Chapter 9 PowerPoints on Stockholders' Equity

Download Chapter 9 PowerPoints on Stockholders' Equity

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For November 1 & 3

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<p>Chapter 9</p> <p>9-1</p> <p>Explain the Features of a Corporation</p> <p>9-2</p> <p>Separate Legal Entity Corporation distinct from owners; artificial person</p> <p>Continuous Life/Transfer of Ownership: Company continues to exist &amp; operate regardless of ownership changes Separation of Ownership &amp; Management: Stockholders elect Board of Directors who, in turn, appoint officers Government Regulation Corporate activities are monitored by government regulations9-3</p> <p>Limited Liability Stockholders are not personally liable for corporate debts</p> <p>Corporate Taxation Corporations are taxed on their earnings; dividends distributed to owners are also taxed</p> <p>Incorporators Organize the corporation Pay fees Sign charter File documents with the state Agree to bylaws</p> <p>9-4</p> <p>9-5</p> <p>Vote at stockholder meetings Receive dividends Receive share if corporation liquidates Maintain proportionate ownership Preemptive right9-6</p> <p>Paid-in capital Represents amounts contributed by stockholders Include stock accounts</p> <p>Retained earnings Amounts earned and kept by the corporation</p> <p>9-7</p> <p>Common Basic form of common stock Have rights of ownership Benefit most of company succeeds Risk most if company does not succeed</p> <p>Preferred Have preference in receiving dividends and assets in case of liquidation Hybrid between common stock and debt Rare for corporations to issue9-8</p> <p>Common stock</p> <p>Preferred stock</p> <p>Long-term debt</p> <p>Obligation to repay principal Dividends/interest</p> <p>No Dividends are not tax deductible Only after declaration</p> <p>No Dividends are not tax deductible Only after declaration</p> <p>Yes Interest expense is tax deductible t fixed rates and date</p> <p>Obligation to pay dividends/interest</p> <p>9-9</p> <p>Par value Arbitrary amount assigned to share of stock</p> <p>No-par Does not have a par value</p> <p>In most states, represents minimum price for shares Legal capital</p> <p>May have a stated value</p> <p>9-10</p> <p>Authorized Issued Outstanding Issue price Market price9-11</p> <p>Account for the Issuance of Stock</p> <p>9-12</p> <p>A company issues 100,000 shares of $5 par value common stock at par 100,000 x $5 The common stock account is always credited in the amount of the shares issued multiplied by par valueAccounts Cash Common stock Debit $500,000 $500,0009-13</p> <p>Date</p> <p>Credit</p> <p>A company issues 100,000 shares of $5 par value stock for $12 per share The amount above par is credited to Paid-in Capital in Excess of ParAccounts Cash (100,000 x $12 price) Common stock (100,000 x $5 par) Paid-in capital in excess of par Debit $1,200,000 $500,000 $700,0009-14</p> <p>Date</p> <p>Credit</p> <p>$1,200,000 - $500,000</p> <p>A company issues 100,000 shares of no par value common stock at a price of $5 per share 100,000 Substitute market price for par value in journal entryDate Accounts Cash Common stock Debit $500,000 $500,0009-15</p> <p>Credit</p> <p>Assets recorded at their fair values Common stock and paid-in capital credited accordingly Suppose a company purchased equipment valued at $800,000 by issuing 50,000 shares of its $5 par common stock 50,000 x $5Debit 8 , 25 , 55 ,9-16</p> <p>Date Accounts E uiCo</p> <p>Credit</p> <p>ent (Fair value of equipment)on stock (50,000 x $5 par)</p> <p>Paid-in ca ital in excess of ar</p> <p>$800,000 - $250,000</p> <p>S 9-7, p. 571</p> <p>Journalize all transactions. Compare balances in all accounts in both cases. Same or different?</p> <p>9-17</p> <p>Case A Issue stock and buy the assets in separate transactions:DEBIT CREDIT</p> <p>DATE ACCOUNT TITLES AND EXPLANATION</p> <p>Cash Common Stock (12,000 $20) Paid-in Capital in Excess of Par Issued stock Building Equipment Cash Purchased plant assets</p> <p>00,000 240,000 560,000</p> <p>550,000 250,000 00,0009-18</p> <p>Case B</p> <p>Issue stock to acquire the assets:DEBIT CREDIT</p> <p>DATE</p> <p>ACCOUNT TITLES AND EXPLANATION</p> <p>Building Equipment Common Stock (12,000 $20) Paid-in Capital in Excess of Par</p> <p>550,000 250,000 240,000 560,000</p> <p>Issued stock to acquire building and equipment</p> <p>9-19</p> <p>The balances in all accounts are the same:Building Equipment Common Stock (12,000 $20) Paid-in Capital in Excess of Par . $550,000 250,000 240,000 560,000</p> <p>9-20</p> <p>Follows the same pattern as common stock entries Preferred stock is credited for the shares issued</p> <p>multiplied by the par value A separate paid-in capital account is used if stock is issued above par</p> <p>9-21</p> <p>Authorized maximum number of shares company can issue as indicated in its charter Issued number of shares company has sold to shareholders Outstanding number of shares currently in shareholders possession Any difference between issued and outstanding is</p> <p>due to treasury stock9-22</p> <p>S 9- , p. 572</p> <p>Required: Prepare stockholders equity section of balance sheet. Net income has already been closed to RE.Note: All amounts have dollar amounts in thousands except for par value.9-23</p> <p>Thousands Stockholders equity: Common stock, $.01 par, 400 thousand shares issued Paid-in capital in excess of par Retained earnings Other stockholders equity Total stockholders equity .. .. .. $ 4 196 647 (22) $ 25</p> <p>9-24</p> <p>E9-20A, p. 575 transaction dataAuthorized to issue 120,000 shares of common stock and 7,000 shares of preferred stock. Had following stock issuance transactions during the year: Jan 19 Issued 12,000 shares of $2.00 par common stock for cash of $6.00 per share Apr 3 Issued 400 shares of $1.00 no-par preferred stock for $54,000 cash Apr 11 Received inventory valued at $16,000 and equipment with market value of $9,500 for 3,700 shares of the $2.00 par common stock.9-25</p> <p>E9-20A (req. 1)</p> <p>Journal - Jan 19</p> <p>9-26</p> <p>E9-20A (req. 1)</p> <p>Journal Apr 3</p> <p>9-27</p> <p>E9-20A (req. 1)</p> <p>Journal Apr 11</p> <p>9-28</p> <p>E9-20A (req. 2), p. 575Given: Ending RE balance is deficit of $43,000.</p> <p>9-29</p> <p>Describe How Treasury Stock Affects a Company</p> <p>9-30</p> <p>Company s own stock that it has issued and later reacquired Reasons: All authorized shares have been issued and shares</p> <p>are needed for employee stock purchase plans Company wants to purchase its shares at a low price and the re-issue them at a higher price Management want to avoid a takeover9-31</p> <p>Recorded at cost (not par value) Contra-equity account (debit balance) Reduces stockholders equity and assets If sold above cost, paid-in capital from treasury stock transactions is credited9-32</p> <p>Suppose a company purchased 10,000 shares of its own $1 par common stock for $200,00010,000 x $2</p> <p>Dat</p> <p>Acc</p> <p>ts</p> <p>Debit</p> <p>redit</p> <p>Treasury stock Cash</p> <p>$200,000 $200,000</p> <p>9-33</p> <p>Later, the company resells the treasury shares for $250,000 (above cost)Debit $250,000 $200,000 Credit</p> <p>Date Accounts Cash</p> <p>(given above) (original cost)</p> <p>Treasury stock</p> <p>Paid-in capital from treasury stock transactions ($250,000 - $200,000) $50,0009-34</p> <p>Balance = Net incomes net losses dividends declared Accumulated earnings the company keeps Not a reservoir of cash Normal credit balance Debit balance = Deficit Losses and dividends exceed earnings9-35</p> <p>Credit balance</p> <p>Lifetime earnings</p> <p>&gt; dividends If retained earnings decreases, net income &lt; dividends9-37</p> <p>S 9-10, p. 572A corporation reported the following SE section at Dec 31 (in millions):</p> <p>During the next year, the corporation purchased treasury stock at a cost of $29 million and resold treasury stock for $8 million (this stock had cost the corporation $2 million).9-38</p> <p>DATE ACCOUNT TITLES AND EXPLANATION</p> <p>DEBIT</p> <p>CREDIT</p> <p>Millions</p> <p>Treasury Stock Cash Cash Treasury Stock Transactions .. ...... .. ..</p> <p>29 29</p> <p>2 6</p> <p>Paid-in Capital from Treasury Stock</p> <p>Overall, stockholders equity decreased by $21 million ($29 M paid out minus $8 M received).9-39</p> <p>E9-24A, p. 576Transactions: Jan 17 Issued 2,200 shares of $2.50 par common stock at $10 per share May 23 Purchased 300 shares of treasury stock at $12 per share Jul 11 Sold 200 shares of treasury stock at $20 per share9-40</p> <p>E9-24A, p. 576 J/E on Jan 17</p> <p>9-41</p> <p>E9-24A, p. 576 J/E on May 23</p> <p>9-42</p> <p>E9-24A, p. 576 J/E on July 11</p> <p>9-43</p> <p>E9-24A, p. 576 Effect on Equity1/17 1/17 5/23 7/11 7/11 Net increase 5,500 16,500 (3,600) 2,400 1,600 22,400</p> <p>9-44</p> <p>Account for Dividends</p> <p>9-45</p> <p>Distribution to stockholders Three forms Cash Stock Noncash assets</p> <p>9-46</p> <p>Company must have both: Enough Retained Earnings to declare the dividend Enough Cash to pay the dividend</p> <p>Board of Directors has authority to declare the dividend</p> <p>9-47</p> <p>Date of Declaration Board of Directors announces dividend Corporation is now obligated to pay</p> <p>Date of record Stockholders who own shares on this date will</p> <p>receive dividend</p> <p>Date of payment Payment sent to shareholders on record9-48</p> <p>Date of Declaration</p> <p>Accounts</p> <p>Debit</p> <p>Credit</p> <p>Retained Earnings Dividends Payable</p> <p>$$$$$ $$$$$</p> <p>Equity Decreases; Liabilities Increase9-49</p> <p>Date of Record no entry Date of PaymentDebit Credit</p> <p>Accounts</p> <p>Dividends Payable Cash</p> <p>$$$$$ $$$$$</p> <p>Liabilities Decrease; Assets Decrease9-50</p> <p>We saw this slide earlier</p> <p>Retained EarningsBeginning Balance Dividends Declared Net Income Ending Balance</p> <p>If retained earnings increases, net income &gt; dividends If retained earnings decreases, net income &lt; dividends9-51</p> <p>Preferred shareholders receive dividends before common shareholders Dividend rate expressed as: Percent of par value Dollar amount per share</p> <p>Cumulative any unpaid dividends are carried forward until paid Dividends in arrears9-52</p> <p>Preferred cumulative any unpaid dividends are carried forward until paid Dividends in arrears</p> <p>Preferred noncumulative Preferred participating Preferred nonparticipating9-53</p> <p>A corporation has 10,000 shares of $100, % cumulative preferred stock outstanding It also has 0,000 shares of $1 par common stock outstanding The Board of Directors declares dividends as follows: Year 1 = $ 20,000 Year 2 = $150,0009-54</p> <p>Preferred Dividend : 10,000 shares x $100 par x % = $ 0,000Preferred Common $20,000 $</p> <p>Year 1 Year 2 Dividends in arrears Current year</p> <p>$60,000 $ 0,000 $140,000 $10,0009-55</p> <p>Access Garde, Inc., has 200,000 shares of 1.80 preferred stock outstanding in addition to its common stock. The 1.80 designation means that the preferred stockholders receive an annual dividend of $1.80 per share. In 2010, the corporation declares an annual dividend of $500,000. The allocation to preferred and common shareholders is:Preferred (200,000 shares x $1.80 per share) = $360,000 Common (Remainder $500,000 - $360,000) = 140,000 Total dividend $500,0009-56</p> <p>Req 1: How much in dividends must Access Garde declare each year before the common shareholders receive any cash dividends for the year? Answer: $360,000 (200,000 shares $1.80 per share)</p> <p>9-57</p> <p>Req 2: Suppose the company declares cash dividends of $400,000 for 2010. How much of the dividends goes to preferred? How much goes to common? Answer: Preferred: $360,000 (200,000 shares $1.80 per share) Common: $40,000 ($400,000 - $360,000)</p> <p>9-58</p> <p>Req 3: Is the companys preferred stock cumulative or noncumulative? How can you tell? Answer: The companys preferred stock are cumulative because they are not specifically designated as noncumulative.</p> <p>9-59</p> <p>Req 4: The company passed the preferred dividend in 2009 and 2010. In 2011, the company declares cash dividends of $1,500,000. How much of the dividends goes to preferred? How much goes to common? Answer: Preferred: $1,080,000 ($360,000 3) Common: $ 420,000 ($1,500,000 $1,080,000)</p> <p>9-60</p> <p>Proportional distribution of shares to stockholders Reasons corporations distribute stock dividends: Provide dividend, yet conserve cash Reduce market price of shares</p> <p>Decrease retained earnings and increase common stock Total equity is unchanged9-61</p> <p>Small Less than 25% of outstanding shares Recorded at market value</p> <p>Large Greater than 25% of outstanding shares Recorded at par value</p> <p>9-62</p> <p>E9-29A, p. 57As of Dec 31, 2010</p> <p>On May 11, 2011, market price of the common stock was $19 per share. HD distributed a 15% stock dividend on this date. Prepare journal entry &amp; Stockholders Equity section of balance sheet. 9-63</p> <p># of sharesAccounts</p> <p>stock dividend %</p> <p>Market priceDebit $ 55,000 $36,000 $ 19,000 Credit</p> <p>Retained Earnings (300,000 0.15 $19) Common stock(300,000 0.15 $0.80)</p> <p>Paid-in capital in excess of par</p> <p>Par value</p> <p>$855,</p> <p>- $36,</p> <p>9-64</p> <p>9-65</p> <p>Question 3: Why is total stockholders equity unchanged by the stock dividend?</p> <p>Answer: Company gave its shareholders no assets. Just transferred $855,000 from RE to Common Stock and Paid-in Capital in Excess of Par</p> <p>9-66</p> <p>Question 4: Suppose HD had a cash balance of $560,000 on May 12, 2011. What is the maximum amount of cash dividends HD can declare?</p> <p>Answer: HDs maximum cash dividends cannot exceed the balance in Cash account, $560,000.</p> <p>9-67</p> <p>Increase in shares coupled with a proportionate reduction in par value 2-for-1 split doubles the shares outstanding and</p> <p>halves the par value</p> <p>No entry made Description of stock changed on balance sheet</p> <p>9-68</p> <p>Assets Issue stock Purchase treasury stock Sell treasury stock Declare cash dividend Pay cash dividend Stock dividend Stock split Increase Decrease Increase No effect Decrease No effect No effect</p> <p>= Liabilities No effect No effect No effect Increase Decrease No effect No effect</p> <p>+</p> <p>Equity Increase Decrease Increase Decrease No effect No effect No effect</p> <p>9-69</p> <p>Use Stock Values in Decision Making</p> <p>9-70</p> <p>Market value Redemption value Liquidation value Book value</p> <p>Price one can buy or sell one share of stock for; varies with company performance and economy Set price company is required to pay to retire preferred stock Required payment to preferred shareholders if the company liquidates Common equity # of common shares outstanding9-71</p> <p>Compute Return on Assets and Return on Equity</p> <p>9-72</p> <p>Measures company s use of asset to earn income for financers of the business Creditors StockholdersNet income + Interest expense Average total assets</p> <p>9-73</p> <p>Shows relationship between net income and equity Computed only on common stockNet income Preferred dividends Average common stockholders equity</p> <p>Should be higher than return on assets Stockholders risk more than bondholders9-74</p> <p>S 9-17, p. 574 (compute ROA &amp; ROE)</p> <p>9-75</p> <p>Net ROA =</p> <p>Interest = 120 + 31 (10,624 + 9,515) / 2 151 10,070</p> <p>income + expense Average total assets</p> <p>=</p> <p>=</p> <p>1.5%</p> <p>Note: 10% is considered good in most industries. Therefore, Godhi s 1.5% return on assets is very weak.</p> <p>9-76</p> <p>Net ROE =</p> <p>Preferred 120 0 = (3,212 + 2, 7 ) / 2</p> <p>income dividends Average common stockholders equity</p> <p>=</p> <p>120 3,045</p> <p>=</p> <p>3.9%</p> <p>Note: 15% is considered good in most industries, so Godhi s return on equity is very weak.</p> <p>9-77</p> <p>Report Equity Transactions on the Statement of Cash Flows</p> <p>9-78</p> <p>All equity transactions are financing activities Financing inflow Issuing stock</p> <p>Financing outflow Purchase of treasury stock Payment of dividends</p> <p>9-79</p> <p>S 9-19, p. 574During 2010, Dwyer...</p>