Principles of Accounting II Chapter 19: Record and Communicate Equity Financing

Transcription

1 Principles of Accounting II Chapter 19: Record and Communicate Equity Financing Time to Review Why does a business need? What are the three sources of? What are the major forms of? To raise large amounts of, what business form is generally preferred? Unlike proprietorships and partnerships, accounts for each owner are not shown on a corporation s? Why not? What are the major advantages of partnerships over? What are the major disadvantages? Which business form has life? In which business form is it easiest to ownership? How are divided among the partners in a partnership? Common techniques for dividing a partnership s among partners are: What type of financing instrument has the last claim on assets in? What type of financing may have rights? 1

2 How does one calculate the dividends on preferred stock? If the number of issued, outstanding, and authorized shares are different, which is? Which is? What do differences between outstanding and shares indicate? Why might a company have stock? What is capital, how is it computed, and why is it necessary? What is value, and what causes it to fluctuate? The amount shares sell for is their. What are the dates on which a corporation establishes an obligation to pay and satisfies that obligation? The date is between what other two dates? Dividends are paid only on shares. Do cash dividends, stock dividends, and stock splits reduce a corporation s? 2

3 Sole Proprietorship owner Not a separate legal liability section consists entirely of owner s capital Owner s Capital = Calculate owner s capital at the end of years 2 and 3: Contributed, year 1 $10,000 Earnings, year 1 1,800 Withdrawal, year 2 1,000 Loss, year 2 4,300 Earnings, year 3 6,000 Withdrawal, year 3 2,000 Three Minute Writing Assignment Why aren t separated from the owner s in a sole proprietorship? 3

4 Recording Owner s Contributions Example journal entry: Non-cash assets are recorded at their. You Record It Charlie has a dry cleaning business. He bought a computer two years ago for $ ; it is worth $ now. He also has 12 bottles of dry cleaning fluid worth $. He purchased the bottles on ebay for $ last winter. He bought a new commercial iron for $ last week. If Charlie contributes the computer, the dry cleaning fluid, and the iron to the business, what is the journal entry to record the transaction? Closing Entries at Year End When the period is over, the and accounts are closed out to (a account), and income summary is closed to owner s. Revenue 14,000 Income summary 14,000 Income summary 8,000 Expenses 8,000 4

5 Partnerships or owners Not separate entity liability agency Separate Partners Capital Accounts Increase for Decrease for Increase for partner s share of Decrease for partner s share of Increase if partner pays the capital account balance assigned Decrease if partner pays the capital account balance assigned 5

6 Balance Sheet for Partnerships account for each partner No account No accounts Recording Equity Transactions Jane Jack John Randy Beginning capital $50,000 $60,000 $100,000 $5,000 Contributions 5,000 5,000 5,000 Withdrawals 20,000 20,000 20,000 Salary allowance Residual earnings Ending capital The partnership earned $ and has agreed to give Randy a $ salary allowance. Remaining income is allocated based on beginning capital accounts. Make the journal entries for the year s contributions, withdrawals, and profit. Determine ending balances. Journal entry for contributions: Journal entry for withdrawals: Journal entry for earnings allocation: 6

7 Admitting a New Partner Jane Jack John Randy Vi Beginning capital $32,500 $48,750 $113,750 $130,000 Capital percentage 10% 15% 35% 40% Bonus allocation Vi wants to join the partnership, and the 4 existing partners agree to admit her. Vi will contribute $ and receive % of the partnership. Post-contribution partnership capital: Vi s initial capital account balance: Bonus: Journal entry to admit Vi: 7

8 Let s Change the Facts Jane Jack John Randy Vi Beginning capital $32,500 $48,750 $113,750 $130,000 Capital percentage 10% 15% 35% 40% Bonus allocation Vi wants to join the partnership, and the 4 existing partners agree to admit her. Vi will contribute $ and receive % of the partnership. Post-contribution partnership capital: Vi s initial capital account balance: Bonus: Journal entry to admit Vi: Characteristics of Corporations legal entity liability taxation Shares evidence 8

9 Corporation s Equity Section Contributions o o capital Retained stock Meaning of Par Value Some states require a capital to protect. Set very No real use Not a measure of 9

10 Stock Issue Issues Par value is recorded in the or account. The rest is recorded as in of. With stock, the full proceeds are recorded in the common or preferred stock account. Recording Stock Issues How many shares were issued in each of the independent cases below? Cash 15,000 Common stock ($ par) 5,000 Paid-in capital in excess of par 10,000 Cash 15,000 Common stock (no par) 15,000 Cash 15,000 Preferred stock ($ par) 1,000 Paid-in capital in excess of par 14,000 10

11 Retained Earnings Recall that sole proprietorships and partnerships closed Income summary to one or more. In contrast, corporations close Income summary to. Revenue 8,000 8,000 Income summary 14,000 14,000 Dividend Timeline Declaration date Ex-dividend date Record date Payment date 11

12 Test Your Understanding Castlemart, Inc. earned $ in December. At their December 18 meeting, the Board declared a $ ($ ) per share dividend on preferred (common) stock. Both dividends are paid on January 12 to shareholders of record on December 24. Equity Section of Castlemart s Balance Sheet 12/1/01 Preferred stock, 8%, $50 par value [1,000,000 shares authorized, 20,000 shares issued] Paid-in capital in excess of par, preferred stock Common stock, no par [3,000,000 shares authorized, 50,000 shares issued] Retained earnings Treasury stock [2,000 shares common stock] Record the net profit for December: Record the dividend for December: Calculate ending retained earnings for December: Stock Dividends Stock dividends occur when a company additional to shareholders. When the additional shares are less than % of shares, it s a stock dividend. Otherwise, it s a stock dividend. 12

13 Recording Stock Dividends Reduce retained earnings just like a cash dividend except: o For a stock dividend, use stock s value o For a stock dividend, use stock s value Instead of payable, use Stock dividend (an account) to show the obligation to issue stock. Sample entries: Treasury Stock When a company purchases its stock in the open, it has treasury stock. Treasury stock: o Reduces ( account) o Does not receive ( but not outstanding) The is recorded at whatever the company for the stock. Sample entry: 13

14 Stock Splits Some companies declare stock splits to reduce the market value per share. They call back their shares and issue multiples of the original shares in exchange. E.g., o 2-for-1 splits double outstanding shares and o 3-for-1 splits triple outstanding shares. Splits involve no additional contributions or dividends. Number of shares increases; par value per share decreases. Only a memo entry is required. Total shareholders equity does not change. 14

15 Test Your Comprehension Equity Section of Castlemart s Balance Sheet 12/1/01 Preferred stock, 8%, $50 par value [1,000,000 shares authorized, 20,000 shares issued] Paid-in capital in excess of par, preferred stock Common stock, no par [3,000,000 shares authorized, 50,000 shares issued] Retained earnings Treasury stock [2,000 shares common stock] At what price per share was the preferred stock originally issued? At what price per share was the common stock originally issued? At what price per share did Castlemart buy treasury stock? What is total shareholder s equity? 15