Acc102 chap11 publisher_power_point

11-2
REPORTING
AND ANALYZING
STOCKHOLDERS’
EQUITY
Accounting, Fifth Edition
11

11-3
After studying this chapter, you should be able to:
1. Identify and discuss the major characteristics of a corporation.
2. Record the issuance of common stock.
3. Explain the accounting for the purchase of treasury stock.
4. Differentiate preferred stock from common stock.
5. Prepare the entries for cash dividends and understand the effect of
stock dividends and stock splits.
6. Identify the items that affect retained earnings.
7. Prepare a comprehensive stockholders’ equity section.
8. Evaluate a corporation’s dividend and earnings performance from a
stockholder’s perspective.
Learning ObjectivesLearning Objectives

11-4
Preview of Chapter 11
Accounting
Fifth Edition
Kimmel Weygandt Kieso

11-5
The Corporate Form of OrganizationThe Corporate Form of Organization
An entity separate and distinct from its owners.
Classified by Purpose
 Not-for-Profit
 For Profit
Classified by Ownership
 Publicly held
 Privately held
► Facebook
► IBM
► Caterpillar
► General Electric
► Salvation Army
► American Cancer
Society
► Cargill Inc.
LO 1 Identify and discuss the major characteristics of a corporation.

11-6
 Separate Legal Existence
 Limited Liability of Stockholders
 Transferable Ownership Rights
 Ability to Acquire Capital
 Continuous Life
 Corporate Management
 Government Regulations
 Additional Taxes
Characteristics that distinguish corporations from
proprietorships and partnerships.
LO 1 Identify the major characteristics of a corporation.
Characteristics of a CorporationCharacteristics of a Corporation
Advantages
Disadvantages

11-7
Corporation acts
under its own name
rather than in the
name of its
stockholders.
 Continuous Life

11-8
Limited to their
investment.
 Continuous Life

11-9
Shareholders may
sell their stock.
 Continuous Life

11-10
Corporation can
obtain capital
through the issuance
of stock.
 Continuous Life

11-11
Continuance as a
going concern is not
affected by the
withdrawal, death, or
incapacity of a
stockholder,
employee, or officer.
 Continuous Life

11-12
 Continuous Life
Separation of
ownership and
management
prevents owners
from having an
active role in
managing the
company.

11-13
 Continuous Life

11-14
 Continuous Life
Corporations pay
income taxes as a
separate legal entity
and in addition,
stockholders pay
taxes on cash
dividends.

11-15
Stockholders
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General
Counsel/
Secretary
Vice President
Marketing
Vice President
Finance/Chief
Financial Officer
Vice President
Operations
Vice President
Human
Resources
Treasurer Controller
Illustration 11-1
Corporation
organization chart

11-17
Other Forms of Business Organization
 Limited partnerships
 Limited liability partnerships (LLPs)
 Limited liability companies (LLCs)
 S Corporation
► No double taxation.
► Cannot have more than 75 shareholders.
Other Forms of Business OrganizationOther Forms of Business Organization

11-18
Forming a Corporation
 File application with the Secretary of State.
 State grants charter.
 Corporation develops by-laws.
Initial Steps:
Companies generally incorporate in a state whose laws are
favorable to the corporate form of business (Delaware, New Jersey).
Corporations engaged in interstate commerce must obtain a license
from each state in which they do business.

11-19
1. Vote in election of board of
directors and on actions that
require stockholder approval.
Stockholders Rights
2. Share the corporate earnings
through receipt of dividends.
Illustration 11-3

11-20
3. Keep the same percentage ownership when new shares
of stock are issued (preemptive right).
Stockholders Rights
Illustration 11-3

11-21
4. Share in assets upon liquidation in proportion to their
holdings. This is called a residual claim.
Stockholders Rights
Illustration 11-3

11-22
Stock Issue ConsiderationsStock Issue Considerations
 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.
Authorized Stock
LO 2 Record the issuance of common stock.

11-23
Name of corporation
Stockholder’s
name
Shares
Signature of
corporate official
Prenumbered Illustration 11-4

11-24
 Corporation can issue common stock
► directly to investors or
► indirectly through an investment banking firm.
 Top five exchanges by value of shares traded:
1. New York Stock Exchange
2. Nasdaq stock market
3. London Stock Exchange
4. Tokyo Stock Exchange
5. Euronext
Issuance of Stock

11-26
 Capital stock that has been assigned a value per share.
 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 fairly common today.
 In many states the board of directors assigns a stated
value to no-par shares.
Par and No-Par Value Stocks

11-27
Review Question
Which of these statements is false?
a. Ownership of common stock gives the owner a
voting right.
b. The stockholders’ equity section begins with paid-in
capital.
c. The authorization of capital stock does not result in a
formal accounting entry.
d. Legal capital is intended to protect stockholders.

11-28
Indicate whether each of the following statements is
true or false.
______ 1. Similar to partners in a partnership, stockholders of a
corporation have unlimited liability.
______ 2. It is relatively easy for a corporation to obtain capital
through the issuance of stock.
______ 3. The separation of ownership and management is an
advantage of the corporate form of business.
______ 4. The journal entry to record the authorization of capital stock
includes a credit to the appropriate capital stock account.
______ 5. All states require a par value per share for capital stock.
False
True
False
False
False

11-29
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained EarningsRetained Earnings
AccountAccount
AccountAccount
Paid-in Capital inPaid-in Capital in
Excess of ParExcess of Par
AccountAccount
AccountAccount
Two Primary
Sources of
Equity
Common StockCommon Stock
AccountAccount
AccountAccount
Preferred StockPreferred Stock
AccountAccount
AccountAccount
Paid-in capital is the total amount of cash and other assets paid in to
the corporation by stockholders in exchange for shares of ownership.

11-30
AccountAccount
AccountAccount
Two Primary
Sources of
Equity
AccountAccount
AccountAccount
AccountAccount
AccountAccount
Retained earnings is net income (earned capital) that a corporation
retains for future use in the business.
AccountAccount
AccountAccount

11-31
Primary objectives:
1) Identify the specific sources of paid-in capital.
2) 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.
Accounting for Issues of Common Stock

11-32
Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of
$1 par value common stock. Prepare Hydro-Slide’s journal entry if
(a) 1,000 share are issued for $1 per share, and (b) 1,000 shares
are issued for $5 per share.
Cash 1,000
Common stock (1,000 x $1) 1,000
Cash 5,000
Common stock (1,000 x $1) 1,000
Paid-in capital in excess of par value 4,000
a)
b)
Accounting for Issues of Common Stock

11-33
Illustration 11-5
Stockholders’ equity section assuming Hydro-Slide, Inc. has
retained earnings of $27,000.

11-34
ABC Corp. issues 1,000 shares of $10 par value common stock
at $12 per share. When the transaction is recorded, credits are
made to:
a. Common Stock $10,000 and Paid-in Capital in Excess of
Stated Value $2,000.
b. Common Stock $12,000.
c. Common Stock $10,000 and Paid-in Capital in Excess of
Par Value $2,000.
d. Common Stock $10,000 and Retained Earnings $2,000.
Review Question

11-36
AccountAccount
AccountAccount
AccountAccount
AccountAccount
Less:Less:
Treasury StockTreasury Stock
Account
Less:Less:
Treasury StockTreasury Stock
Account
Two Primary
Sources of
Equity
AccountAccount
AccountAccount
AccountAccount
AccountAccount
Accounting for Treasury StockAccounting for Treasury Stock
LO 3 Explain the accounting for the purchase of treasury stock.

11-37
Treasury stock - corporation’s own stock that it has reacquired
from shareholders, but not retired.
Corporations purchase their outstanding stock:
1. To reissue shares to officers and employees under bonus
and stock compensation plans.
2. To increase trading of the company’s stock in the securities
market.
3. To have additional shares available for use in acquiring
other companies.
4. To increase earnings per share.
Another infrequent reason is to eliminate hostile shareholders.

11-38
Purchase of Treasury Stock
 Generally accounted for by the cost method.
 Debit Treasury Stock for the price paid.
 Treasury stock is a contra stockholders’ equity account,
not an asset.
 Treasury Stock decreases by the same amount when the
company later sells the shares.

11-39
Treasury stock (4,000 x $8) 32,000
Cash 32,000
Illustration: On February 1, 2014, Mead acquires 4,000 shares of
its stock at $8 per share. Prepare the entry.
Illustration 11-6

11-40
Stockholders’ Equity with Treasury stock
Both the number of shares issued (100,000), outstanding (96,000), and
the number of shares held as treasury (4,000) are disclosed.
Illustration 11-7

11-41
Review Question
Treasury stock may be repurchased:
a. to reissue the shares to officers and employees under
bonus and stock compensation plans.
b. to signal to the stock market that management believes
the stock is underpriced.
c. to have additional shares available for use in the
acquisition of other companies.
d. more than one of the above.

11-42
Typically, preferred stockholders have a priority in relation to
1. dividends and
2. assets in the event of liquidation.
However, they sometimes do not have voting rights.
LO 4 Differentiate preferred stock from common stock.
Each paid-in capital account title should identify the stock to
which it relates:
 Paid-in Capital in Excess of Par Value—Preferred Stock
 Paid-in Capital in Excess of Par Value—Common Stock

11-43
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.
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.

11-44
 Right to receive dividends before common stockholders.
 Per share dividend amount is stated as a percentage of
the preferred stock’s 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.
Dividend Preferences

11-45
Cumulative Dividend
Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par
value, cumulative preferred stock outstanding. Each $100 share
pays a $7 dividend (.07 x $100). The annual dividend is $35,000
(5,000 x $7 per share). If dividends are two years in arrears,
preferred stockholders are entitled to receive the following
dividends in the current year.

11-46
 Preference on corporate assets if the corporation fails.
 Preference may be
► for the par value of the shares or
► for a specified liquidating value.
Liquidation Preference

11-47
M-Bot Corporation has 10,000 shares of 8%, $100 par
value, cumulative preferred stock outstanding at December
31, 2014. No dividends were declared in 2012 or 2013. If M-
Bot wants to pay $375,000 of dividends in 2014, common
stockholders will receive:
a. $0.
b. $295,000.
c. $215,000.
d. $135,000.
Review Question

11-48
A distribution to stockholders on a pro rata (proportional to
ownership) basis.
Types of Dividends:
DividendsDividends
LO 5 Prepare the entries for cash dividends and understand the
effect of stock dividends and stock splits.
1. Cash dividends.
2. Property dividends.
Dividends expressed: (1) as a percentage of the par or stated
value, or (2) as a dollar amount per share.
3. Stock dividends.
4. Scrip (promissory note)

11-49
For a corporation to pay a cash dividend, it must have:
1. Retained earnings - Payment of dividends from retained
earnings is legal in all states.
2. Adequate cash.
3. Declaration by the Board of Directors.
DividendsDividends
Cash Dividends

11-50
Dividends require information concerning three dates:
DividendsDividends

11-51
Illustration: On Dec. 1, the directors of Media General declare a
$0.50 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:
December 1 (Declaration Date)
Cash dividends 50,000
Dividends payable 50,000
December 22 (Record Date)
January 20 (Payment Date)
DividendsDividends
Dividends payable 50,000
Cash 50,000
No entry

11-52
DividendsDividends
Entries for cash dividends are required on the:
a. declaration date and the record date.
b. record date and the payment date.
c. declaration date, record date, and payment date.
d. declaration date and the payment date.
Review Question

11-54
Pro rata distribution of the corporation’s own stock.
DividendsDividends
Results in decrease in retained earnings and increase in paid-in capital.
Illustration 11-10
Stock Dividends

11-55
Reasons why corporations issue stock dividends:
1. Satisfy stockholders’ dividend expectations without
spending cash.
2. Increase the marketability of the corporation’s stock.
3. Emphasize that a portion of stockholders’ equity has been
permanently reinvested in the business.
DividendsDividends
Stock Dividends

11-56
Effects of Stock Dividends
 Changes the composition of stockholders’ equity.
 Total stockholders’ equity remains the same.
 No effect on the par or stated value per share.
 Increases the number of shares outstanding.
DividendsDividends

11-57
Illustration: Medland Corp. declares a 10% stock dividend on its
$10 par common stock when 50,000 shares were outstanding. The
market price was $15 per share.
DividendsDividends
Illustration 11-9

11-58
 Reduces the market value of shares.
 No entry recorded for a stock split.
 Decrease par value and increase number of shares.
DividendsDividends
Stock Splits

11-59
Illustration: Assuming that instead of issuing a 10% stock
dividend, Medland splits its 50,000 shares of common stock on a
2-for-1 basis.
DividendsDividends
Illustration 11-11

11-60
Differences between the effects of stock dividends and stock
splits.
DividendsDividends
Illustration 11-12

11-61
DividendsDividends
Which of these statements about stock dividends is true?
a. Stock dividends reduce a company’s cash balance.
b. A stock dividend has no effect on total stockholders’
equity.
c. A stock dividend decreases total stockholders’ equity.
d. A stock dividend ordinarily will increase total
stockholders’ equity.
Review Question

11-63
 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.
LO 6 Identify the items that affect retained earnings.

11-64
Illustration 11-14

11-65
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Retained Earnings Restrictions
Illustration 11-15
Disclosure of unrestricted
retained earnings

11-66
Balance Sheet Presentation
Presentation of Stockholders’ EquityPresentation of Stockholders’ Equity
LO 7 Prepare a comprehensive stockholders’ equity section.
Two classifications of paid-in capital:
1. Capital stock
2. Additional paid-in capital

11-67
LO 7 Prepare a comprehensive stockholders’ equity section.
Presentation of Stockholders’ EquityPresentation of Stockholders’ Equity
Balance
Sheet
Presentation
Illustration 11-16

11-68
Dividend Record
Measuring Corporate PerformanceMeasuring Corporate Performance
LO 8 Evaluate a corporation’s dividend and earnings
performance from a stockholder’s perspective.
Illustration: The following is the calculation of the payout ratio for
Nike in 2011 and 2010.
The payout ratio measures the percentage of earnings a company distributes
in the form of cash dividends.
Illustration 11-18

11-69
This ratio shows how many dollars of net income a company earned for each
dollar of common stockholders’ equity.
Illustration 11-20
Earnings Performance
Illustration: The following is the calculation of Nike’s return on
common stockholders’ equity ratios for 2011 and 2010.

11-70
Debt Versus Equity Decision
Illustration 11-21

11-71
Illustration 11-22
Debt Versus Equity Decision

11-72
LO 8
Illustration: Microsystems Inc. currently has 100,000 shares of
common stock outstanding issued at $25 per share and no debt. It is
considering two alternatives for raising an additional $5 million: Plan A
involves issuing 200,000 shares of common stock at the current market
price of $25 per share. Plan B involves issuing $5 million of 12% bonds at
face value. Income before interest and taxes will be $1.5 million; income
taxes are expected to be 30%.
Illustration 11-23

11-73
Illustration: Medland Corporation declares a 10% stock dividend on its
50,000 shares of $10 par value common stock. The current fair market
value of its stock is $15 per share. Record the entry on the declaration
date:
Stock dividends (50,000 x 10% x $15) 75,000
Common stock dividends distributable 50,000
Paid-in capital in excess of par 25,000
LO 9 Prepare entries for stock dividends.
Illustration 11A-1
Appendix 11AAppendix 11A
Entries for Stock
Dividends

11-74
Common stock dividends distributable 50,000
Common stock 50,000
LO 9 Prepare entries for stock dividends.
Illustration: Record the journal entry when Medland issues the dividend
shares.
Appendix 11AAppendix 11A
Entries for Stock
Dividends

11-75
Key Points
 Under IFRS, the term reserves is used to describe all equity
accounts other than those arising from contributed capital. This
would include, for example, reserves related to retained earnings,
asset revaluations, and fair value differences.
 Many countries have a different mix of investor groups than in the
United States. For example, in Germany, financial institutions like
banks are not only major creditors of corporations but often are the
largest corporate stockholders as well. In the United States, Asia,
and the United Kingdom, many companies rely on substantial
investment from private investors.
LO 10 Compare the accounting for transactions related to
stockholders’ equity under GAAP and IFRS.

11-76
Key Points
LO 10
 There are often terminology differences for equity accounts. The
following summarizes some of the common differences in terminology.

11-77
 The accounting for treasury stock differs somewhat between IFRS
and GAAP. (However, many of the differences are beyond the scope
of this course.) Like GAAP, IFRS does not allow a company to record
gains or losses on purchases of its own shares. One difference worth
noting is that, when a company purchases its own shares, IFRS treats
it as a reduction of stockholders’ equity, but it does not specify which
particular stockholders’ equity accounts are to be affected. Therefore,
it could be shown as an increase to a contra equity account (Treasury
Stock) or a decrease to retained earnings or share capital. IFRS
requires that the number of treasury shares held be disclosed.
Key Points

11-78
 A major difference between IFRS and GAAP relates to the account
Revaluation Surplus. Revaluation surplus arises under IFRS because
companies are permitted to revalue their property, plant, and
equipment to fair value under certain circumstances. This account is
part of general reserves under IFRS and is not considered
contributed capital.
 As indicated earlier, the term reserves is used in IFRS to indicate all
noncontributed (non–paid-in) capital. Reserves include retained
earnings and other comprehensive income items, such as revaluation
surplus and unrealized gains or losses on available-for-sale
securities.
Key Points

11-79
Key Points
 Under GAAP, some contingent liabilities are recorded in the
financial statements, others are disclosed, and in some cases no
disclosure is required. Unlike GAAP, IFRS reserves the use of the
term contingent liability to refer only to possible obligations that are
not recognized in the financial statements but may be disclosed if
certain criteria are met.
 For those items that GAAP would treat as recordable contingent
liabilities, IFRS instead uses the term provisions. Provisions are
defined as liabilities of uncertain timing or amount. Under IFRS, the
measurement of a provision related to an uncertain obligation is
based on the best estimate of the expenditure required to settle the
obligation.
LO 10

11-80
Key Points
 IFRS often uses terms such as retained profits or accumulated profit
or loss to describe retained earnings. The term retained earnings is
also often used.
 The accounting related to prior period adjustments is essentially the
same under IFRS and GAAP. IFRS addresses the accounting for
errors in IAS 8 (“Accounting Policies, Changes in Accounting
Estimates, and Errors”). One area where IFRS and GAAP differ in
reporting relates to error corrections in previously issued financial
statements. While IFRS requires restatement with some exceptions,
GAAP does not permit any exceptions.

11-81
Key Points
 Equity is given various descriptions under IFRS, such as
shareholders’ equity, owners’ equity, capital and reserves, and
shareholders’ funds.

11-82
Looking to the Future
The FASB and IASB are currently involved in two projects. One project is
investigating approaches to differentiate between debt and equity
instruments. The other project, the elements phase of the conceptual
framework project, will evaluate the definitions of the fundamental building
blocks of accounting. In addition to these projects, the FASB and IASB
have also identified leasing as one of the most problematic areas of
accounting. A joint project will initially focus primarily on lessee accounting.
One of the first areas to be studied is, “What are the assets and liabilities
to be recognized related to a lease contract?” Should the focus remain on
the leased item or the right to use the leased item? This question is tied to
the Boards’ joint project on the conceptual framework—defining an “asset”
and a “liability.”

11-83
IFRS Practice
Under IFRS, a purchase by a company of its own shares is recorded
by:
a) an increase in Treasury Stock.
b) a decrease in contributed capital.
c) a decrease in share capital.
d) All of these are acceptable treatments.

11-84
IFRS Practice
The term reserves is used under IFRS with reference to all of the
following except:
a) gains and losses on revaluation of property, plant, and
equipment.
b) capital received in excess of the par value of issued shares.
c) retained earnings.
d) fair value differences.

11-85
IFRS Practice
Under IFRS, the amount of capital received in excess of par value
would be credited to:
a) Retained Earnings.
b) Contributed Capital.
c) Share Premium-Ordinary.
d) Par value is not used under IFRS.

11-86
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