chapter 12-1 corporations: organization, stock transactions, dividends, and retained earnings...
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Chapter 12-1
Corporations: Organization,
Stock Transactions,Dividends, and
Retained Earnings
Corporations: Organization,
Stock Transactions,Dividends, and
Retained Earnings
Chapter Chapter 1212Chapter Chapter 1212
Financial Accounting, Sixth Edition
Chapter 12-2
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.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 12-3
Cash dividendsCash dividends
Stock dividendsStock dividends
Stock splitsStock splits
Corporate Corporate
Organization Organization
and Stock and Stock
TransactionsTransactions
Corporate Corporate
Organization Organization
and Stock and Stock
TransactionsTransactions
DividendsDividendsDividendsDividendsRetained Retained
EarningsEarningsRetained Retained
EarningsEarnings
Statement Statement
Presentation and Presentation and
AnalysisAnalysis
Statement Statement
Presentation and Presentation and
AnalysisAnalysis
Corporate form of Corporate form of organizationorganization
Common stock Common stock issuesissues
Treasury stockTreasury stock
Preferred stockPreferred stock
Retained earnings Retained earnings restrictionsrestrictions
Prior period Prior period adjustmentsadjustments
Retained earnings Retained earnings statementstatement
PresentationPresentation
AnalysisAnalysis
Corporations: Organization, Stock Corporations: Organization, Stock Transactions, Dividends and Retained Transactions, Dividends and Retained
EarningsEarnings
Corporations: Organization, Stock Corporations: Organization, Stock Transactions, Dividends and Retained Transactions, Dividends and Retained
EarningsEarnings
Chapter 12-4
An entity separate and distinct from its owners.
The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization
Classified by Purpose
Not-for-Profit
For Profit
Classified by Ownership
Publicly held
Privately held
McDonald’s Ford Motor Company PepsiCo Google
Salvation Army American Cancer
Society Gates
Foundation
Cargill Inc.
Chapter 12-5
Separate Legal Existence
Limited Liability of Stockholders
Transferable Ownership Rights
Ability to Acquire Capital
Continuous Life
Government Regulations
Additional Taxes
Corporate Management
Characteristics that distinguish corporations from proprietorships and partnerships.
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Advantages
Disadvantages
Chapter 12-6
Characteristics of a CorporationCharacteristics of a CorporationCharacteristics of a CorporationCharacteristics of a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Stockholders
Chairman and Board of Directors
President andChief Executive
Officer
General Counsel and
Secretary
Vice PresidentMarketing
Vice PresidentFinance/Chief
Financial Officer
Vice PresidentOperations
Vice PresidentHuman
Resources
Treasurer Controller
Illustration 12-1
Corporation organization chart
Chapter 12-7
File application with the Secretary of State.
State grants charter.
Corporation develops by-laws.
Initial Steps:
Forming a CorporationForming a CorporationForming a CorporationForming a Corporation
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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.
Chapter 12-8
1. Vote in election of board of directors and on actions that require stockholder approval.
Stockholders have the right to:
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
2. Share the corporate earnings through receipt of dividends.
Illustration 12-3
Chapter 12-9
3. Keep the same percentage ownership when new shares of stock are issued (preemptive right*).
Stockholders have the right to:
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
* A number of companies have eliminated the preemptive right.
Illustration 12-3
Chapter 12-10
4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.
Stockholders have the right to:
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Illustration 12-3
Chapter 12-11
Ownership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of StockholdersOwnership Rights of Stockholders
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Class A COMMON STOCK
Class A COMMON STOCK
PAR VALUE $1 PER SHARE
PAR VALUE $1 PER SHARE
Stock CertificateStock Certificate
Name of corporation
Stockholder’s name
Class
Shares
Signature of corporate official
PrenumberedIllustration 12-4
Chapter 12-12
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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
Chapter 12-13
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Corporation can issue common stock
directly to investors or
indirectly through an investment banking firm.
Factors in setting price for a new issue of stock:
1. the company’s anticipated future earnings
2. its expected dividend rate per share
3. its current financial position
4. the current state of the economy
5. the current state of the securities market
Issuance of Stock
Chapter 12-14
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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 company’s earnings and dividends.
Factors beyond a company’s control, may cause day-to-day fluctuations in market prices.
Market Value of Stock
Chapter 12-15
Stock Issue ConsiderationsStock Issue ConsiderationsStock Issue ConsiderationsStock Issue Considerations
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
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.
Par and No-Par Value Stock
Chapter 12-16
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained Retained EarningsEarningsAccountAccount
Retained Retained EarningsEarningsAccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred StockAccountAccount
Preferred StockPreferred StockAccountAccount
Corporate CapitalCorporate CapitalCorporate CapitalCorporate Capital
Paid-in capital is the total amount of cash and other assets paid in by stockholders in exchange for capital stock.
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Chapter 12-17
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained Retained EarningsEarningsAccountAccount
Retained Retained EarningsEarningsAccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred StockAccountAccount
Preferred StockPreferred StockAccountAccount
Corporate CapitalCorporate CapitalCorporate CapitalCorporate Capital
Retained earnings is net income that a corporation retains for future use.
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Chapter 12-18
Corporate CapitalCorporate CapitalCorporate CapitalCorporate Capital
Comparison of the owners’ equity (stockholders’ equity) accounts reported on a balance sheet for a proprietorship and a corporation.
Illustration 12-6
SO 1 Identify the major characteristics of a SO 1 Identify the major characteristics of a corporation.corporation.
Chapter 12-19
Issuing Par Value Common Stock for Cash
Primary objectives:
1) Identify specific sources of paid-in capital.
2) Maintain distinction between paid-in capital and
retained earnings.
Accounting for Common Stock Accounting for Common Stock IssuesIssuesAccounting for Common Stock Accounting for Common Stock IssuesIssues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Issuing No-Par Common Stock for Cash
Avoids contingent liability for stockholders.
Chapter 12-20
Illustration:Illustration: Viking Corporation issued 300 shares of $10 par value common stock for $4,100. Prepare Vikings’ journal entry.
Cash 4,100
Common stock (300 x $10) 3,000
Paid-in capital in excess of par 1,100
Accounting for Common Stock Accounting for Common Stock IssuesIssuesAccounting for Common Stock Accounting for Common Stock IssuesIssues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Chapter 12-21
Illustration:Illustration: Knopfle Corporation issued 600 shares of no-par common stock for $10,200. Prepare Knopfle’s journal entry if (a) the stock has no stated value, and (b) the stock has a stated value of $2 per share.
Cash 10,200Common stock 10,200
Cash 10,200Common stock (600 x $2) 1,200
Paid-in capital in excess of stated value 9,000
a.
b.
Accounting for Common Stock Accounting for Common Stock IssuesIssuesAccounting for Common Stock Accounting for Common Stock IssuesIssues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Chapter 12-22
Issuing Common Stock for Services orNoncash Assets
Corporations also may issue stock for:
Services (attorneys or consultants).
Noncash assets (land, buildings, and equipment).
Accounting for Common Stock Accounting for Common Stock IssuesIssuesAccounting for Common Stock Accounting for Common Stock IssuesIssues
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.SO 2 Record the issuance of common stock.
Chapter 12-23
Illustration: Illustration: On March 2nd, Leone Co. issued 5,000 shares of $5 par value common stock to attorneys in payment of a bill for $30,000 for services provided in helping the company to incorporate.
Organizational expense 30,000
Common stock (5,000 x $5) 25,000
Paid-in capital in excess of par 5,000
Accounting for Common Stock Accounting for Common Stock IssuesIssuesAccounting for Common Stock Accounting for Common Stock IssuesIssues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Chapter 12-24
Illustration: Illustration: Kane Inc.’s $10 par value common stock is actively traded at a market value of $15 per share. Kane issues 5,000 shares to purchase land advertised for sale at $85,000. Journalize the issuance of the stock in acquiring the land.
Land (5,000 x $15) 75,000
Common stock (5,000 x $10) 50,000
Paid-in capital in excess of par 25,000
Accounting for Common Stock Accounting for Common Stock IssuesIssuesAccounting for Common Stock Accounting for Common Stock IssuesIssues
SO 2 Record the issuance of common stock.SO 2 Record the issuance of common stock.
Chapter 12-25
Paid-in CapitalPaid-in CapitalPaid-in CapitalPaid-in Capital
Retained Retained EarningsEarningsAccountAccount
Retained Retained EarningsEarningsAccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Paid-in Capital Paid-in Capital in Excess of Parin Excess of Par
AccountAccount
Less:Less:Treasury StockTreasury Stock
Account
Less:Less:Treasury StockTreasury Stock
Account
Two Primary Sources of
Equity
Common StockCommon StockAccountAccount
Common StockCommon StockAccountAccount
Preferred StockPreferred StockAccountAccount
Preferred StockPreferred StockAccountAccount
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Chapter 12-26
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 enhance the stock’s market value.
3. To have additional shares available for use in acquisition of other companies.
4. To increase earnings per share.
5. To rid company of disgruntled investors, perhaps to avoid a takeover.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Chapter 12-27
Purchase of Treasury Stock
Two acceptable methods:
Cost method (more widely used).
Par or Stated value method.
Treasury stock, reduces stockholders’ equity.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Chapter 12-28
Treasury stock (1,000 x $28) 28,000
Cash 28,000
Illustration: UC Company originally issued 15,000 shares of $1 par, common stock for $25 per share. Record the journal entry for the following transaction:
April 1st the company re-acquired 1,000 shares for $28 per share.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Chapter 12-29
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
Stockholders' equityPaid-in capital
Common stock, $1 par, 15,000 issuedand 14,000 outstanding 15,000$
Paid-in capital in excess of par 360,000 Retained earnings 200,000
Total paid-in capital and retained earnings 575,000 Less: Treasury stock (1,000 shares) 28,000 Total stockholders' equity 547,000$
UC CompanyBalance Sheet (partial)
Stockholders’ Equity with Treasury stock
The number of shares issued (15,000), outstanding (14,000) and in the treasury (1,000) are disclosed. .
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Chapter 12-30
Sale of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders’ equity.
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Chapter 12-31
Cash (500 x $30) 15,000
Treasury stock (500 x $28) 14,000
Illustration: On April 1st, UC Company reacquired 1,000 shares of its $1 par, common stock, for $28 per share.
June 1st Sold 500 shares of its Treasury Stock for $30 per share.
Paid-in capital treasury stock 1,000
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAbove Cost
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Chapter 12-32
Cash (300 x $9) 2,700
Treasury stock (300 x $28) 8,400
Illustration: Record the journal entry for the following transaction:
Oct. 15th Sold 300 shares of its Treasury Stock for $9 per share.
Paid-in capital treasury stock 1,000
Retained earnings 4,700
Limited to
balance on hand
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockBelow Cost
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Chapter 12-33
Cash (100 x $11) 1,100
Treasury stock (100 x $28) 2,800
Illustration: Record the journal entry for the following transaction:
Oct. 30th Sold 100 shares of its Treasury Stock for $11 per share.
Retained earnings 1,700
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockBelow Cost
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Chapter 12-34
Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock
Stockholders' equityPaid-in capital
Common stock, $1 par, 15,000 issuedand 14,900 outstanding 15,000$
Paid-in capital in excess of par 360,000 Retained earnings 193,600
Total paid-in capital and retained earnings 568,600 Less: Treasury stock (100 shares) 2,800 Total stockholders' equity 565,800$
UC CompanyBalance Sheet (partial)
Stockholders’ Equity with Treasury stock
The number of shares issued (15,000), outstanding (14,900) and in the treasury (100) are disclosed .
SO 3 Explain the accounting for treasury stock.SO 3 Explain the accounting for treasury stock.
Chapter 12-35
Features often associated with preferred stock.
1. Preference as to dividends.
2. Preference as to assets in liquidation.
3. Nonvoting.
SO 4 Differentiate preferred stock from common stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
Accounting for preferred stock at issuance is similar to that for common stock.
Chapter 12-36
Illustration: Acker Inc. issues 5,000 shares of $100 par value preferred stock for cash at $130 per share. Journalize the issuance of the preferred stock.
Preferred StockPreferred StockPreferred StockPreferred Stock
Cash (5,000 x $130) 650,000
Preferred stock (5,000 x $100) 500,000
Paid-in capital in excess of par – Preferred stock 150,000
Preferred stock may have a par value or no-par value.
SO 4 Differentiate preferred stock from common stock.
Chapter 12-37
Dividend Preferences
Right to receive dividends before common stockholders.
Per share dividend amount is stated as a percentage of preferred stock’s par value or as a specified amount.
Cumulative dividend – preferred stockholders must be paid both current-year dividends and any unpaid prior-year (arrears) dividends before common stockholders receive dividends.
Preferred StockPreferred StockPreferred StockPreferred Stock
SO 4 Differentiate preferred stock from common stock.
Chapter 12-38
A distribution of cash or stock to stockholders on a pro rata (proportional) basis.
Types of Dividends:
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
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. Script (promissory note).
4. Stock dividends.
Chapter 12-39
Dividends require information concerning three dates:
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-40
Cash Dividends
For a corporation to pay a cash dividend, it must have:
1. Retained earnings - Payment of cash dividends from retained earnings is legal in all states.
2. Adequate cash.
3. A declaration of dividends by the Board of Directors.
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-41
Illustration: What would be the journal entries made by a corporation that declared a $50,000 cash dividend on March 10, payable on April 6 to shareholders of record on March 25?
March 10 (Declaration Date)
Retained earnings 50,000Dividends payable 50,000
March 25 (Date of Record) No entry
April 6 (Payment Date)
DividendsDividendsDividendsDividends
Dividends payable 50,000Cash 50,000
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-42
Allocating Cash Dividends Between Preferred and Common Stock
DividendsDividendsDividendsDividends
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 SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-43
Exercise:Exercise: Arnez Corporation was organized on January 1, 2007. During its first year, the corporation issued 2,000 shares of $50 par value preferred stock and 100,000 shares of $10 par value common stock. At December 31, the company declared the following cash dividends: 2007, $6,000, 2008, $12,000, and 2009, $28,000.
Instructions: (a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and not cumulative.
DividendsDividendsDividendsDividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-44
Exercise:Exercise: (a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and not cumulative.
DividendsDividendsDividendsDividends
2007 2008 2009
Dividends declared 6,000$ 12,000$ 28,000$
Allocation to pref erred 6,000 8,000 8,000
Remainder to common -$ 4,000$ 20,000$
* 2,000 shares x $50 par x 8% = $8,000
*
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-45
Exercise:Exercise: (b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 9% and cumulative.
DividendsDividendsDividendsDividends
2007 2008 2009
Dividends declared 6,000$ 12,000$ 28,000$
Dividends in arrears 3,000
Allocation to pref erred 6,000 9,000 9,000
Remainder to common -$ -$ 19,000$
* 2,000 shares x $50 par x 9% = $9,000
*
** 2007 Pfd. dividends $9,000 – declared $6,000 = $3,000
**
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-46
Exercise:Exercise: (c) Journalize the declaration of the cash dividend at December 31, 2009, under part (b).
DividendsDividendsDividendsDividends
Retained earnings 28,000
Dividends payable
28,000
2007 2008 2009
Dividends declared 6,000$ 12,000$ 28,000$
Dividends in arrears 3,000
Allocation to pref erred 6,000 9,000 9,000
Remainder to common -$ -$ 19,000$
Journal entry:
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-47
Stock Dividends
Pro rata distribution of the corporation’s own stock.
Stock DividendsStock DividendsStock DividendsStock Dividends
Results in decrease in retained earnings and increase in paid-in capital.
Illustration 12-14
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-48
Stock Dividends
Reasons why corporations issue stock dividends:
1. Satisfy stockholders’ dividend expectations without spending cash.
2. Increase marketability of corporation’s stock.
3. Emphasize that a portion of stockholders’ equity has been permanently reinvested in the business.
Stock DividendsStock DividendsStock DividendsStock Dividends
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-49
Size of Stock Dividends
Small stock dividend (less than 20–25% of the corporation’s issued stock, recorded at fair market value)
Large stock dividend (greater than 20–25% of issued stock, recorded at par value)
* Assumption that a small stock dividend will have little effect on market price of outstanding shares.
*
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Stock DividendsStock DividendsStock DividendsStock Dividends
Chapter 12-50
10% stock dividend is declaredRetained earnings (5,000 x 10% x $40)
20,000Common stock dividends
distributable500
Additional paid-in capital 19,500
Stock issued
Common stock div. distributable
500Common stock (5,000 x 10% x $1) 500
Illustration: HH Inc. has 5,000 shares issued and outstanding. The per share par value is $1, book value $32 and market value is $40.
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Stock DividendsStock DividendsStock DividendsStock Dividends
Chapter 12-51
Stockholders' equityPaid-in capital
Common stock, $1 par, 5,000 issuedand outstanding 5,000$
Common stock dividends distributable 500 Paid-in capital in excess of par 64,500
Retained earnings 90,000 Total stockholders' equity 160,000$
HH Inc.Balance Sheet (partial)
Stockholders’ Equity with Dividends Distributable
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Stock DividendsStock DividendsStock DividendsStock Dividends
Chapter 12-52
HH Inc. Before After NetDividend Dividend Change
Stockholders' equityPaid-in capital
Common stock, $1 par, 5,000 issuedand outstanding 5,000$ 5,500$ 500$
Paid-in capital in excess of par 45,000 64,500 19,500 Retained earnings 110,000 90,000 (20,000)
Total stockholders' equity 160,000$ 160,000$
Outstanding shares 5,000 5,500 Book value per share 32$ 29$
Effects of Stock Dividends
$ 0
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Stock DividendsStock DividendsStock DividendsStock Dividends
Chapter 12-53
Stock Split
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of shares.
Stock SplitStock SplitStock SplitStock Split
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Chapter 12-54
2 for 1 Stock Split
No Entry -- Disclosure that par is now $.50 No Entry -- Disclosure that par is now $.50 and shares outstanding are 10,000.and shares outstanding are 10,000.
Illustration: HH Inc. has 5,000 shares issued and outstanding. The per share par value is $1, book value $32 and market value is $40.
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Stock SplitStock SplitStock SplitStock Split
Chapter 12-55
HH Inc. Before After NetSplit Split Change
Stockholders' equityPaid-in capital
Common stock 5,000$ 5,000$ -$ Paid-in capital in excess of par 45,000 45,000 -
Retained earnings 110,000 110,000 - Total stockholders' equity 160,000$ 160,000$ -$
Outstanding shares 5,000 10,000
Book value per share 32$ 16$
Effects of Stock Split
SO 5 Prepare the entries for cash dividends and stock SO 5 Prepare the entries for cash dividends and stock dividends.dividends.
Stock SplitStock SplitStock SplitStock Split
Chapter 12-56
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 stockholders’ claim on total assets of the corporation.
Debit balance in Retained Earnings is identified as a deficit.
Retained EarningsRetained EarningsRetained EarningsRetained Earnings
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Chapter 12-57
Restrictions can result from:
1. Legal restrictions.
2. Contractual restrictions.
3. Voluntary restrictions.
Retained Earnings RestrictionsRetained Earnings RestrictionsRetained Earnings RestrictionsRetained Earnings Restrictions
Companies generally disclose retained earnings restrictions in the notes to the financial statements.
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Chapter 12-58
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 to beginning balance of retained earnings
Prior Period AdjustmentsPrior Period AdjustmentsPrior Period AdjustmentsPrior Period Adjustments
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Chapter 12-59
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2007
Balance, January 1 1,050,000$ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000$
Before issuing the report for the year ended December 31, 2007, you discover a $50,000 error (net of tax) that caused 2006 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2006). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2007?
Prior Period AdjustmentsPrior Period AdjustmentsPrior Period AdjustmentsPrior Period Adjustments
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Chapter 12-60
Woods, Inc.Statement of Retained Earnings
For the Year Ended December 31, 2007
Balance, January 1, as previously reported 1,050,000$ Prior period adjustment - error correction (50,000) Balance, January 1, as restated 1,000,000 Net income 360,000 Dividends (300,000) Balance, December 31 1,060,000$
Retained Earnings StatementRetained Earnings StatementRetained Earnings StatementRetained Earnings Statement
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Chapter 12-61
Retained Earnings StatementRetained Earnings StatementRetained Earnings StatementRetained Earnings Statement
The company prepares the statement from the Retained Earnings account.
Illustration 12-24
SO 6 Identify the items reported in a retained earnings SO 6 Identify the items reported in a retained earnings statement.statement.
Chapter 12-62 SO 7 Prepare and analyze a comprehensive stockholders’ equity
section.
Statement Analysis and Statement Analysis and PresentationPresentationStatement Analysis and Statement Analysis and PresentationPresentation Illustration 12-26
Chapter 12-63
Stockholders’ Equity Analysis
Net Income Available to Common Stockholders
Return on Common
Stockholders’ Equity
= Average Common
Stockholders’ Equity
Statement Analysis and Statement Analysis and PresentationPresentationStatement Analysis and Statement Analysis and PresentationPresentation
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.
Chapter 12-64
Many have chosen to use home-equity loans to finance vacations, new cars, home improvements, educational pursuits, and consolidate debt, thus reducing the equity in that home.
Home-Equity LoansHome-Equity Loans
Some Facts:
PNC Financial Services Group Inc. offered gifts, two airline tickets, to borrowers who took out a new home-equity loan.
Many banks are extending the length of home-equity loans.
All About YouAll About YouAll About YouAll About You
Chapter 12-65
Some Facts:
While home-equity loans tend to have fixed rates, home-equity lines of credit, have variable rates.
Home-equity loan interest is tax deductible (like home mortgage interest). Interest on car loans, most student loans, and credit cards is not.
All About YouAll About YouAll About YouAll About You
Home-Equity LoansHome-Equity Loans
Chapter 12-66
Suppose that you wanted to borrow $5,000 to take a vacation. You could spread your payments over 15 years and pay only about $50 per month. But look what your total payments would be over the life of the 15-year loan. Some vacation!
All About YouAll About YouAll About YouAll About You
Source: Data from, “When Mining Your Home for Money, Beware of Fool’s Gold,” Good Advice Press, www.goodadvicepress.com/omhomeequity.htm (accessed June 20, 2006).
Chapter 12-67
What Do You Think?What Do You Think?
Your home has increased in value by $50,000 during the last five years. You have very little savings outside of the equity in your home. You desperately need a vacation, and you are considering taking out a $5,000 home-equity loan to finance a two-week dream vacation in Europe. Is this is a bad idea?
All About YouAll About YouAll About YouAll About You
YES: This represents a significant portion of your savings. Home-equity loans should be used to finance investments of a lasting nature, not items of afleeting nature like vacations.
NO: If you use equity in your home now, you can make it up when your house increases in value in the future.
Chapter 12-68
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