Libby Libby Short 3rd Edition

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Chapter 11
Reporting and Interpreting Owners Equity
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Business Background
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Business Background
Because a corporation is a separate legal entity,
it can . . .
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Ownership of a Corporation
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Ownership of a Corporation
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Authorized, Issued, and Outstanding Capital Stock
The maximum number of shares of capital stock
that can be sold to the public.
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Authorized, Issued, and Outstanding Capital Stock
Authorized Shares
Issued shares are authorized shares of stock that
have been sold.
Unissued shares are authorized shares of stock
that never have been sold.
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Authorized, Issued, and Outstanding Capital Stock
Authorized Shares
Outstanding Shares
Unissued Shares
Treasury Shares
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Types of Capital Stock
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Common Stock
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Par Value and No-par Value Stock
Par Value
Legal capital is the amount of capital, required
by the state, that must remain invested in the
business.
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Par Value and No-par Value Stock
?
Par Value
Market Value
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No-par Value Stock
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Preferred Stock
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Special Features of Preferred Stock
Convertible preferred stock may be exchanged for
common stock.
Callable preferred stock may be repurchased by
the corporation at a predetermined price.
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Accounting for Capital Stock
Two primary sources of stockholders equity
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Sale and Issuance of Capital Stock
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.
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Secondary Markets

• Transactions between two investors that do not
  affect the corporations accounting records.

Id like to sell some of myWal-Mart stock.
Id like to buy some of yourWal-Mart stock.
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Sale and Issuance of Capital Stock

• On July 6, Wal-Mart issued 100,000 shares of
  0.10 par value common stock for 22 per share.

Prepare the journal entry to record this
transaction.
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Sale and Issuance of Capital Stock

• On July 6, Wal-Mart issued 100,000 shares of
  0.10 par value common stock for 22 per share.

100,000 shares 0.10 par value 10,000
100,000 shares 22 per share 2,200,000
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Capital Stock Sold for Noncash Assets and/or
Services
Issues stock
Provides accounting services
Accountant
Record assets or services received at the market
value of the stock at the date of the transaction.
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Capital Stock Sold for Noncash Assets and/or
Services
Issues stock
Provides accounting services
Accountant
If the market value of the stock cannot be
determined, then the market value of the assets
or services received should be used.
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Capital Stock Sold for Noncash Assets and/or
Services

• On March 14, Wal-Mart issued 10,000 shares of its
  0.10 par value common stock to the Rose Law
  firms. The stock was selling for 15 per share.

Prepare the journal entry to record this
transaction.
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Capital Stock Sold for Noncash Assets and/or
Services

• On March 14, Wal-Mart issued 10,000 shares of its
  0.10 par value common stock to the Rose Law
  firms. The stock was selling for 15 per share.

10,000 shares 0.10 par value 1,000
10,000 shares 15 per share 150,000
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Stock Options
Management compensation package includes salary
and stock options.
Stock options allow management to purchase stock
from the corporation at a fraction of the stocks
value in the secondary market.
Management
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Treasury Stock
Wal-Mart buysits own stock in
the secondary market. (Treasury stock)
Management compensation package includes salary
and stock options.
Stock options allow management to purchase stock
from the corporation at a fraction of the stocks
value in the secondary market.
Management
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Treasury Stock
When stock is reacquired, the corporation records
the treasury stock at cost.
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Treasury Stock
On May 1, Wal-Mart reacquired 100,000 shares of
its common stock at 22 per share. The journal
entry for May 1 is . . . .
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Treasury Stock
On December 3, Wal-Mart reissued 10,000 shares of
the treasury stock at 30 per share. The journal
entry for December 3 is . . .
10,000 shares 22 cost 220,000
10,000 shares 30 300,000
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Accounting for Cash Dividends
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Dividend Dates

• Declaration date
• Board of directors declares the dividend.
• Record a liability.

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Dividend Dates

• Date of Record
• Stockholders holding shares on this date will
  receive the dividend. (No entry)

X
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Dividend Dates

• Date of Payment
• Record the payment of the dividend to
  stockholders.

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Dividend Yield Ratio
The 1999 dividend per share for Wal-Mart common
stock is 0.14 per share. The market price is
52.
This ratio is often used to compare the
dividend-paying performance of different
investment alternatives.
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Dividend Yield Ratio
This ratio is often used to compare the
dividend-paying performance of different
investment alternatives.
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Dividend Yield Ratio
This ratio is often used to compare the
dividend-paying performance of different
investment alternatives.
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Dividends on Preferred Stock

• 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.

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Dividends on Preferred Stock
If the preferred stock is noncumulative, any
dividends not declared in previous years are lost
permanently.
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Dividends on Preferred Stock

• 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?

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Dividends on Preferred Stock
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Dividends on Preferred Stock
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Dividends on Preferred Stock
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Dividends on Preferred Stock
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DividendsQuestion
On June 1, 2000 a corporations 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.
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DividendsQuestion
On June 1, 2000 a corporations 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.
100 8 8 dividend per share 8 2,500
20,000 total dividend
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Focus on Cash Flows
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Accounting for Stock Dividends
Distribution of additional sharesof stock to
stockholders.
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Stock Dividends
Small
Large
Stock dividend lt 25
Stock dividend gt 25
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Stock Splits

• Distributions of 100 or more of stock to
  stockholders.

Ice Cream Parlor
Banana Splits On Sale Now
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Stock Splits
Assume that a corporation had 5,000 shares of 1
par value common stock outstanding before a
2for1 stock split.
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Stock Splits
Assume that a corporation had 5,000 shares of 1
par value common stock outstanding before a
2for1 stock split.
Increase
Decrease
No Change
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Restrictions on Retained Earnings
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Restrictions on Retained Earnings
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Dividend Payout Ratio
In 1999, Wal-Mart earned 4,430,000,000 and paid
693,000,000 in dividends.
This ratio indicates the portion of current
earnings paid to owners in the form of dividends.
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Dividend Payout Ratio
Dividend Payout
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This ratio indicates the portion of current
earnings paid to owners in the form of dividends.
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Dividend Payout Ratio
This ratio is often used to compare the dividend
policy of different investment alternatives.
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Accounting and Reporting for Unincorporated
Businesses
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End of Chapter 11