ns:
t io
ra
rpo ation,
Co niz
ck
rga
O
Sto
and
s,
i o n n ds
act ide
ns
Tra
Div
11
ter
ap
Ch
c. 2014 Cengage Learning.   A...
Learning Objectives

1. Describe the nature of the corporate form of
organization.

2. Describe the two main sources of
st...
Learning Objectives

6. Describe and illustrate the reporting of
stockholders’ equity.

7. Describe the effect of stock sp...
Lear
ning
Obje
Desc
ctive
r ibe
the n
ature
of t h
e co
form
r po r
of o r
ate
gani
zatio
n

1

c. 2014 Cengage Learning. ...
Characteristics of a Corporation

o A corporation is a legal entity, distinct and

separate from the individuals who creat...
Characteristics of a Corporation

o The stockholders or shareholders who own the
stock own the corporation. They can buy a...
Characteristics of a Corporation

o Corporations whose shares of stock are traded
in public markets are called public
corp...
Characteristics of a Corporation

o Corporations whose shares are not traded

publicly are usually owned by a small group ...
Characteristics of a Corporation

o The stockholders control a corporation by

electing a board of directors. This board m...
CHARACTERISTI
CS OF A
CORPORATION
Characteristics of a Corporation

o A corporation has separate legal existence
from its owners.

o A corporation has trans...
CHARACTERISTI
CS OF A
CORPORATION

(continued)
CHARACTERISTI
CS OF A
CORPORATION
Forming a Corporation

o The first step in forming a corporation is to file
an application of incorporation with the state...
FORMING A
CORPORATION
Forming a Corporation

o After the application is approved, the state

grants a charter or articles of incorporation,
whic...
Forming a Corporation

o Costs may be incurred in organizing a

corporation, such as legal fees, taxes, license
fees, and ...
Lear
ning
Obje
ctive
Desc
r ibe
the t
wo
o ma
stock in sour
c
hol d
ers’ e es of
quity

2

c. 2014 Cengage Learning.   All...
Stockholders’ Equity

o The owner’s equity in a corporation is called
stockholders’ equity, shareholders’ equity,
sharehol...
Stockholders’ Equity

o Stockholders’ equity

is reported by its two
main sources.
 Capital contributed to

the corporati...
STOCKHOLDERS’
EQUITY

If there is only one class
of stock, the account is
entitled Common Stock
or Capital Stock.
Stock
Stockholders’ Equity

o Retained earnings is a corporation’s

cumulative net income that has not been
distributed as divid...
Stockholders’ Equity

o A debit balance in Retained Earnings is called
a deficit. Such a balance often results from
accumu...
Lear
ning
Obje
ctive
char Describ
ac
e
a nd
stock teristic
s of s illustra
, and
t
tock
ent r i
, clas e the
es f o
se s o...
Characteristics of Stock

o The number of shares of stock that a

corporation is authorized to issue is stated in
the char...
CHARACTERISTI
CS OF STOCK

Outstanding
Characteristics of Stock

o Corporations may issue stock certificates to
stockholders to document their ownership.

o Shar...
Characteristics of Stock

o Stock issued without par is called no-par stock.
Some states require the board of directors to...
Characteristics of Stock

o The major rights that accompany ownership of
a share of stock are as follows:

 The right to ...
Classes of Stock

o The two primary classes of paid-in capital are
common stock and preferred stock.

o The primary attrac...
Classes of Stock

o The payment of dividends is authorized by the
corporation’s board of directors.

o When authorized, th...
Classes of Stock

o Cumulative preferred stock has a right to
receive regular dividends that were not
declared (paid) in p...
Classes of Stock

o A corporation has issued the following
preferred and common stock:

1,000 shares of $4 cumulative pref...
Classes of Stock

The 2012 dividends in arrears are paid first.
There are 1,000 shares, and each share
receives $4 for a t...
Classes of Stock

The 2013 dividends in arrears are paid next. Again, the
preferred stockholders receive $4 for each share...
Classes of Stock

The current dividends for 2014 must be paid to
preferred stockholders before common stockholders
can par...
Classes of Stock

Of the $22,000 in dividends declared, preferred
must receive $12,000 before common can receive
any divid...
Classes of Stock

Dividends available to common stockholders
Issuing Stock

o A corporation is authorized to issue 10,000

shares of preferred stock, $100 par, and
100,000 shares of c...
Issuing Stock

o If the stock is issued (sold) for a price that is

more than its par, the stock has been sold at a
premiu...
Premium on Stock

o Caldwell Company issues 2,000 shares of $50
par preferred stock for cash at $55.

c. 2014 Cengage Lear...
Premium on Stock

o A corporation acquired land for which the fair
market value cannot be determined. In
exchange for the ...
No-Par Stock

o On January 9, a corporation issues 10,000

shares of no-par common stock at $40 a share.
On June 27, the c...
No-Par Stock

o Some states require that the entire proceeds

from the issue of no-par stock be recorded as
legal capital....
No-Par Stock

o Using the same data as in the previous

transaction, assume that the stock is assigned a
stated value of $...
Lear
ning
Obje
ctive
De s c
acco
ribe
un t
ting f
or

a nd
cash illustrat
e t he
divid
stock ends an
d
divid
e n ds

4

c....
Cash Dividends

o A cash distribution of earnings by a

corporation to its stockholders is called a cash
dividend. The thr...
Cash Dividends

o The date of declaration is the date the board of
directors formally authorizes the payment of
the divide...
Cash Dividends

o The date of record is the date the corporation
uses to determine which stockholders will
receive the div...
Cash Dividends

o The date of payment is the date the corporation
will pay the dividends to the stockholders who
owned the...
Cash Dividends

o On October 1, Hiber Corporation declares the
cash dividends shown below with a date of
record of Novembe...
Cash Dividends

o On October 1, the declaration date, Hiber
Corporation records the following entry:

c. 2014 Cengage Lear...
Cash Dividends

o On November 10, the date of record, no entry

is required, since this date merely determines
which stock...
Cash Dividends

o On December 2, the date of payment, Hiber
Corporation records the payment of the
dividends as follows:

...
Stock Dividends

o A distribution of dividends to stockholders in

the form of the firm’s own shares is called a
stock div...
Stock Dividends

o On December 15, the board of directors of

Hendrix Corporation declares a 5 percent
stock dividend of 1...
Stock Dividends

o The entry to record the declaration of the 5
percent stock dividend is as follows:

c. 2014 Cengage Lea...
Stock Dividends

o At the end of the period, the stock dividends

distributable and paid-in capital in excess of
par—commo...
Stock Dividends

o On January 10, the stock dividend is

distributed to stockholders by issuing 100,000
shares of common s...
Stock Dividends

o Before and After Stock Dividend Distribution

Total shares issued

After 6%
Before
Stock Dividend Stock...
Stock Dividends

o Before and After Stock Dividend Distribution

Total shares issued
Number of shares owned
by one stockho...
Stock Dividends

o Before and After Stock Dividend Distribution

Total shares issued
Number of shares owned
by one stockho...
Lear
ning
Obje
ctive
Desc
ribe
acco
a
untin
n
g for d illustra
te th
treas
e
ury s
t oc k
trans
actio
ns

5

c. 2014 Cenga...
Treasury Stock Transactions

o Treasury stock is stock that a corporation has

issued and then reacquired. A corporation m...
Treasury Stock Transactions

o On February 13, a firm purchased 1,000 shares

of treasury stock (common stock, $25 par) at...
Treasury Stock Transactions

o On April 29, the corporation sells 600 shares of
the treasury stock for $60. The entry to r...
Treasury Stock Transactions

o On October 4, the corporation sells the

remaining 400 shares of treasury stock for $40
per...
Lear
ning
Obje
ctive
repo Describ
e
rt
ting o
a
f stoc nd illustr
a
khol
ders te the
’ e qu
ity

6

c. 2014 Cengage Learni...
Reporting Stockholders’ Equity

o Exhibit 4 shows two methods for reporting
stockholders’ equity for the December 31,
2014...
REPORTING
STOCKHOLDERS’
EQUITY

(continued)
Reporting Stockholders’ Equity

o In the second method, the stock accounts are
reported, followed by the paid-in capital
r...
REPORTING
STOCKHOLDERS’
EQUITY

(concluded)
Reporting Retained Earnings

o Changes to retained earnings may be reported
using one of the following:

 Separate retain...
REPORTING
RETAINING
EARNINGS

When a separate retained earnings
statement i s prepared, the beginning
balance of retained ...
Restrictions

o The retained earnings available for use as

dividends may be restricted by action of a
corporation’s board...
Restrictions

o Restrictions of retained earnings are classified
as follows:

 Legal: State laws may require a restrictio...
Prior Period Adjustments

o Errors may not be discovered within the same
period in which they occur. The correction of
thi...
Statement of Stockholders’ Equity

o When the only change to stockholders’ equity

is due to net income or net loss and di...
STATEMENT OF
STOCKHOLDERS’
EQUITY
MORNIN’ JOE’S STATEMENTS
MORNIN’ JOE’S STATEMENTS
Mornin’ Joe’s retained earnings statement for the year
ended December 31, 2014, is as follows:
MORNIN’ JOE’S STATEMENTS
The statement of stockholders’ equity for Mornin’
Joe is shown below:
Lear
ning
Obje
Desc
ctive
r ibe
the e
ffect
corp
pora
te fin of stock s
ancia
plits
o
l stat
eme n
nt s

7

c. 2014 Cengag...
Stock Splits

o A stock split is a process by which a

corporation reduces the par or stated value of
its common stock and...
Stock Splits

o Rojek Corporation has 10,000 shares of $100

par common stock outstanding with a current
market price of $...
STOCK SPLITS
Lear
ning
Obje
ctive
De s c
ear n ribe and
ing
ill
ustra
te th
s har
e use
com e in eva
pany
luati of
ng a
’s pro
fitab
il...
Earnings per Share

o Earnings per common share (EPS), sometimes
called basic earnings per share, is the net
income per sh...
EARNINGS PER
SHARE
ns:
t io
ra
rpo ation,
Co niz
ck
rga
O
Sto
and
s,
i o n n ds
act ide
ns
Tra
Div
nd
eE
Th
c. 2014 Cengage Learning.   All R...
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Ch11 wrd12e instructor_final

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Ch11 wrd12e instructor_final

  1. 1. ns: t io ra rpo ation, Co niz ck rga O Sto and s, i o n n ds act ide ns Tra Div 11 ter ap Ch c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  2. 2. Learning Objectives 1. Describe the nature of the corporate form of organization. 2. Describe the two main sources of stockholders’ equity. 3. Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. 4. Describe and illustrate the accounting for cash dividends and stock dividends. 5. Describe and illustrate the accounting for treasury stock transactions.
  3. 3. Learning Objectives 6. Describe and illustrate the reporting of stockholders’ equity. 7. Describe the effect of stock splits on corporate financial statements. 8. Describe and illustrate the use of earnings per share in evaluating a company’s profitability.
  4. 4. Lear ning Obje Desc ctive r ibe the n ature of t h e co form r po r of o r ate gani zatio n 1 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  5. 5. Characteristics of a Corporation o A corporation is a legal entity, distinct and separate from the individuals who create and operate it. As a legal entity, a corporation may acquire, own, and dispose of property in its own name. o A corporation sells shares of ownership, called stock. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  6. 6. Characteristics of a Corporation o The stockholders or shareholders who own the stock own the corporation. They can buy and sell stock without affecting the corporation’s operations or continued existence. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  7. 7. Characteristics of a Corporation o Corporations whose shares of stock are traded in public markets are called public corporations. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  8. 8. Characteristics of a Corporation o Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called nonpublic or private corporations. The stockholders of all corporations have limited liability. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  9. 9. Characteristics of a Corporation o The stockholders control a corporation by electing a board of directors. This board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  10. 10. CHARACTERISTI CS OF A CORPORATION
  11. 11. Characteristics of a Corporation o A corporation has separate legal existence from its owners. o A corporation has transferable units of ownership. o A corporation has limited stockholders’ liability. o A corporation is subject to taxes. Thus, the corporate form has the disadvantage of double taxation. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  12. 12. CHARACTERISTI CS OF A CORPORATION (continued)
  13. 13. CHARACTERISTI CS OF A CORPORATION
  14. 14. Forming a Corporation o The first step in forming a corporation is to file an application of incorporation with the state.  Because state laws differ, corporations often organize in states with more favorable laws.  More than half of the largest companies are incorporated in Delaware (see Exhibit 3, next slide). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  15. 15. FORMING A CORPORATION
  16. 16. Forming a Corporation o After the application is approved, the state grants a charter or articles of incorporation, which formally create the corporation. o Management and the board of directors then prepare bylaws which are operating rules and procedures for conducting the corporation’s affairs. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  17. 17. Forming a Corporation o Costs may be incurred in organizing a corporation, such as legal fees, taxes, license fees, and promotional costs. The recording of a corporation’s organizing costs of $8,500 on January 5 is shown below: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  18. 18. Lear ning Obje ctive Desc r ibe the t wo o ma stock in sour c hol d ers’ e es of quity 2 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  19. 19. Stockholders’ Equity o The owner’s equity in a corporation is called stockholders’ equity, shareholders’ equity, shareholders’ investment, or capital. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  20. 20. Stockholders’ Equity o Stockholders’ equity is reported by its two main sources.  Capital contributed to the corporation by the stockholders, called paid-in capital or contributed capital.  Net income retained in the business, called retained earnings. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  21. 21. STOCKHOLDERS’ EQUITY If there is only one class of stock, the account is entitled Common Stock or Capital Stock. Stock
  22. 22. Stockholders’ Equity o Retained earnings is a corporation’s cumulative net income that has not been distributed as dividends. o Dividends are distributions of a corporation’s earnings to stockholders. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  23. 23. Stockholders’ Equity o A debit balance in Retained Earnings is called a deficit. Such a balance often results from accumulated net losses. o A credit balance in Retained Earnings does not represent surplus cash or cash left over for dividends. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  24. 24. Lear ning Obje ctive char Describ ac e a nd stock teristic s of s illustra , and t tock ent r i , clas e the es f o se s o r issu f i ng s t oc k 3 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  25. 25. Characteristics of Stock o The number of shares of stock that a corporation is authorized to issue is stated in the charter. o The term issued refers to the shares issued to the stockholders. o A corporation may reacquire some of the stock that has been issued. The stock remaining in the hands of stockholders is then called outstanding stock. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  26. 26. CHARACTERISTI CS OF STOCK Outstanding
  27. 27. Characteristics of Stock o Corporations may issue stock certificates to stockholders to document their ownership. o Shares of stock are often assigned a dollar amount, called par value. o Some corporations have stopped issuing stock certificates except on special request. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  28. 28. Characteristics of Stock o Stock issued without par is called no-par stock. Some states require the board of directors to assign a stated value to no-par stock. o Some state laws require that corporations maintain a minimum stockholder contribution, called legal capital, to protect creditors. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  29. 29. Characteristics of Stock o The major rights that accompany ownership of a share of stock are as follows:  The right to vote in matters concerning the corporation.  The right to share in distributions of earnings.  The right to share in assets upon liquidation. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  30. 30. Classes of Stock o The two primary classes of paid-in capital are common stock and preferred stock. o The primary attractiveness of preferred stock is that it is given a preference to dividends over common stock. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  31. 31. Classes of Stock o The payment of dividends is authorized by the corporation’s board of directors. o When authorized, the directors are said to have declared a dividend. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  32. 32. Classes of Stock o Cumulative preferred stock has a right to receive regular dividends that were not declared (paid) in prior years.  Noncumulative preferred stock does not have this right.  Cumulative preferred stock dividends that have not been paid in prior years are said to be in arrears. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  33. 33. Classes of Stock o A corporation has issued the following preferred and common stock: 1,000 shares of $4 cumulative preferred stock, $50 par 4,000 shares of common stock, $15 par o The corporation was organized on January 1, 2012, and paid no dividends in 2012 and 2013. In 2014, the corporation paid $22,000 in dividends, of which $12,000 was paid to preferred stockholders and $10,000 was paid to common stockholders. (continued) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  34. 34. Classes of Stock The 2012 dividends in arrears are paid first. There are 1,000 shares, and each share receives $4 for a total of $4,000. (continued)
  35. 35. Classes of Stock The 2013 dividends in arrears are paid next. Again, the preferred stockholders receive $4 for each share held. (continued)
  36. 36. Classes of Stock The current dividends for 2014 must be paid to preferred stockholders before common stockholders can participate in the dividends. (continued)
  37. 37. Classes of Stock Of the $22,000 in dividends declared, preferred must receive $12,000 before common can receive any dividends. (continued)
  38. 38. Classes of Stock Dividends available to common stockholders
  39. 39. Issuing Stock o A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and 100,000 shares of common stock, $20 par. Onehalf of each class of authorized shares is issued at par for cash. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  40. 40. Issuing Stock o If the stock is issued (sold) for a price that is more than its par, the stock has been sold at a premium. o If the stock is issued (sold) for a price that is less than its par, the stock has been sold at a discount. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  41. 41. Premium on Stock o Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  42. 42. Premium on Stock o A corporation acquired land for which the fair market value cannot be determined. In exchange for the land, the corporation issued 10,000 shares of $10 par common that had a current market value of $12. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  43. 43. No-Par Stock o On January 9, a corporation issues 10,000 shares of no-par common stock at $40 a share. On June 27, the corporation issues an additional 1,000 shares at $36. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  44. 44. No-Par Stock o Some states require that the entire proceeds from the issue of no-par stock be recorded as legal capital. In other states, no-par stock may be assigned a stated value per share. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  45. 45. No-Par Stock o Using the same data as in the previous transaction, assume that the stock is assigned a stated value of $25. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  46. 46. Lear ning Obje ctive De s c acco ribe un t ting f or a nd cash illustrat e t he divid stock ends an d divid e n ds 4 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  47. 47. Cash Dividends o A cash distribution of earnings by a corporation to its stockholders is called a cash dividend. The three conditions a corporation must meet to pay a cash dividend are as follows:  Sufficient retained earnings  Sufficient cash  Formal action by the board of directors c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  48. 48. Cash Dividends o The date of declaration is the date the board of directors formally authorizes the payment of the dividend. On this date, the corporation incurs the liability to pay the amount of the dividend. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  49. 49. Cash Dividends o The date of record is the date the corporation uses to determine which stockholders will receive the dividend. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  50. 50. Cash Dividends o The date of payment is the date the corporation will pay the dividends to the stockholders who owned the stock on the date of record. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  51. 51. Cash Dividends o On October 1, Hiber Corporation declares the cash dividends shown below with a date of record of November 10 and a date of payment of December 2. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  52. 52. Cash Dividends o On October 1, the declaration date, Hiber Corporation records the following entry: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  53. 53. Cash Dividends o On November 10, the date of record, no entry is required, since this date merely determines which stockholders will receive the dividends. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  54. 54. Cash Dividends o On December 2, the date of payment, Hiber Corporation records the payment of the dividends as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  55. 55. Stock Dividends o A distribution of dividends to stockholders in the form of the firm’s own shares is called a stock dividend. Stock dividends normally are declared only on common stock and issued to common stockholders. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  56. 56. Stock Dividends o On December 15, the board of directors of Hendrix Corporation declares a 5 percent stock dividend of 100,000 shares (2,000,000 shares × 5%) to be issued on January 10 to stockholders of record on December 31. The market price on the declaration date is $31 per share. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  57. 57. Stock Dividends o The entry to record the declaration of the 5 percent stock dividend is as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  58. 58. Stock Dividends o At the end of the period, the stock dividends distributable and paid-in capital in excess of par—common stock accounts are reported in the Paid-In Capital section of the balance sheet. Thus, the effect of the preceding stock dividend is to transfer $3,100,000 of retained earnings to paid-in capital. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  59. 59. Stock Dividends o On January 10, the stock dividend is distributed to stockholders by issuing 100,000 shares of common stock. The following entry records the issue of the stock: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  60. 60. Stock Dividends o Before and After Stock Dividend Distribution Total shares issued After 6% Before Stock Dividend Stock Dividend 10,000 10,600 10,000 + (10,000 x 6%) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  61. 61. Stock Dividends o Before and After Stock Dividend Distribution Total shares issued Number of shares owned by one stockholder After 6% Before Stock Dividend Stock Dividend 10,000 10,600 1,000 1,060 1,000 + (1,000 x 6%) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  62. 62. Stock Dividends o Before and After Stock Dividend Distribution Total shares issued Number of shares owned by one stockholder Proportionate ownership After 6% Before Stock Dividend Stock Dividend 10,000 10,600 1,000 10% 1,000 ÷ 10,000 1,060 10% 1,060 ÷ 10,600 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  63. 63. Lear ning Obje ctive Desc ribe acco a untin n g for d illustra te th treas e ury s t oc k trans actio ns 5 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  64. 64. Treasury Stock Transactions o Treasury stock is stock that a corporation has issued and then reacquired. A corporation may purchase its own stock for a variety of reasons, including the following:  To provide shares for resale to employees  To reissue as bonuses to employees, or  To support the market price of the stock c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  65. 65. Treasury Stock Transactions o On February 13, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share. The cost method for accounting for treasury stock is used. The entry to record the purchase of the treasury stock is as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  66. 66. Treasury Stock Transactions o On April 29, the corporation sells 600 shares of the treasury stock for $60. The entry to record the sale is as follows: * The amount (per share) debited to Treasury Stock when purchased is the amount per share that must be credited to that account when sold (600 x $45). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  67. 67. Treasury Stock Transactions o On October 4, the corporation sells the remaining 400 shares of treasury stock for $40 per share. The entry to record the sale is as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  68. 68. Lear ning Obje ctive repo Describ e rt ting o a f stoc nd illustr a khol ders te the ’ e qu ity 6 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  69. 69. Reporting Stockholders’ Equity o Exhibit 4 shows two methods for reporting stockholders’ equity for the December 31, 2014, balance sheet of Telex Inc. o In the first method, shown in the next slide, each class of stock is reported, followed by its related paid-in capital accounts. Retained earnings is then reported, followed by a deduction for treasury stock. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  70. 70. REPORTING STOCKHOLDERS’ EQUITY (continued)
  71. 71. Reporting Stockholders’ Equity o In the second method, the stock accounts are reported, followed by the paid-in capital reported as a single item, Additional paid-in capital. Retained earnings is then reported, followed by a deduction for treasury stock. Method 2 is shown on the next slide. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  72. 72. REPORTING STOCKHOLDERS’ EQUITY (concluded)
  73. 73. Reporting Retained Earnings o Changes to retained earnings may be reported using one of the following:  Separate retained earnings statement  Combined income and retained earnings statement  Statement of stockholders’ equity c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  74. 74. REPORTING RETAINING EARNINGS When a separate retained earnings statement i s prepared, the beginning balance of retained earnings is reported.
  75. 75. Restrictions o The retained earnings available for use as dividends may be restricted by action of a corporation’s board of directors. o These amounts, called restrictions or appropriations, remain part of the retained earnings. However, they must be disclosed, usually in the notes to the financial statements. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  76. 76. Restrictions o Restrictions of retained earnings are classified as follows:  Legal: State laws may require a restriction of retained earnings.  Contractual: A corporation may enter into contracts that require restrictions of retained earnings.  Discretionary: A corporation’s board of directors may restrict retained earnings voluntarily. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  77. 77. Prior Period Adjustments o Errors may not be discovered within the same period in which they occur. The correction of this type of error, called a prior period adjustment, is reported in the retained earnings statement as an adjustment to the beginning balance of retained earnings. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  78. 78. Statement of Stockholders’ Equity o When the only change to stockholders’ equity is due to net income or net loss and dividends, a retained earnings statement is sufficient. o When a corporation also has changes in stock and paid-in capital accounts, a statement of stockholders’ equity is normally prepared. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  79. 79. STATEMENT OF STOCKHOLDERS’ EQUITY
  80. 80. MORNIN’ JOE’S STATEMENTS
  81. 81. MORNIN’ JOE’S STATEMENTS Mornin’ Joe’s retained earnings statement for the year ended December 31, 2014, is as follows:
  82. 82. MORNIN’ JOE’S STATEMENTS The statement of stockholders’ equity for Mornin’ Joe is shown below:
  83. 83. Lear ning Obje Desc ctive r ibe the e ffect corp pora te fin of stock s ancia plits o l stat eme n nt s 7 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  84. 84. Stock Splits o A stock split is a process by which a corporation reduces the par or stated value of its common stock and issues a proportionate number of additional shares. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  85. 85. Stock Splits o Rojek Corporation has 10,000 shares of $100 par common stock outstanding with a current market price of $150 per share. The board of directors declares the following stock split:  Each common shareholder will receive 5 shares for each share held.  The par of each share of common stock will be reduced to $20 ($100/5). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  86. 86. STOCK SPLITS
  87. 87. Lear ning Obje ctive De s c ear n ribe and ing ill ustra te th s har e use com e in eva pany luati of ng a ’s pro fitab ility s pe r 8 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  88. 88. Earnings per Share o Earnings per common share (EPS), sometimes called basic earnings per share, is the net income per share of common stock outstanding during a period. o Earnings per share is computed as follows: Earnings per Share = Net Income – Preferred Dividends Average Number of Common Shares Outstanding c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  89. 89. EARNINGS PER SHARE
  90. 90. ns: t io ra rpo ation, Co niz ck rga O Sto and s, i o n n ds act ide ns Tra Div nd eE Th c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

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