Financial accounting tools for business decision making 9 KIeso ppt ch11

Stock Issue Considerations 3 of 5Par and No-Par Value Stocks • Par value stock has been assigned a value per share • Years ago, par value determined legal capital per share that a compa

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Financial Accounting: Tools for Business

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Chapter Outline:

Learning Objectives

LO 1 Discuss the major characteristics of a corporation

LO 2 Explain how to account for the issuance of

common, preferred, and treasury stock

LO 3 Explain how to account for cash dividends, stock

dividends, and stock splits

LO 4 Discuss how stockholders’ equity is reported and

analyzed

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Learning Objective 1

Discuss the Major Characteristics of a Corporation

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Corporate Form of Organization

An entity separate and distinct from its owners.

LO1

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Characteristics of a Corporation (1 of 2)

Characteristics that distinguish corporations from

proprietorships and partnerships

Advantages

• Separate legal existence

• Limited liability of stockholders

• Transferable ownership rights

• Ability to acquire capital

• Continuous life

• Corporation management

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Characteristics of a Corporation (2 of 2)

Characteristics that distinguish corporations from

proprietorships and partnerships

LO1

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Corporation Organization Chart

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Other Forms of Business Organization

• Limited partnerships

• Limited liability partnerships (LLPs)

• Limited liability companies (LLCs)

• S Corporations

 No double taxation

 Cannot have more than 100 shareholders

LO1

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Forming a Corporation

• Initial steps of forming

• File application with Secretary of State

• State grants charter

• Corporation develops by-laws

• Companies generally incorporate in a state whose laws

are favorable to the corporate form of business

• Corporations engaged in interstate commerce must

obtain a license from each state in which they do

business

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Stockholder Rights (1 of 3)

1 Vote in election of

board of directors and

on actions that require

LO1

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Stockholder Rights (2 of 3)

3 Keep the same percentage ownership when new

shares of stock are issued (preemptive right)

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LO1

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Stock Certificate

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Stock Issue Considerations (1 of 5)

Authorized Stock

• Charter indicates the number of shares of stock that a

corporation is authorized to sell

• Number of authorized shares is often reported in

stockholders’ equity section

LO1

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Par and No-Par Value Stocks

• Par value stock has been assigned a value per share

• Years ago, par value determined legal capital per

share that a company must retain in business for

protection of corporate creditors

• Many states do not require a par value

• No-par value stock is fairly common

• In many states, the board of directors assigns a stated

value to no-par shares

LO1

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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

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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

LO1

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Do It! 1a: Corporate Organization

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. False

2 It is relatively easy for a corporation to obtain capital

3 The separation of ownership and management is an

advantage of the corporate form of business. False

4 The journal entry to record the authorization of capital

stock includes a credit to the appropriate capital stock

account.

False

5 All states require a par value per share for capital stock. False

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Paid-in capital is the total amount of cash and other

assets paid in to the corporation by stockholders in

exchange for capital stock

Paid-in Capital

Paid-in Capital in Excess of Par-Common

Account

LO1

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Retained earnings is net income that a corporation

retains for future use

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Illustration: Net income is recorded in Retained Earnings by a

closing entry that debits Income Summary and credits

Retained Earnings Assuming that net income for Delta

Robotics in its first year of operations is $130,000, the closing entry is

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If Delta Robotics has a balance of $800,000 in common stock and $130,000 in retained earnings at the end of its first year, its stockholders’ equity section is as follows.

Delta Robotics Balance Sheet (partial)

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Comparison of accounts reported on the balance sheet as owners’ equity and stockholders’ equity

Capital Comparison

LO1

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Illustration: At the end of its first year of operation, Doral

Corporation has $750,000 of common stock and net income of

$122,000

(a) Prepare the closing entry for net income.

DO IT! 1b: Corporate Capital

(b) Prepare the stockholders’ equity section at year-end

Dec 31 Income Summary 122,000

Retained Earnings 122,000

Stockholders’ equity

Common Stock $750,000 Retained earnings 122,000 Total stockholders’ equity $872,000

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Explain How to Account for the

Issuance of Common, Preferred, and

Treasury Stock

LO2

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Primary Objectives

a Identify the specific sources of paid-in capital

b Maintain the distinction between paid-in capital and

retained earnings

c Other than consideration received, the issuance of

common stock affects only paid-in capital accounts

Accounting for Common Stock

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Illustration: Hydro-Slide, Inc issues 1,000 shares of $1 par

value common stock Prepare Hydro-Slide’s journal entry if

(a) 1,000 share are issued for $1 per share

Issuing Par Value Common Stock for Cash

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Hydro-Slide, Inc.

Balance Sheet (partial)

Issuing Par Value Common Stock for Cash

(2 of 2)

Stockholders' equity

Paid-in capital

Paid-in capital in excess of par value 4,000

Total stockholders' equity $33,000

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Illustration: Hydro-Slide, Inc issues $5 of no-par value stock

with a stated value of $1 and the company issues 5,000 shares

at $8 per share for cash.

Issuing Stated Value Common Stock

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Illustration: Hydro-Slide, Inc issues no-par stock that has no

stated value The company issues 5,000 shares at $8 per share for cash.

Issuing No-Par Value Common Stock for Cash

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Typically, preferred stockholders have a priority as to

Distributions of earnings (dividends)

Assets in event of liquidation

Generally do not have voting rights

Accounting for preferred stock at issuance is similar to

that for common stock

LO2

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Illustration: Stine Corporation issues 10,000 shares of $10 par

value preferred stock for $12 cash per share.

Journal entry to record the issuance

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

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Illustration: Cayman Corporation begins operations on March

1 by issuing 100,000 shares of $1 par value common stock for cash at $12 per share

Journalize the issuance of the common shares

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Illustration: On March 28, Cayman issues 1,500 shares of $10

par value preferred stock for cash at $30 per share

Journalize the issuance of preferred shares.

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Paid-in Capital in Excess of Par-Common

Account

Paid-in Capital in Excess of Par-Preferred

Account

LO2

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Treasury stock is a corporation’s own stock that it has

reacquired from shareholders but not retired

Corporations acquire treasury stock for various reasons

a To reissue the shares to officers and employees

under bonus and stock compensation plans

b To enhance the stock’s market value

c To have additional shares available for use in the

acquisition of other companies

d To increase earnings per share

Treasury Stock

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Companies generally use cost method

Debit Treasury Stock for price paid to reacquire sharesConsidered to be issued but not outstanding shares

a Number of issued shares does not change

Reduces stockholders’ equity

Accounting for Treasury Stock

LO2

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Illustration: On February 1, 2022, Mead acquires 4,000 shares of its

stock at $8 per share

Stockholders’ equity

Paid-in capital

Common stock, $5 par value, 400,000 shares

authorized, 100,000 shares issued and outstanding $500,000

Mead, Inc.

Purchase of Treasury Stock

Treasury Stock (4,000 × $8) 32,000

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Stockholders’ equity

Paid-in capital

Common stock, $5 par value, 400,000 shares

authorized, 100,000 shares issued, 96,000

Total paid-in capital and retained earnings 700,000

Less: Treasury stock (4,000 shares) 32,000

Mead, Inc.

Treasury Stock on the Balance Sheet

Both the number of shares issued (100,000) and the number of

shares held as treasury (4,000) are disclosed.

LO2

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Treasury Stock (1 of 2)

Review Question

Treasury stock may be repurchased

a to reissue the shares to officers and employees

b to signal to the stock market that management

believes the stock is underpriced

c to have additional shares available for use in the

d More than one of the above

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Treasury Stock (2 of 2)

Review Question

Treasury stock may be repurchased

a to reissue the shares to officers and employees

b to signal to the stock market that management

believes the stock is underpriced

c to have additional shares available for use in the

d more than one of the above

LO2

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Santa Anita Inc purchases 3,000 shares of its $50 par value common stock for $180,000 cash on July 1 It expects to hold the shares in the treasury until resold

Journalize the treasury stock transaction.

DO IT! 2b: Issuance of Stock

July 1 Treasury Stock 180,000

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Explain How to Account for Cash

Dividends, Stock Dividends, and Stock Splits

LO3

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Dividends are a distribution of cash or stock to

stockholders on a pro rata (proportional to ownership)

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For a corporation to pay a cash dividend, it must have

a Sufficient retained earnings

Payment of cash dividends from retained earnings is legal in all states

b Adequate cash

c A declaration of dividends by Board of Directors

Cash Dividend Requirements

LO3

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Three dividend dates

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Illustration: On December 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

January 20 to shareholders of record on December 22.

Recording Cash Dividends

Dec 1 Cash Dividends 50,000

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Cash Dividends (1 of 2)

Review Question

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

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Cash Dividends (2 of 2)

Review Question

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

LO3

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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

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Illustration: Scientific Leasing has 5,000 shares of 7%, $100

par value, cumulative preferred stock outstanding Each $100 share pays a $7 dividend (.07 × $100) The annual dividend is

$35,000 (5,000 × $7 per share) If dividends are two years in arrears, preferred stockholders are entitled to receive the

following dividends.

Cumulative Dividend Feature

LO3

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Cumulative Dividend (1 of 2)

Review Question

U-Bet Corporation has 10,000 shares of 8%, $100 par

value, cumulative preferred stock outstanding at

December 31, 2022 No dividends were declared in 2020

or 2021 If U-Bet wants to pay $375,000 of dividends in

2022, common stockholders will receive

a $0

b $295,000

c $215,000

d $135,000

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Cumulative Dividend (2 of 2)

Review Question

U-Bet Corporation has 10,000 shares of 8%, $100 par

value, cumulative preferred stock outstanding at

December 31, 2022 No dividends were declared in 2020

or 2021 If U-Bet wants to pay $375,000 of dividends in

2022, common stockholders will receive

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MasterMind Corporation has 2,000 shares of 6%, $100 par value

preferred stock outstanding at December 31, 2022 At December

31, 2022, the company declared a $60,000 cash dividend

Determine the dividend paid to preferred stockholders and

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common stockholders if

2 Preferred stock is noncumulative, and the company did not pay

a dividend in each of the two previous years.

Past unpaid dividends do not have to be paid

Preferred stockholders = $12,000 (2,000 x 06 x $100)

Common stockholders = $48,000 ($60,000 − $12,000)

LO3

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common stockholders if

3 Preferred stock is cumulative, and the company did not pay a

dividend in each of the two previous years.

Past unpaid dividends do not have to be paid

Preferred stockholders = $36,000 (3 × 2,000 × 06 × $100)

Common stockholders = $24,000 ($60,000 − $36,000)

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A pro rata (proportional to ownership) distribution of the corporation’s own stock to stockholders

Reasons why corporations issue stock dividends

a Satisfy stockholders’ dividend expectations without

spending cash

b Increase marketability of corporation’s stock

c Emphasize a portion of stockholders’ equity has

been permanently reinvested in business

Reasons for Stock Dividends

LO3

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a Small stock dividend

Less than 20–25% of corporation’s issued

stock Recommendation is to record at the fair market value of the stock

Based on assumption that a small stock dividend will have little effect on market price of outstanding shares

b Large stock dividend

Greater than 20–25% of issued stock

Small and Large Stock Dividends

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