Chapter 15
Learning Objectives
Stockholders’ Equity
1.  Discuss corporate form of organization
2.  Identify key components of stockholders’ equity
3.  Explain accounting for issuing shares of stock
4.  Describe accounting for treasury stock
5.  Explain accounting and reporting of preferred stock
6.  Describe policies used in distributing dividends
7.  Identify various forms of dividend distributions
8.  Explain small, large stock dividends, share splits
9.  How to present and analyze stockholders’ equity
10.  Appendix: Additional preferred stock calculations
Annual reports: Chipotle, Whole Foods
1
Stockholders’ Equity
Corporate
Form
"
Corporate law
"
Capital stock
or share
system
"
Preferred
Stock
Equity
"
"
Issuance of
stock
Reacquisition
of shares
Variety of
ownership
interests
"
Features
"
Accounting
for and
reporting
preferred
stock
"
Learning Objective 1, 2
Dividend
Policy
Presentation
and Analysis
Financial
condition and
dividend
distributions
"
Presentation
"
Analysis
"
Types of
dividends
"
Stock split
"
Disclosure of
restrictions
2
§  Discuss the characteristics of the
corporate form of organization
§  Identify the key components of
stockholders’ equity
3
Forms of Ownership
4
Proprietorship
§  Three forms of business ownership
§  Single owner
§  Net income belongs to one owner
§  Owner personally liable for all
business’s debts
§  Proprietorship
§  Partnership
§  Corporation
5
1
Limited-Liability Co. (LLC)
Limited-Liability Partner. (LLP)
Partnership
§  Two or more parties are co-owners
§  Formula to allocate profits to partners
§  Unlimited liability
§  May have one owner or many owners
§  Formula to allocate profits to owners
§  Owners have limited liability
§  Each partner personally liable for debt
§  No personal liability
§  No mutual agency
§  Liability limited to investment in business
§  Mutual agency
§  When any partner enters into contract all
partners personally liable for debt
Corporation
Advantages of Corporation
§  Many owners
§  Owners called stockholders
§  Stockholders share equally
§  Stock represents % ownership
§  Ease of raising capital
§  Ease of transferring ownership
§  Continuous life
§  Limited liability of stockholders
9
Stockholders’ Rights
10
Board of Directors
§  Vote
§  Sets goals, policies of company
§  Measures performance of management
§  Hires executive officers
§  Elect board of directors
§  Issues at annual meeting
§  Dividends
§  CEO (chief executive officer)
§  CFO (chief financial officer)
§  CTO (chief technical officer)
§  Receive share of net income
§  Liquidation
§  Receive assets after liabilities paid in full
§  Preemption
§  Maintain % when new stock issued
11
12
2
State Corporate Law
Learning Objective 3
§  Submits articles of incorporation to state
§  Accounting for stockholder’s equity
follows state law
§  Where are they incorporated?
§  Explain the accounting procedures for
issuing shares of stock
§  Hewlett-Packard: Delaware
§  Google: Delaware
§  Facebook: Delaware
13
14
Stockholders’ Equity
Shares of Stock
§  Paid-in capital
Number of Shares
§  Cash from investors, sale of stock
§  Also called “Contributed capital”
§  Retained earnings
Authorized
Maximum shares that can be issued
Issued
Shares sold to public
Treasury
Shares issued and repurchased
Outstanding
= Issued − Treasury
15
16
17
18
3
19
Issuance of Stock
20
Par Value
§  Par value stock
§  No-par stock
§  Stated value stock
§  Arbitrary amount assigned to stock
§  Legal capital
§  Must remain invested in corporation
§  Cannot be paid as dividends
21
ISSUE STOCK AT PAR
ISSUING STOCK
§  Issue price > par value
§  Two paid-in capital accounts
Issue Stock at Par
Issue price
$10
Par value
$10
Shares issued
Description
Cash
Debit
(3,200,000 × $10) 32,000,000
Common Stock (3.2M × $10)
Issued 3,200,000 shares of common stock at $10 par
22
§  Common stock, at par value
§  Additional paid-in capital [Add. PIC]
3,200,000
Credit
32,000,000
23
24
4
ISSUED ABOVE PAR
PAID-IN CAPITAL
§  Cash received when stock first sold
§  Amount invested by stockholders
Issue Stock Above Par Value
Issue price
$10.00
Par value
$ 0.01
Shares issued
Description
Cash
3,200,000
Debit
(3,200,000 × $10) 32,000,000
Common Stock (3.2M × $0.01)
Calculation of Total Paid-In Capital
Common stock (par value)
Credit
32,000
+ Additional paid-in capital
32,000
31,968,000
Total paid-in capital
32,000,000
Additional Paid-In Capital
31,968,000
Plug
Issued 3,200,000 shares of $0.01 par common stock at $10 par
25
STOCKHOLDERS’ EQUITY
ISSUING STOCK
§  No profit (loss) incurs when stock
Stockholders’ Equity
Common stock, $0.01 par, 40 million
shares authorized, 3.2 million issued
$
31,968,000
Total Paid-In Capital
32,000,000
Total Stockholders’ Equity
§  Originally sold to public
§  Repurchased, resold to public
32,000
Additional Paid-In Capital
Retained Earnings
26
§  No stock transaction ever results in
§  Revenue
§  Gain
§  Expense
§  Loss
26,000,000
$58,000,000
27
WileyPLUS
28
NO-PAR STOCK
§  Brief exercise 1
§  Does not have a par value
§  May have stated value (similar to par)
§  Some states count total issue price for
no-par stock as legal capital, which
reduces flexibility in paying dividends
29
30
5
ISSUING NO-PAR STOCK
STOCKHOLDERS’ EQUITY
Stockholders’ Equity
Issue No Par Common Stock
Issue price
$20
Shares issued
Description
Cash
Common stock, no-par, 10,000 shares
authorized, 3,000 issued
3,000
(3,000 × $20)
Debit
60,000
Common Stock
Issued 3,000 shares of $20 no-par common stock
Retained Earnings
Total Stockholders’ Equity
Credit
60,000
46,000
$106,000
60,000
No “Additional Paid-In Capital” account
31
No Par Stated Value
32
WileyPLUS
§  Some states require no-par stock to
have stated value
§  JE calculation treats stated value as par
Description
Debit
Cash
15,000
Common stock (1,000 × $5)
PIC in excess of stated value
Plug
Issued 1,000 shares with $5 stated value at $15 per share
$
§  Brief exercise 2
Credit
5,000
10,000
33
34
Common Stock Issued with
Other Securities
Three Cases
§  Stock issued in combination (bundle)
§  Stock issued in noncash transactions
§  Costs of issuing stock
§  Usually each type of stock (common,
preferred) sold separately
§  Sometimes common and preferred sold
together in a bundle
§  Two methods of allocating proceeds
§  Proportional method
§  Incremental method
35
36
6
Common Stock Issued with
Other Securities
Proportional Method
Cash Received
§  Proportional method
Cash
§  Allocated by relative FMV
$13,500
Common Stock
§  Incremental method
§  Allocate to one security based on FMV,
remainder allocated to other security
Market value per share
$20
Par value
$10
Shares issued
300
Preferred Stock
37
Proportional Method
Number
300
100
Common shares
Preferred shares
Allocation:
Issue price
Allocation %
Total
Common
$
13,500
40%
$
5,400
Market Value
x $
20.00 =
x
90.00
Fair Market Value
$90
Par value
$50
Shares issued
100
Number
300
100
Common shares
Preferred shares
Total
6,000
9,000
$ 15,000
$
Market value per share
Percent
40%
60%
100%
Preferred
13,500
60%
$
8,100
Allocation:
Issue price
Allocation %
Total
Market Value
x $
20.00 =
x
90.00
Fair Market Value
Common
$
13,500
40%
$
5,400
Total
6,000
9,000
$ 15,000
$
38
Percent
40%
60%
100%
Preferred
13,500
60%
$
8,100
$
$
39
Description
Cash
Preferred Stock (100 × $50)
PIC In Excess of Par – Preferred
Common Stock (300 × $10)
PIC In Excess of Par – Common
Incremental Method
$13,500
$20
Par value
$10
Shares issued
300
Number
300
100
Common shares
Preferred shares
Common Stock
Market value per share
Preferred Stock
Market value per share
Credit
5,000
3,100
3,000
2,400
Plug
Plug
40
Incremental Method
Cash Received
Cash
Debit
13,500
Allocation:
Issue price
Ordinary
Total
Common
Amount
x $
20.00 =
x
Fair Market Value
Total
6,000
$
6,000
$
Preferred
13,500
(6,000)
$
7,500
$
$
6,000
Unknown
Par value
$50
Shares issued
100
41
42
7
Number
300
100
Common shares
Preferred shares
Allocation:
Issue price
Ordinary
Total
Amount
x $
20.00 =
x
Fair Market Value
Common
Total
6,000
$
6,000
WileyPLUS
$
§  Brief exercise 4
Preferred
13,500
(6,000)
$
7,500
$
$
6,000
Description
Cash
Preferred stock (100 × $50)
PIC in excess of par – preferred
Common stock (300 × $10)
PIC in excess of par – common
Debit
13,500
Credit
5,000
2,500
3,000
3,000
Plug
Plug
43
Stock Issued in
Noncash Transactions
44
Example 1: Stock Issued in
Noncash Transactions
§  Use value more clearly determinable
Issue Common Stock in Exchange for Patent
Par common stock value
§  Fair value of stock given
§  Fair value of noncash consideration
received (goods or services)
Shares common stock issued
$10
10,000
FMV common stock
$140,000
FMV patent
Unknown
Description
Debit
Credit
Patent
140,000
Common stock (10,000 × $10)
100,000
Plug
Paid-in capital in excess of par
40,000
Issued 10,000 shares, $10 par, FMV $140,000, in exchange for patent
45
Example 2: Stock Issued in
Noncash Transactions
Example 3: Stock Issued in
Noncash Transactions
Issue Common Stock in Exchange for Patent
Issue Common Stock in Exchange for Patent
Par common stock value
Shares common stock issued
FMV common stock
FMV patent
46
Par common stock value
$10
Shares common stock issued
10,000
$10
10,000
Unknown
FMV common stock
$150,000
FMV patent
Unknown
PV of future cash flows from patent
$125,000
Description
Debit
Credit
Patent
150,000
Common stock (10,000 × $10)
100,000
Plug
Paid-in capital in excess of par
50,000
Issued 10,000 shares with $10 par value for patent with FMV $150,000
47
Unknown
Description
Debit
Credit
Patent
125,000
Common stock (10,000 × $10)
100,000
Paid-in capital in excess of par
25,000
Plug
Issued 10,000 shares with $10 par value for patent valued at $125,000
48
8
Costs of Issuing Stock
Costs of Issuing Stock
Common Stock with Issuing Costs
§  Direct costs incurred to sell stock
Issue price
Par value
§  Underwriting costs
§  Accounting and legal fees
§  Printing costs
§  Taxes
$ 50
$ 1
Shares issued
Legal, accounting, filing fees
5,000
$10,000
Description
Debit
Credit
Cash [(5,000 × $50) − 10,000]
240,000
Common stock (5,000 × $1)
5,000
Paid-in capital in excess of par
235,000
Plug
Issued 5,000 shares, $1 par value, at $50, issue costs $10,000
§  Do not record expense
§  Stock transactions never impact N/I
§  Reduction to PIC in Excess of Par
49
WileyPLUS
50
Learning Objective 4
§  Brief exercises 5, 6
§  Describe accounting for treasury stock
51
TREASURY STOCK
52
WALL STREET JOURNAL
§  Purchase stock already issued
§  Stock held in treasury
§  Receive no dividends
§  Do not vote
§  As if never issued
53
54
9
55
56
57
58
59
60
10
61
WHY TREASURY STOCK?
62
WHY TREASURY STOCK?
§  Increase stock price
§  Reward shareholders by returning cash
§  Tax-efficient distribution of excess cash
§  Need stock for employee stock
compensation
§  Need stock for potential merger
§  Temporary stock price decline
§  To increase stock price
§  Increase earnings per share (EPS)
§  Increase dividends per share
Net income
Earnings per share =
Average shares outstanding
Dividends per
share
63
PURCHASE, SELL T-STOCK
Total dividends paid
=
Average shares outstanding
64
Two Methods
§  Cost method (more widely used)
Before purchase
Treasury stock for
$4 billion
Sold treasury stock
for $7 billion
§  Recorded at cost, without reference
to par value or original issue price
§  Par value method (rarely used)
Assets
$17
Liabilities
$10
Liabilities
$10
Stockholders’
Equity
$7
Assets
$13
Liabilities
$10
Stockholders’
Equity
$3
Assets
$20
§  Recorded at par value
Stockholders’
Equity
$10
65
66
11
TREASURY STOCK
TREASURY STOCK
§  Treasury stock has debit balance
§  Recorded at cost, without reference to
par value or original issue price
Stockholders’ Equity
(Before Purchase of Treasury Stock)
Common stock, $1 par, 10,000 shares
authorized, 8,000 shares issued
$
8,000
Additional Paid-In Capital
12,000
Retained Earnings
40,000
Total Stockholders’ Equity
$
Description
Treasury Stock
60,000
(1,000 × $5)
Debit
5,000
Cash
Purchase 1,000 shares for treasury at $5 per share
Credit
5,000
67
TREASURY STOCK
TREASURY STOCK
Treasury Stock like contra-account in stockholders’ equity
Calculation of Shares Outstanding
Shares issued
Treasury Stock
−
− Shares in treasury
+
Beginning balance
0
Purchases at cost
5,000
Ending balance
5,000
68
Shares outstanding
TREASURY STOCK
7,000
$
§  Above cost
§  Below cost
8,000
Additional Paid-In Capital
12,000
Retained Earnings
40,000
Subtotal
70
Sale of Treasury Stock
Stockholders’ Equity
(After Purchase of Treasury Stock)
Treasury Stock, 1,000 shares
Total Stockholders’ Equity
1,000
Sales at cost
69
Common stock, $1 par, 10,000 shares
authorized, 8,000 shares issued
8,000
60,000
$
(5,000)
55,000
71
72
12
Sale of Treasury Stock
Sale of Treasury Stock
§  Treasury stock purchased and sold
§  No gains, losses, revenue or expense
§  No change in net income
§  Increases assets and equity
§  Selling price > purchase cost
§  Increase Add. Paid-In Capital Treas-Stock
§  Selling price < purchase cost
§  Decrease Add. Paid-In Capital Treas-Stock
§  Decrease Retained Earnings
73
Example 1: Treasury Stock
Sold Above Cost
Treasury Stock
−
Sale of Treasury Stock
Shares of treasury stock sold
200
Selling price
$ 9
Purchase cost
$ 5
Description
Cash
(200 × $9)
Debit
1,800
74
+
Beginning balance
0
Purchases at cost
5,000
Ending balance
4,000
1,000
Sales at cost
Additional Paid-In Capital, Treasury Stock
−
Credit
+
0
Beginning balance
1,000
800
Sale of T-stock
Additional Paid-In Cap: T-Stock
800
Plug
Sold 200 shares of treasury stock at $9 per share, purchase cost $5
800
Ending balance
Treasury Stock
(200 × $5)
75
Example 2: Treasury Stock
Sold Below Cost
TREASURY STOCK
Sale of Treasury Stock
Stockholders’ Equity
(After Sale of Treasury Stock)
Common stock, $1 par, 10,000 shares
authorized, 8,000 shares issued
$
8,000
Additional Paid-In Capital (12,000 + 800)
12,800
Retained Earnings
40,000
Subtotal
Treasury Stock, 800 shares
Total Stockholders’ Equity
76
100
Selling price
$ 4
Purchase cost
$ 5
Description
Cash
Additional PIC: T-Stock
60,800
$
Shares of treasury stock sold
(4,000)
56,800
(100 × $4)
Plug
Debit
400
100
Credit
Treasury Stock
(100 × $5)
500
Sold 100 shares of treasury stock at $4 per share, purchase cost $5
77
78
13
Example 3: Treasury Stock
Sold Below Cost
Treasury Stock
−
+
Beginning balance
0
Purchases at cost
5,000
Ending balance
1,000
Sales at cost
500
Sales at cost
Sale of Treasury Stock
3,500
Additional Paid-In Capital, Treasury Stock
$ 3
Purchase cost
$ 5
Description
Cash
800
Sale of T-stock
Additional Paid-In Cap: T-Stock
700
Ending balance
+
0
100
500
Selling price
Beginning balance
−
Sale of T-stock
Shares of treasury stock sold
Retained Earnings
79
(500 × $3)
Plug
Debit
1,500
Credit
700
300
Treasury Stock
(500 × $5)
2,500
Sold 500 shares of treasury stock at $3 per share, purchase cost $5
80
Treasury Stock
−
0
Purchases at cost
5,000
Ending balance
Retiring Treasury Stock
+
Beginning balance
1,000
Sales at cost
500
Sales at cost
2,500
Sales at cost
§  Cancellation of treasury stock
§  Reduction in number of shares issued
1,000
Additional Paid-In Capital, Treasury Stock
−
+
0
Sale of T-stock
100
Sale of T-stock
700
800
0
Beginning balance
Sale of T-stock
Ending balance
81
WileyPLUS
82
Learning Objective 5
§  Brief exercises 3, 7, 8
§  Preferred stock
83
84
14
PREFERRED STOCK
§  Hybrid security (common stock, bond)
§  Non-voting
§  Paid before common stock
§  Cash dividends
§  In liquidation
§  Issued primarily by
§  Banks, insurance companies
§  Older corporations
85
AMOUNT OF DIVIDEND
86
PREFERRED DIVIDENDS
§  Stated as dollar amount, $3.00
§  Stated as percentage of par value
§  Dividends must be declared by Board
§  Usually paid in full
§  May not be declared if no cash available
§  Par value, $100
§  Stated rate, 6%
§  Dividend amount, $6.00
87
PREFERRED STOCK
88
STOCKHOLDERS’ EQUITY
Issue Preferred Stock
Stockholders’ Equity
Par value
$ 50
Issue price
$ 80
Preferred stock, $50 par, 6%, 50,000
shares authorized, 1,000 shares issued
Shares issued
1,000
Additional Paid-In Capital: Preferred
Credit
Common stock, $1 par, 10,000 shares
authorized, 8,000 shares issued
Description
Cash
Preferred Stock
(1,000 × $80)
(1,000 × $50)
Debit
80,000
Additional Paid-In Capital: Common
50,000
Retained Earnings
Total Stockholders’ Equity
Additional Paid-In Cap: Preferred Plug
30,000
Issued 1,000 shares of $50 par preferred stock at $80 per share
89
$ 50,000
30,000
8,000
12,000
40,000
$ 140,000
90
15
PREFERRED STOCK
PREFERRED STOCK
§  Can be issued with conversion feature
§  Allows preferred shareholders to
exchange preferred shares for common
Description
Cash
(1,000 × $60)
Debit
60,000
Description
Cash
(1,000 × $60)
Debit
60,000
Credit
Convertible Preferred Stock
60,000
Issued 1,000 shares of convertible preferred stock at par, $60 per share
Credit
Description
Convertible Preferred Stock
Convertible Preferred Stock
60,000
Issued 1,000 shares of convertible preferred stock at par, $60 per share
Debit
60,000
Credit
Common Stock (1,000 × 5 × $1)
91
5,000
Additional Paid-In Capital
55,000
Plug
Converted 1,000 preferred stock to $1 par common stock
Conversion rate: 1 share preferred stock = 5 shares common stock
Preferred Stock:
Possible Features
92
Comparison
§  Convertible (into common stock)
§  Participating (more than stated div)
§  Redeemable (maturity date)
§  Callable (at option of corporation)
Common
Stock
Preferred
Stock
Long-Term
Debt
Never repaid
Never repaid
Yes,
legal obligation
Dividends / interest Dividends,
not tax
deductible
Dividends,
not tax
deductible
Interest exp,
tax deductible
Obligation to pay
dividends / interest
No legal
obligation
No legal
obligation
Yes, amount
and dates fixed
Risk to issuer
None
None
High
Buyer risk
Highest
Moderate
Lowest
Buyer reward
Highest
Moderate
Lowest
Legal obligation to
repay principal
93
WileyPLUS
94
Learning Objective 6
§  Brief exercise 9
§  Dividend policies
95
96
16
Why Not Pay All Net Income
as Dividends?
Retained Earnings
§  Net income over lifetime of business not
paid out as dividends
§  Not a reservoir of cash
§  Source of equity financing
§  Finance growth or expansion
§  Smooth out dividend payments
§  Cushion against possible losses
§  Maintain agreements with creditors
§  Purchase assets
§  Pay liabilities
§  Research and development
97
98
Learning Objective 7
§  Forms of dividend distributions
99
Types of Dividends
100
Cash Dividends
§  Cash dividends
§  Property dividends
§  Liquidating dividends
§  Stock dividends
§  Board of directors vote to declare
§  Declared dividend is a liability
All dividends, except stock dividends,
reduce total stockholders’ equity
101
102
17
Dividend Dates
CASH DIVIDENDS
Date
Declaration
Description
Board declares dividend
Record
Holders on date receive dividend
Payment
Dividend paid
Description
Retained Earnings
JE
✔
Debit
50,000
Credit
Dividends Payable
Cash dividend declared, $50,000
50,000
✔
No journal entry on date of record
Description
Dividends Payable
103
Retained Earnings
50,000
104
§  Distribution of investments
§  Debt or equity of other companies
100,000 Beginning balance
50,000
Cash
Cash dividend paid, $50,000
§  Dividends paid in non-cash assets
+
Cash dividends
Credit
Property Dividends
Retained Earnings
−
Debit
50,000
§  Declaration date: Restate property at
fair value, record gain (loss)
80,000 Net income
130,000 Ending balance
Privately held corporation, few shareholders,
give dividend to owners without using cash
105
106
Calculation of Gain (Loss)
Property Dividends
Investments (Assets) Transferred to Stockholders
Cost of investments
$ 125,000
FMV of investments
$ 200,000
$200,000
Cost of investments
125,000
Gain (loss)
$75,000
$200,000
Cost of investments
125,000
Gain (loss)
$75,000
Description
Debit
Credit
Investments
75,000
Gain on Investments
75,000
Declaration date: Adjust Investments to FMV, record gain (loss)
Calculation of Gain (Loss)
FMV of investments
FMV of investments
Description
Debit
Retained Earnings
200,000
Property Dividends Payable
Declaration date: Reduce Retained Earnings, create liability
107
Credit
200,000
108
18
Property Dividends:
Date of Property Distribution
Description
Debit
Retained Earnings
200,000
Property Dividends Payable
Declaration date: Reduce Retained Earnings, create liability
Liquidating Dividends
§  Retained Earnings balance negative
§  Dividend amount > Retained Earnings
§  Reduce any positive Retained Earnings
§  Reduce Additional Paid-In Capital
Credit
200,000
Description
Debit
Credit
Property Dividends Payable
200,000
Investments
200,000
Payment date: Investments distributed to stockholders of record
109
Liquidating Dividends:
Date of Declaration
WileyPLUS
§  Brief exercises 10, 12
Liquidating Dividend
Cash dividend declared
110
$ 120,000
Retained Earnings balance
$ 90,000
Additional Paid-In Capital balance
$ 800,000
Description
Debit
Credit
Retained Earnings
90,000
Paid-in Capital in Excess of Par
30,000
Dividends Payable
120,000
Declare cash dividends, $120,000; Retained Earnings balance, $90,000
111
Learning Objective 8
112
Why Stock Dividends, Splits
§  Explain accounting for small and large
stock dividends, and for stock splits
§  Increase shares outstanding to
§  Reduce market price of stock
113
114
19
Increase Shares Outstanding:
Three Methods
Type
% Stock Outstanding
Value
Small dividend
Less 20 – 25%
Market
Large dividend
More 20 – 25%
Par
Split
STOCK DIVIDENDS, SPLITS
§  Distribution of stock to shareholders
§  Proportionally
§  Own 10% of stock
§  Receive 10% of shares distributed
Not applicable
115
Small Stock Dividend
116
Small Stock Dividend
§  Journal entry
Small Stock Dividend
Market price of stock
$16
Shares outstanding
20,000
Stock dividend rate
10%
§  Decrease R/E at market value of stock
§  Increase common stock at par value
§  Increase additional paid-in capital
§  No change is total equity
§  No cash transferred to stockholders
Shares × Market price = Market value of company
Shares
Price
Value
Before
20,000
$16.00
$320,000
After
22,000
$14.55
$320,000
117
Small Stock Dividend
Small Stock Dividend
Small Stock Dividend
Stockholders’ Equity
(Before Stock Dividend)
Common stock, $10 par, 50,000 shares
authorized, 20,000 shares issued
118
Par value
$10
Market value
$16
$ 200,000
Shares outstanding
20,000
Additional Paid-In Capital
70,000
Stock dividend rate
10%
Retained Earnings
80,000
Total Stockholders’ Equity
$
Description
Retained Earnings (20,000 × 10%× $16)
350,000
Common Stock (20,000 × 10%× $10)
119
Debit
32,000
Credit
20,000
Additional Paid-In Capital
12,000
Plug
Issued 10% stock dividend (small), market value $16, par value $10
120
20
Stockholders’ Equity
(Before Stock Dividend)
Small Stock Dividend
Common stock, $10 par, 50,000 shares
authorized, 20,000 shares issued
Stockholders’ Equity
(After Stock Dividend)
Common stock, $10 par, 50,000 shares
authorized, 22,000 shares issued
70,000
Retained Earnings
Total Stockholders’ Equity
$ 220,000
Additional Paid-In Capital
82,000
Retained Earnings
48,000
Total Stockholders’ Equity
$ 200,000
Additional Paid-In Capital
$
80,000
$
350,000
Stockholders’ Equity
(After Stock Dividend)
350,000
Common stock, $10 par, 50,000 shares
authorized, 22,000 shares issued
$ 220,000
Additional Paid-In Capital
82,000
Retained Earnings
121
Large Stock Dividend
Total Stockholders’ Equity
48,000
$
122
Large Stock Dividend
Large Stock Dividend
§  Journal entry
Par value
§  Decrease R/E at par value of stock
§  Increase common stock at par value
§  No change in additional paid-in capital
$10
Shares outstanding
20,000
Stock dividend rate
40%
Description
Retained Earnings (20,000 × 40%× $10)
Debit
80,000
Common Stock
Issued 40% stock dividend (large), par value $10
123
Stock Splits
Increase
350,000
Credit
80,000
124
Yahoo Finance: INTC Historical Prices
Decrease
Shares authorized
Shares issued
Par value
Shares outstanding
125
126
21
4:1 Stock Split
Before
After
Stock price
$100
Par value before split
$5.00
$1.25
140 M
560 M
Shares issued before split
$25
Shares × Market price = Market value of company
Shares
Price
Value
140 M
$100.00
$14,000 M
560 M
$25.00
$14,000 M
127
Stockholders’ Equity
(Before 4:1 Stock Split)
Common stock, $5 par
200 million authorized, 140 million issued
$
12,300
Retained Earnings
20,000
Total Stockholders’ Equity
Stock Splits
700
Additional Paid-In Capital
No journal entry, Memo only
$ 33,000
Description
Called in the outstanding
$5 par common stock and distributed
four shares of $1.25 par common stock
for each share outstanding
Memo only: 4 for 1 stock split
Stockholders’ Equity
(After 4:1 Stock Split)
Common stock, $1.25 par,
800 million authorized, 560 million issued
Additional Paid-In Capital
Retained Earnings
Total Stockholders’ Equity
$
128
700
Debit
Credit
12,300
20,000
$ 33,000
129
STOCK DIVIDENDS, SPLITS
130
WileyPLUS
§  Both increase issued, outstanding
§  Both decrease market price of stock
§  Stock dividend
§  Brief exercises 13, 14
§  R/E È and paid-in capital Ç
§  No change to par value, authorized
§  Stock split
§  No change to R/E and paid-in capital
§  Par value È and shares authorized Ç
131
132
22
Learning Objective 9
§  Indicate how to present and analyze
stockholders’ equity
133
Statement of
Stockholders’ Equity
134
Ratio Analysis
135
Ratio Analysis
136
Ratio Analysis
137
138
23
LO 10: Appendix
Dividend Preferences
§  Explain different types of preferred
stock dividends and their effect on book
value per share
§  Distribute $50,000 cash dividends
§  Common stock par value, $400,000
§  Preferred stock 6%, par value $100,000
Omit participating preferred stock
Preferred stock noncumulative and nonparticipating
139
140
Dividend Preferences
Book Value Per Share
§  Distribute $50,000 cash dividends
§  Common stock par value, $400,000
§  Preferred stock 6%, par value $100,000
§  Net assets/common shares outstanding
§  Preferred stock reduces R/E by
§  Preferred dividends in arrears
§  Preferred stock participating amount
§  Excess of redemption value > book value
Preferred stock is cumulative and non-participating, and
Mason Company did not pay dividends on preferred
stock in preceding two years
141
Book Value Per Share
142
End of Chapter
§  No dividends in arrears
§  No participating amount
§  Redemption value < book value
§  No reduction to retained earnings
143
24
§  Distribute $50,000 cash dividends
§  Common stock par value, $400,000
§  Preferred stock 6%, par value $100,000
Dividend Preferences
§  Distribute $50,000 cash dividends
§  Common stock par value, $400,000
§  Preferred stock 6%, par value $100,000
Preferred stock is noncumulative, fully participating
Preferred stock is cumulative and fully participating, did
not pay dividends on preferred stock in past two years
145
§  Preferred 5%, cumulative
§  Three years preferred div in arrears
§  Preferred participating, up to 8%
§  Dividends not yet declared for period
146
Calculation of retained earnings used in book value
per common share calculation
Retained earnings
$162,582
Preferred stock
Less dividends in arrears
(45,000)
Less current dividend at 5%
(15,000)
Less participating at 3%
(9,000)
Common stock
Less current year at 5%
(20,000)
Less participating at 3%
(12,000)
Retained earnings available
See next page
147
$61,582
148
25