Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 1
CORPORATIONS: STOCKHOLDERS' EQUITY and DIVIDENDS
I. Types of Business Organizations:
Proprietorship:
A proprietorship is a business operated one owner, the proprietor. The proprietor may have any number of employees,
but is the only individual responsible for the operation of the business. A proprietorship is an accounting entity but it is
not an entity for legal or tax purposes.
1. Principal advantages:
a.
ease of formation
b.
flexibility due to freedom from outside constraints
2. Principal disadvantages:
a.
unlimited liability of the proprietor because the proprietorship is not a legal entity;
Partnerships:
Same as proprietorship except two or more owners
Corporation:
Corporations differ from proprietorships and partnerships in that they are legal and taxable entities in addition to being
an accounting entity. They are characterized by stock, which represents ownership shares. Individuals purchase stock to
own part of the corporation.
1. Principle advantages:
a.
separation of ownership (stockholders) from management usually insures a more professional management team;
b.
ability to raise capital through the sale of common stock
c.
owners (stockholders) liability is limited to the amount of their investment (purchase price of their stock)
2. Principle disadvantages:
a. Strict regulations must be adhered to on formation to protect creditors, owners and other outsiders result in high initial costs;
b. Because the corporation is a legal and taxable entity in addition to being an accounting entity, income is taxed at the corporate level
and taxed again at the ownership level when dividends are declared.
II. Corporations:
A. Public Corporations: Government owned corporations to meet a social need. Examples include the FDIC (Federal
Deposit Insurance Corporation), FSLIC (Federal Savings and Loan Insurance Corporation) among others.
B. Mutual Corporations: Cooperatives formed to benefit specific consumer groups. There are many insurance
companies and savings and loans operated as mutual corporations.
C. Private Corporations:
1. Publicly held corporations: This is the type of "corporation" most commonly thought of when we think of the
corporate form of business. The stock is actively traded on organized stock exchanges and changes hands
on a regular basis. There is a ready "market" for such stock as a result of being traded on the stock
market. The discussion about corporations above and to follow refers to publicly held corporations.
2. Closely held corporations:
a. Professional Corporations: Limited stock ownership to members of legally recognized professions and shares
are not actively traded on organized exchanges.
b. Subchapter S Corporations: Small business corporations allowed under Subchapter S of the Internal
Revenue Code to prevent double taxation of owners while still allowing other benefits that accrue to
legal entities (corporations) such as certain types of health plans, retirement benefits, ownership of
assets etc. Ownership is limited to 35 individuals (70 if spouses are owners) and shares are not traded
on organized exchanges.
III. The Nature of Stockholders' Equity
A. "Equity" means ownership interest. Therefore stockholders' equity represents that part of the corporation
"owned" by the stockholders (in concept). This ownership is "in concept" because stockholder equity represents
the book value of the stockholders ownership interest, which usually bears little if any relationship to the fair
market value of the corporation. This concept will be illustrated in the following discussion and examples.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 2
B. The terminology of Stockholders Equity.
1. Par Value: An arbitrary value assigned to each share of stock issued by a corporation. This value is
determined by the issuing corporation and is imprinted on each stock certificate issued. The number of
shares issued multiplied by the par value per share becomes the legal capital of the corporation. The
par value of the stock has absolutely no effect on the market value of the stock.
Note: The value of capital stock on the balance sheet is always equal to the number of shares issued and
outstanding multiplied by the par or stated value of the common stock.
2. No Par Stock: If allowed by the State in which the corporation is chartered stock may be issued without a par
value. In this case no value is imprinted on the stock certificates issued. All no par stock must have a
"stated value" in lieu of par value. In the case of no par stock, the legal capital is the number of shares
issued multiplied by the stated value of the stock. If no stated value exists, legal capital is the total
amount received.
3. Legal Capital: Legal capital is the number of shares issued and outstanding multiplied by the par or stated value
of the stock. Because assets must equal labilities plus owners equity, Legal capital provides protection for
the creditors by guaranteeing that the corporation maintain a certain amount of assets on the books.
Further, legal capital may have the effect of restricting the amount of cash dividends that can be
distributed to stockholders because cash is an asset and the payment of dividends would reduce the asset
side of the equation. Dividends can generally only be distributed to the extent that a company has retained
earnings.
Legal Capital
The concept of Legal Capital is illustrated below:
Assume that 100,000 shares of $10 par value stock is issued at par and that the corporation has $50,000 in liabilities:
*
Assets =
Labilities
+
$ 1,050,000*
$ 50,000
We can compute the value of assets by definition
Stockholders Equity
$ 1,000,000 (100,000 x $10)
Note that because the equation must by definition be "in balance", the asset side of the equation must always be
maintained at a certain minimum. By definition, this provides protection to creditors. If not for the concept of legal
capital (a result of the stock market crash of 1929) the stock holders equity portion of the equation could be reduced
an thereby put creditors at much greater risk. To illustrate, assume that the par value of the stock is $1. Note the
effect on assets.
$
Assets =
Labilities
150,000*
$ 50,000
+
Stockholders Equity
$ 100,000 (100,000 x $1)
Obviously, the lower the par or stated value, the less protection is provided to creditors in the form of mandatory
assets that must be maintained. It should be noted that the value of assets is historical cost, and may bear little
or no relationship to the actual fair market value of the assets.
4. Classes of Stock:
a. Common Stock: CS has the following rights:
1. Voting rights: The right to vote for the Board of Directors and on other important issues. A
stockholder has one vote for each share of common stock owned.
2. Dividend rights: The right to receive dividends (distribution of earnings from retained earnings)
WHEN DECLARED by the Board of Directors.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 3
3. Liquidation Rights: A right to share in the distribution of assets upon liquidation of the corporation.
Liquidation rights are residual. This means that when the corporation is liquidated, the common
stockholders receive their share of the liquidating proceeds only after the preferred stockholders
liquidation rights are satisfied (preferred stockholder receive par value of the preferred stock).
4. Preemptive Right: The right to maintain a proportionate share of ownership in the corporation.
b. Preferred Stock: PS has the following rights:
1. No voting rights.
2. Preference rights to dividends. Preferred stockholders' dividends must be paid before common
stock dividends are paid. Dividends are fixed but are still only paid if declared by the Board of
Directors.
3. Preference of liquidation distribution. Preferred stockholders get residual distribution before
common stockholders.
4. No preemptive rights.
5. Preferred Stock "Sweeteners": In order to make preferred stock more attractive and thereby
reduce the stated interest rate that will be paid to preferred stockholders, some corporations add
characteristics to the preferred stock to make it more attractive. These enticing characteristics
are commonly referred to as "sweeteners".
a. Cumulative Preferred: Dividends not paid in one year accumulate and must be paid in
succeeding years. The unpaid dividends are generally referred to as DIVIDENDS IN ARREARS.
The total amount of dividends in arrears plus the current year's dividends must be paid to the
preferred stockholders before common stockholders have rights to dividend payments declared by
the Board of Directors in the current year.
Note: Dividends in arrears are not liabilities but they should be disclosed as footnotes to the financial
statements.
b. Participating Preferred: When the board of directors declares a dividend large enough exceed
the amount due to preferred stockholders (par value of the preferred stock multiplied by the
stated dividend rate) and the same rate applied to the common stock (par value of the common
stock multiplied by the preferred stated dividend rate), the participation feature entitles
preferred stockholders to participate in the excess dividends ratably (based on relative par values)
with the common stockholders. Participating preferred stock may be either fully or partially
participating. Fully participating preferred stock shares dividends with common stock on the basis
of the relative par value of the stock, without limitation. Partially participating preferred stock is
limited by the terms of the participation agreement, usually a stated percentage of par value.
5. Authorized Stock: The corporate charter of a corporation permits the issuance of a specified number of
shares. Sometimes all of the stock is issued at once, but more often, some shares are not issued, but are held in
reserve to raise more capital. A company may only issue the authorized number of shares. If more shares are
needed to raise additional capital, the company must return to the state corporation commission and receive
authorization for any additional shares.
6. Issued, Outstanding and Treasury Stock: Authorized shares of stock that are sold by the corporation are
referred to as issued stock. Issued stock can be either outstanding stock or treasury stock. Outstanding
stock is stock that has been issued but not reacquired by the corporation; Treasury Stock is stock that has
been issued but then subsequently reacquired by the corporation from the open market.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 4
Cumulative and Participating Preferred Stock Illustrated
Assume the following facts for Shane, Inc. at 12/31/x5:
8% Preferred stock outstanding 10,000 shares @ $100 par,.................. $
Common stock outstanding 300,000 shares @ $10 par.........................
Total par value ..........................................................
1,000,000
3,000,000
$ 4,000,000
Required:For each of the following independent situations computed the distribution of the dividend to preferred and
common stock holders.
Situation One:
--The preferred stock is cumulative, and two years in arrears (including the current year).
--Shane, Inc. declares a $500,000 dividend
Distribution:
Total Dividend declared..........................................
$ 500,000
To Preferred Stock: (2yrs x .08 x 1,000,000)................
(160,000)
Balance to common stock.................................. …………………..
340,000
Total distribution.................................................................
$ 500,000
Situation Two:
--The preferred stock is cumulative, and two years in arrears (including the current year).
--The preferred stock is fully participating.
--Shane, Inc. declares a $500,000 dividend
Distribution:
Total Dividend declared..........................................................................
To Preferred Stock: (2yrs x .08 x 1,000,000)................ ………..
Common stock: (3,000,000 x .08).......................... ……………………..
Excess dividend available to preferred and common........
Excess to preferred (1,000,000/4,000,000)(100,000)................
Excess to common stock (3,000,000/4,000,000)(100,000)........
value)
Total distribution.......................................
CS shares “ratably” with the PS;
in this case 8%
$
$
$
500,000
(160,000)
(240,000)
100,000
(25,000)
(75,000)
(Cumulative feature)
(distrib. @ rel. par value)
(distrib. @ rel. par
500,000
Situation Three: --The preferred stock is cumulative, and two years in arrears (including the current year).
--The preferred stock is partially participating (limited to 10% of par value).
Distribution based on relative par values
--Shane, Inc. declares a $500,000 dividend
PS
1,000,000
CS
Distribution:
Total Dividend declared.......................................... ……………………………
To Preferred Stock: (2yrs x .08 x 1,000,000)................
To Common stock: (3,000,000 x .08)..........................
Excess dividend available to preferred and common........
Excess to preferred (100,000 x .02)...................... ……………
Balance to common stock..................................
Total distribution.......................................
3,000,000
$
$
$
500,000
(160,000)
(240,000)
100,000
20,000
80,000
500,000
Total Par: 4,000,000
(Cumulative feature)
7. Valuation of Corporate Stock: Corporate stock (either common or preferred) has both a book value and a
market value.
a. Book Value:
1. Preferred Stock: The book value of preferred stock is usually its par value if the corporation is
solvent. If the corporation in danger of becoming insolvent, book value is the liquidating value (the
value per share that will be available for distribution to the preferred stock). If it is cumulative
preferred stock, any dividends in arrears are added to the liquidating value in calculating the book
value.
a. Common Stock: The book value of common stock is the amount each share of common stock would
receive if the corporation were liquidated on the basis of the amounts on the balance sheet i.e.
book values were equal to market value.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 5
Book Value of Common Stock
Book value per common share is computed as follows:
Common Stock + Common stock paid-in capital in excess of par* + Retained Earnings available to common
shareholders** + Donated Capital
Number of Common Shares Outstanding
*
Paid in capital in excess of par represents amounts received in excess of par value when the stock was sold, it is
more fully explained below.
**
Retained earnings available to common stock is total retained earnings reduced by any preferred stock or other
claims.
b. Market Value: For common and preferred stock the market value is the amount the stock is selling for on
the open market. If the stock is actively traded on a major stock exchange, the market value is easily
determined. If the stock is not actively traded or is stock of a closely held company, the market value is
more difficult to determine.
III. Stockholders Equity: Stockholders equity consists of two components:
A. Paid-in Capital: The contributed equity component of stockholder's equity. Paid-in capital (also known as
contributed capital), paid-in capital has two components:
1. Value of the shares: # of shares x par value (this is the amount that is recorded on the books)
2. Paid in capital in excess of par value: the amount in excess of par value received when the shares were
originally sold.
B. Retained Earnings: The earned equity component of stockholders' equity. Retained earnings represents the
cumulative effect of all corporate earnings, less dividends paid to stockholders from the date the firm was
founded to the date of the financial statements.
1.
When presented in the stockholders' equity section, retained earnings is the year end retained earnings
(retained earnings as of the date of the financial statements.
2. Retained earnings is sometimes presented in its own statement (the Retained Earnings Statement); in this
case, all components comprising retained earnings are included in detail with the end result being the year
end retained earnings.
3. Retained earnings that is avaialable for any purpose is unrestriced. Retained earnings may be restricted
for specific purposes by action of the board of directors. If restricted, such restrictions must be
disclosed in the Stockholders' equity section of the balance sheet.
Stockholders' Equity Section Illustrated
Stockholders' Equity:
Preferred Stock: ($100 par, 8% cumulative, 15,000 shares authorized,
10,000 shares issued and outstanding...............................................
$
Common stock: ($10 par, 400,000 shares authorized, 300,000 shares issued
and outstanding....................................................................
Paid-in capital in excess of par value................................................
Total paid-in capital.................................................................
Retained Earnings:
Restricted for Plant replacement..............................
$ 500,000
Unrestricted..................................................
1,500,000
Total stockholders equity........................................................
$
*
1,000,000
3,000,000
1,000,000
$ 5,000,000
2,000,000
7,000,000*
When presented in the Stockholder's equity section, retained earnings always represents year-end retained
earnings (End of Year).
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 6
Statement of Retained Earnings Illustrated
Statement of Retained Earnings
Retained earnings, 1/1/x1......................................................................
$ 1,800,000
Prior period adjustment: Correction of depreciation error in prior period (net of $20,000 tax).
(50,000)
Retained earnings, 1/1/x1 restated.............................................................
$ 1,750,000
Add: Current year income.......................................................................
$ 350,000
Less: Dividends................................................................................
(100,000)
250,000
Retained earnings, 12/31/x1....................................................................
$ 2,000,000
IV. Dividends: Dividends represent a nonreciprocal distributions of earnings to the stockholders. Dividends must
be declared by the board of directors, they are never automatic.
A. Legal requirements to pay dividends: In order to pay dividends a corporation must have
1. sufficient retained earnings (retained earnings must never be reduce below zero) and
2. sufficient assets to distribute (with the exception of stock dividends).
B. There are five types of dividend distributions (note: all dividends except stock dividends reduce
stockholders equity)
1. Cash dividends: (illustrated in table above)
2. Property dividends (dividends in kind): property dividends may involve assets or services. Journal entries
for property dividends are similar to cash dividends except that retained earnings is reduced by the FMV
of the property distributed. Property dividends are valued at the FMV of the property distributed.
This means that the property must be revalued at current FMV and gains and losses are recognized.
3. Scrip dividends: scrip is a special form of a note payable. A corporation issuing a scrip dividend is in effect
issuing a note (creating a liability) for a dividend to be paid at some future time.
4. Liquidating dividends: Liquidating dividends are dividends in excess of retained earnings and are illegal in
some states. In those states where liquidating dividends are legal, paid-in capital in excess of par is
debited for the amount of dividend in excess of retained earnings. A technical “liquidating dividend” may
occur if a company’s dividend in any given year exceeds its earnings for that year.
5. Stock dividends: Stock dividends are unique in that they are capitalizations of retained earnings. In stock
dividends, total stockholders equity remains constant but retained earnings is reduced by the value of the
dividend and paid-in capital is increased by the amount of the dividend in equal amounts. There are two
types of stock dividends, large stock dividends and small stock dividends.
a. Large stock dividends: Large stock dividends are dividends in excess of 25% of the outstanding
common stock
1. large stock dividends reduce retained earnings by the number of shares issued times par value
2. Small stock dividends: Small stock dividends are dividends less than 20% of the outstanding
common stock
a. small stock dividends reduce retained earnings by the number of shares issued times market
value. The difference between par and market value is credited to pain-in capital in excess of par
Stock Dividends Between 20% and 25% of Outstanding Common Stock
For dividends between 20% and 25%, the accountant must make an election based on the
assumption of how the dividend will affect the market price of the stock. If no change in market
price is expected, the dividend would be treated as a small stock dividend, otherwise, it should be
treated as a large stock dividend.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 7
Summary of Dividend Entries
Action
Nomenclature
Board declares dividend, specifying a Date of
Date of Declaration
Journal Entry
Retained Earnings.......xxxx
Record and a Date of Payment
Dividends Payable..
xxxx
To record dividend liability
Date of Record arrives. The date of record
Date of Record
As soon as the information about who owns
is important because dividends are paid to
the shares on the date of record, a Memo
stockholders holding the stock on the date of
entry to specific stockholders accounts
record. After the date of record the stock
(subsidiary record) is made to insure proper
trades ex dividend (without dividend). No
crediting for shares held as of the date of
action takes place on the date of record
record.
because it takes the corporation some time to
discern who held the stock on the date of
record.
Dividends are paid
Date of Payment
Dividends payable......xxxx
Cash..............
xxxx
To record payment of cash dividend
Journal entries to record Property Dividends
Retained earnings (reduced by FMV of property distributed................
xxxx
Accumulated depreciation-property (pro rata based on % distributed)...... xxxx
Loss on property distribution (if FMV of property is less than BV).......
xxxx
Gain on property distribution (if FMV of property is more than BV)...
Property (taken off the books at book value).........................
xxxx
xxxx
Journal Entries to record Declaration and Payment of a Scrip Dividend
Date of declaration:
Retained earnings (scrip dividend declared)................... xxxx
Notes payable to stockholders............................
To record declaration of a scrip dividend
xxxx
Date of Payment:
Notes payable to stockholders.................................
xxxx
Interest expense..............................................
xxxx
cash.....................................................
xxxx
To record payment of scrip dividend and accrued interest
Journal Entries to record Declaration and Payment of a Liquidating Dividend
Assume that retained earnings is $500,000, and the corporation declares and pays a $800,000 cash dividend
(assume that this is permissible under the law of the state of incorporation and that Paid-in capital in excess of par
totals $1,000,000).
Date of declaration:
Retained earnings ........................................
500,000
Paid-in capital in excess of par..........................
300,000
Dividends payable......................................
To record declaration of a scrip dividend
Date of Payment:
Dividends payable.........................................
Cash...................................................
To record payment of cash dividend
800,000
800,000
800,000
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 8
Stock Dividends Illustrated
The stockholders' equity section of Dallas, Inc. on 12/31/x1 is presented below:
--The market value of Dallas, Inc. common stock on 12/31/x1 is $45/share.
Stockholders' Equity:
Preferred Stock: ($100 par, 8% cumulative, 15,000 shares authorized, 10,000 shares issued and outstanding ….
$
Common stock: ($10 par, 500,000 shares authorized, 300,000 shares issued and outstanding.................................
Paid-in capital in excess of par value.........................................................................................................................................
1,000,000
3,000,000
1,000,000
Total paid-in capital....................................................................................................................................................................... $
5,000,000
Retained Earnings.....................................................................................................................................................................
2,000,000
Total stockholders equity........................................................ …………………………………………………………………………………..
$
7,000,000
Situation One: Large stock dividend
The board of directors of Dallas, Inc. declares a 50% stock dividend.
Required:
1. Present all necessary journal entries to record the dividend.
Date of Declaration:
Retained earnings (.5)(300,000)($10).............................
1,500,000
Common stock dividend distributable.........................
1,500,000
Date of Distribution:
Common stock dividend distributable..............................
1,500,000
Common Stock................................................
1,500,000
2. Present the stockholders' equity section of Dallas, Inc. after the dividend has been distributed.
Stockholders' Equity after large stock dividend:
Preferred Stock: ($100 par, 8% cumulative, 15,000 shares authorized, 10,000 shares issued and outstanding $
stock: ($10 par, 500,000 shares authorized, 450,000 shares issued and outstanding………………………………
.
1,000,000
Paid-in capital in excess of par value................................................ ……………………………………………………………………………………
Total paid-in capital................................................................. ……………………………………………………………………………………………….. $
1,000,000
6,500,000
Retained Earnings.......................................................................................................................................................................
Total stockholders equity.........................................................................................................................................................
Common
4,500,000
500,000
$
7,000,000
Situation Two: Small stock dividend
The board of directors of Dallas, Inc. declares a 10% stock dividend.
Required:
1. Present all necessary journal entries to record the dividend.
Date of Declaration:
Retained earnings (.1)(300,000)($45).............................
1,350,000
Common stock dividend distributable (30,000)($10)...........
300,000
Paid-in capital in excess of par (30,000($45-$10)...........
1,050,000
Date of Distribution:
Common stock dividend distributable..............................
Common Stock................................................
300,000
300,000
2. Present the stockholders' equity section of Dallas, Inc. after the dividend has been distributed.
Stockholders' Equity after small stock dividend:
Preferred Stock: ($100 par, 8% cumulative, 15,000 shares authorized, 10,000 shares issued and outstanding
$
1,000,000
Common stock: ($10 par, 500,000 shares authorized, 330,000 shares issued and outstanding…………………………..
3,300,000
Paid-in capital in excess of par value................................................ ……………………………………………………………………………………
2,050,000
Total paid-in capital................................................................. ……………………………………………………………………………………………….. $
5,350,000
Retained Earnings..................................................................... ………………………………………………………………………………………………..
Total Stockholders equity........................................................ ……………………………………………………………………………………………….
650,000
$
7,000,000
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 9
C. Stock Splits: A stock split is a distribution of stock to existing stockholders designed to lower the market
price of the stock. Stock splits result in a percentage increase in the number of common stock shares
outstanding. The increase is usually expressed as a ratio (e.g. two for one). This means that if a common
stockholder owned one share before the split, the common stockholder would own two shares after the split.
Due to the relatively large increase in the number of shares outstanding after the split, the market price of
the stock is initially reduced in value proportionately to the amount of shares issued. For example, if before a
two for one stock split the market price of a share of stock for X Company is $100, the after split market
price per share of X would be approximately $50. Because of the decrease in the market value of a share of
stock after a stock split, the split is a technique often used by a company to promote activity in their stock by
reducing the market price.
1. From an accounting standpoint, the only effect of a stock split is to change the par value of the stock.
Unlike a stock dividend, stock splits do not change the value of the components of stockholders' equity.
Both paid-in capital and retained earnings remain unchanged in a stock split. The only effect of a stock
split is to change the par value per share and the number of shares outstanding.
Stock Split Illustrated
The stockholders' equity section of Dallas, Inc. on 12/31/x1 is presented below:
--The market value of Dallas, Inc. common stock on 12/31/x1 is $45/share.
Stockholders' Equity:
Preferred Stock: ($100 par, 8% cumulative, 15,000 shares authorized, 10,000 shares issued and outstanding
$
Common stock: ($10 par, 1,000,000 shares authorized, 300,000 shares issued and outstanding
3,000,000
Paid-in capital in excess of par value................................................ ………………………………………………………………………………….
Total paid-in capital................................................................. ………………………………………………………………………………………………..
1,000,000
1,000,000
$
Retained Earnings.......................................................................................................................................................................
5,000,000
2,000,000
Total stockholders equity........................................................ ………………………………………………………………………………………………
$
7,000,000
Situation One: 2 for 1 stock split
The board of directors of Dallas, Inc. declares a 2 for 1 stock split.
Required:
1. Present all necessary journal entries to record the dividend.
Date of Declaration:
Memo entry: Par is reduced 50% (to $5 per share) subsequent to a 2 for 1 stock split
Date of Distribution:
No entry
2. Present the stockholders' equity section of Dallas, Inc. after the dividend has been distributed.
Stockholders' Equity after a 2 for 1 stock split:
Preferred Stock: ($100 par, 8% cumulative, 15,000 shares authorized, 10,000 shares issued and outstanding
$
Common stock: ($5 par, 1,000,000 shares authorized, 600,000 shares issued and outstanding …………………………..
3,000,000
Paid-in capital in excess of par value................................................ …………………………………………………………………………………….
Total paid-in capital................................................................. …………………………………………………………………………………………………
1,000,000
1,000,000
$
5,000,000
Retained Earnings.......................................................................................................................................................................
2,000,000
Total stockholders equity........................................................ ………………………………………………………………………………………………..
$
7,000,000
Note: The stockholders' equity section is unchanged (except for the par value per share and the total number of shares issued and
outstanding. Compare this effect to the stock dividends.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 10
D. Special Issues Involving Stockholders' equity
1. Treasury stock: Treasury stock is stock that has been issued and then reacquired by the issuing
corporation. Treasury stock is not an asset and it cannot vote or receive dividends or qualify for any of
the other rights associated with common stock. Treasury stock is accounted for as a contra (reduction) to
paid in capital. There are two methods of accounting for treasury stock, the cost method and the par
method.
a.
Cost Method: The cost method is based on the presumption that treasury stock is being purchased in
order to reissue it at some future date. Because the company plans to reissue the stock in the future,
it is justified in carrying the treasury stock at cost in the stockholders' equity section of the balance
sheet.
1.
Recording treasury stock at cost: Treasury stock account is debited at the cost of the acquired
treasury stock. When the stock is reissued, treasury stock is credited at cost. If groups of
treasury stock are acquired in different steps at different costs, records must be maintained that
identify the cost of each share. If the proceeds from the reissuance of the treasury differs from
the acquisition cost, the differences are credited (proceeds > cost) or debited to (proceeds < cost)
the account paid-in capital from treasury stock of the same class. Notice that this is paid-in
capital from treasury stock, not generic paid-in capital. If paid-in capital from preexisting
treasury stock transactions does not exist or is insufficient, to cover the deficit, retained earnings
is debited for the difference. This procedure is illustrated on the following page.
b. Par Method: The par method is based on the presumption that the purchase of treasury stock is a
constructive retirement of the acquired shares. Because the shares are being retired, both the stock
account and the Paid-in capital in excess of par account associated with it must be reduced
proportionate to the constructive retirement. This means that when treasury stock is acquired,
both the stock account and the Paid-in capital in excess of par account must be reduced. This is
due to the presumption of retirement. When the par method is utilized, all adjustments to the stock
account must be at par rather than cost. When the stock is reissued, the same rules (same as cost
method) apply with respect to the creation of paid-in capital from treasury stock transactions. In
other words, if the proceeds from the reissuance of the treasury differs from the acquisition cost, the
differences are credited (proceeds > par) or debited to (proceeds < par) the account paid-in capital
from treasury stock of the same class. Notice that this is paid-in capital from treasury stock, not
generic paid-in capital. If paid-in capital from preexisting treasury stock transactions does not exist
or is insufficient, to cover the deficit, retained earnings is debited for the difference. The only
difference here is that proceeds are compared to par rather than cost. This procedure is illustrated
on the following page.
2. Recording Transactions For Shares of Stock Issued For Consideration Other Than Cash: Shares issued for
consideration other than cash are recorded at the fair market value of the stock or the consideration
received whichever is more readily obtainable. If the fair market value of the stock is not readily
available (e.g. stock is not traded on a major exchange) it is often difficult to determine the fair market
value of the consideration other than cash.
3. Recording Donated Assets in the Accounts: Assets donated by stockholders or entities outside the
corporation (e. g. state or city government) not in exchange for stock are recorded by DEBITING the
ASSETS at their fair market value on the date they were donated. The account that is CREDITED in this
transaction is the owner equity account DONATED CAPITAL. For example, if land with a FAIR MARKET
VALUE of $75,000 and COST of $10,000 is donated by a city to a corporation for the purpose of creating
jobs in that city, the journal entry would be:
DEBIT:
CREDIT:
Asset account at fair market value-LAND
Owner equity account-DONATED CAPITAL
4. Stock Subscriptions: Sales of stock on a subscription basis can occur when a company is preparing a new
issue and is offered to old stockholders, or when a new company is preparing to go public and wants
employee participation in the company in the form of stock ownership. The accounting problem with stock
subscriptions is that not all of the price of the stock is initially received. The accounting procedures to
record subscriptions of stock are illustrated below:
Dr. M. D. Chase
Intermediate Accountng-44A
a.
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 11
Defaults on stock subscriptions: A potential problems exists when stock subscriptions are defaulted on
by subscribers. The accounting treatment is a function of state law in the state of incorporation. The
most common options are:
1. refund the subscribed amounts to subscribers;
2. write-off the remaining subscription receivable (subscriber forfeits funds invested); (this is most
used)
3. subscriber is legally bound for full subscription amount.
Accounting for Stock Subscriptions
--Rhett, Inc is offering stock subscriptions to employees giving them the right to purchase 100 shares of $5 par stock at a
price of $2,500 per subscription (this indicates an initial market price of $2,500/100 or $25/share).
--500 employees accept the offer and agree to pay 50% down within one month of submitting the subscription, and 50% in six
months.
At the date signed stock subscriptions are received:
Subscriptions Receivable (500 x $2,500).......................
1,250,000
Common stock subscribed (500 x 100 x $5)..................
Paid-in capital in excess of par (500 x 100 x $20)........
To record receipt of stock subscriptions
250,000
1,000,000
At the date the first installment is received:
Cash (500 x $1,250)...........................................
625,000
Subscriptions Receivable .................................
625,000
To record receipt of first cash installment (1/2 of total) on stock subscriptions
At the date the second installment is received:
Cash (500 x $1,250)....................................................................
625,000
Subscriptions Receivable ................................................
625,000
To record receipt of second cash installment (1/2 of total) on stock subscriptions
Common stock subscribed........................................................... 250,000
Common stock (500 x 100 x $5)......................................
250,000
To record issuance of stock upon receipt of final payment of subscriptions
Note: Some controversy exists with respect to whether the account subscriptions receivable should be reported as a
current asset or a contra equity. Current accounting practice generally follows the contra equity approach, i.e. it is
reported as a debit balance account in the stockholders equity section of the balance sheet (similar to the treatment of
treasury stock)
5. Stock Issuance Costs: Stock issuance costs are the direct costs of issuing stock (professional fees, printing
costs, taxes etc). These costs are unrelated to the operations of the corporation and should reduce any
PIC in excess of par created in the stock issue.
Example:
Assume that JSTRM, Inc. issues 100,000 shares of $10 Par stock for $1,180,000 and incurs $50,000
legal fees, $35,000 Accounting fees and $20,000 underwriting fees. JSTRM would make the following
entry:
Cash…………………………………. 1,180,000
CS………………………………
1,000,000
The key point here is that direct costs of issuing stock
Stock Issue Costs…
105,000
are not expensed; they are reductions of PIC.
PIC in Excess of par
75,000
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 12
Cost and Par Methods of Recording Treasury Stock Illustrated
Cost Method Illustrated:
A. Issued 100,000 shares of $100 par common stock @ $110:
Cash (100,000 x $110)..................................……………………………………..11,000,000
Common stock (100,000 x $100).................. ……………………….
10,000,000
Paid-in capital in excess of par (100,000 x $10) ………………
1,000,000
To record original issuance of common stock
B. 10,000 shares of the common stock are reacquired @ $112:
TS recorded at Cost
Treasury Stock (10,000 x $112)....................................................... 1,120,000
Cash...................................................................................................
1,120,000
To record purchase of 10,000 shares of treasury stock at $112 (cost method)
C. 1,000 shares of treasury stock are reissued @ $112:
Cash (1,000 x $112)..............................................................................
112,000
Treasury stock..............................................................................
112,000
To record reissuance of treasury stock at acquisition price
D. 1,000 shares of treasury stock are reissued @ $130:
Cash (1,000 x $130)..............................................................................
130,000
Treasury stock (1,000 x $112).....................................................
112,000
Paid-in capital from treasury stock (100,000 x $18)........ …
18,000
To record reissuance of treasury stock for more than acquisition price
Reissue price above par creates PIC from
TS transactions…
If TS is issued at less than par, PIC from
TS is debited until unavailable; then RE is
debited
E. 1,000 shares of treasury stock are reissued @ $ 98:
Cash (1,000 x $ 98)........................................... ………………………………..
98,000
Paid-in capital from treasury stock (1,000 x $112 - $98)..........
14,000
Treasury stock (1,000 x $112)............................. ………………….
Paid-in Cap from T/S
18,000 (D)
112,000
To record reissuance of treasury stock for less than acquisition
14,000 (E)
4,000 (F)
price (paid-in capital from prior treasury stock transactions is sufficient to cover the deficit)
Only a total of 18,000 is available for TS
transactions…
F. 1,000 shares of treasury stock are reissued @ $105:
Cash (1,000 x $105)........................................... ……………………………… 105,000
Paid-in capital from treasury stock (1,000 x $112 -$105)......
4,000*
Retained earnings (to make up deficit it PIC-T/S)..................
3,000
Treasury stock (1,000 x $112)..............................................
Retained Earnings
100,000 Bal.
112,000
3,000 (F)
To record reissuance of treasury stock for less than acquisition price (paid-in capital from prior treasury stock transactions is
not sufficient to cover the deficit)
*
Only $4,000 is available in PIC-T/S, Retained earnings is charged for the excess
If TS is retired, remaining shares must be converted back to par with appropriate adjustments to PIC and RE
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 13
Par Method Illustrated:
Assume the same original issuance of stock, the corresponding entries utilizing the Par Method would be:
B. 10,000 shares of the common stock are reacquired @ $112:
Treasury Stock (10,000 x $100)....................................................
1,000,000
Paid-in capital in excess of par (100,000 x $12)........................
100,000
Retained Earnings..............................................................................
20,000
Cash...........................................................................................
TS recorded at Par Value
1,120,000
To record purchase of 10,000 shares of treasury stock at $112 (cost method)
C. 1,000 shares of treasury stock are reissued @ $112:
Cash (1,000 x $112)....................................................................................
112,000
Treasury stock (1,000 x $100).............................. ……………………….
100,000
Paid-in capital reissuance of treasury stock............... ……………….
12,000
Creates PIC from TS transactions
To record reissuance of treasury stock at acquisition price
D. 1,000 shares of treasury stock are reissued @ $130:
Cash (1,000 x $130).....................................................................................
130,000
Treasury stock (1,000 x $100)..........................................................
100,000
Paid-in capital from treasury stock (100,000 x $30)...................
30,000
To record reissuance of treasury stock for more than acquisition price
E. 1,000 shares of treasury stock are reissued @ $ 98:
Cash (1,000 x $ 98)........................................... ………………………………………..
98,000
Paid-in capital from treasury stock (1,000 x $100 - $98)...... ………..
Paid-in Cap from T/S
2,000
Treasury stock (1,000 x $100)............................. …………………………
30,000 (D)
100,000
To record reissuance of treasury stock for less than acquisition
2,000 (E)
5,000 (F)
price (paid-in capital from prior treasury stock transactions is sufficient to cover the deficit)
33,000 Bal
F. 1,000 shares of treasury stock are reissued @ $105:
Cash (1,000 x $105)....................................................................................
105,000
Paid-in capital from treasury stock (1,000 x $105 - $100)………
5,000
Treasury Stock (1,000 x $100)........................................................
100,000
To record reissuance of Treasury stock
6. Prior Period Adjustments: adjustments for items that should have been included in net income of prior periods
but were not due to:
-- errors in reporting prior period income or
-- adjustments that result from realization of income tax benefits of pre-acquisition operating loss
carry-forwards of purchased subsidiaries.
1.
Recall that the statement is always presented in a specific format. That format is presented below in its
entirety for purposes of reference only.
Retained earnings: Beginning of year...................
$
Add: Net income (or deduct net loss)...................
Deduct: Dividends declared.............................
Prior Period Adjustments (net of tax effect)...........
Adjustments due to Quasi-reorganization................
Retained earnings: End of year................................................. $
xxxx
xxxx
(xxx)
xxxx
(xxx)
xxxx
NOTE: For purposes of this class, prior period
adjustments will be limited to correction on the
financial statements of the current period of an
error that was made in the financial statements of
a prior period.
1. Prior period adjustments are charged (debited)
or credited directly to retained earnings net of any
tax effect that relates to them.
--Prior period adjustments affect only the Balance Sheet (and Statement of retained earnings if presented);
--Prior period adjustments have no effect on the net income of the current period;
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 14
V. Reporting the results of Operations: The following Income statement classifications appear after and
separate from net income from operations (GAAP: APB-9; APB-30):
A. Discontinued operations: When a firm disposes of a segment of the business it must report, net of applicable
tax effects, both
1. the income or loss generated by the disposed segment during the current period and
2. he gain or loss on the disposal itself (sales price less book value of assets disposed of);
B. Extraordinary items: Extraordinary items are current period gains and/or losses that are both
1. infrequent in occurrence and
2. unusual in their nature
--these extraordinary items and must be reflected in the current periods income statement after net of
there tax effects and after the presentation of net income and the effects of discontinued operations.
C. Cumulative Effects of Changes in Accounting Principle: If the firm changes from one generally accepted
accounting principle to another, the cumulative effect of the change on the retained earnings at the beginning
of the period of change will normally be presented in the income statement of the period of change, net of
income tax effects and will appear after extraordinary items, if any.
NOTE: The effect of each of these items on earnings per share must be reported separately
D. Basic Financial Statement Analysis: The primary purpose of the financial statements is to convey useful
financial information to owners, investors, creditors and other analysts so that scarce economic resources can
be efficiently allocated to the best firms. Other constraints being equal, it can be assumed that the users of
the financial statements are interested in allocating their scarce dollars to investments in firms that will yield
the highest economic return. Two areas of analysis of interest to the users of the financial statements are
short-term solvency analysis and operations efficiency analysis.
1.
Short-term Solvency Analysis: Solvency (liquidity) refers to the ability of a firm to meet its obligations;
to pay its bills. Short-term solvency addresses a firms ability to pay its bills in the short term, i.e. the
longer of the operating cycle or one year. Short-term solvency is usually evaluated by the use of ratios
that are easily computed from the data presented in classified financial statements.
a.
Current ratio: current assets/current liabilities
--considered a "crude" measure of liquidity because it assumes that all current assets can be quickly
and efficiently converted into cash to meet current liabilities
b. Acid-test ratio: cash + temporary investments + current receivables/current liabilities
--also known as the "quick ratio"
--recognizes that not all current assets can be quickly converted into cash
2. Analysis of Operations Efficiency: The ability of a firm to employ the assets at its disposal to earn a
profit is termed operations efficiency. In general, the more risk an investment poses, the higher the
potential return must be for an investor to provide funds. Measures of operations efficiency examine the
firms ability to earn a return (earnings) as a percentage of the assets at its disposal. The more efficiently
assets are utilized, the greater the return.
Return on total assets: income from continuing operations/average total assets
--average total assets = (assets at beginning of year + total assets at end of year)/2
b. Return on Stockholders equity: income from continuing operations/average stockholders equity
--average stockholders equity = (SHE at beginning of year + SHE at end of year)/2
--Stockholders equity = the sum of all paid in capital accounts (preferred stock, common stock, paid in
capital in excess of par) and retained earnings
c. Return on Sales: income from continuing operations/net sales
a.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 15
Completion:
1. The amount that each common share would receive if the corporation were liquidated is called the
per share.
2. A
is designed to reduce the market value of the corporation's shares.
3. Professional and subchapter S corporations have
liability.
.
4. An arbitrary value assigned to stock in order to create legal capital is known as
5. A corporation may issue both
and
stock.
6. When a corporation has no par-value shares, and no stated value is required by the state of incorporation, the
.
amount credited to the stock account is
7. Three principle advantages of the corporate form of businesses are:
a.
b.
c.
.
8. The amount of retained earnings unavailable for dividends is shown as
9. Donated capital is shown in the
section of shareholders' equity.
.
10. Partial payment of stock subscriptions are normally recorded as
, the preferred shareholders are entitled to dividends for each year that they
11. If preferred stock is
until they are paid.
own the stock, and any unpaid dividends remain in
12. Dividends are paid to the shareholders owning the stock on the
13.If preferred stock is
investment as the common shareholders.
.
preferred shareholders have the right to the same return on their
14. When there is insufficient cash to pay cash dividends, the board of directors may vote to issue a
.
15. When treasury stock is originally recorded using the cost method and is subsequently reissued at a price below its
cost, and there isn't a credit balance in the Paid-in capital in excess of par-Treasury Stock account, or the credit
account.
balance is insufficient, then the loss is recorded with a debit to the
increases the number of shares held by each shareholder, and reduces the par value, book
16. A
value and the market value of each share.
17. The
later date.
of a dividend is the day the board of directors decided that the dividend will be paid at a
18. When preferred shares are
19. A stock dividend has the effect of
, dividends in arrears must be paid before any current year's dividends.
retained earnings.
True and False:
1. Shareholders of a corporation have a liability equal to the amount of their investment.
2. Restricted retained earnings are shown in the liability section of the balance sheet.
3. Legal capital represents an amount of capital that must be maintained by the corporation at all times.
4. The concept of legal capital provides protection for creditors by insuring that a minimum amount of assets will be
maintained the corporation.
5. Donated assets are recorded at the fair market value of the assets on the date of donation.
6. The market value of a common share of stock is normally lower than its book value.
7. Under normal circumstances, only common shareholders have voting rights in a corporation.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 16
8. Common shares may only be issued for cash.
9. The book value of the common stock is determined by dividing the equity of the common shareholders by the
authorized.
10. Retained earnings represents the earnings of the corporation from its inception less dividends paid and the net
effects of prior period adjustments.
11. A stock split decreases the number of shares outstanding.
12. Common shareholders receive the same return as the preferred shareholders when the preferred shares are fully
participating.
13. Dividends are paid each quarter.
14. Common shareholders receive dividends before the preferred shareholders.
15. The total shareholders' equity does not change when there is a stock split.
16. A stock dividend does not necessarily require any cash.
17. Non-participating, cumulative preferred shareholders receive dividends in arrears as well as their regular
preferred dividends, when dividends are declared.
Problems
Problem 1 (No par/stated value stock; share transactions, preparation of the shareholders' equity section of the
balance sheet and the book value of the common stock)
6/1/x1
--Authorization was received by Nado Corp. to issue 200,000 no par value common shares and 10,000 no par-value $5
preferred shares.
6/2/x2
--Issued 20,000 common shares at $30 a share and 1000 shares of preferred at $60 for cash.
6/10/x1
--Received assets from Dallas Ltd. at their fair cash value, land worth $20,000, buildings worth $152,800, and
equipment worth $75,000. Issued 8000 shares of common stock in exchange for these assets.
9/30/x1
--Received land worth $10,000 from the city of San Diego in return for the obligation to establish a manufacturing
branch in this location.
10/31/x1
--Reacquired 2,000 shares of common stock at $25.
11/25/x1
--The shareholders approved a stock split of 2 shares for every 1 share previously held.
12/31/x1
--Net income for the year was $110,000.
Required:
1. Prepare journal entries for the above transactions.
2. Prepare the shareholders' equity section of the balance sheet as at December 31, 20X1.
3. Compute the book value of the common stock at December 31, 20X1.
Problem 2 (Shareholders' equity)
Required:
From the following selected accounts, prepare in proper form the shareholders' equity section of the balance sheet of
Shane, Inc., at December 31, 20X4.
Common Stock, no par-value, authorized
$
Preferred Stock, $10, no par-value, authorized
Accumulated Depreciation
Allowance for Doubtful Accounts
Appraisal Increase on Revaluation of Fixed Assets
Cash
Common Stock, issued and outstanding, 1,500,000 shares
Earnings Appropriated for Bond Redemption
Earnings Appropriated for Plant Expansion
Income Tax Expense
Income Tax Payable
Land Donated by the City of Lancaster
Preferred Stock, issued and outstanding, 150,000 shares
Total Retained Earnings
2,000,000
200,000
90,000
45,000
210,000
157,000
1,815,000
55,000
116,000
175,000
110,000
250,000
200,000
995,000
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 17
Problem 3 (Shareholders' equity)
From the information provided, prepare in proper form the shareholders'
equity section of the balance sheet of Dallas, Inc. at December 31, 20X1. Dallas was incorporated in a state that
permits par-value shares.
Allowance for Doubtful Accounts
$
20,000
Building
130,000
Common Stock, $15 par-value, 30 000 shares authorized;
issued and outstanding, 11,000 shares
165,000
Plant Site, Donated
90,000
Preferred Stock, 10%, $5 par value, 15,000 shares authorized;
issued and outstanding, 8,000 shares
40,000
Paid-in capital in excess of par, common stock
25,000
Paid-in capital in excess of par, preferred stock
10,000
Reserve for Bond Redemption
150,000
Reserve for Plant Relocation
85,000
Retained Earnings
210,000
Problem 4 (Shares sold through subscription plans and the shareholders' equity section of the balance sheet)
-- L. Young Inc. was incorporated on January 4, 20X1. Its authorized capital was 80,000 shares of $8 no
par-value preferred stock and 500,000 shares of no par-value common stock.
-- During the year, the following transactions affecting shareholders' equity occurred:
1. On January 18, 20X1, 6,000 common shares were issued in exchange for land and buildings. The land was appraised
at $30,000 and the building was appraised at $70,000.
2. On February 6, received subscriptions for 20,000 preferred shares at $110 per share. A down payment of 20
percent accompanied each subscription; the balance is to be paid in two equal installments on April 30 and August
15, 20X1.
3. On March 1, subscriptions were received for 200,000 common shares at $20 per share. A down payment of 50
percent accompanied each subscription; the balance is due on April 10.
4. The final instalment on the common stock was received on April 10.
5. The first instalment on the preferred stock was received on April 30, 20X1.
6. Cash was received on August 15, 20X1 for the balance of the amount owed on the preferred stock subscriptions.
7. The after-tax earnings of the company from the date of incorporation to the year-end December 31, 20X1 were
$140,000.
Required:
1. Prepare journal entries to record these transactions.
2. Prepare the shareholders' equity section of the balance sheet at December 31, 20X1.
Problem 5 (A stock dividend and portfolio review)
The shareholders' equity section of Moose Ltd.'s balance sheet consists of the following accounts:
Moose Ltd.
PARTIAL BALANCE SHEET
At December 31, 20X2
Common Stock, $10 Par-value: Authorized, Issued and Outstanding 10,000 Shares......................... $
Retained Earnings...............................................................................................................................................
Total Shareholders' Equity ............................................................................................................................ $
100,000
65,000
165,000
Required:
1. Moose declares a stock dividend instead on 6/1/x2. Each shareholder is to receive 1 dividend share for each 8
shares he/she now holds. Market value of the stock is $60 and the distribution is to be made on 8/1/x2.
a. Prepare the journal entries to record the declaration and distribution of the stock dividend.
b. Compute the book value per share of the common stock immediately before the declaration of the stock
dividend.
c. Compute the book value per share of the common stock immediately after the distribution of the stock
dividend.
2. Bozo owns 48 shares of Moose Ltd. stock. What is his equity:
a. before the stock dividend?
b. after the stock dividend?
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 18
Problem 6(Payment of dividends to shareholders; calculation of dividends payable to the preferred and common
shareholders, with various different types of preferred stock)
The Coronado Company Ltd. had outstanding share capital as follows:
2,000 shares $7, Preferred Stock, $100 Par-value
80,000 shares Common Stock, $10 Par-value
For the years 20X2 through 20X6 dividends were declared $42,000; $35,000; $3,500; $84,500; and $38,500,
respectively. There were no dividends in arrears on December 31, 20X1 .
Required:
1. Calculate for 20X2 through 20X6 the total amount of dividends for each class of stock, assuming:
a. the preferred is cumulative and non-participating.
b. the preferred is cumulative and fully participating.
c. the preferred is non-cumulative and fully participating.
d. the preferred is non-cumulative and non-participating.
Use the form below for your answer.
Year
20X2
Stock
Preferred
Common
20X3
Preferred
Common
20X4
Preferred
Common
20X5
Preferred
Common
20X6
Preferred
Common
Requirement a.
Requirement b.
Requirement c.
Requirement d.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 19
Problem 7 (Shareholders' equity section of the balance sheet)
DMC Inc. pays dividends on the issued and outstanding preferred and common shares semiannually. In December
20X3, the directors declared the semi-annual dividend on the preferred shares and $1 per share dividend on the
common shares. The dividends are to be paid January 15, 20X4. The shareholders' equity section of DMC's balance
sheet appears below:
DMC Inc.
PARTIAL BALANCE SHEET
At December 31, 20X3
Shareholders' Equity
Paid-in Capital:
Preferred Stock, $4, $100 Par-value: Authorized 15,000 Shares, Issued and Outstanding 4,000 Shares
$
400,000
Common Stock, $10 Par value: Authorized 100,000 Shares, Issued and Outstanding 50,000 Shares
500,000
Retained Earnings:……………………………………………………………………………………………………………………………………………………………
240,120
Total stockholders' equity …………………………………………………………………………………………………………………………………………..
$
1,140,120
In 20X4 the following transactions affecting the company shares took place:
1/15/x4
3/10/x4
6/29/x4
Paid the dividends declared in December 20X3.
Sold 5,000 common shares at $25 per share.
Declared the regular semi-annual dividend on the preferred shares and a $1 per share dividend on the
common shares, payable July 15, 20X4.
7/15/x4 Paid the dividends declared in June.
9/5/x4
Declared a 5% stock dividend on the outstanding common shares to be issued October 10 to the
shareholders of record on September 30. The market price of $12 is to be used.
10/10/x4 Issued the stock dividend declared in September.
12/29/x4 Declared the regular semi-annual preferred share dividend and a cash dividend of $1 per share on the
common shares outstanding, payable on January 15, 20X5.
12/31/x4 Net income for the period was $215,000.
Required:
1. Prepare the journal entries for the above transactions.
2. Prepare the shareholders' equity section of DMC Inc.'s balance sheet as at December 31, 20X4.
Problem 8 (Journal entries for stock transactions; the purchase of treasury stock and its subsequent sale)
MDC Ltd. was incorporated in February 20X2 and was authorized to issue 80,000 shares of common stock at $25
par-value. On May 31, 20X3 MDC Ltd. had 8,500 shares issued and outstanding.
6/10/x3
7/4/x3
7/5/x3
8/10/x3
8/15/x3
8/30/x3
Declared a cash dividend of $3 per share to shareholders of record on June 25, 20X3, payable on July 4,
20X3.
Paid the dividend declared on June 10, 20X3.
Purchased 1,000 shares of treasury stock at $32 per share.
Sold for cash 300 shares of treasury stock at $36 per share.
Sold for cash 700 shares of treasury stock at $30 per share.
hares were trading on the Toronto Stock Exchange for $42 per share, when the board of directors voted
a 10% stock dividend to the common shareholders of record on September 15, 20X3, to be distributed on
September 25, 20X3.
Required: Prepare the journal entries to record the transactions for MDC Ltd.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 20
SOLUTIONS
Completion:
1. book value per share of common stock
2. stock split
3. unlimited
4. par value
5 .preferred / common
6. the entire amount invested
7. a. professional management
b. ability to raise capital through stock sales
c. limited liability to owners
8. restricted retained earnings
9. contributed capital
10. contra equity accounts
11. Cumulative / arrears
12. date of record
13. Fully participating
14. stock dividend
15. Retained Earnings
16. stock split
17. date of declaration
18. cumulative
19. capitalizing
True or False
1. T
2. F
3.
4.
5.
6.
T
T
T
F
8. F
9. F
10.
11.
12.
13.
14.
15.
16.
17.
T
F
T
F
F
T
T
T
Restricted retained earnings are shown in the shareholders' equity section of the balance sheet under the
retained earnings sub-heading.
There is no relationship between the market value and the book value of a corporation's shares, but in most
cases, book value will be less than market value.
Shares may be issued for cash, assets, and/or services.
The book value of the common stock of a corporation is computed by dividing the total number of common
shares outstanding into the total shareholders' equity less the equity of the preferred and/or other claims on
retained earnings.
A stock split increases the number of shares outstanding.
Dividends are paid only after they are declared by the board of directors.
Common shareholders receive dividends after the preferred shareholders receive their regular dividend.
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 21
Solution Problem 1
Requirement 1. Prepare journal entries for the above transactions.
GENERAL JOURNAL
Date
Description
6/1/x1
Memorandum
Authorization received to issue 200,000 no par $5 preferred stock
6/2/x1
Cash
660,000
Common Stock
600,000
Preferred Stock
60,000
To record the issue of 20,000 shares of common stock at $30 per share,
and 1000 shares of preferred stock at $60 per share
6/10/x1
Land
20,000
Buildings
150,000
Equipment
75,000
Common Stock
245,000
To record the issue of 8,000 shares common stock for land, buildings
and equipment at their FMV
9/30/x1
Land
10,000
Donated Capital-Land
10,000
To record the receipt of land donated by the city of San Diego
10/31/x1
Common Stock
50,000
Cash
50,000
To record the purchase of 2,000 shares of common stock at cost
11/25/x1
Memorandum
Board of Dir approval to split common stock, 2 shares for each outstanding
share; number of shares doubled from 26,000 to 52,000 shares outstanding
12/31/x1
Income Summary
110,000
Retained earnings
To close the income summary account to retained earnings
110,000
Requirement 2. Prepare the shareholders' equity section of the balance sheet as at December 31, 20X1.
Nado Corp.
PARTIAL BALANCE SHEET
At December 31, 20X1
Shareholders' Equity
Paid-In Capital:
Preferred Stock, $5, No Par-value:
Authorized 10,000 Shares
Issued and Outstanding 1,000 Shares
Common Stock, No Par-value:
Authorized 200,000 Shares
Issued and Outstanding 52,000 Shares
Total Paid-in Capital
Donated Capital-Land
Retained Earnings:
Total Shareholders' Equity
$
60,000
$
797,800
857,800
$
10,000
100,000
977,800
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 22
Requirement 3.
1. Compute the book value of the common stock at December 31, 20X1.
Book value per common share is computed as follows:
Common Stock + Common stock paid-in capital in excess of par* + Retained Earnings available to common shareholders** + Donated Capital
Number of Common Shares Outstanding
797,800 + 0 + 110,000 + 10,000 = $17.65
52,000
*
**
Paid in capital in excess of par represents amounts received in
excess of par value when the stock was sold, it is more fully explaine
Retained earnings available to common stock is total retained
earnings reduced by any preferred stock or other claims.
below.
Solution Problem 2
Shane, Inc.
PARTIAL BALANCE SHEET
At December 31, 20X4
Shareholders' Equity
Paid-in Capital:
Preferred Stock, $10, No Par-value: Authorized 200,000 Shares, Issued and Outstanding 150,000 Shares
$
Common Stock, No Par-value: Authorized 2,000,000 Shares, Issued and Outstanding 1,500,000 Shares
200,000
1,815,000
Total Paid-in Capital
$
2,015,000
$
250,000
Donated Capital:
Land Donated by the City of Lancaster …………………………………………………………….
Retained Earnings:
Restricted:
For Bond Redemption ……………………………………………………………………. $
55,000
For Plant Expansion
116,000 $
……………………………………………………………………
171,000
Unrestricted ………………………………………………………………………………………………………...
824,000
Total Retained Earnings ……………………………………………………………………………………..
995,000
Appraisal Capital-Fixed Assets ……………………………………………………………………………….
210,000
Total stockholders' equity ……………………………………………………………………………………….
$
3,470,000
Solution Problem 3
Dallas, Inc.
PARTIAL BALANCE SHEET
At December 31, 20X1
Shareholders' Equity
Paid-in Capital:
Preferred Stock, 10%, $5 Par-value: Authorized 15,000 Shares, Issued and Outstanding 8,000 Shares
$
Common Stock, $15 Par value: Authorized 30,000 Shares, Issued and Outstanding 11,000 Shares
40,000
165,000
Additional paid-in capital:
Paid-in capital in excess of par, preferred stock
Paid-in capital in excess of par, common stock
Total Paid-in Capital
……………………………………………………………………………………..
10,000
…………………………………………………………………………………….
25,000
………………………………………………………………………………………………………………………………………………………
$
240,000
Donated Capital:
Land Donated - Plant cite………………………………………………………………………………………………………………………………………………………….
90,000
Retained Earnings:
Restricted:
For Bond Redemption …………………………………………………………………… $
For Plant Relocation ………………………………………………………………………
Unrestricted …………………………………………………………………………………………………………………….
150,000
85,000 $
235,000
210,000
Total Retained Earnings …………………………………………………………………………………………………………
Total stockholders' equity
445,000
$
775,000
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 23
Solution Problem 4
GENERAL JOURNAL
Date
Description
1/4/x1
Memorandum
Authorization received to issue 80,000 shares of $8 no par preferred stock
and 500,000 share no par common stock
│
1/18/x1 Land
30,000
Building
70,000
Common Stock
100,000
To record the issue of 6,000 shares of common stock for land and building
(assets recorded @ FMV)
2/6/x1
Cash
440,000
Subscriptions receivable
1,760,000
Preferred stock subscribed
2,200,000
To record 20% down payment on subscriptions for 20,000 shares of no par
preferred stock @ $110/share, 89% balance due in two equal payments on 4/30/x1
and 8/15/x1 (20,000 x $110 x 20% = $440,000)
3/1/x1
Cash
2,000,000
Subscriptions receivable
2,000,000
Common stock subscribed
4,000,000
To record 50% downpayment on subscriptions for 200,000 shares of no par common
stock @ $20/share, remaining 50% due 4/10/x1 (200,000 x $20 x 50%)
4/10/x1
Cash
2,000,000
Subscriptions receivable
2,000,000
To record final 50% payment on subscription for 200,000 shares of no par common
stock @ $20/share, (200,000 x $20 x 50% = $2,000,000)
4/10/x1 Common stock subscribed
4,000,000
Common stock
4,000,000
To record the issuance of stock subscription 3/1/x1
4/30/x1 Cash
880,000
Subscriptions receivable
880,000
To record first 40% installment on subscriptions for 20,000 shares of no par
preferred stock @$110/share,remaining 40% due 8/15/x1 (20,000 x $110 x 40%)
8/15/x1 Cash
880,000
Subscriptions receivable
880,000
To record final 40% installment on subscriptions for 20,000 shares of no par
preferred stock @$110/share (20,000 x $110 x 40%)
8/15/
Preferred stock subscribed
2,200,000
Preferred stock
2,200,000
To record issuance of preferred stock subscription of 2/6/x1
12/31/
Income Summary
140,000
Retained earnings
140,000
To close the income summary account to retained earnings account
Paid-in Capital:
Shareholders' Equity
Preferred Stock, $8 No Par-value:
Common Stock, No Par value:
L. Young Inc.
PARTIAL BALANCE SHEET
At December 31, 20X1
Authorized 80,000 Shares, Issued and Outstanding 82,000 Shares
$
Retained Earnings:
140,000
Total stockholders' equity
*
2,200,000
4,100,000*
Authorized 500,000 Shares, Issued and Outstanding 206,000 Shares
$
6,000 shares issued for FMV of Land and Building
$
200,000 shares issued @ $20/share by subscription
4,000,000
$
4,100,000
100,000
6,440,000
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 24
Solution Problem 5
Requirement 1a. Prepare journal entries to record the declaration and distribution of the stock dividend.
GENERAL JOURNAL
Date
Description
6/1/x2
Retained earnings (1,250 x $60)
75,000
Common stock dividend distributable (1,250 x $10)
12,500
Paid-in capital in excess of par (1,250 x $50)
62,500
To record declaration of a 1 for 8 stock dividend; 10,000 shares/8 - 1,250 shares to be
distributed (small stock dividend so Retained Earnings is charged at FMV of stock issued)
8/1/x2
Common stock dividend distributable
12,250
Common Stock
12,250
To record payment of small stock dividend
Requirement 1b.
Compute the book value per share of the common stock immediately before the declaration of the stock dividend.
Book value per common share is computed as follows:
Common Stock + Common stock paid-in capital in excess of par* + Retained Earnings available to common shareholders** + Donated Capital
Number of Common Shares Outstanding
165,000 =
$16.50 per share
10,000
Requirement 1c: Compute the book value per share of the common stock immediately after the distribution of the
stock dividend.
165,000 =
$14.67
11,250
Requirement 2: Bozo owns 48 shares of Moose Ltd. stock. What is his equity:
a. before the stock dividend?
48 x $16.50 = $792 (note: this is the book value of his investment, the market value is 48 x $60 = $2,880)
b. after the stock dividend?
(48 + 6) x $14.67 = $792(note: this is the book value of his investment, the market value will probably increase to
approximately is 54 x $60 = $3,240) because this is a small stock dividend and it would be unlikely that the market
would reflect the change in the number of outstanding shares
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 25
Problem 6
1. Calculate for 20X2 through 20X6 the total amount of dividends for each class of stock, assuming:
a. the preferred is cumulative and non-participating.
b. the preferred is cumulative and fully participating.
c. the preferred is non-cumulative and fully participating.
d. the preferred is non-cumulative and non-participating.
Use the form below for your answer.
Year
Stock
20X2
20X3
20X4
Requirement a.
Requirement b.
Requirement c.
Requirement d.
Preferred
$14,000
$14,000
$14,000
$14,000
Common
28,000
28,000
28,000
28,000
Preferred
14,000
14,000
14,000
14,000
Common
21,000
21,000
21,000
21,000
Preferred
3,500
3,500
3,500
3,500
-0-
-0-
-0-
-0-
Preferred
24,500
25,300
16,900
14,000
Common
60,000
59,200
67,600
70,000
Preferred
14,000
14,000
14,000
14,000
Common
24,500
24,500
24,500
24,500
Common
20X5
20X6
Year 5 computations (requirement b:)
Preferred
Common
Total
Total dividends available.................................................................................................
To Preferred stock: Arrears from year 4 (14,000 - 3,500)...................................
$
$
84,500
$
60,000
10,500
current year dividend................................................................
14,000
(24,500)
Dividend remaining......................................................................... ………………………………..
Pro rata distribution to CS (7% rate to match preferred) (7% x 80,000 x $100)....
$ 56,000
(56,000)
Dividend remaining......................................................................... …………………………………………
4,000
To preferred based on relative par value ($200,000/$1,000,000)(4,000)......................
800
(800)
3,200
To common based on relative par value ($800,000/$1,000,000)(4,000).........................
Total distribution.....................................................................
Year 5 computations (requirement c:)
$
25,300
Preferred
-0-
Common
Total dividends available..............................................................................................................
Total
$
To Preferred stock: current year dividend.................................................. …………………………
84,500
14,000
(14,000)
Dividend remaining........................................................................................................................
$
Pro rata distribution to common stock (7% rate to match preferred) (7% x 80,000 x $100)....
$ 56,000
Dividend remaining........................................................................................................................
70,500
(56,000)
14,500
To preferred based on relative par value ($200,000/$1,000,000)(14,500)......................
2,900
(2,900)
11,600
To common based on relative par value ($800,000/$1,000,000)(4,000).........................
Total distribution.....................................................................
(3,200)
$ 59,200
$
16,900
$ 67,600
(11,600)
-0-
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 26
Solution Problem 7
Requirement 1. Prepare journal entries for the above transactions.
GENERAL JOURNAL
Date
Description
1/15/
Dividends payable-Preferred stock
8,000
Dividends payable-Common stock
50,000
Cash
58,000
To record payment of dividends declared 12/31/x3 (Preferred: $4 x 4,000 x 1/2 year =
$8,000) Common: $1 x 50,000 = $50,000)
3/10/
Cash
125,000
Common Stock (5,000 x $10)
50,000
Paid-in capital in excess of par (5,000 x $15)
75,000
To record the issue of 5,000 common shares at $25
6/29
Retained Earnings
63,000
Dividends payable-Preferred stock
8,000
Dividends payable-Common stock
55,000
To record declaration of stock dividend (Preferred: $4 x 4,000 x 1/2 year = $8,000)
(Common: $1 x 55,000 = $50,000)
7/15
Dividends payable-Preferred stock
8,000
Dividends payable-Common stock
55,000
Cash
63,000
To record payment of dividends declared 6/29/x4 (Preferred: $4 x 4,000 x 1/2 year =
$8,000) (Common: $1 x 55,000 = $50,000)
9/5
Retained earnings
33,000
Stock dividend payable
33,000
To record declaration of 5% stock dividend payable 10/10/x4 to owners of record on
9/30/x4. (FMV on 9/9/x4 = $12; 5% x 55,000 x $12 = $33,000)
10/10
Stock dividend payable
33,000
Common stock (55,000 x .05 x $10)
27,500
Paid-in capital in excess of par (2,750 x $2)
5,500
To record issuance of 5% stock dividend
12/29
Retained Earnings
65,750
Dividends payable-Preferred stock
8,000
Dividends payable-Common stock
57,250
To record declaration of stock dividend (Preferred: $4 x 4,000 x 1/2 year = $8,000)
(Common: $1 x 57,250 = $57,250)
12/3
Income Summary
215,000
Retained earnings
215,000
To close the income summary account to retained earnings
2. Prepare the shareholders' equity section of DMC Inc.'s balance sheet as at December 31, 20X4.
DMC Inc.
PARTIAL BALANCE SHEET
At December 31, 20X4
Shareholders' Equity
Paid-in Capital:
Preferred Stock, $4, $100 Par-value: Authorized 15,000 Shares, Issued and Outstanding 4,000 Shares $
400,000
Common Stock, No Par value: Authorized 100,000 Shares, Issued and Outstanding 57,750 Shares
577,500*
293,370**
Retained Earnings:
Total stockholders' equity
*
50,000 shares at beginning of year
5,000 shares issued on 3/10/x4
2,750 shares issued on 1/10/x4
$
$ 500,000
50,000
27,500
$ 577,500
**
Retained earnings: Beginning Balance:
Stock dividend 6/29/x4 .... $
63,000
Stock dividend 9/5/x4......
33,000
Stock dividend 12/29/x4....
65,750
$
240,120
(161,750)
Add: Net income............
Retained earnings 12/31/x4
1,270,870
215,000
$
293,370
Dr. M. D. Chase
Intermediate Accountng-44A
Long Beach State University
Corporations: Stockholder's Equity/Dividends
Page 27
Solution Problem 8
Requirement 1: Prepare the journal entries to record the transactions for MDC Ltd.
GENERAL JOURNAL
Date
6/10/
Description
Retained earnings
25,500
Dividends payable-Common stock
25,500
To record declaration of dividends payable 7/4/x3 to holders of record on 6/25/x3
(Common: $3 x 8,500 = $25,500)
7/4
Dividend payable-Common stock
25,500
Cash
25,500
To record payment of cash dividend declared 6/10/x3
7/5
Treasury Stock (1,000 shares @ $32)
32,000
Cash
32,000
To record purchase of 1,000 shares of common at cost of $32/share
8/10
Cash (300 x $36)
10,800
Treasury stock (300 x $32)
9,600
Paid-in capital-Treasury stock
1,200
To record sale of treasury stock @ $36/share
8/15
Cash (700 x $30)
Paid-in capital-Treasury stock
Retained earnings
21,000
1,200
200
Treasury Stock (700 x $32)
22,400
To record sale of treasury stock @ $30/share
8/30
Retained earnings (8,500 x .1 x $42)
35,700
Stock dividend payable (8,500 x .1 x $25)
21,250
Paid-in capital in excess of par (850 x $17)
14,450
To record issuance of 10% stock dividend