1. 11-1 Preview of Chapter 1 Financial Accounting Ninth Edition Weygandt Kimmel Kieso

2. 11-2 Preview of Chapter 11 Financial Accounting Ninth Edition Weygandt Kimmel Kieso

3. 11-3 Learning Objectives After studying this chapter, you should be able to: [1] Identify the major characteristics of a corporation. [2] Record the issuance of common stock. [3] Explain the accounting for treasury stock. [4] Differentiate preferred stock from common stock. [5] Prepare the entries for cash dividends and stock dividends. [6] Identify the items reported in a retained earnings statement. [7] Prepare and analyze a comprehensive stockholders’ equity section. 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings

4. 11-4 An entity separate and distinct from its owners. Classified by Purpose  Not-for-Profit  For Profit Classified by Ownership  Publicly held  Privately held ► McDonald’s ► Nike ► PepsiCo ► Google ► Salvation Army ► American Cancer Society ► Cargill Inc. The Corporate Form of Organization Alternative Terminology Privately held corporations are also referred to as closely held corporations. Alternative Terminology Privately held corporations are also referred to as closely held corporations. LO 1

5. 11-5 Characteristics that distinguish corporations from proprietorships and partnerships. Advantages Disadvantages Characteristics of an Organization  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes LO 1

6. 11-6 Corporation acts under its own name rather than in the name of its stockholders. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of an Organization  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes LO 1

7. 11-7 Limited to their investment. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of an Organization  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes LO 1

8. 11-8 Shareholders may sell their stock. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of an Organization  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes LO 1

9. 11-9 Corporation can obtain capital through the issuance of stock. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of an Organization  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes LO 1

10. 11-10 Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of an Organization  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes LO 1

11. 11-11 Separation of ownership and management often reduces an owner’s ability to actively manage the company. Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of an Organization  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes LO 1

12. 11-12  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of an Organization LO 1

13. 11-13 Characteristics that distinguish corporations from proprietorships and partnerships. Characteristics of an Organization  Separate Legal Existence  Limited Liability of Stockholders  Transferable Ownership Rights  Ability to Acquire Capital  Continuous Life  Corporate Management  Government Regulations  Additional Taxes Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends. LO 1

14. 11-14 Stockholders Chairman and Board of Directors President and Chief Executive Officer General Counsel/ Secretary Vice President Marketing Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources TreasurerController Illustration 11-1 Corporation organization chart Characteristics of an Organization LO 1

15. 11-15 Forming a Corporation  File application with the Secretary of State.  State grants charter.  Corporation develops by-laws. Initial Steps: Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey). Corporations engaged in interstate commerce must obtain a license from each state in which they do business. The Corporate Form of Organization Alternative Terminology The charter is often referred to as the articles of incorporation. Alternative Terminology The charter is often referred to as the articles of incorporation. LO 1

16. 11-16 LO 1

17. 11-17 1.Vote in election of board of directors and on actions that require stockholder approval. Stockholders Rights 2.Share the corporate earnings through receipt of dividends. The Corporate Form of Organization LO 1 Illustration 11-3 Ownership rights of stockholders

18. 11-18 3.Keep the same percentage ownership when new shares of stock are issued (preemptive right). Stockholders Rights The Corporate Form of Organization * A number of companies have eliminated the preemptive right. LO 1 Illustration 11-3 Ownership rights of stockholders

19. 11-19 4.Share in assets upon liquidation in proportion to their holdings. This is called a residual claim. Stockholders Rights The Corporate Form of Organization LO 1 Illustration 11-3 Ownership rights of stockholders

20. 11-20 When a corporation decides to issue stock, it must resolve a number of basic questions: 1.How many shares should it authorize for sale? 2.How should it issue the stock? 3.What value should the corporation assign to the stock? Stock Issue Considerations The Corporate Form of Organization LO 1

21. 11-21  Charter indicates the amount of stock that a corporation is authorized to sell.  Number of authorized shares is often reported in the stockholders’ equity section.  No formal accounting entry. Authorized Stock Stock Issue Considerations LO 1

22. 11-22 Name of corporation Stockholder’s name Shares Signature of corporate official Prenumbered Illustration 11-4 Stock Issue Considerations LO 1

23. 11-23  Companies issue common stock directly to investors or indirectly through an investment banking firm.  Factors in setting price for a new issue of stock: 1.Company’s anticipated future earnings. 2.Expected dividend rate per share. 3.Current financial position. 4.Current state of the economy. 5.Current state of the securities market. Issuance of Stock Stock Issue Considerations LO 1

24. 11-24  Stock of publicly held companies is traded on organized exchanges.  Interaction between buyers and sellers determines the prices per share.  Prices tend to follow the trend of a company’s earnings and dividends.  Factors beyond a company’s control may cause day-to- day fluctuations in market prices. Market Price of Stock Stock Issue Considerations LO 1

25. 11-25 LO 1

26. 11-26  Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors.  Today many states do not require a par value.  No-par value stock is fairly common today.  In many states, the board of directors assigns a stated value to no-par shares. Par and No-Par Value Stock Stock Issue Considerations LO 1

27. 11-27 Question Which of these statements is false? a.Ownership of common stock gives the owner a voting right. b.The stockholders’ equity section begins with paid-in capital. c.The authorization of capital stock does not result in a formal accounting entry. d.Legal capital is intended to protect stockholders. Stock Issue Considerations LO 1

28. 11-28 Indicate whether each of the following statements is true or false. ______ 1. Similar to partners in a partnership, stockholders of a corporation have unlimited liability. ______ 2. It is relatively easy for a corporation to obtain capital through the issuance of stock. ______ 3. The separation of ownership and management is an advantage of the corporate form of business. ______ 4. The journal entry to record the authorization of capital stock includes a credit to the appropriate capital stock account. ______ 5. All states require a par value per share for capital stock. False True False LO 1

29. 11-29 Paid-in Capital Retained Earnings Account Account Paid-in Capital in Excess of Par Account Account Two Primary Sources of Equity Common Stock Account Account Preferred Stock Account Account Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock. Corporate Capital LO 1

30. 11-30 Paid-in Capital Retained Earnings Account Account Two Primary Sources of Equity Common Stock Account Account Preferred Stock Account Account Retained earnings is net income that a corporation retains for future use. Corporate Capital Paid-in Capital in Excess of Par Account Account LO 1

31. 11-31 If Delta Robotics has a balance of $800,000 in common stock and $130,000 in retained earnings at the end of its first year, its stockholders’ equity section is as follows. Corporate Capital Illustration 11-5 Stockholders’ equity section LO 1

32. 11-32 Comparison of the owners’ equity (stockholders’ equity) accounts reported on a balance sheet for a proprietorship and a corporation. Corporate Capital Illustration 11-6 Comparison of owners’ equity accounts LO 1

33. 11-33 LO 1

34. 11-34 Learning Objectives After studying this chapter, you should be able to: [1] Identify the major characteristics of a corporation. [2] Record the issuance of common stock. [3] Explain the accounting for treasury stock. [4] Differentiate preferred stock from common stock. [5] Prepare the entries for cash dividends and stock dividends. [6] Identify the items reported in a retained earnings statement. [7] Prepare and analyze a comprehensive stockholders’ equity section. 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings

35. 11-35 Accounting for Stock Transactions LO 2 Primary Objectives: 1)Identify the specific sources of paid-in capital. 2)Maintain the distinction between paid-in capital and retained earnings. Other than consideration received, the issuance of common stock affects only paid-in capital accounts. Accounting for Common Stock

36. 11-36 b. Cash1,000 Common Stock (1,000 x $1) 1,000 Cash5,000 Common Stock (1,000 x $1)1,000 Paid-in Capital in Excess of Par Value 4,000 Issuing Par Value Common Stock for Cash Accounting for Common Stock Illustration: Assume that Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share. a. LO 2

37. 11-37 Illustration 11-7 Accounting for Common Stock Alternative Terminology Paid-in Capital in Excess of Par is also called Premium on Stock. Alternative Terminology Paid-in Capital in Excess of Par is also called Premium on Stock. LO 2

38. 11-38 Illustration: Assume that instead of $1 par value stock, Hydro- Slide, Inc. has $5 stated value no-par stock and the company issues 5,000 shares at $8 per share for cash. Cash40,000 Common Stock25,000 Paid-in Capital in Excess of Stated Value15,000 Issuing No-Par Common Stock for Cash Accounting for Common Stock LO 2

39. 11-39 Illustration: What happens when no-par stock does not have a stated value? Cash40,000 Common Stock40,000 Issuing No-Par Common Stock for Cash Accounting for Common Stock LO 2

40. 11-40 Corporations also may issue stock for:  Services (attorneys or consultants).  Noncash assets (land, buildings, and equipment). Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable. Accounting for Common Stock Issuing Common Stock for Services or Noncash Assets LO 2

41. 11-41 Illustration: Attorneys have helped Jordan Company incorporate. They have billed the company $5,000 for their services. They agree to accept 4,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction. Organizational Expense5,000 Common Stock (4,000 x $1) 4,000 Paid-in Capital in Excess of Par1,000 Accounting for Common Stock LO 2

42. 11-42 Illustration: Athletic Research Inc. is an existing publicly held corporation. Its $5 par value stock is actively traded at $8 per share. The company issues 10,000 shares of stock to acquire land recently advertised for sale at $90,000. Prepare the journal entry for this transaction. Accounting for Common Stock Land80,000 Common Stock (10,000 x $5) 50,000 Paid-in Capital in Excess of Par30,000 LO 2

43. 11-43 THE MISSING CONTROL Independent internal verification. The company’s board of directors should have ensured that the awards were properly administered. For example, the date on the minutes from the board meeting could be compared to the dates that were recorded for the awards. In addition, the dates should again be confirmed upon exercise. Total take: $1.7 million ANATOMY OF A FRAUD The president, chief operating officer, and chief financial officer of SafeNet, a software encryption company, were each awarded employee stock options by the company’s board of directors as part of their compensation package. Stock options enable an employee to buy a company’s stock sometime in the future at the price that existed when the stock option was awarded. For example, suppose that you received stock options today, when the stock price of your company was $30. Three years later, if the stock price rose to $100, you could “exercise” your options and buy the stock for $30 per share, thereby making $70 per share. After being awarded their stock options, the three employees changed the award dates in the company’s records to dates in the past, when the company’s stock was trading at historical lows. For example, using the previous example, they would choose a past date when the stock was selling for $10 per share, rather than the $30 price on the actual award date. In our example, this would increase the profit from exercising the options to $90 per share. Advance slide in presentation mode to reveal the missing control. LO 2

44. 11-44 Learning Objectives After studying this chapter, you should be able to: [1] Identify the major characteristics of a corporation. [2] Record the issuance of common stock. [3] Explain the accounting for treasury stock. [4] Differentiate preferred stock from common stock. [5] Prepare the entries for cash dividends and stock dividends. [6] Identify the items reported in a retained earnings statement. [7] Prepare and analyze a comprehensive stockholders’ equity section. 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings

45. 11-45 Paid-in Capital Retained Earnings Account Account Paid-in Capital in Excess of Par Account Account Less: Treasury Stock AccountLess: Treasury Stock Account Two Primary Sources of Equity Common Stock Account Account Preferred Stock Account Account Accounting for Treasury Stock LO 3

46. 11-46 Treasury stock is a corporation’s own stock that it has reacquired from shareholders but not retired. Corporations acquire treasury stock for various reasons: 1.To reissue the shares to officers and employees under bonus and stock compensation plans. 2.To enhance the stock’s market value. 3.To have additional shares available for use in the acquisition of other companies. 4.To increase earnings per share. Accounting for Treasury Stock LO 3

47. 11-47 Purchase of Treasury Stock  Companies generally use the cost method.  Debit Treasury Stock for the price paid to reacquire the shares.  Treasury stock is a contra stockholders’ equity account. Reduces stockholders’ equity. Accounting for Treasury Stock Helpful Hint Treasury shares do not have dividend rights or voting rights. Helpful Hint Treasury shares do not have dividend rights or voting rights. LO 3

48. 11-48 Treasury Stock (4,000 x $8) 32,000 Cash32,000 Illustration: On February 1, 2015, Mead acquires 4,000 shares of its stock at $8 per share. Accounting for Treasury Stock Illustration 11-8 Stockholders’ equity with no treasury stock LO 3

49. 11-49 Both the number of shares issued (100,000) and the number of shares held as treasury (4,000) are disclosed. Accounting for Treasury Stock Illustration 11-9 Stockholders’ equity with treasury stock LO 3

50. 11-50 LO 3

51. 11-51 Sale of Treasury Stock  Above Cost  Below Cost Both increase total assets and stockholders’ equity. Accounting for Treasury Stock Disposal of Treasury Stock Helpful Hint Treasury stock transactions are classified as capital stock transactions. As in the case when stock is issued, the income statement is not involved. Helpful Hint Treasury stock transactions are classified as capital stock transactions. As in the case when stock is issued, the income statement is not involved. LO 3

52. 11-52 Illustration: On July 1, Mead sells for $10 per share 1,000 shares of its treasury stock previously acquired at $8 per share and makes the following entry. Cash 10,000 Treasury Stock 8,000 Paid-in Capital from Treasury Stock 2,000 A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders. Sale of Treasury Stock “Above” Cost LO 3

53. 11-53 Illustration: On Oct. 1, Mead sells an additional 800 shares of treasury stock at $7 per share and makes the following entry. Illustration 11-10 Treasury stock accounts Sale of Treasury Stock “Below” Cost Cash 5,600 Paid-in Capital from Treasury Stock 800 Treasury Stock 6,400 LO 3

54. 11-54 Cash 15,400 Paid-in Capital from Treasury Stock 1,200 Retained Earnings 1,000 Treasury Stock 17,600 Illustration: On Dec. 1, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share and makes the following entry. Sale of Treasury Stock “Below” Cost Limited to balance on hand LO 3

55. 11-55 Learning Objectives After studying this chapter, you should be able to: [1] Identify the major characteristics of a corporation. [2] Record the issuance of common stock. [3] Explain the accounting for treasury stock. [4] Differentiate preferred stock from common stock. [5] Prepare the entries for cash dividends and stock dividends. [6] Identify the items reported in a retained earnings statement. [7] Prepare and analyze a comprehensive stockholders’ equity section. 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings

56. 11-56 Typically, preferred stockholders have a priority as to: 1.Distributions of earnings (dividends). 2.Assets in event of liquidation. Generally do not have voting rights. Accounting for preferred stock at issuance is similar to that for common stock. Accounting for Stock Transactions LO 4 Accounting for Preferred Stock

57. 11-57 Illustration: Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. The journal entry to record the issuance is: Preferred stock may have a par value or no-par value. Accounting for Preferred Stock Cash 120,000 Preferred Stock (10,000 x $10) 100,000 Paid-in Capital in Excess of Par20,000 LO 4

58. 11-58   Right to receive dividends before common stockholders.   Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount. Dividend Preferences  Cumulative Dividend Preferred stockholders must be paid both current-year dividends and any unpaid prior- year dividends before common stockholders receive dividends. Accounting for Preferred Stock LO 4

59. 11-59 Cumulative Dividend Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par value, cumulative preferred stock outstanding. Each $100 share pays a $7 dividend (.07 x $100). The annual dividend is $35,000 (5,000 x $7 per share). If dividends are two years in arrears, preferred stockholders are entitled to receive the following dividends in the current year. Illustration 11-11 Computation of total dividends to preferred stock Advance slide in presentation mode to reveal dividend amounts. Accounting for Preferred Stock LO 4

60. 11-60   Most preferred stocks have a preference on corporate assets if the corporation fails.   Provides security for the preferred stockholder.   Preference to assets may be for the par value of the shares or for a specified liquidating value. Liquidation Preferences Accounting for Preferred Stock LO 4

61. 11-61 Learning Objectives After studying this chapter, you should be able to: [1] Identify the major characteristics of a corporation. [2] Record the issuance of common stock. [3] Explain the accounting for treasury stock. [4] Differentiate preferred stock from common stock. [5] Prepare the entries for cash dividends and stock dividends. [6] Identify the items reported in a retained earnings statement. [7] Prepare and analyze a comprehensive stockholders’ equity section. 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings

62. 11-62 Distribution of cash or stock to stockholders on a pro rata (proportional to ownership) basis. Types of Dividends: 1.Cash dividends. 2.Property dividends. Dividends are generally reported quarterly as a dollar amount per share. 3.Stock dividends. 4.Scrip (promissory note). Dividends LO 5

63. 11-63 For a corporation to pay a cash dividend, it must have: 1. 1.Retained earnings - Payment of cash dividends from retained earnings is legal in all states. 2. 2.Adequate cash. 3. 3.A declaration of dividends by the Board of Directors. Dividends Cash Dividends LO 5

64. 11-64 Three dates are important: Dividends Illustration 11-12 Key dividend dates LO 5

65. 11-65 Illustration: On Dec. 1, the directors of Media General declare a 50 cents per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on Jan. 20 to shareholders of record on Dec. 22. Dec. 1 (Declaration Date) Cash Dividends 50,000 Dividends Payable 50,000 Dec. 22 (Date of Record) Jan. 20 (Payment Date) Dividends Payable 50,000 Cash 50,000 No entry Dividends LO 5

66. 11-66 Allocating Cash Dividends Between Preferred and Common Stock Holders of cumulative preferred stock must be paid any unpaid prior-year dividends and their current year’s dividend before common stockholders receive dividends. Dividends LO 5

67. 11-67 Illustration: On December 31, 2015, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock. It also has 50,000 shares of $10 par value common stock outstanding. At December 31, 2015, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend. Cash Dividends 6,000 Dividends Payable6,000 Preferred Dividends: 1,000 shares x $100 par x 8% = $8,000 Dividends LO 5

68. 11-68 * 1,000 shares x $100 par x 8% = $8,000 * ** 2015 Pfd. dividends $8,000 – declared $6,000 = $2,000 ** Illustration: At December 31, 2016, IBR declares a $50,000 cash dividend. Show the allocation of dividends to each class of stock. $ 50,000 2,000 8,000 $ 40,000 Dividends LO 5

69. 11-69 Illustration: At December 31, 2016, IBR declares a $50,000 cash dividend. Prepare the entry to record the declaration of the dividend. Dividends Cash Dividends 50,000 Dividends Payable50,000 LO 5

70. 11-70 A pro rata (proportional to ownership) distribution of the corporation’s own stock to stockholders. Reasons why corporations issue stock dividends: 1. 1.Satisfy stockholders’ dividend expectations without spending cash. 2. 2.Increase marketability of the corporation’s stock. 3. 3.Emphasize a portion of stockholders’ equity has been permanently reinvested in the business. Dividends Stock Dividends LO 5

71. 11-71   Small stock dividend (less than 20–25% of the corporation’s issued stock, recorded at fair market value)   Large stock dividend (greater than 20–25% of issued stock, recorded at par value) * Accounting based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares. * Dividends Stock Dividends LO 5

72. 11-72 Illustration: Medland Corporation declares a 10% stock dividend on its 50,000 shares of $10 par value common stock. The current fair market value of its stock is $15 per share. Record the entry on the declaration date: Stock Dividends (50,000 x 10% x $15)75,000 Common Stock Dividends Distributable50,000 Paid-in Capital in Excess of Par 25,000 Illustration 11-14 Dividends Statement Presentation LO 5

73. 11-73 Illustration: Medland Corporation declares a 10% stock dividend on its 50,000 shares of $10 par value common stock. The current fair market value of its stock is $15 per share. Record the entry on the declaration date: Stock Dividends (50,000 x 10% x $15)75,000 Common Stock Dividends Distributable50,000 Paid-in Capital in Excess of Par 25,000 Dividends Common Stock Dividends Distributable50,000 Common Stock50,000 Record the journal entry when Medland issues the dividend shares. LO 5

74. 11-74 Effects of Stock Dividends Dividends Illustration 11-15 LO 5

75. 11-75 Which of the following statements about small stock dividends is true? a.A debit to Stock Dividends for the par value of the shares issued should be made. b.A small stock dividend decreases total stockholders’ equity. c.Market value per share should be assigned to the dividend shares. d.A small stock dividend ordinarily will have an effect on par value per share of stock. Question Dividends LO 5

76. 11-76 In the stockholders’ equity section, Common Stock Dividends Distributable is reported as a(n): a.deduction from total paid-in capital and retained earnings. b.current liability. c.deduction from retained earnings. d.addition to capital stock. Dividends Question LO 5

77. 11-77 Dividends  Issuance of additional shares to stockholders according to their percentage ownership.  Reduction in the par or stated value per share.  Increase in number of shares outstanding.  Reduces the market value of shares.  No journal entry recorded. Stock Splits Helpful Hint A stock split changes the par value per share but does not affect any balances in stockholders’ equity. Helpful Hint A stock split changes the par value per share but does not affect any balances in stockholders’ equity. LO 5

78. 11-78 Dividends Stock Splits Effect of 4-for-1 stock split for stockholders Illustration 11-16 LO 5

79. 11-79 Effects for Medland Corporation, assuming that it splits its 50,000 shares of common stock on a 2-for-1 basis. Dividends Illustration 11-17 LO 5

80. 11-80 LO 5

81. 11-81 Learning Objectives After studying this chapter, you should be able to: [1] Identify the major characteristics of a corporation. [2] Record the issuance of common stock. [3] Explain the accounting for treasury stock. [4] Differentiate preferred stock from common stock. [5] Prepare the entries for cash dividends and stock dividends. [6] Identify the items reported in a retained earnings statement. [7] Prepare and analyze a comprehensive stockholders’ equity section. 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings

82. 11-82 Retained earnings is net income that a company retains in the business.   Part of the stockholders’ claim on the total assets of the corporation.   Debit balance in Retained Earnings is identified as a deficit. Retained Earnings Illustration 11-20 LO 6

83. 11-83 Restrictions can result from: 1. 1.Legal restrictions. 2. 2.Contractual restrictions. 3. 3.Voluntary restrictions. Retained Earnings Restrictions Retained Earnings Illustration 11-22 Disclosure of restriction LO 6

84. 11-84  Correction of an error in previously issued financial statements.  Result from: ► mathematical mistakes. ► mistakes in application of accounting principles. ► oversight or misuse of facts.  Adjustment made to the beginning balance of retained earnings. Prior Period Adjustments Retained Earnings LO 6

85. 11-85 Before issuing the report for the year ended December 31, 2015, you discover a $50,000 error (net of tax) that caused the 2014 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2014. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2015? Retained Earnings Statement LO 6

86. 11-86 Retained Earnings Statement Advance slide in presentation mode to reveal answer. LO 6

87. 11-87 Debits and Credits to Retained Earnings Illustration 11-24 Retained Earnings Statement LO 6

88. 11-88 Retained Earnings Statement Illustration 11-25 Retained earnings statement LO 6

89. 11-89 All but one of the following is reported in a retained earnings statement. The exception is: a.cash and stock dividends. b.net income and net loss. c.some disposals of treasury stock below cost. d.sales of treasury stock above cost. Question Retained Earnings Statement LO 6

90. 11-90 Learning Objectives After studying this chapter, you should be able to: [1] Identify the major characteristics of a corporation. [2] Record the issuance of common stock. [3] Explain the accounting for treasury stock. [4] Differentiate preferred stock from common stock. [5] Prepare the entries for cash dividends and stock dividends. [6] Identify the items reported in a retained earnings statement. [7] Prepare and analyze a comprehensive stockholders’ equity section. 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings

91. 11-91 Illustration 11-15 Statement Presentation and Analysis Illustration 11-26 LO 7

92. 11-92 Ratio shows how many dollars of net income the company earned for each dollar invested by the common stockholders. Statement Presentation and Analysis Analysis To illustrate, Walt Disney Company’s beginning-of-the-year and end- of-the-year common stockholders’ equity were $31,820 and $30,753 million, respectively. Its net income was $4,687 million, and no preferred stock was outstanding. Illustration 11-28 LO 7

93. 11-93 LO 8 Describe the use and content of the stockholders’ equity statement. Illustration 11A-1 When a stockholders’ equity statement is presented, a retained earnings statement is not necessary. APPENDIX 11A Stockholders’ Equity Statement

94. 11-94 Illustration 11B-1 The equity a common stockholder has in the net assets of the corporation. Book Value per Share LO 9 Compute book value per share. APPENDIX 11B Book Value—Another per Share Amount

95. 11-95 The computation of book value per share involves the following steps. 1.Compute the preferred stock equity. This equity is equal to the sum of the call price of preferred stock plus any cumulative dividends in arrears. If the preferred stock does not have a call price, the par value of the stock is used. 2.Determine the common stock equity. Subtract the preferred stock equity from total stockholders’ equity. 3.Determine book value per share. Divide common stock equity by shares of common stock outstanding. Book Value per Share APPENDIX 11B Book Value—Another per Share Amount LO 9

96. 11-96 Illustration: Using the stockholders’ equity section of Graber Inc. shown in Illustration 11-26. Graber’s preferred stock is callable at $120 per share and is cumulative. Assume that dividends on Graber’s preferred stock were in arrears for one year, $54,000 (6,000 x $9). The computation of preferred stock equity (Step 1 in the preceding list) is: Illustration 11B-2 APPENDIX 11B Book Value—Another per Share Amount LO 9

97. 11-97 Computation of book value: Illustration 11B-2 Illustration 11B-3 APPENDIX 11B Book Value—Another per Share Amount LO 9

98. 11-98 The correlation between book value and the annual range of a company’s market value per share is often remote. Book Value versus Market Value Illustration 11B-4 APPENDIX 11B Book Value—Another per Share Amount LO 9

99. 11-99 Key Points LO 10 Compare the accounting procedures for stockholders’ equity under GAAP and IFRS.  Under IFRS, the term reserves is used to describe all equity accounts other than those arising from contributed (paid-in) capital. This would include, for example, reserves related to retained earnings, asset revaluations, and fair value differences.  Many countries have a different mix of investor groups than in the United States. For example, in Germany, financial institutions like banks are not only major creditors of corporations but often are the largest corporate stockholders as well. In the United States, Asia, and the United Kingdom, many companies rely on substantial investment from private investors.

100. 11-100 Key Points  There are often terminology differences for equity accounts. The following summarizes some of the common differences in terminology. LO 10

101. 11-101 Key Points  The accounting for treasury stock differs somewhat between IFRS and GAAP. (However, many of the differences are beyond the scope of this course.) Like GAAP, IFRS does not allow a company to record gains or losses on purchases of its own shares. One difference worth noting is that, when a company purchases its own shares, IFRS treats it as a reduction of stockholders’ equity, but it does not specify which particular stockholders’ equity accounts are to be affected. Therefore, it could be shown as an increase to a contra equity account (Treasury Stock) or a decrease to retained earnings or share capital. LO 10

102. 11-102 Key Points  A major difference between IFRS and GAAP relates to the account Revaluation Surplus. Revaluation surplus arises under IFRS because companies are permitted to revalue their property, plant, and equipment to fair value under certain circumstances. This account is part of general reserves under IFRS and is not considered contributed capital.  IFRS often uses terms such as retained profits or accumulated profit or loss to describe retained earnings. The term retained earnings is also often used. LO 10

103. 11-103 Key Points  The accounting related to prior period adjustment is essentially the same under IFRS and GAAP. IFRS addresses the accounting for errors in IAS 8 (“Accounting Policies, Changes in Accounting Estimates, and Errors”). One area where IFRS and GAAP differ in reporting relates to error corrections in previously issued financial statements. While IFRS requires restatement with some exceptions, GAAP does not permit any exceptions.  Equity is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves, and shareholders’ funds. LO 10

104. 11-104 Key Points  The income statement using IFRS is called the statement of comprehensive income. A statement of comprehensive income is presented in a one- or two-statement format. The single-statement approach includes all items of income and expense, as well as each component of other comprehensive income or loss by its individual characteristic. In the two-statement approach, a traditional income statement is prepared. It is then followed by a statement of comprehensive income, which starts with net income or loss and then adds other comprehensive income or loss items. Regardless of which approach is reported, income tax expense is required to be reported.  The computations related to earnings per share are essentially the same under IFRS and GAAP. LO 10

105. 11-105 Looking to the Future The IASB and the FASB are currently working on a project related to financial statement presentation. An important part of this study is to determine whether certain line items, subtotals, and totals should be clearly defined and required to be displayed in the financial statements. For example, it is likely that the statement of stockholders’ equity and its presentation will be examined closely. Both the IASB and FASB are working toward convergence of any remaining differences related to earnings per share computations. LO 10

106. 11-106 Under IFRS, a purchase by a company of its own shares is recorded by: a)an increase in Treasury Stock. b)a decrease in contributed capital. c)a decrease in share capital. d)All of these are acceptable treatments IFRS Self-Test Questions LO 10

107. 11-107 IFRS Self-Test Questions Which of the following is true? a)In the United States, the primary corporate stockholders are financial institutions. b)Share capital means total assets under IFRS. c)The IASB and FASB are presently studying how financial statement information should be presented. d)The amount to treasury stock is very different between U.S. GAAP and IFRS. LO 10

108. 11-108 A Look at IFRS IFRS Self-Test Questions Under IFRS, the amount of capital received in excess of par value would be credited to: a)Retained Earnings. b)Contributed Capital. c)Share Premium. d)Par value is not used under IFRS. LO 10

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