stockholders’ equity presentations for chapter 12 by glenn owen

Stockholders’ EquityStockholders’ Equity

Presentations for Chapter 12 by Glenn Owen

Key PointsKey Points The three forms of financing and their relative importance to major U.S.

Corporations. Distinctions between debt and equity. Economic consequences associated with the methods used to account for

stockholders’ equity. Rights associated with preferred and common stock and the methods used to

account for stock issuances. Distinctions among the market value, book value, and par (stated) value of a share

of common stock. Treasury stock. Cash dividends and dividend strategies

followed by corporations. Stock dividends and stock splits.

Liabilities as a Percentage Liabilities as a Percentage of Total Assetsof Total Assets

Company (Industry)

Liabilities /Total Assets

General Electric (Manufacturing) .88

Chevron Oil (Oil drilling and refining) .52

Super Value (Grocery) .73

Tommy Hilfiger (Clothing) .46

Yahoo (Internet search engine) .16

Cisco (Internet systems) .19

SBC Communications (Telcom services) .69

Wendy’s (Restaurant services) .43

Bank of America (Banking services) .93

Merrill Lynch (Investment services) .95

Contributed Capital as a Percentage Contributed Capital as a Percentage of Total Assetsof Total Assets

Company (Industry)

Capital /Total Assets

General Electric (Manufacturing) -.02

Chevron Oil (Oil drilling and refining) -.03

Super Value (Grocery) -.05








Retained Earnings as a Percentage Retained Earnings as a Percentage of Total Assetsof Total Assets

Company (Industry)

Retained Earnings /Total Assets

General Electric (Manufacturing) .14

Chevron Oil (Oil drilling and refining) .51

Super Value (Grocery) .28








Debt vs. EquityDebt vs. EquityDebtDebt EquityEquity

Formal legal contract No legal contract

Fixed maturity date No fixed maturity date

Fixed periodic payments Discretionary dividends

Security in case of default Residual asset interest

No voice in management Vote - board of directors

Interest expense Dividends reduce RE

Distinctions Between Distinctions Between Debt and EquityDebt and Equity

Interested Party Debt Equity

Investors / Creditors

Lower investment risk Higher investment risk

Management

Fixed cash receipts Variable cash receipts

Contractual future cash payments

Dividends are discretionary

Effects on credit rating

Effects of dilution/ takeover

Interest is tax deductible

Dividends are not tax deductible

Accountants/Auditors

Liabilities section of the balance sheet

Stockholders’ equity of the balance sheet

Income statement effects from debt

No income statement effects from equity

Accounting for Accounting for Stockholders’ EquityStockholders’ Equity

Preferred stock Common stock Treasury stock Stock options Dividends

Preferred StockPreferred Stock Authorized, issued, and outstanding preferred

shares Preferred dividend payments Cumulative preferred stock Participating preferred stock Debt or equity?

Common StockCommon Stock Market value Book value Par value Accounting for issuances

Treasury StockTreasury Stock Why companies purchase treasury stock Purchasing treasury stock Reissuing treasury stock for more than acquisition

cost Reissuing treasury stock for less than acquisition

cost The magnitude of the treasury

stock account

Stock OptionsStock Options Stock options as a means of compensation Methods used to account for stock options Are stock options compensation expense?

DividendsDividends Dividend strategy Accounting for cash dividends Stock splits Stock dividends Retained earnings appropriations

Review Problem - 2001Review Problem - 2001

The company issued 1,000 shares of $1 par value stock for $70 per share.

Cash (+A) 70,000Common Stock (+SE) 1,000Additional Paid-In Capital (+SE) 69,000

Issued common stock.

Cash (+A) 70,000Common Stock (+SE) 1,000Additional Paid-In Capital (+SE) 69,000

Issued common stock.

The company issued 500 shares of no par value, $5, cumulative preferred stock for $50 per share.

Cash (+A) 25,000Preferred Stock (+SE) 25,000

Issued preferred stock.

Cash (+A) 25,000Preferred Stock (+SE) 25,000

Issued preferred stock.


Net income during the year = $2,000 Dividends = $0

No entryNo entry


Pike Place CorporationBalance SheetDecember 31, 2001

Stockholders’ EquityPreferred stock (500 sh., no par value) $25,000Common stock (1,000 sh. @ $1 par value) 1,000Additional paid-in capital (C/S) 69,000Retained earnings 2,000Total stockholders’ equity $97,000


Note: Dividends in arrears on cumulative preferred stock = $2,500 (500 sh. x $5/sh.)

The company purchased 200 treasury (common) shares for $60 per share.

Treasury Stock (-SE) 12,000Cash (-A)12,000

Acquired treasury stock.

Treasury Stock (-SE) 12,000Cash (-A)12,000

Acquired treasury stock.


Net income for the year = $20,000.Dividends = $6,600:

$5,000 for preferred shareholders [$2,500 dividends in arrears and $2,500 (500 sh. x $5/sh.)], and $1,600 for the common stockholders (800 outstanding sh. x $2/sh.). The dividends were declared and paid.

Preferred Dividends (-SE) 5,000Common Dividends (-SE) 1,600

Dividends Payable (+L) 6,600Declared dividends.

Dividends Payable (-L) 6,600Cash (-A) 6,600

Paid dividends.


Dividends Payable (+L) 6,600Declared dividends.

Dividends Payable (-L) 6,600Cash (-A) 6,600

Paid dividends.



Stockholders’ EquityPreferred stock (500 sh, no par value) $25,000Common stock (1,000 sh. @ $1 par value) 1,000Additional paid-in capital (C/S) 69,000Retained earnings 15,400Less: Treasury stock (200 sh. x $60/sh.) (12,000)

Total stockholders’ equity $98,400

* $2,000 + $20,000 - $6,600

*


The company reissued 100 treasury shares for $65 each.

Cash (+A) 6,500Treasury Stock (+SE) 6,000Additional Paid-In Capital, T/S (+SE) 500

Reissued treasury stock.

Cash (+A) 6,500Treasury Stock (+SE) 6,000Additional Paid-In Capital, T/S (+SE) 500

Reissued treasury stock.


The company reissued 50 treasury shares for $40 each.

Cash (+A) 2,000Additional Paid-In Capital, T/S (-SE) 500Retained Earnings (-SE) 500

Treasury Stock (+SE) 3,000Reissued treasury stock.

Cash (+A) 2,000Additional Paid-In Capital, T/S (-SE) 500Retained Earnings (-SE) 500

Treasury Stock (+SE) 3,000Reissued treasury stock.


The company declared a 10 percent stock dividend. There were 950 common shares outstanding at the time of the dividend, each with a fair value of $5.

Stock Dividend (-SE) 475Common Stock (+SE) 95Additional Paid-In Capital (+SE) 380

Declared stock dividend.

Stock Dividend (-SE) 475Common Stock (+SE) 95Additional Paid-In Capital (+SE) 380

Declared stock dividend.


Net income for the year = $35,000Dividends = $4,690: $2,500 to preferred shareholders

and $2,190 to common shareholders (1,095 sh. outstanding x $2/sh.).

The dividends were declared but unpaid at year-end.


Dividends Payable(+L) 4,690Declared dividends.


Dividends Payable(+L) 4,690Declared dividends.



Stockholders’ EquityPreferred stock (500 sh. no par value) $ 25,000 Common stock (1,095 sh. @ $1 par value) 1,095


*

* $1,000 + $95


Stockholders’ EquityPreferred stock (500 sh. no par value) $ 25,000 Common stock (1,095 sh. @ $1 par value) 1,095 Additional paid-in capital 69,380


*

* $69,000 + $500 - $500 + $380


Stockholders’ EquityPreferred stock (500 sh. no par value) $ 25,000 Common stock (1,095 sh. @ $1 par value) 1,095 Additional paid-in capital 69,380 Retained earnings:

Restricted $30,000Unrestricted 14,735 44,735


*

$15,400 - $500 - $475 + $35,000 - $4,690


Stockholders’ EquityPreferred stock (500 sh. no par value) $ 25,000 Common stock (1,095 sh. @ $1 par value) 1,095 Additional paid-in capital 69,380 Retained earnings:

Restricted $30,000Unrestricted 14,735 44,735

Less: Treasury stock (3,000)Total stockholders’ equity $137,210

* 50 sh. x $60/sh. or $12,000 - $6,000 - $3,000

*


C O P Y R I G H T

C o p y r i g h t © 2 0 0 3 , J o h n W i l e y & S o n s , I n c . A l l r i g h t s r e s e r v e d .R e p r o d u c t i o n o r t r a n s l a t i o n o f t h i s w o r k b e y o n d t h a t p e r m i t t e d i n S e c t i o n 1 1 7 o f t h e 1 9 7 6 U n i t e d S t a t e s C o p y r i g h t A c t w i t h o u t t h ee x p r e s s w r i t t e n p e r m i s s i o n o f t h e c o p y r i g h t o w n e r i s u n l a w f u l . R e q u e s t f o r f u r t h e r i n f o r m a t i o n s h o u l d b e a d d r e s s e d t o t h e P e r m i s s i o n s D e p a r t m e n t , J o h n W i l e y & S o n s , I n c . T h e p u r c h a s e r m a y m a k e b a c k - u p c o p i e s f o r h i s / h e r o w n u s e o n l y a n d n o t f o r d i s t r i b u t i o n o r r e s a l e . T h e P u b l i s h e r a s s u m e s n o r e s p o n s i b i l i t yf o r e r r o r s , o m i s s i o n s , o r d a m a g e s , c a u s e d b y t h e u s e o f t h e s e p r o g r a m s o r f r o m t h e u s e o f t h e i n f o r m a t i o n c o n t a i n e d h e r e i n .

stockholders’ equity presentations for chapter 12 by glenn owen

Documents

stock options stock

stock issuances

preferred stock debt

preferred stock se25

treasury stock account

par value stock

share of common stock

common stock se1