Download - Stockholders’ Equity
Chapter 15-1
Stockholders’ Equity
Chapter 15
Intermediate Accounting12th Edition
Kieso, Weygandt, and Warfield
Prepared by Coby Harmon, University of California, Santa Barbara
Chapter 15-2
Contributed Capital
Retained EarningsAccount
Additional Paid-in CapitalAccount
Less:Treasury Stock
Account
Two Primary Sources of
Equity
Corporate Capital
LO 2 Identify the key components of stockholders’ equity.
Common StockAccount
Preferred StockAccount
Assets – Liabilities = Equity
Chapter 15-3
State Corporate Law
The Corporate Form of Organization
LO 1 Discuss the characteristics of the corporate form of organization.
Corporations must submit a Corporate Charter to the desired State of incorporation. A Corporate Charter includes 1) Articles of Incorporation and 2) ByLaws
General Motors - incorporated in Delaware.U.S. Steel - incorporated in New Jersey.
Chapter 15-4
The Corporate Form of Organization
LO 1 Discuss the characteristics of the corporate form of organization.
Common Stock - represent owners’ shares or interests in the business. Shareholders bear ultimate risk of loss & benefits. Common Stockholders’ rights include:
1. To share proportionately in profits and losses.2. To share proportionately in management (the
right to vote on major issues).3. To share proportionately in assets upon
liquidation.4. To share proportionately in any new issues of
stock of the same class—called the preemptive right.
Chapter 15-5
The Corporate Form of Organization
LO 1 Discuss the characteristics of the corporate form of organization.
Par Value - Nominal value per share of Common Stock established in the Corporate Charter - *No relation to market value
• The initial sale of stock cannot be below Par Value. The secondary market, however, can sell for whatever the market demands.
• Par value was originally established to protect creditors. Owners could not withdraw ownership interests below Par Value of stock “Legal Capital”.
• Today many states permit No-Par Stock. State law will establish the requirements.
Chapter 15-6
Ex) Assume a Corporation issues 100,000 shares of $10 par value Common Stock for $32 per share, prepare the necessary journal entry.
DR CR Cash 3,200,000
Common Stock 1,000,000Paid In Capital – CS 2,200,000
The Corporate Form of Organization
Chapter 15-7
Ex) Assume a Corporation issues 100,000 shares of No Par value Common Stock for $32 per share, prepare the necessary journal entry.
DR CR Cash 3,200,000
Common Stock 3,200,000
The Corporate Form of Organization
Chapter 15-8
The Corporate Form of Organization
LO 1 Discuss the characteristics of the corporate form of organization.
Authorized Shares – Maximum number of shares to be issued per the charter. Selling more than Authorized amount requires a vote by the Board of Directors.
Unissued Shares – Total number of shares that have never been issued.
Issued Shares – Total number of shares that have been Issued [Outstanding Shares and Treasury Shares].
Outstanding Shares – Total shares of stock owned by stockholders on a given date.
Treasury Shares – Stock that has once been issued and since purchased back by the company. Treasury stock is considered issued stock that is currently inactive.
Chapter 15-9
The Corporate Form of Organization
LO 1 Discuss the characteristics of the corporate form of organization.
Authorized Shares = Issued Shares + Unissued Shares
Outstanding + Treasury Shares
Chapter 15-10
Treasury Shares
LO 4 Describe the accounting for treasury stock.
Treasury stock is considered inactive Issued Stock The Treasury stock account is a Contra Equity account reducing the overall value of equity
Corporate Capital
Equity: Common Stock $100,000 ($1 Par 100,000 shares issued 98,000 shares OS) Additional PIC 264,000 Retained Earnings 411,000 Treasury Stock (2,000 shares) (75,000)
Total Equity: $700,000
Chapter 15-11
Treasury Shares (Reacquisition of Shares)
LO 4 Describe the accounting for treasury stock.
Corporate Capital
Corporations purchase their outstanding stock:
• To improve the EPS and ROE ratios• To have shares available to distribute through Employee Benefit Plans
• To maintain control of ownership in the company [perhaps to prevent an unwanted takeover]
• To make a market in their stock
Chapter 15-12
Common Stock $100,000 [$5 par value, 500,000 shares authorized] [? shares issued, ? shares OS]
Paid in Capital - Common Stock $400,000
Retained Earnings $500,000
Treasury Stock [2,000 shares] ($36,000)
Total Stockholders' Equity $964,000
Corporate Capital
How many Common Stock shares are issued?$100,000/$5 p/s = 20,000 shares issued
How many Common Stock shares are outstanding?20,000 issued – 2,000 Treasury = 18,000 shares outstanding
What is the average market price per share of Issued Common Stock?($100,000 + $400,000)/20,000 = $25 p/s
Chapter 15-13
Preferred Stock
A special class of stock with specific rights over Common Stock
Preferred Stock has some characteristics of DebtAnd some characteristics of Equity
LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Chapter 15-14
Preferred Stock1. Has no voting Rights2. Raises equity funds without diluting
Common stockholders’ voting control3. Has a fixed dividend rate which takes
priority over Common stockholders when dividends are declared
4. Has priority over Common stockholders in case of asset liquidation.
LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Chapter 15-15
Example of Fixed Dividend Rate on Preferred Stock:
If a company has $500,000 of 6% Preferred Stock outstanding, the Fixed Dividend Rate is:
$500,000 * .06 = $30,000 per year
Preferred Stock
Chapter 15-16
Cumulative Participating Convertible Callable Redeemable
LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Specific Features of Preferred Stock
A corporation may attach whatever preferences or
restrictions, as long as it does not violate its
state incorporation law.Accounting for preferred stock at issuance is similar to that for common stock.
Chapter 15-17
Cumulative Preferred Stock - requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders.
Participating Preferred Stock – shares ratably with the common stockholders in any profit distribution beyond the prescribed preferred stock rate. That is, 5 percent preferred stock, if fully participating, will receive not only its 5 percent return, but also dividends at the same rates as those paid to common stockholders if paying amounts in excess of 5 percent of par or stated value to common stockholders.
LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Chapter 15-18
Callable Preferred Stock - permits the corporation at its option to call or redeem the outstanding preferred shares at specified future dates and at stipulated prices.
Redeemable Preferred Stock – has a mandatory redemption period or a redemption feature that the issuer cannot control. This type of Preferred Stock is more like debt than equity because it is a legal obligation to pay by a deadline date. FASB now requires this type of Preferred Stock to be reported as a liability.
LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Convertible Preferred Stock – allows stockholders, at their option, to exchange preferred shares for common stock at a predetermined ratio.
Chapter 15-19
1. Cash dividends.2. Property
dividends.
LO 7 Identify the various forms of dividend distributions.
Types of Dividends
3. Liquidating dividends.
4. Stock dividends.
Chapter 15-20
Cash DividendsBoard of directors vote on the declaration of cash dividends.A declared cash dividend is a liability.Companies do not declare or pay cash dividends on Treasury Stock.
LO 7 Identify the various forms of dividend distributions.
Types of Dividends
Chapter 15-21
Property DividendsDividends payable in assets other than cash.Before distribution, the company must restate at fair value the property it will distribute, recognizing any gain or loss.
LO 7 Identify the various forms of dividend distributions.
Types of Dividends
Chapter 15-22
Liquidating DividendsDividends that reduce stockholders’ Additional Paid In CapitalIf a company distributes a dividend in EXCESS of earnings, it will reduce Contributed Capital of stockholders [PIC account]
LO 7 Identify the various forms of dividend distributions.
Types of Dividends
Chapter 15-23
Stock DividendsIssuance of own stock to stockholders on a pro rata basis, without receiving any consideration.Stock dividends are the redistribution of Equity between Retained Earnings and Contributed CapitalWhen a stock dividend is less than 25 percent of the common shares outstanding, a company transfers the fair market value of the stock from retained earnings (small stock dividend).
LO 8 Explain the accounting for small and large stock dividends, and for stock splits.
Types of Dividends
Chapter 15-24
Stock DividendsA stock dividend of more than 25 percent of the number of shares previously outstanding is called a large stock dividend.With a large stock dividend, transfer from retained earnings to capital stock the par value of the stock issued.
Types of Dividends
LO 8 Explain the accounting for small and large stock dividends, and for stock splits.
Chapter 15-25
Stock SplitsReduces the market value of shares proportionally.No entry recorded for a stock split.Decreases par value and increases number of shares outstanding proportionally.
Types of Dividends
LO 8 Explain the accounting for small and large stock dividends, and for stock splits.
Chapter 15-26
US GAAP IFRS Common Stock Share Capital
Paid-In-Capital In Excess of Par/ Share PremiumAdditional Paid In Capital
Preferred Stock Preference Shares
Retained Earnings/ Retained Earnings/ Retained ProfitsReinvested Earnings Accumulated Profit and Loss
Accumulated Other Comprehensive General Reserve & Other Reserve
Income Accounts
TerminologyUS GAAP vs IFRS
