company can issue (without revising the corporate
  charter).

385,000
Unissued Shares 600,000
15,000
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54
Accounting for Treasury Stock
Disposal of Treasury Stock

• Above Cost
• Below Cost
• Both increase total assets (Cash) and
  stockholders equity (reducing/eliminating the
  contra account (T-Stock).

SO 3 Explain the accounting for treasury stock.
55
Accounting for Treasury Stock
Above Cost
Illustration On February 1, 2011, Mead acquired
4,000 shares of its stock at 8 per share. On
July 1, Mead sells for 10 per share 1,000 shares
of its treasury stock, previously acquired at 8
per share.
Note this Journal Entries in your Course Pack
July 1
Cash 10,000
Treasury stock (1,000 x 8) 8,000
Paid-in capital treasury stock 2,000
A corporation does not realize a gain or suffer a
loss from stock transactions with its own
stockholders.
SO 3 Explain the accounting for treasury stock.
56
Accounting for Treasury Stock
Below Cost
Illustration On February 1, 2011, Mead acquired
4,000 shares of its stock at 8 per share. On
Oct. 1, Mead sells an additional 800 shares of
treasury stock at 7 per share.
Note this Journal Entries in your Course Pack
Oct. 1
Cash 5,600
Paid-in capital treasury stock 800
Treasury stock (800 x 8) 6,400
Mead uses Paid-in Capital from Treasury Stock, if
available, for the difference between cost and
resale price of the shares.
SO 3 Explain the accounting for treasury stock.
57
Accounting for Treasury Stock
Below Cost
Illustration On February 1, 2011, Mead acquired
4,000 shares of its stock at 8 per share. On
Dec. 1, assume that Mead, Inc. sells its
remaining 2,200 shares at 7 per share.
Note this Journal Entries in your Course Pack
Dec. 1
Cash 15,400
Limited to balance on hand
Paid-in capital treasury stock 1,200
Retained earnings 1,000
Treasury stock (2,200 x 8) 17,600
SO 3 Explain the accounting for treasury stock.
58
Accounting for Treasury Stock
Practice Do Problem 11-2B
See solution at the end of the Powerpoint slides
SO 2 Record the issuance of common stock.
59
Preferred Stock

• Features often associated with preferred stock.
• Preference as to dividends.
• Preference as to assets in liquidation.
• Nonvoting.

Accounting for preferred stock at issuance is
similar to that for common stock.
SO 4 Differentiate preferred stock from common
stock.
60
Preferred Stock
Illustration Stine Corporation issues 10,000
shares of 10 par value preferred stock for 12
cash per share. Journalize the issuance of the
preferred stock.
Note this Journal Entries in your Course Pack
Cash 120,000
Preferred stock (10,000 x 10) 100,000
Paid-in capital in excess of par
Preferred stock 20,000
Preferred stock may have a par value or no-par
value.
SO 4 Differentiate preferred stock from common
stock.
61
CHAPTER 11 - Part 3
Cash Dividends Stock Dividends Stock
Splits Retained Earnings
SO 1 Identify the major characteristics of a
corporation.
62
Preferred Stock

• Dividend Preferences
• Right to receive dividends before common
  stockholders.
• Per share dividend amount is stated as a
  percentage of the preferred stocks par value or
  as a specified amount.
• Cumulative dividend holders of preferred stock
  must be paid their annual dividend plus any
  dividends in arrears before common stockholders
  receive dividends.

SO 4 Differentiate preferred stock from common
stock.
63
Preferred Stock Dividends - example

• Preferred Stock Dividends are usually expressed
  as a of par, for example
• 10, 100 par value Preferred Stock
• 10.00 Preferred Dividend per share

64
Dividends
A distribution of cash or stock to stockholders
on a pro rata (proportional) basis. Types of
Dividends

1. Cash dividends.
2. Property dividends.

1. Scrip (note)
2. Stock dividends.

Dividends expressed (1) as a percentage of the
par or stated value, or (2) as a dollar amount
per share.
SO 5 Prepare the entries for cash dividends and
stock dividends.
65
Accounting for Dividends
Declaration Date - The Board of directors
announces a dividend Record Date -The date
ownership is determined. Current stockholder on
this date receives the dividend Payment Date The
date the dividend is paid to the stockholder of
record on the Record Date.
Liability Recorded No journal entry
made Liability paid
66
Cash Dividends

• Cash Dividends
• For a corporation to pay a cash dividend, it must
  have
• Retained earnings - Payment of cash dividends
  from retained earnings is legal in all states.
• Adequate cash.
• A declaration of dividends by the Board of
  Directors.

SO 5 Prepare the entries for cash dividends and
stock dividends.
67
Cash Dividends

• Illustration On Dec. 1, the directors of Media
  General declare a 50 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?

Note these Journal Entries in your Course Pack
December 1 (Declaration Date)
Cash Dividends 50,000
Dividends payable 50,000
No entry
December 22 (Date of Record)
January 20 (Payment Date)
Dividends payable 50,000
Cash 50,000
SO 5 Prepare the entries for cash dividends and
stock dividends.
68
Cash Dividends

• Allocating Cash Dividends Between Preferred and
  Common Stock

Holders of cumulative preferred stock must be
paid any unpaid prior-year dividends before
common stockholders receive dividends.
SO 5 Prepare the entries for cash dividends and
stock dividends.
69
Cash Dividends - Allocations
Illustration On December 31, 2011, 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, 2011, the directors declare a 6,000
cash dividend. Prepare the entry to record the
declaration of the dividend.
Stop Try these Journal Entries in your Course
Pack
Even though the Preferred Shareholders have an 8
dividend feature, IBR can only pay them 6,000
SO 5 Prepare the entries for cash dividends and
stock dividends.
70
Cash Dividends Watch the Dates
Illustration On December 31, 2011, 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, 2011, the directors declare a 6,000
cash dividend. Prepare the entry to record the
declaration of the dividend.
Note these Journal Entries in your Course Pack
Cash Dividends 6,000
Dividends payable 6,000
Pfd Dividends 1,000 shares x 100 par x 8
8,000
SO 5 Prepare the entries for cash dividends and
stock dividends.
71
Cash Dividends
Illustration At December 31, 2012, 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
1,000 shares x 100 par x 8 8,000
2010 Pfd. dividends 8,000 declared 6,000
2,000
SO 5 Prepare the entries for cash dividends and
stock dividends.
72
Dividends in Arrears - Practice

• PREFERRED STOCK, CUMULATIVE DIVIDENDS Source 
  Rigos CPA review materials, 2002
• At 12/31 19x2, and 19x3, Apex Co. had 3,000
  shares of 100 par, 5 cumulative preferred stock
  outstanding.  No dividends were in arrears as of
  December 31, 19x1.
• Apex did NOT declare a dividend during 19x2.
• During 19x3, Apex paid a cash dividend of 10,000
  on its preferred stock. 
• Apex should report dividends in arrears in its
  19x3 financial statements as a (an)
• a. Accrued Liability of 15,000
• b. Disclosure of 15,000
• c. Accrued liability of 20,000
• d. Disclosure of 20,000
• Show your work

See solution at the end of the Powerpoint slides
YEAR DIVIDENDs PAID BALANCE IN ARREARS
19X1 15,000 15,000 0
19X2
19X3
73
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74
Stock Dividends

• Stock Dividends
• Pro rata distribution of the corporations own
  stock.

Illustration 11-14
Results in decrease in retained earnings and
increase in paid-in capital. But no change in
total Stockholders Equity
SO 5 Prepare the entries for cash dividends and
stock dividends.
75
Stock Dividends

• Stock Dividends
• Reasons why corporations issue stock dividends
• To satisfy stockholders dividend expectations
  without spending cash.
• To increase the marketability of the
  corporations stock.
• To emphasize that a portion of stockholders
  equity has been permanently reinvested in the
  business.

SO 5 Prepare the entries for cash dividends and
stock dividends.
76
Stock Dividends

• Size of Stock Dividends
• Small stock dividend (less than 2025 of the
  corporations issued stock, recorded at fair
  market value)
• Large stock dividend (greater than 2025 of
  issued stock, recorded at par value)

This accounting is based on the assumption that
a small stock dividend will have little effect on
the market price of the outstanding shares.
SO 5 Prepare the entries for cash dividends and
stock dividends.
77
Stock Dividends
Illustration Medland Corp. has 50,000 shares
issued and outstanding. The par value is 10 per
share and market value is 15 per share.
10 stock dividend is declared
Stock Dividend (50,000 x 10 x 15)
75,000
Common stock dividends distributable
50,000
Paid-in capital in excess of par value
25,000
Stock issued
Common stock dividends distributable
50,000
Common stock
50,000
SO 5 Prepare the entries for cash dividends and
stock dividends.
78
Stock Dividends
Stockholders Equity with Dividends Distributable
Illustration 11-15
SO 5 Prepare the entries for cash dividends and
stock dividends.
79
Stock Dividends
Effects of Stock Dividends
Illustration 11-16
Note total Stockholders Equity is the same
SO 5 Prepare the entries for cash dividends and
stock dividends.
80
Stock Dividends
Question

• Which of the following statements about small
  stock dividends is true?
• A debit to Retained Earnings for the par value of
  the shares issued should be made.
• A small stock dividend decreases total
  stockholders equity.
• Market value per share should be assigned to the
  dividend shares.
• A small stock dividend ordinarily will have no
  effect on book value per share of stock.

SO 5 Prepare the entries for cash dividends and
stock dividends.
81
Stock Dividends
Question

• Which of the following statements about small
  stock dividends is true?
• A debit to Retained Earnings for the par value of
  the shares issued should be made.
• A small stock dividend decreases total
  stockholders equity.
• Market value per share should be assigned to the
  dividend shares.
• A small stock dividend ordinarily will have no
  effect on book value per share of stock.

SO 5 Prepare the entries for cash dividends and
stock dividends.
82
Stock Dividends
Question

• In the stockholders equity section, Common Stock
  Dividends Distributable is reported as a(n)
• deduction from total paid-in capital and retained
  earnings.
• current liability.
• deduction from retained earnings.
• addition to capital stock.

SO 5 Prepare the entries for cash dividends and
stock dividends.
83
Stock Dividends
Question

• In the stockholders equity section, Common Stock
  Dividends Distributable is reported as a(n)
• deduction from total paid-in capital and retained
  earnings.
• current liability.
• deduction from retained earnings.
• addition to capital stock.

SO 5 Prepare the entries for cash dividends and
stock dividends.
84
Stock Splits

• Stock Split
• Reduces the market value of shares.
• No entry recorded for a stock split.
• Decrease par value and increase number of shares.

85
Stock Splits

• Illustration Assume Medland Corporation splits
  its 50,000 shares of common stock on a 2-for-1
  basis.

Before Split Common Stock (50,000
shares outstanding, 10 par value) 500,000 Paid
in capital in excess of par value
0 Total Paid in Capital 500,000 Retained
Earnings 300,000 Total Stockholders
Equity 800,000 Outstanding Shares
50,000
Results in a reduction of the par or stated value
per share.
86
Stock Splits

• Illustration Assume Medland Corporation splits
  its 50,000 shares of common stock on a 2-for-1
  basis.

AFTER
Split Common Stock (100,000 shares outstanding,
5 par value) 500,000 Paid in capital in excess
of par value 0 Total Paid in
Capital 500,000 Retained Earnings 300,0
00 Total Stockholders Equity 800,000 Outsta
nding Shares 100,000
Results in a reduction of the par or stated value
per share.
87
Stock Splits

• So what is the value in a stock split???

When stock is split, the market responds. Lets
say the Medland stock was trading at 80 in the
market. After the split, the market will
adjust its price to match the split and move to
40. (This will not affect the stockholder, who
know owns 2 shares of stock with a total value of
80) Often, lowering the price of a share of
stock, will stimulate trades. More trades mean
more demand, which often drives the stock price
UP.
88
Stock Splits other types

• Stock splits can be structure any way.

For example, they can be 3 shares issued for
every 2 shares owned Before Outstanding
Shares of 10,000 at a 6 par value
60,000 After Outstanding Shares of 15,000 at
a 4 par value 60,000
89
Retained Earnings

• Retained earnings is net income that a company
  retains for use in the business.
• Net income increases Retained Earnings and a net
  loss decreases Retained Earnings.
• Retained earnings is part of the stockholders
  claim on the total assets of the corporation.
• A debit balance in Retained Earnings is
  identified as a deficit.

SO 6 Identify the items reported in a retained
earnings statement.
90
Retained Earnings Restrictions

• Restrictions can result from
• Legal restrictions.
• Contractual restrictions.
• Voluntary restrictions.

Illustration 11-22
SO 6 Identify the items reported in a retained
earnings statement.
91
Prior Period Adjustments

• Corrections of Errors
• Result from
• mathematical mistakes
• mistakes in application of accounting principles
• oversight or misuse of facts
• Corrections treated as prior period adjustments
• Adjustment made to the beginning balance of
  Retained Earnings

SO 6 Identify the items reported in a retained
earnings statement.
92
Prior Period Adjustments
Before issuing the report for the year ended
December 31, 2011, you discover a 50,000 error
(net of tax) that caused the 2010 inventory to be
overstated (overstated inventory caused COGS to
be lower and thus net income to be higher in
2010. Would this discovery have any impact on
the reporting of the Statement of Retained
Earnings for 2011?
SO 6 Identify the items reported in a retained
earnings statement.
93
Prior Period Adjustments
SO 6 Identify the items reported in a retained
earnings statement.
94
Retained Earnings Statement
The company prepares the statement from the
Retained Earnings account.
Illustration 11-24
SO 6 Identify the items reported in a retained
earnings statement.
95
Retained Earnings Statement
Illustration 11-25
SO 6 Identify the items reported in a retained
earnings statement.
96
Retained Earnings Statement
Question

• All but one of the following is reported in a
  retained earnings statement. The exception is
• cash and stock dividends.
• net income and net loss.
• some disposals of treasury stock below cost.
• sales of treasury stock above cost.

SO 6 Identify the items reported in a retained
earnings statement.
97
Statement Presentation and Analysis
Illustration 11-26
SO 7
98
Statement Analysis and Presentation
Analysis
Net Income Available to Common
Stockholders
Return on Common Stockholders Equity

Average Common Stockholders Equity
This ratio shows how many dollars of net income
the company earned for each dollar invested by
the stockholders.
SO 7 Prepare and analyze a comprehensive
stockholders equity section.
99
Statement Analysis and Presentation
Analysis
Illustration Kellogg Companys
beginning-of-the-year and end-of-the-year common
stockholders equity were 2,526 and 1,448
million, respectively. Its net income was 1,148
million, and no preferred stock was outstanding.
The return on common stockholders equity ratio
is computed as follows.
Illustration 11-28
Solution on notes page
SO 7 Prepare and analyze a comprehensive
stockholders equity section.
100
Home-Equity Loans

• Home-equity loans are now difficult to get. The
  reasons are that banks are not making the loans,
  and sinking home prices give homeowners less
  equity to borrow against.
• Four major reasons why many individuals employ
  home-equity loans are (1) to invest, (2) to get
  a tax deduction, (3) to defer other debt, or (4)
  to buy from a wish list.

101
End of Chapter 11
Good Bye and Good Luck! Solutions to problems
next
102
Prob 11-1B
(a) Jan. 10 Cash (80,000 X 4) 320,000 Common
Stock (80,000 X 3) 240,000 Paid-in
Capital in Excess of Stated
ValueCommon Stock (80,000 X 1)
80,000 Mar. 1 Cash (5,000 X 105) 525,000 P
referred Stock (5,000 X 100) 500,000 Paid-i
n Capital in Excess of Par ValuePreferred
Stock (5,000 X 5) 25,000 Apr.
1 Land 85,000 Common Stock (24,000 X 3)
72,000 Paid-in Capital in Excess of
Stated ValueCommon Stock (85,000
72,000) 13,000 May 1 Cash (80,000 X
4.50) 360,000 Common Stock (80,000 X
3) 240,000 Paid-in Capital in Excess
of Stated ValueCommon Stock (80,000
X 1.50) 120,000 Aug. 1 Organization
Expense 40,000 Common Stock (10,000 X
3) 30,000 Paid-in Capital in Excess
of Stated ValueCommon Stock (40,000
30,000) 10,000 Sept. 1 Cash (10,000 X
5) 50,000 Common Stock (10,000 X 3)
30,000 Paid-in Capital in Excess of
Stated ValueCommon Stock (10,000 X 2)
20,000
103
Prob 11-1B
PROBLEM 11-1B (Continued) (c) KEELER
CORPORATION Stockholders equity Paid-in
capital Capital stock 8 Preferred stock,
100 par value, 10,000 shares
authorized, 6,000 shares issued
600,000 Common stock, no par, 3 stated
value, 500,000 shares authorized, 204,000
shares issued 612,000 Total
capital stock 1,212,000 Additional paid-in
capital In excess of par value
preferred stock 34,000 In excess of stated
value common stock 243,000 Total
additional paid-in capital
277,000 Total paid-in capital 1,489,000
104
Prob 11-2B
(a) Mar. 1 Treasury Stock (5,000 X
8) 40,000 Cash 40,000 June 1 Cash
(1,000 X 12) 12,000 Treasury Stock (1,000 X
8) 8,000 Paid-in Capital from
Treasury Stock (1,000 X 4)
4,000 Sept. 1 Cash (2,000 X 10) 20,000 Tre
asury Stock (2,000 X 8) 16,000 Paid-in
Capital from Treasury Stock (2,000 X 2)
4,000 Dec. 1 Cash (1,000 X 6)
6,000 Paid-in Capital from Treasury Stock
(1,000 X 2) 2,000 Treasury Stock (1,000 X
8) 8,000 31 Income Summary 40,000 Retai
ned Earnings 40,000
105
Prob 11-2B
(c) GOLDBERG CORPORATION Stockholders
equity Paid-in capital Capital
stock Common stock, 5 par, 100,000
shares issued and 99,000 outstanding 500,
000 Additional paid-in capital In excess
of par value 200,000 From treasury stock
6,000 Total additional paid-in
capital 206,000 Total paid-in capital
706,000 Retained earnings
140,000 Total paid-in capital and
retained earnings 846,000 Less Treasury
stock (1,000 common shares, at cost)
(8,000) Total stockholders
equity 838,000
106
Prob 11-3B
(a) Feb. 1 Cash 100,000 Common Stock
(25,000 X 1) 25,000 Paid-in Capital in
Excess of Stated ValueCommon Stock
(100,000 25,000) 75,000 Apr. 14 Cash
33,000 Treasury StockCommon (6,000 X
4) 24,000 Paid-in Capital from
Treasury Stock-Common (33,000
24,000) 9,000 Sept. 3 Patent
30,000 Common Stock (5,000 X 1)
5,000 Paid-in Capital in Excess of
Stated ValueCommon Stock (30,000
5,000) 25,000 Nov. 10 Treasury
StockCommon 6,000 Cash
6,000 Dec. 31 Income Summary 452,000 Retaine
d Earnings 452,000
107
Prob 11-3B
(c) PORT CORPORATION Stockholders
equity Paid-in capital Capital stock
8 Preferred stock, 50 par
value, cumulative, 10,000 shares authorized,
8,000 shares issued and
outstanding 400,000
Common stock, no par, 1 stated value,
2,000,000 shares
authorized, 1,030,000 shares issued
and 1,025,000 shares outstanding 1,030,000
Total capital stock
1,430,000 Additional paid-in capital
In excess of par value preferred
stock 100,000 In excess of stated
value common stock 1,550,000
From common treasury stock
9,000 Total additional
paid-in capital 1,659,000 Total paid-in
capital 3,089,000 Retained earnings (see
Note X) 2,268,000 Total paid-in capital
and retained earnings
5,357,000 Less Treasury stock (5,000
common shares) (22,000) Total
stockholders equity 5,335,000 Note
X Dividends on preferred stock totaling 32,000
8,000 X (8 X 50) are in arrears.
108
Dividends in Arrears Practice Solution

• PREFERRED STOCK, CUMULATIVE DIVIDENDS Source 
  Rigos CPA review materials, 2002
• At 12/31 19x2, and 19x3, Apex Co. had 3,000
  shares of 100 par, 5 cumulative preferred stock
  outstanding.  No dividends were in arrears as of
  December 31, 19x1.
• Apex did NOT declare a dividend during 19x2.
• During 19x3, Apex paid a cash dividend of 10,000
  on its preferred stock. 
• Apex should report dividends in arrears in its
  19x3 financial statements as a (an)
• a. Accrued Liability of 15,000
• b. Disclosure of 15,000
• c. Accrued liability of 20,000
• d. Disclosure of 20,000
• Show your work

YEAR DIVIDENDs PAID BALANCE IN ARREARS
19X1 15,000 15,000 0
19X2 15,000 0 15,000
19X3 15,000 10,000 25,000