Reporting and Interpreting Owners Equity Irwin/McGraw-Hill

Transcription

1 Chapter 11 Reporting and Interpreting Owners Equity

2 Business Background Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limited liability

3 Business Background Because a corporation is a separate legal entity, it can... Own assets. Incur liabilities. Sue and be sued. Enter into contracts.

4 Ownership of a Corporation!Voting (in person or by proxy). Stockholders Rights "Proportionate distributions of profits. #Proportionate distributions of assets in a liquidation.

5 Ownership of a Corporation Stockholders (Owners of voting shares) Appointed by directors Board of Directors Internal (managers) and External (non-managers) President Elected by shareholders Vice President (Production) Vice President (Marketing) Vice President (Finance) Vice President (Controller)

6 Authorized, Issued, and Outstanding Capital Stock Authorized Shares The maximum number of shares of capital stock that can be sold to the public.

7 Authorized, Issued, and Outstanding Capital Stock Authorized Shares Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold.

8 Authorized, Issued, and Outstanding Capital Stock Authorized Shares Issued Shares Outstanding Shares Treasury Shares Outstanding shares are issued shares that are owned by stockholders. Unissued Shares Treasury shares are issued shares that have been reacquired by the corporation.

9 Types of Capital Stock Common Stock Preferred Stock

10 Common Stock Basic voting stock Ranks after preferred stock Dividend set by board of directors

11 Par Value and No-par Value Stock Par Value Nominal value Legal capital Legal capital is the amount of capital, required by the state, that must remain invested in the business.

12 Par Value and No-par Value Stock Par Value Market Value I get it!

13 No-par Value Stock Some states do not Some require states that a par do value notbe require stated in a the par charter. value to be stated in the charter.

14 Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate

15 Special Features of Preferred Stock Convertible preferred stock may be exchanged for common stock. Callable preferred stock may be repurchased by the corporation at a predetermined price.

16 Accounting for Capital Stock Two primary sources of stockholders equity Contributed capital Retained earnings Par value Additional paid-in capital

17 Sale and Issuance of Capital Stock Initial public offering (IPO) Seasoned new issue The first time a corporation sells stock to the public. Wal-Mart Wal-Mart issues new stock. Subsequent sales of new stock to the public.

18 Secondary Markets Transactions between two investors that do not affect the corporation s accounting records. I d like to sell some of my Wal-Mart stock. I d like to buy some of your Wal-Mart stock.

19 GENERAL JOURNAL Page 34 Date Description Debit Credit July 6 Sale and Issuance of Capital Stock On July 6, Wal-Mart issued 100,000 shares of $0.10 par value common stock for $22 per share. Prepare the journal entry to record this transaction.

20 Sale and Issuance of Capital Stock On July 6, Wal-Mart issued 100,000 shares of $0.10 par value common stock for $22 per share. 100,000 shares $0.10 par value = $10, ,000 shares GENERAL $22 per JOURNAL share = $2,200,000 Page 34 Date Description Debit Credit July 6 Cash 2,200,000 Common Stock 10,000 Capital In Excess of Par Value 2,190,000

21 Capital Stock Sold for Noncash Assets and/or Services Issues stock Wal-Mart Accountant Provides accounting services Record assets or services received at at the market value of the stock at at the date of the transaction.

22 Capital Stock Sold for Noncash Assets and/or Services Issues stock Wal-Mart If If the market value of the stock cannot be determined, then the market value of the assets or services received should be used. Accountant Provides accounting services

23 Capital Stock Sold for Noncash Assets and/or Services On March 14, Wal-Mart issued 10,000 shares of its $0.10 par value common stock to the Rose Law firms. The stock was selling for $15 per share. GENERAL JOURNAL Page 12 Date Description Debit Credit Mar. 14 Prepare the journal entry to record this transaction.

24 Capital Stock Sold for Noncash Assets and/or Services On March 14, Wal-Mart issued 10,000 shares of its $0.10 par value common stock to the Rose Law firms. The stock was selling for $15 per share. 10,000 shares $0.10 par value = $1,000 10,000 shares GENERAL $15 per JOURNAL share = $150,000 Page 12 Date Description Debit Credit Mar. 14 Legal Fees 150,000 Common Stock 1,000 Capital In Excess of Par Value 149,000

25 Stock Options Wal-Mart If Wal-Mart does not have new stock to issue when the stock options are exercised, then.. Management compensation package includes salary and stock options. Stock options allow management to purchase stock from the corporation at a fraction of the stock s value in the secondary market. Management

26 Treasury Stock Wal-Mart Wal-Mart buys its own stock in the secondary market. (Treasury stock) Stockholders Management compensation package includes salary and stock options. Stock options allow management to purchase stock from the corporation at a fraction of the stock s value in the secondary market. Management

27 Treasury Stock No voting or dividend rights Contra equity account When stock is reacquired, the corporation records the treasury stock at cost.

28 Treasury Stock On May 1, Wal-Mart reacquired 100,000 shares of its common stock at $22 per share. The journal entry for May 1 is.... GENERAL JOURNAL Page 27 Date Description Debit Credit May 1 Treasury Stock 2,200,000 Cash 2,200, ,000 shares $22 = $2,200,000

29 Treasury Stock On December 3, Wal-Mart reissued 10,000 shares of the treasury stock at $30 per share. The journal entry for December 3 is... 10,000 shares $22 cost = $220,000 10,000 shares $30 = $300,000 GENERAL JOURNAL Page 68 Date Description Debit Credit Dec. 3 Cash 300,000 Treasury Stock 220,000 Contributed Capital from Treasury Stock Transactions 80,000

30 Accounting for Cash Dividends Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash.

31 Declaration date Dividend Dates $ Board of directors declares the dividend. $ Record a liability. Date GENERAL JOURNAL Page 12 Description Retained Earnings Dividends Payable Post. Ref. Debit Credit XXX XXX

32 Dividend Dates Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) X

33 Date of Payment Dividend Dates Record the payment of the dividend to stockholders. Date GENERAL JOURNAL Page 12 Description Dividends Payable Cash Post. Ref. Debit Credit XXX XXX

34 Dividends on Preferred Stock!Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock. "Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

35 Dividends on Preferred Stock If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently.

36 Dividends on Preferred Stock Kites, Inc. has the following stock outstanding: Common stock: $1 par, 100,000 shares Preferred stock: 3%, $100 par, cumulative, 5,000 shares Preferred stock: 6%, $50 par, noncumulative, 3,000 shares Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000. How much will each class of stock receive?

37 Dividends on Preferred Stock Total dividend declared $ 50,000 Preferred stock (cumulative) Remainder Preferred stock (noncumulative) Remainder Common stock Remainder

38 Dividends on Preferred Stock Total dividend declared $ 50,000 Preferred stock (cumulative) Arrearage ($100 par 3% 5,000 shares) $ 15,000 Current Yr. ($100 par 3% 5,000 shares) 15,000 30,000 Remainder $ 20,000 Preferred stock (noncumulative) Remainder Common stock Remainder

39 Dividends on Preferred Stock Total dividend declared $ 50,000 Preferred stock (cumulative) Arrearage ($100 par 3% 5,000 shares) $ 15,000 Current Yr. ($100 par 3% 5,000 shares) 15,000 30,000 Remainder $ 20,000 Preferred stock (noncumulative) Current Yr. ($50 par 6% 3,000 shares) 9,000 Remainder $ 11,000 Common stock Remainder

40 Dividends on Preferred Stock Total dividend declared $ 50,000 Preferred stock (cumulative) Arrearage ($100 par 3% 5,000 shares) $ 15,000 Current Yr. ($100 par 3% 5,000 shares) 15,000 30,000 Remainder $ 20,000 Preferred stock (noncumulative) Current Yr. ($50 par 6% 3,000 shares) 9,000 Remainder $ 11,000 Common stock Current Yr. ($11,000 Remainder) 11,000 Remainder $ 0

41 Dividends Question On June 1, 2000 a corporation s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry? a. Debit Retained Earnings $20,000. b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000.

42 Dividends Question On June 1, 2000 a corporation s board of directors GENERAL declared a JOURNAL dividend for the 2,500 shares Page 12 Date Description Debit Credit of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following Cash will be included in the July 15 entry? 20,000 July 15 Dividends Payable 20,000 $100 8% = $8 dividend per share a. Debit Retained Earnings $20,000. $8 2,500 = $20,000 total dividend b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000.

43 Accounting for Stock Dividends Distribution of additional shares of stock to stockholders. No change in total stockholders equity. No change in par values. All stockholders retain same percentage ownership.

44 Stock Dividends Small Stock dividend < 25% Large Stock dividend > 25% Record at at current market value of stock. Record at at par value of stock.

45 Stock Splits Distributions of 100% or more of stock to stockholders. Ice Cream Parlor Banana Splits On Sale Now

46 Stock Splits Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2 for 1 stock split. Before Split Common Stock Shares 5,000 After Split Par Value per Share $ 1.00 Total Par Value $ 5,000

47 Stock Splits Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2 for 1 stock split. Before Split After Split Common Stock Shares 5,000 10,000 Increase Par Value per Share $ 1.00 $ 0.50 Total Par Value $ 5,000 $ 5,000 Decrease No Change

48 Restrictions on Retained Earnings If I loan you $150,000, I will want you to restrict your retained earnings. Why would you want to do that?

49 Restrictions on Retained Earnings Because I want to restrict the amount you can pay out in dividends.

50 Accounting and Reporting for Unincorporated Businesses Equity Accounts Distributions to Owners Closing Entries Income Statement Balance Sheet Corporation (Stockholders' Equity) Sole Proprietorship (Owner's Equity) Partnership (Partners' Equity) Capital Stock Doe, Capital Able, Capital Baker, Capital Contributed Capital in Not used Not used Excess of Par Retained Earnings Not used Not used Dividends Paid Doe, Drawings Able, Drawings Baker, Drawings Income Summary Income Summary Income Summary (closed to Retained (closed to Doe, Capital) (closed to Able, Capital Earnings) and Baker, Capital) Revenues, expenses, Same Same gains and losses Assets and liabilities Same Same

51 C mon Chester! With your smarts and my savvy, we could make a great partnership!! End of Chapter 11