1. Stockholders’ Equity
Chapter 10

2. Explain the advantages
and disadvantages
of a corporation.

3. What is the Best Way to Organize a Business?
Proprietorship
Partnership
Corporation

4. Advantages and Disadvantages of a Corporation
1. Can raise more capital than a
proprietorship or partnership can
2. Continuous life is possible
3. Ease of transferring ownership
4. Limited liability of stockholders
Advantages
1. Separation of ownership
2. Corporate taxation
3. Government regulation
Disadvantages

5. Stockholders’ Equity Owners’ equity in a corporation
has two main components:
Paid-in capital
(contributed capital)
Retained earnings

6. Capital Stock Corporate ownership is evidenced
by a stock certificate which may
be for any number of shares.

7. Capital Stock Common Stock Preferred Stock A class of stock
that has several
preferences over
common stock.
The most basic form
of capital stock
issued by every
corporation.

8. Measure the effect of issuing
stock on a company’s
financial position.

9. Common Stock at Par Suppose IHOP’s common stock
carries a par value of $10 per share.
The company issues 6,200,000
shares of common stock at par.
What is the entry?

10. Common Stock at Par January 8 Cash (6,200,000 × $10) 62,000,000
To issue common stock

11. Common Stock Above Par IHOP’s common stock has a
par value of $0.01 per share.
The company issues 6,200,000 shares
of common stock at $10 per share.
What is the entry?

12. Common Stock Above Par July 23 Cash (6,200,000 × $10) 62,000,000
(6,200,000 × $0.01) ,000
Paid-in Capital in Excess of Par –
Common (6,200,000 × $9.99) ,938,000
To issue common stock

13. Common Stock Above Par Stockholders’ Equity Common Stock, $.01 par;
40 million shares authorized,
6.2 million shares issued $ ,000
Paid-in capital in excess of par ,938,000
Total paid-in capital $ 62,000,000
Retained earnings ,000,000
Total stockholders’ equity $256,000,000

14. No-Par Common Stock When a company issues no-par stock, it debits
the asset received and credits the stock account.
August 14
Cash (3,000 × $20) 60,000
Common Stock ,000
To issue no-par common stock

15. Preferred Stock Accounting for preferred stock follows the
pattern illustrated for common stock.
Stockholders’ equity on the balance sheet
lists preferred stock, common stock,
and retained earnings – in that order.

16. Describe how treasury stock transactions affect a company.

17. Treasury Stock Transactions
Treasury stock are shares that a company
has issued and later reacquired.
Reasons for purchasing their own stock:
Stock purchase plan distribution
Increase net assets (i.e. SE)
Avoidance of a takeover

18. IHOP Corp. Purchase of Treasury Stock
During 2000, IHOP paid $5,170 to purchase
288 shares of its common stock as treasury stock.
($000)
November 12, 2000
Treasury Stock ,170
Cash ,170
Purchased treasury stock

19. IHOP Corp. After Purchase of Treasury Stock
Common Stock $
Paid-in capital in excess of par ,655
Retained earnings ,632
Less: Treasury stock (288 shares at cost) – 5,170
Total equity $258,320
Stockholder’s Equity at December 31, 2000
(with treasury stock purchased – $000)

20. Sale of Treasury Stock Assume that on July 22, 2002, the shares
of treasury stock are sold for $5,300.
Cash ,300
Treasury Stock ,170
PIC from T Stock Transactions
Sold treasury stock

21. Account for dividends and
measure their impact
on a company.

22. Dividends A dividend is a corporation’s return
to its stockholders of some of the
benefits of earnings.

23. Three relevant dates for dividends are:
Dividend Dates
Three relevant dates for dividends are:
Declaration date
Date of record
Payment date

24. Preferred Stock Dividends
When a company has issued both
preferred and common stock,
the preferred stockholders
receive their dividends first.
Pinecraft Industries, Inc., has both
common stock and 90,000 shares
of preferred stock outstanding.

25. Preferred Stock Dividends
Preferred dividends are paid at the annual
rate of $1.75 per share.
Assume that in 2004, the company declares
an annual dividend of $1,500,000.
Preferred dividend (90,000 × $1.75 per share) $157,500
Common dividend ($1,500,000 – $157,500) 1,342,500
Total dividend $1,500,000

26. Expressing the Dividend Rate on Preferred Stock
Percentage rate (% of Par)
Dollar amount per share

27. Preferred Stock Dividends
The preferred stock of Pinecraft is CUMULATIVE
Suppose the company passed/ skipped/ did NOT pay the 2004
preferred dividend of $157,500. They didn’t pay ANY div
In 2005, the company declares a $500,000 dividend.
Retained Earnings ,000
Divs Payable, Pfd ($157,500 × 2 years) ,000
Divs Payable, CS ($500,000 – $315,000) ,000
To declare a cash dividend

28. Why Issue a Stock Dividend?
To continue dividends but conserve cash
To reduce the per-share market price of its stock

29. Stock Dividend IHOP declared a 10% stock dividend in 2001.
Assume IHOP had 20,000,000 shares
of common stock outstanding.
The stock is trading for $15 per share.
How would this stock dividend be recorded?

30. Stock Dividend CS (20,000,000 × 10% × $0.01) 20,000
Retained Earnings (20,000,000 × 10% × $15) 30,000,000
CS (20,000,000 × 10% × $0.01) ,000
Paid-in Capital ,980,000
Distributed a 10% stock dividend

31. Stock Splits A stock split is an increase in the number of
authorized, issued, and outstanding shares
of stock, coupled with a proportionate
reduction in the stock’s par value.
A stock split decreases the market price of stock.

32. Stock Splits The market price of a share of Quaker Oats
has been approximately $25.
Assume that the company wants
to decrease it to $12.50.
This 2-for-1 split means that the company
would have twice as many shares outstanding
after the split.

33. Use different stock values
in decision making.

34. (amount pfd SH’s will get paid if company liquidates)
Stock Values
Market value
Redemption value
Liquidation value
(amount pfd SH’s will get paid if company liquidates)
Book value

35. Book Value Book value of preferred stock
= Redemption value + Dividends in arrears
Book value of common stock
= Total stockholders’ equity – Preferred equity

36. Assume that a company’s balance sheet reports the following:
Book Value
Assume that a company’s balance sheet reports the following:
Preferred stock, 6%, $100 par, 5,000 shares
authorized, 400 shares issued,
redemption value $130 per share $ 40,000
Additional paid-in capital in excess of par – preferred ,000
Common stock, $10 par, 20,000 shares authorized,
5,500 shares issued ,000
Additional paid-in capital in excess of par – common ,000
Retained earnings ,000
Treasury stock – common, 500 shares at cost – 15,000
Total stockholders’ equity $241,000
Stockholders’ Equity

37. Book Value Suppose that four years’ (including the current year)
cumulative preferred dividends are in arrears.
The book-value-per-share computations
for this company are as follows:

38. Book Value Preferred equity:
Redemption value (400 shares × 130) $ 52,000
Cumulative dividends ($40,000 × $0.06 × 4 years) ,600
Preferred equity $ 61,600
Common equity:
Total stockholders’ equity $241,000
Less preferred equity – 61,600
Common equity $179,400
Book value per share: $179,400 ÷ 5,000 shares* $
*5,500 shares issued minus 500 treasury shares

39. Evaluate a company’s return
on assets and return on
stockholders’ equity.

40. Return on Assets Rate of return on total assets
= (Net income + Interest expense)
÷ Average total assets
It is a measure of a company’s ability to
generate profits from the use of its assets.

41. Return on Equity Rate of return on common stockholders’ equity
= (Net income – Preferred dividends)
÷ Average common stockholders’ equity
It is a measure of the income earned from the
common stockholders’ investment in the company.

42. End of Chapter 10