1. Identify the key components of
stockholders’ equity.
2. Explain the accounting for issuing shares of
stock.
3. Describe the accounting for treasury stock.
4. Explain the accounting for preferred stock.
5. Identify the various forms of dividend
distributions.
6. Explain the accounting for small and large
stock dividends, and for stock splits.
Learning Objectives
Issuance of
stock
Reacquisition
of shares
The
Corporate
Form
Corporate
Capital
Preferred
Stock
Dividend
Policy
Capital
stock or
share
system
Variety of
ownership
interests
Features
Accounting
for
preferred
stock
dividend
distributions
Types of
dividends
Stock split
Stockholders’ Equity
Three primary forms of business organization
The Corporate Form of Organization
Proprietorship Partnership Corporation
Special characteristics of the corporate form:
1. Influence of state corporate law.
2. Use of capital stock or share system.
3. Development of a variety of ownership
interests.
State Corporate Law
Corporation must submit articles of
incorporation to the state in which
incorporation is desired.
General Motors-incorporated in
Delaware.
. Steel-incorporated in New
Jersey.
Capital Stock or Share System
In the absence of restrictive provisions, each
share carries the following rights:
share proportionately in profits and
losses.
share proportionately in management
(the right to vote for directors).
share proportionately in assets upon
liquidation.
share proportionately in any new issues
of stock of the same class—called the
preemptive right.
Variety of Ownership Interests
Common stock represents basic ownership
interest.
Bears ultimate risks of loss.
Receives the benefits of success.
Not guaranteed dividends nor assets upon
dissolution.
Preferred stock is created by contract,
when stockholders’ sacrifice certain rights in
return for other rights or privileges, usually
dividend preference.
Contributed Contributed
CapitalCapital
Retained EarningsRetained Earnings
AccountAccount
Additional PaidAdditional Paid
-in Capital-in Capital
AccountAccount
Less:Less:
Treasury StockTreasury Stock
Account
Two Primary
Sources of
Equity
Corporate Capital
Common StockCommon Stock
AccountAccount
Preferred StockPreferred Stock
AccountAccount
Assets – Assets –
Liabilities =Liabilities =
EquityEquity
Issuance of Stock
Accounting problems:
1. Par value stock.
2. No-par stock.
3. Stock issued with other securities.
4. Stock issued in noncash transactions.
5. Costs of issuing stock.
Shares authorized - Shares sold - Shares
issued
Par Value Stock
Corporations maintain accounts for:
Preferred Stock or Common Stock.
Additional Paid-in Capital
BE15-1: Lost Vikings Corporation issued 300
shares of $10 par value common stock for
$4,100. Prepare Lost Vikings’ journal entry.
Cash 4,100
Common stock (300 x $10) 3,000
Additional paid-in capital 1,100
No-Par Stock
Reasons for issuance:
Avoids contingent liability.
Avoids confusion over recording par
value versus fair market value.
Some states require that no-par stock
have a stated value.
BE15-2: Shinobi Corporation issued 600
shares of no-par common stock for $10,200.
Prepare Shinobi’s journal entry if (a) the
stock has no stated value, and (b) the stock
has a stated value of $2 per share.
Cash 10,200
Common stock 10,200
Journal entry:
Cash 10,200
Common stock (600 x $2) 1,200
Additional paid-in capital 9,000
a.
b.
Stock Issued with Other Securities
Two methods of allocating proceeds:
1. the proportional method and
2. the incremental method.
BE15-4:Primal Rage Corporation issued 300
shares of $10 par value common stock and
100 shares of $50 par value preferred stock
for a lump sum of $14,200. The common
stock has a market value of $20 per share,
and the preferred stock has a market value
of $90 per share.
Cash 14,200
Preferred stock (100 x $50) 5,000
Additional paid-in capital-preferred 3,520
Common stock (300 x $10) 3,000
Additional paid-in capital-common 2,680
Proportional
Method
BE15-4: (Variation) Primal Rage
Corporation issued 300 shares of $10
par value common stock and 100 shares
of $50 par value preferred stock for a
lump sum of $14,200. The common
stock has a market value of $20 per
share, and the value of the preferred
stock is unknown.
Cash 14,200
Preferred stock (100 x $50) 5,000
Journal entry (Incremental):
Additional paid-in capital-preferred 3,200
Common stock (300 x $10) 3,000
Additional paid-in capital-common 3,000
Incremental
Method
Stock Issued in Noncash Transactions
The general rule: Companies should record
stock issued for services or property other
than cash at either the:
fair value of the stock issued or
fair value of the noncash consideration
received,
whichever is more clearly determinable.
Land 80,000
Common stock (24,000 x $1) 24,000
April 1 Issued 24,000 shares of common
stock for land. The asking price of the land
was $90,000; the fair market value of the
land was $80,000.
Additional paid-in capital 56,000
E15-2: Kathleen Battle Corporation was
organized on January 1, 2007. It is
authorized to issue 500,000 shares of no par
common stock with a stated value of $1 per
share.
Organization expense 50,000
Common stock (10,000 x $1) 10,000
Aug. 1 Issued 10,000 shares of common
stock to attorneys in payment of their bill of
$50,000 for services rendered in helping the
company organize.
Additional paid-in capital 40,000
E15-2: Kathleen Battle Corporation was
organized on January 1, 2007. It is
authorized to issue 500,000 shares of no par
common stock with a stated value of $1 per
share.
Costs of Issuing Stock
Direct costs incurred to sell stock, such as
underwriting costs,
accounting and legal fees,
printing costs, and
taxes,
should be reported as a reduction of the
amounts paid in (additional paid-in capital).
Reacquisition of Shares
Corporations purchase their outstanding
stock:
To provide tax-efficient distributions of
excess cash to shareholders.
To increase earnings per share and return
on equity.
To provide stock for employee stock
compensation contracts or to meet
potential merger needs.
To thwart takeover attempts or to reduce
the number of stockholders.
To make a market in the stock.
Purchase of Treasury Stock
Two acceptable methods:
Cost method (more widely used).
Par or Stated value method.
Treasury stock, reduces stockholders’ equity.
Treasury stock (1,000 x $28) 28,000
Cash 28,000
Illustration: UC Company originally issued
15,000 shares of $1 par, common stock for
$25 per share. April 1st the company re-
acquired 1,000 shares for $28 per share.
Sale of Treasury Stock
Above Cost or Below Cost
Both increase total assets and stockholders’
equity.
Cash (500 x $30) 15,000
Treasury stock (500 x $28) 14,000
Illustration: UC Company originally issued
15,000 shares of $1 par, common stock for
$25 per share. June 1st Sold 500 shares of
its Treasury Stock for $30 per share.
Paid-in capital treasury stock 1,000
Cash (300 x $9) 2,700
Treasury stock (300 x $28) 8,400
Illustration: UC Company originally issued
15,000 shares of $1 par, common stock for
$25 per share. Oct. 15th Sold 300 shares
of its Treasury Stock for $9 per share.
Paid-in capital treasury stock 1,000
Retained earnings 4,700
Limited
to
balance
on hand
Cash (100 x $11) 1,100
Treasury stock (100 x $28) 2,800
Illustration: UC Company originally issued
15,000 shares of $1 par, common stock for
$25 per share. Oct. 30th Sold 100 shares
of its Treasury Stock for $11 per share.
Retained earnings 1,700
Common stock (100 x $1) 100
Paid-in capital common (100 x $24) 2,400
Illustration: UC Company originally issued
15,000 shares of $1 par, common stock for
$25 per share. Nov. 10th Retired remaining
100 shares of its Treasury Stock.
Treasury stock (100 x $28) 2,800
Retained earnings 300
Illustration 15-4
No Treasury Stock
Illustration 15-5
with Treasury Stock
Features often associated with
preferred stock.
1. Preference as to dividends.
2. Preference as to assets in
liquidation.
3. Convertible into common stock.
4. Callable at the option of the
corporation.
5. Nonvoting.
LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Cumulative
Participating
Convertible
Callable
Redeemable
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.
Dividend Policy
Dividend distributions generally are based on
accumulated profits (retained earnings).
Few companies pay dividends in amounts equal
to their legally available retained earnings.
Why?
Maintain agreements with
creditors.
Meet state incorporation
requirements.
To finance growth or
expansion.
To smooth out dividend
payments.
To build up a cushion against
possible losses.
1. Cash dividends.
2. Property dividends.
3. Liquidating dividends.
4. Stock dividends.
Types of DividendsTypes of Dividends
Dividends require information concerning
three dates:
a. Date of declaration
of record
c. Date of payment
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.
Illustration What would be the journal
entries made by a corporation that declared
a $50,000 cash dividend on March 10,
payable on April 6 to shareholders of record
on March 25?
March 10 (Declaration Date)
Retained earnings 50,000
Dividends payable 50,000
March 25 (Date of Record) No entry
April 6 (Payment Date)
Dividends payable 50,000
Cash 50,000
Debit Credit
Property
Dividends
Dividends payable in assets other than
cash.
Restate at fair value the property it
will distribute, recognizing any gain or
loss.
Illustration A dividend is declared Jan. 5th and
paid Jan. 25th, in bonds held as an
investment; the bonds have a book value of
$100,000 and a fair market value of
$135,000.
Date of Declaration
Investment in bonds 35,000
Gain on investment 35,000
Date of Issuance
Property dividend payable 135,00
0 Investment in bonds 135,000
Debit Credit
Retained earnings 135,00
0 Property dividend payable 135,00
0
Liquidating
DividendsDividend not based on earnings reduces paid-in capital.
June 1 (Payment Date)
April 20 (Declaration Date)
Retained earnings 575,00
0Additional paid-in capital 125,00
0 Dividends payable 700,000
Dividends payable 700,00
0 Cash 700,00
0
BE15-12 Radical Rex Mining Company declared, on
April 20, a dividend of $700,000 payable on June
1. Of this amount, $125,000 is a return of
capital. Prepare the April 20 and June 1 entries
for Radical Rex.
Issuance of own stock to
stockholders on a pro rata
basis, without receiving any
consideration.
When stock dividend is less
than 20–25 percent of the
common shares outstanding,
company transfers fair market
value from retained earnings
(small stock dividend).
Stock Dividends
10% stock dividend is declared
Retained earnings 20,000
Common stock dividend distributable 500
Debit Credit
Additional paid-in capital 19,500
Stock issued
Common stock div. distributable 500
Common stock 500
Illustration HH Inc. has 5,000 shares issued
and outstanding. The per share par value is
$1, book value $32 and market value is $40.
Stock Split
To reduce the market value of shares.
No entry recorded for a stock split.
Decrease par value and increased
number of shares.
2 for 1 Stock Split
No Entry —— Disclosure that par is No Entry —— Disclosure that par is
now $.50 and shares outstanding are now $.50 and shares outstanding are
10,,000.
Illustration HH Inc. has 5,000 shares issued
and outstanding. The per share par value is
$1, book value $32 and market value is $40.
Stock Split and Stock
DividendDifferentiated
If the stock dividend is large, it has the
same effect on market price as a stock
split.
A stock dividend of more than 20–25
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.
