This chapter discusses stockholders' equity, including components like common stock, additional paid-in capital, and retained earnings. It covers procedures for issuing stock and accounting for treasury stock. Preferred stock features and dividends are explained. Small and large stock dividends and stock splits are distinguished. Finally, stockholders' equity is presented and analyzed.
This chapter discusses stockholders' equity, including components like common stock, additional paid-in capital, and retained earnings. It covers procedures for issuing stock and accounting for treasury stock. Preferred stock features and dividends are explained. Small and large stock dividends and stock splits are distinguished. Finally, stockholders' equity is presented and analyzed.
This chapter discusses stockholders' equity, including components like common stock, additional paid-in capital, and retained earnings. It covers procedures for issuing stock and accounting for treasury stock. Preferred stock features and dividends are explained. Small and large stock dividends and stock splits are distinguished. Finally, stockholders' equity is presented and analyzed.
This chapter discusses stockholders' equity, including components like common stock, additional paid-in capital, and retained earnings. It covers procedures for issuing stock and accounting for treasury stock. Preferred stock features and dividends are explained. Small and large stock dividends and stock splits are distinguished. Finally, stockholders' equity is presented and analyzed.
Download as PPT, PDF, TXT or read online from Scribd
Download as ppt, pdf, or txt
You are on page 1/ 30
Intermediate Accounting, 11th ed.
Kieso, Weygandt, and Warfield
Chapter 15: Stockholders’ Equity
Prepared by Jep Robertson and Renae Clark New Mexico State University Chapter 15: Stockholders’ Equity
After studying this chapter, you should
be able to: 1. Discuss the characteristics of the corporate form of organization. 2. Explain the key components of stockholders’ equity. 3. Explain the accounting procedures for issuing shares of stock. 4. Explain the accounting for treasury stock. Chapter 15: Stockholders’ Equity
5. Explain the accounting for and reporting of
preferred stock. 6. Describe the policies used in distributing dividends. 7. Identify the various forms of dividend distributions. 8. Explain the accounting for small and large stock dividends, and for stock splits. 9. Indicate how stockholders’ equity is presented and analyzed. The Rights of Stockholders
The stockholders have the right to:
• share proportionately in profits and losses • share proportionately in management • share proportionately in corporate assets upon liquidation • share proportionately in any new issues of stock of the same class (preemptive right) Components of Stockholders’ Equity Normally three categories: 1. Capital stock 2. Additional-paid in capital 3. Retained earnings The first two represent contributed capital, whereas retained earnings is earned capital. Components of Equity
EQUITY Less:T.Stock at COST
Earned capital Contributed capital
(Ret. Earn).
Paid-in Additional Restrict Unrestritct capital Paid-in
Less: T.stock common preferred common preferred at PAR Accounting for Share Issues
Accounts must be maintained for:
Par value stock preferred stock or common stock paid-in capital in excess of par discount on stock (if present) No par stock preferred stock or common stock paid-in capital in excess of par Stock Issuance Par value has no economic significance. • When par value stock is issued for cash: Cash (proceeds) Common Stock (# of Sh. X Par value) Paid in Capital in Excess of Par (balance) Many states permit no-par stock. • When no-par stock is issued for cash: Cash (proceeds) Common Stock (proceeds) Stock Issued in Lump-Sum Sales Both COMMON and PREFERRED stocks are issued for cash in a single transaction. The two methods of allocation available are: • Proportional Method [relative fair market values] • Incremental Method When stock is issued for services or property other than cash, the property or services are recorded at • either the fair market value of assets received or • the fair value of the non-cash consideration received, whichever is more clearly determinable Treasury Stock
Outstanding stock, purchased by the corporation,
is known as treasury stock. The reasons as to why corporations buy back their outstanding stock may include: 1. to increase earnings per share and return on equity 2. to provide tax efficient distributions of excess cash to shareholders 3. to provide stock for employee stock compensation contracts 4. to thwart takeover attempts 5. to create or improve the market for the stock Recording Treasury Stock: Methods COST METHOD: • Treasury stock is recorded at purchase COST • Treasury stock is a contra-stockholders’ account. PAR VALUE METHOD: • Treasury stock is recorded at PAR value • It is presented as a deduction from capital stock Treasury Stock: Cost Method
• Debit treasury stock for purchase cost,
and credit treasury stock at cost if shares reissued. • The initial issue price of stock does not affect subsequent treasury stock transactions. • No gain or loss can be recognized when treasury shares are re-issued. Cost Method: Example Given: • Issued: 1,000 common shares; Par, $100; issued at $110. • Reacquired: 100 shares at $112 each. • 10 shares were reissued at 112 (at cost). • 10 shares were reissued at 130 (above cost). • 10 shares were reissued at $98 (below cost). • 10 shares reissued at $105 (below cost). Show journal entries for these transactions. Cost Method: Example 1 Issued: (par, $100); Cash 110,000 1,000 sh. at $110. Common stock 100,000 Additional PIC: Common stock 10,000
to absorb any shortfall. Then, use retained earnings.
Cash 1,050 Addl PIC (T/stock) 40 Retained earnings 30 Treasury stock 1120 Par Value Method: Main Points
• Treasury stock is recorded at par when
bought or reissued. • Any shortfalls between the par value and the reissue price of treasury stock is borne: first by Paid-In and then by Retained Earnings Retirement of Treasury Stock
• Repurchase of stock does NOT mean
retirement • Retired stock becomes authorized/unissued stock • Active retirement is effected by application to the State • Constructive retirement is effected by Board Resolution Preferred Stock
Preferred stock has certain preferences or
features not possessed by common stock. These features are: • preference as to dividends • preference as to assets in the event of liquidation • may be convertibility into common stock at the option of the stockholders • may be callable at the option of the issuer • absence of voting rights Preferred Stock: Features • Cumulative preferred stock • Participating preferred stock: • Fully Participating • Partially Participating • Convertible preferred stock • Callable preferred stock • Redeemable preferred stock • Has features that make these securities more like debt than an equity instruments; therefore, these securities must be classified as liabilities Legality of Dividends
• Dividends come from present and past
earnings in majority of states. • Dividends come also from appreciation of assets in some states. • Dividends restrictions are based on liquidity and solvency tests. Types of Dividends
1. the declaration date (dividends are declared and accrued) 2. the record date (list of stockholders to whom dividends are to be paid is finalized) 3. the payment date (dividends are paid to stockholders of record) Cash Dividends: Journal Entries
• DATE DECLARED • Retained Earnings
Dividends Payable • No Entry • DATE OF RECORD • Dividends Payable • DATE OF PAYMENT Cash Property Dividends
• Are payable in assets of company
• Are non-reciprocal transfers between corporation and shareholders • Are equal to the fair market value of assets distributed at time of declaration [except in spin-offs and reorganizations] • Corporation recognizes gain/loss on the distribution Stock Dividends: Concept • Stock dividends result in more shares being issued as dividend (no cash flow is involved). • Small stock dividends involve issues of less than 20%–25% of stock. • The accounting for small stock dividends is based on the fair market value of stock issued. • The accounting for large stock dividends (more than 20%–25%) is based on the par value of stock issued. Stock Dividends and Stock Splits Stock Dividends Stock Splits Parvalue Par valueofofaashare sharedoes does Parvalue Par valueofofaashare share notchange not change decreases decreases Totalnumber Total numberof ofshares shares Totalnumber Total numberof ofshares shares increases increases increases increases Totalstockholders’ Total stockholders’equity equity Totalstockholders’ Total stockholders’equity equity doesnot does notchange change doesnot does notchange change Thecomposition The compositionof ofequity equity Thecomposition The compositionof ofequity equity changes(less changes (lessof ofretained retained doesnot does notchange change(same (same earnings;more earnings; moreofofstock) stock) amountsof amounts ofstock stockand andRE) RE) Stockdividends Stock dividendsrequire require Stocksplits Stock splitsdo donot notrequire require journalentries journal entries journalentries journal entries Statement of Stockholders’ Equity
Typical format: 1. Balance at beginning of the period 2. Additions 3. Deductions 4. Balance at end of period Analysis
Commonly used ratios:
1. Rate of return on equity: Net income – Preferred dividends Average common equity 2. Payout ratio: Cash dividends
