slide 13-1 corporations: organization, stock transactions, dividends,and retained earnings financial...

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Corporations: Corporations: Organization, Organization,

Stock Stock Transactions, Transactions, Dividends,and Dividends,and

Retained Retained EarningsEarnings

Financial Accounting,

Seventh Edition

Chapter 11

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Separate Legal Existence

Limited Liability of Stockholders

Transferable Ownership Rights

Ability to Acquire Capital

Continuous Life

Corporate Management

Government Regulations

Additional Taxes

Advantages

Disadvantages

The Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of OrganizationThe Corporate Form of Organization

Characteristics that distinguish corporations from proprietorships and partnerships.

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Consolidated Statement of Retained Consolidated Statement of Retained EarningsEarnings2012 2011 2010

Retained Earnings, at

the beginning of year

$114,269 $135,866 $147,687

Net Earnings 52,004 43,938 53,063

Cash Dividends

(47,729) (18,360) (18,078)

Stock Dividends

(38,334) (47,175) (46,806)

Retained Earnings at the end of the year

$80,210 $114,269 $135,866

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Authorized Shares: Total amount of stock that a corporation’s charter authorized it to sell.

Authorized Shares: Total amount of stock that a corporation’s charter authorized it to sell.

Issued Shares: TOTAL shares that have been issued to stockholders.

Issued Shares: TOTAL shares that have been issued to stockholders.

Treasury Stock: Shares which were purchased and are currently held by the company

Treasury Stock: Shares which were purchased and are currently held by the company

Components of Stockholders’ EquityComponents of Stockholders’ EquityComponents of Stockholders’ EquityComponents of Stockholders’ Equity

OUTSTANDING Shares = Issued Shares – Treasury Shares (NOTE: Dividends are ONLY paid on outstanding shares)

OUTSTANDING Shares = Issued Shares – Treasury Shares (NOTE: Dividends are ONLY paid on outstanding shares)

SHAREHOLDERS’ EQUITY: (in thousands of dollars)

Dec 31, 2012 Dec 31, 2011

Common Stock, $0.69-4/9 par value— 120,000,000 shares authorized— 36,649,000 and 36,479,000 respectively, issued

$ 25,450 $ 25,333

Class B common stock, $.69-4/9 par value— 40,000,000 shares authorized— 21,627,000 and 21,025,000 respectively, issued

15,018 14,601

Capital in excess of par value 547,576 533,677

Retained earnings, per accompanying statement 80,210 114,269

Accumulated other comprehensive loss (16,447) (19,953)

Treasury stock (at cost) – 73,000 shares and 71,000 shares respectively (1,992) (1,992)

Total shareholders’ equity $ 649,815 $ 665,935

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Stock Issue ConsiderationsStock Issue ConsiderationsStock 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

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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

An investment in GROUPON of $1,000 on November 4, 2011 (Price

per share = $26.11)

Is worth $235.54 on April 10, 2013 (Price per share = $6.15)

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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

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Par value is an arbitrary amount assigned to each

share of stock when it is

authorized.

Par value is an arbitrary amount assigned to each

share of stock when it is

authorized.

Market value is the amount that

each share of stock will sell for in the

market.

Market value is the amount that

each share of stock will sell for in the

market.

Par Value = $0.001

Market Price (on April 10, 2, 2013) : $791.00

Par Value = $0.001

Market Price (on April 10, 2, 2013) : $791.00

Par Value and Market ValuePar Value and Market ValuePar Value and Market ValuePar Value and Market Value

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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 to the corporation by stockholders in exchange for capital stock.

Retained earnings is net income that a corporation retains for future use.

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Rose Company issued 1,000 shares of $1 par value common stock for $70 per share. Record the

transaction.

Accounting for Common Stock Accounting for Common Stock IssuanceIssuanceAccounting for Common Stock Accounting for Common Stock IssuanceIssuanceIssuing Par Value Common Stock for Cash

Rose Company issued 1,000 shares of common stock of $1 par value at par. Record the

transaction.

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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 IssuanceIssuanceAccounting for Common Stock Accounting for Common Stock IssuanceIssuance

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.

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Illustration: Assume that attorneys have helped Tulips Company incorporate. They have billed the company $50,000 for their services, and agree to accept 5,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction.


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Accounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock IssuesAccounting for Common Stock Issues

Daffodils Company exchanged 4,000 shares of $4 par common stock for a building. Market value of the building is $80,000. Record the

transaction.

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Assume that Jasmine Company issues 10,000 shares of $5 stated value no-par common stock for $18 per share. Record the journal entry.


Issuing No-Par Common Stock for Cash

Prepare the entry assuming there is no stated value:

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Northern Company purchased a building in exchange for 20,000 shares of common stock with a par value of $1 per share. The building has a market value of $350,000, but has an outstanding mortgage balance of $250,000 (which is now being taken over by Northern). As result of this transaction, Northern Company’s accounting equation will NOT

1.Show an increase in Assets of $350,0002.Show an increase in Contributed Capital of $20,0003.Show an increase in Stockholders’ Equity of $100,0004.Show an increase in Liabilities of $250,000

Knowledge Check Question 1:Knowledge Check Question 1:Knowledge Check Question 1:Knowledge Check Question 1:

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Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired.

Corporations purchase their outstanding stock:

1. To reissue the 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 the

acquisition of other companies.

4. To increase earnings per share.

5. To rid the company of disgruntled investors, perhaps to

avoid a takeover.

Accounting for Treasury StockAccounting for Treasury StockAccounting for Treasury StockAccounting for Treasury Stock

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Purchase of Treasury Stock

Debit Treasury Stock for the price paid to

reacquire the shares.

Treasury stock is a contra stockholders’ equity

account, not an asset.

Purchase of treasury stock reduces

stockholders’ equity.


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On January 1, 2012, Magnolia Company purchased 1,000 shares of its own $1 par

common stock for $8 per share. Record the transaction.

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Treasury Stock is shown as a reduction in Treasury Stock is shown as a reduction in

Stockholders’ Equity on the balance sheet.Stockholders’ Equity on the balance sheet. The number of shares issued (100,000), number of

shares outstanding (99,000), and the number of shares held as treasury (1,000)

are disclosed in the Stockholder’s Equity section.

Treasury Stock is shown as a reduction in Treasury Stock is shown as a reduction in

Stockholders’ Equity on the balance sheet.Stockholders’ Equity on the balance sheet. The number of shares issued (100,000), number of

shares outstanding (99,000), and the number of shares held as treasury (1,000)

are disclosed in the Stockholder’s Equity section.

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Disposal of Treasury Stock

Above Cost

Below Cost

Both increase total assets and stockholders’ equity.


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Selling Treasury Stock Above CostSelling Treasury Stock Above CostSelling Treasury Stock Above CostSelling Treasury Stock Above Cost

On March 1, 2012, Magnolia Company reissued 500 shares of treasury stock

(originally purchased for $8 a share) for $12 per share. Record the transaction.

A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.

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Selling Treasury Stock Below CostSelling Treasury Stock Below CostSelling Treasury Stock Below CostSelling Treasury Stock Below Cost

On April 1, 2012, Magnolia Company reissued 300 shares of treasury stock

(originally purchased for $8 per share) for $3 per share. Record the transaction.

Magnolia uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares.

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Selling Treasury Stock Below CostSelling Treasury Stock Below CostSelling Treasury Stock Below CostSelling Treasury Stock Below Cost

On May 1, 2012, Magnolia Company reissued the remaining 200 shares of treasury stock (originally purchased for $8 per share) for $1 per share. Record the transaction.

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Knowledge Check Question 2:Knowledge Check Question 2:Knowledge Check Question 2:Knowledge Check Question 2:

Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31, 2012 showed the following:

Common Stock, $1 par value, 20,000 shares authorized and issued $20,000

Paid-in-Capital in excess of par – Common Stock 80,000

Treasury Stock, common, 2,000 shares (at cost) (40,000)

Paid-in-Capital, Treasury Stock 10,000

Retained Earnings 130,000

Total Stockholders’ Equity $200,000

On January 1, 2013, Northern Company reissued 2,000 shares of Treasury stock at a market price of $12 per share. The resulting journal entry will:

1.Debit Cash by $40,0002.Debit Treasury Stock by $24,0003.Debit Paid-in-Capital, Treasury Stock by $20,0004.Debit Retained Earnings by $6,000

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Features often associated with preferred stock.

1. Preference as to dividends.

2. Preference as to assets in liquidation.

3. Nonvoting.

Preferred StockPreferred StockPreferred StockPreferred Stock

Accounting for preferred stock at issuance is similar to that for common stock.

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Illustration: Dahlia Corporation issues 10,000 shares of$10 par value preferred stock for $25 cash per share. Journalize the issuance of the preferred stock.


Preferred stock may have a par value or no-par value.

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Dividend Preferences

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.


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A distribution of cash or stock to stockholders on a pro rata (proportional) basis.

Common types of Dividends :

DividendsDividends

1. Cash dividends.

2. Stock dividends.

Cash Dividends may be expressed as:

(1)as a percentage of the par or stated value, or

(2)as a dollar amount per share.

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On October 25, 2012, Apple’s Board of Directors declared a cash dividend of $2.65 per share of the Company’s common stock. The dividend is payable on November 15, 2012, to shareholders of record as of the close of business on November 12, 2012.

A Dividend Announcement Example(Source: investor.apple.com)A Dividend Announcement Example(Source: investor.apple.com)

Excerpted from APPLE INC’s 10K Statement dated September 29, 2012:

Shareholders’ Equity: Sep 29, 2012

Common stock, no par value; 1,800,000,000 shares authorized; 939,208,000 shares issued and outstanding

16,422 million

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Oct 25, 2012 (Date of Declaration):

November 12, 2012 (Date of Record):

November 15 , 2012 (Date of Payment):

APPLE, Inc’s Dividend Entries:APPLE, Inc’s Dividend Entries:

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Dividends for Mr. Bill Gates?Dividends for Mr. Bill Gates?(Source: (Source:

http://www.microsoft.com/investor/proxy)http://www.microsoft.com/investor/proxy)

Microsoft Press Release:REDMOND, Wash. — Mar. 11, 2013 — Microsoft Corp. today announced that its board of directors declared a quarterly dividend

of $0.23 per share. The dividend is payable June 13, 2013 to shareholders of record on May 16, 2013.

INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS

William H. Gates III, (Chairman): 460,984,209 (5.47%)

So, Cash Dividends to be paid to Mr. Gates on June 13, 2013 (for one quarter only):

460,984,209 shares * $0.23 per share ~ $106 million

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Allocating Cash Dividends Between Preferred and Common Stock

Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends.

Cash DividendsCash Dividends

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Vs. Noncumulative

Cumulative

Dividends in arrears must be

paid before dividends may be paid on common

stock.

Dividends in arrears must be

paid before dividends may be paid on common

stock.

Undeclared dividends from

current and prior years do not have to be paid in

future years.

Undeclared dividends from

current and prior years do not have to be paid in

future years.

Most preferred stock is

cumulative.

Most preferred stock is

cumulative.

Cumulative vs Noncumulative Dividends


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Example: Consider the following partial Statement of Stockholders’ Equity

The Board of Directors did not declare or pay dividends in 2011. In 2012, the Board

of Directors declare and pay total cash dividends of $30,000



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If Preferred Stock is NonCumulative:

If Preferred Stock is Cumulative:

Preferred Dividends Common Dividend

Year 2011:

Year 2012:

Preferred Dividends Common Dividends

Year 2011:

Year 2012:



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Jordan Company has 1,000 shares of $50 par Jordan Company has 1,000 shares of $50 par value, 4.5% cumulative and nonparticipating value, 4.5% cumulative and nonparticipating preferred stock and 10,000 shares of $10 preferred stock and 10,000 shares of $10 par value common stock outstanding. The par value common stock outstanding. The company paid total cash dividends of $1,000 company paid total cash dividends of $1,000 in its first year of operation, and declared in its first year of operation, and declared total cash dividends of $5,000 in its second total cash dividends of $5,000 in its second year of operation. The cash dividend paid to year of operation. The cash dividend paid to common stockholders in the second year common stockholders in the second year will be: will be:

1.1. $1,500. $1,500. 2.2. $3,500. $3,500. 3.3. $2,250. $2,250. 4.4. $2,750. $2,750.

Knowledge Check Question 3Knowledge Check Question 3

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Stock Dividends

Reasons why corporations issue stock dividends:

1. To satisfy stockholders’ dividend expectations

without spending cash.

2. To increase the marketability of the corporation’s

stock.

3. To emphasize that a portion of stockholders’ equity

has been permanently reinvested in the business.

Stock DividendsStock Dividends

Results in decrease in retained earnings and increase in paid-in capital.

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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)


* This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares.

*

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Journal entry to declare a 10% stock dividend:

Journal entry when the stocks are issued:

Illustration: Lily Corp. has 50,000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share. Record the relevant journal entries.


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Journal entry to declare a 50% stock dividend:

Journal entry when the stocks are issued:

Illustration: Violet Corp. has 50,000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share. Record the relevant journal entries.


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Stockholders' equityPaid-in capital

Common stock 50,000$ Common stock dividends distributable 5,000

Total stockholders' equity 55,000$

Lily CorporationBalance Sheet (partial)

Stockholders’ Equity with Dividends Distributable


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Effects of Stock Dividends on Stockholders’ Equity:

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Southern Company’s Stockholders’ Equity section of its Balance Sheet on Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31, 2012 showed the following:December 31, 2012 showed the following:

Common Stock, $1 par value, 20,000 shares authorized and issued Common Stock, $1 par value, 20,000 shares authorized and issued $20,000$20,000

Paid-in-Capital in excess of par – Common Stock 80,000Paid-in-Capital in excess of par – Common Stock 80,000

Treasury Stock, common, 2,000 shares (at cost) (40,000)Treasury Stock, common, 2,000 shares (at cost) (40,000)

Paid-in-Capital, Treasury Stock 10,000Paid-in-Capital, Treasury Stock 10,000

Retained Earnings Retained Earnings 130,000130,000

Total Stockholders’ Equity Total Stockholders’ Equity $200,000$200,000

On January 1, 2013, Northern Company declared a 10% stock dividend, when On January 1, 2013, Northern Company declared a 10% stock dividend, when the market price per share was $30 per share. The resulting journal entry will:the market price per share was $30 per share. The resulting journal entry will:

1.1.Debit Stock Dividends by $60,000Debit Stock Dividends by $60,000

2.2.Credit Common Stock Dividends Distributable by $20,000Credit Common Stock Dividends Distributable by $20,000

3.3.Credit Paid-in-Capital, Common Stock by $52,200Credit Paid-in-Capital, Common Stock by $52,200

4.4.Credit Common Stock by $2,000Credit Common Stock by $2,000

Knowledge Check Question 4:Knowledge Check Question 4:

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Southern Company’s Stockholders’ Equity section of its Balance Sheet on Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31, 2012 showed the following:December 31, 2012 showed the following:

Common Stock, $1 par value, 20,000 shares authorized and issued Common Stock, $1 par value, 20,000 shares authorized and issued $20,000$20,000

Paid-in-Capital in excess of par – Common Stock 80,000Paid-in-Capital in excess of par – Common Stock 80,000

Treasury Stock, common, 2,000 shares (at cost) (40,000)Treasury Stock, common, 2,000 shares (at cost) (40,000)

Paid-in-Capital, Treasury Stock 10,000Paid-in-Capital, Treasury Stock 10,000

Retained Earnings Retained Earnings 130,000130,000

Total Stockholders’ Equity Total Stockholders’ Equity $200,000$200,000

On January 1, 2013, Northern Company declared a 30% stock dividend, when On January 1, 2013, Northern Company declared a 30% stock dividend, when the market price per share was $30 per share. The resulting journal entry will:the market price per share was $30 per share. The resulting journal entry will:

1.1.Debit Stock Dividends by $162,000Debit Stock Dividends by $162,000

2.2.Credit Common Stock Dividends Distributable by $5,400Credit Common Stock Dividends Distributable by $5,400

3.3.Credit Paid-in-Capital, Common Stock by $156,600Credit Paid-in-Capital, Common Stock by $156,600

4.4.Credit Common Stock by $6,000Credit Common Stock by $6,000

Knowledge Check Question 5:Knowledge Check Question 5:

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Stock Split

Reduces the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number of

shares.

Stock SplitsStock Splits

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Illustration: Assume Daisy Corporation splits its

50,000 shares of common stock on a 2-for-1 basis.

Results in a reduction of the par or stated value per share.

Stock SplitsStock Splits

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Microsoft's initial public offering (IPO) was March 13, 1986Split Payable Date Split Type Equivalent # of SharesFirst Sept. 18, 1987 2 for 1 1 x 2 = 2

Second April 12, 1990 2 for 1 2 x 2 = 4Third June 26, 1991 3 for 2 4 x 1.5 = 6

Fourth June 12, 1992 3 for 2 6 x 1.5 = 9Fifth May 20, 1994 2 for 1 9 x 2 = 18Sixth December 6, 1996 2 for 1 18 x 2 = 36

Seventh February 20, 1998 2 for 1 36 x 2 = 72

Eighth March 26, 1999 2 for 1 72 x 2 = 144Ninth February 18, 2003 2 for 1 144 x 2 = 288

Price of 1 share of Microsoft common stock on March 13, 1986 = $28.00

Price of 1 share of Microsoft common stock on April 10, 2013 = $30.12

This means, 1 share of Microsoft in 1986 = 288 shares today

So, an investment of $28 on March 13, 1986 = $8,672 on April 10, 2013

The Implication of Stock SplitsThe Implication of Stock Splits

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BERKSHIRE HATHAWAY, Inc. BERKSHIRE HATHAWAY, Inc. Class AClass A

(CEO: Mr. Warren Edward Buffet)(CEO: Mr. Warren Edward Buffet)

Stock price on October 14, 1976 = $67

Stock price on April 10, 2013 = $158,846

(Shares outstanding = 1.65 million)

What happens when a stock does NOT split?What happens when a stock does NOT split?

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End of Chapter 11End of Chapter 11

slide 13-1 corporations: organization, stock transactions, dividends,and retained earnings financial...

Documents

authorized stock slide

stock dividends

share of stock

treasury stock

market value of stock

total shares

stock transactions

shares respectively1