1. Chapter 11-1

2. Chapter 11-2 Reporting and Analyzing Stockholders’ Equity Accounting, Third Edition

3. Chapter 11-3 1. 1.Identify and discuss the major characteristics of a corporation. 2. 2.Record the issuance of common stock. 3. 3.Explain the accounting for the purchase of treasury stock. 4. 4.Differentiate preferred stock from common stock. 5. 5.Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits. 6. 6.Identify the items that affect retained earnings. 7. 7.Prepare a comprehensive stockholders’ equity section. 8. 8.Evaluate a corporation’s dividend and earnings performance from a stockholder’s perspective. 9. 9.Prepare entries for stock dividends. Study Objectives

4. Chapter 11-4 Authorized stock Issuance Par and no- par value Accounting for common stock issues The Corporate Form of Organization CharacteristicsFormation Stockholder rights Purchase of treasury stock Dividend preferences Liquidation preference Stock Issue Consideratio n Accounting for Treasury Stock Preferred Stock Dividends and Retained Earnings Cash dividends Stock dividends Stock splits Retained earnings restrictions Financial Statement Presentation and Corporate Performance Balance sheet Statement of cash flows Dividend record Earnings performance Debt vs. equity decision Reporting and Analyzing Stockholders’ Equity

5. Chapter 11-5 An entity separate and distinct from its owners. The Corporate Form of Organization Classified by Purpose Not-for-Profit For Profit Classified by Ownership Publicly held Privately held  Nike  General Motors  IBM  General Electric  Salvation Army  American Cancer Society  Gates Foundation  Cargill Inc.

6. Chapter 11-6 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes Characteristics of a Corporation Advantages Disadvantages The Corporate Form of Organization SO 1 Identify and discuss the major characteristics of a corporation.

7. Chapter 11-7 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Corporation acts under its own name rather than in the name of its stockholders. Characteristics of a Corporation The Corporate Form of Organization SO 1 Identify and discuss the major characteristics of a corporation.

8. Chapter 11-8 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Limited to their investment. Characteristics of a Corporation The Corporate Form of Organization SO 1 Identify and discuss the major characteristics of a corporation.

9. Chapter 11-9 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Shareholders may sell their stock. Characteristics of a Corporation The Corporate Form of Organization SO 1 Identify and discuss the major characteristics of a corporation.

10. Chapter 11-10 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Corporation can obtain capital through the issuance of stock. Characteristics of a Corporation The Corporate Form of Organization SO 1 Identify and discuss the major characteristics of a corporation.

11. Chapter 11-11 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer. Characteristics of a Corporation The Corporate Form of Organization SO 1 Identify and discuss the major characteristics of a corporation.

12. Chapter 11-12 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Characteristics of a Corporation The Corporate Form of Organization SO 1 Identify and discuss the major characteristics of a corporation.

13. Chapter 11-13 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management SO 1 Identify and discuss the major characteristics of a corporation. Corporations pay income taxes as a separate legal entity and stockholders pay taxes on cash dividends. Characteristics of a Corporation The Corporate Form of Organization

14. Chapter 11-14 Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Government Regulations Additional Taxes Corporate Management Separation of ownership and management prevents owners from having an active role in managing the company. Characteristics of a Corporation The Corporate Form of Organization SO 1 Identify and discuss the major characteristics of a corporation.

15. Chapter 11-15 Stockholders Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Vice President Finance/Chief Financial Officer Vice President Operations Vice President Human Resources TreasurerController Illustration 11-1 Corporation organization chart The Corporate Form of Organization SO 1 Identify and discuss the major characteristics of a corporation.

16. Chapter 11-16

17. Chapter 11-17 Other Forms of Business Organization  Limited partnerships  Limited liability partnerships (LLPs)  Limited liability companies (LLCs)  S Corporation no double taxation cannot have more than 75 shareholders Characteristics of a Corporation The Corporate Form of Organization SO 1 Identify and discuss the major characteristics of a corporation.

18. Chapter 11-18 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. SO 1 Identify and discuss the major characteristics of a corporation. The Corporate Form of Organization

19. Chapter 11-19 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. Illustration 11-3 SO 1 Identify and discuss the major characteristics of a corporation. The Corporate Form of Organization

20. Chapter 11-20 3.Keep the same percentage ownership when new shares of stock are issued (preemptive right). Illustration 11-3 SO 1 Identify and discuss the major characteristics of a corporation. Stockholders Rights The Corporate Form of Organization

21. Chapter 11-21 4.Share in assets upon liquidation in proportion to their holdings. This is called a residual claim. Illustration 11-3 SO 1 Identify and discuss the major characteristics of a corporation. Stockholders Rights The Corporate Form of Organization

22. Chapter 11-22 Stock Issue Considerations 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. Authorized Stock SO 1 Identify and discuss the major characteristics of a corporation.

23. Chapter 11-23 Stock Issue Considerations Name of corporation Stockholder’s name Shares Signature of corporate official Prenumbered Illustration 11-4 SO 1 Identify and discuss the major characteristics of a corporation.

24. Chapter 11-24 Stock Issue Considerations Corporation can issue common stock  directly to investors or  indirectly through an investment banking firm. U.S. securities exchanges  New York Stock Exchange  American Stock Exchange  13 regional exchanges  NASDAQ national market Issuance of Stock SO 1 Identify and discuss the major characteristics of a corporation.

25. Chapter 11-25 Stock Issue Considerations Capital stock that has been assigned a value per share. 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 quite common today. In many states the board of directors assigns a stated value to no-par shares. Par and No-Par Value Stocks SO 1 Identify and discuss the major characteristics of a corporation.

26. Chapter 11-26 Stock Issue Considerations Review Question SO 1 Identify and discuss the major characteristics of a corporation. 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.

27. Chapter 11-27 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. SO 2 Record the issuance of common stock. Stock Issue Considerations

28. Chapter 11-28 Paid-in Capital Retained Earnings Account Account Additional Paid- in Capital 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. SO 2 Record the issuance of common stock. Stock Issue Considerations

29. Chapter 11-29 Primary objectives: 1)Identify the specific sources of paid-in capital. 2)Maintain the distinction between paid-in capital and retained earnings. SO 2 Record the issuance of common stock. Other than consideration received, the issuance of common stock affects only paid-in capital accounts. Stock Issue Considerations Accounting for Common Stock Issues

30. Chapter 11-30 Illustration: Assume that Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock at par. Prepare the journal entry. Cash1,000 Common stock (1,000 x $1) 1,000 SO 2 Record the issuance of common stock. Stock Issue Considerations Accounting for Common Stock Issues

31. Chapter 11-31 Cash5,000 Common stock (1,000 x $1) 1,000 Paid-in capital in excess of par value 4,000 SO 2 Record the issuance of common stock. Accounting for Common Stock Issues Stock Issue Considerations Illustration: Now assume Hydro-Slide, Inc. issues an additional 1,000 shares of the $1 par value common stock for cash at $5 per share. Prepare Hydro-Slide’s journal entry.

32. Chapter 11-32 SO 2 Record the issuance of common stock. Illustration 11-5 Stock Issue Considerations Stockholders’ equity section assuming Hydro-Slide, Inc. has retained earnings of $27,000.

33. Chapter 11-33 ABC Corp. issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, credits are made to: a.Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $2,000. b.Common Stock $12,000. c.Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000. d.Common Stock $10,000 and Retained Earnings $2,000. Stock Issue Considerations Review Question SO 2 Record the issuance of common stock.

34. Chapter 11-34

35. Chapter 11-35 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 SO 3 Explain the accounting for the purchase of treasury stock.

36. Chapter 11-36 Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired. Corporations purchase their outstanding stock: 1.To reissue the shares to officers and employees under bonus and stock compensation plans. 2.To increase trading of the company’s stock in the securities market. 3.To have additional shares available for use in acquiring other companies. 4.To increase earnings per share. Another infrequent reason is to eliminate hostile shareholders. Accounting for Treasury Stock SO 3 Explain the accounting for the purchase of treasury stock.

37. Chapter 11-37 Purchase of Treasury Stock Generally accounted for by the cost method. Debit Treasury Stock for the price paid. Treasury stock is a contra stockholders’ equity account, not an asset. Purchase of treasury stock reduces stockholders’ equity. Accounting for Treasury Stock SO 3 Explain the accounting for the purchase of treasury stock.

38. Chapter 11-38 Treasury stock (4,000 x $8) 32,000 Cash 32,000 Illustration: On February 1, 2008, Mead acquires 4,000 shares of its stock at $8 per share. Prepare the entry. Accounting for Treasury Stock Illustration 11-6 SO 3 Explain the accounting for the purchase of treasury stock.

39. Chapter 11-39 Accounting for Treasury Stock Stockholders’ Equity with Treasury stock Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed. Illustration 13-7 SO 3 Explain the accounting for the purchase of treasury stock.

40. Chapter 11-40 Accounting for Treasury Stock SO 3 Explain the accounting for the purchase of treasury stock. Review Question Treasury stock may be repurchased: a.to reissue the shares to officers and employees under bonus and stock compensation plans. b.to signal to the stock market that management believes the stock is underpriced. c.to have additional shares available for use in the acquisition of other companies. d.more than one of the above.

41. Chapter 11-41

42. Chapter 11-42 Features often associated with preferred stock. 1. Preference as to dividends. 2. Preference as to assets in liquidation. 3. Nonvoting. SO 4 Differentiate preferred stock from common stock. Preferred Stock Each paid-in capital account title should identify the stock to which it relates: Paid-in Capital in Excess of Par Value—Preferred Stock Paid-in Capital in Excess of Par Value—Common Stock

43. Chapter 11-43 Illustration: Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Journalize the issuance of the preferred stock. SO 4 Differentiate preferred stock from common stock. Preferred Stock Cash120,000 Preferred stock (10,000 x $10) 100,000 Paid-in capital in excess of par – Preferred stock20,000 Preferred stock may have a par value or no-par value.

44. Chapter 11-44 Dividend Preferences 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. Cumulative dividend – holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends. SO 4 Differentiate preferred stock from common stock. Preferred Stock

45. Chapter 11-45 Liquidation Preference Preference on corporate assets if the corporation fails. Preference may be for the par value of the shares or for a specified liquidating value. SO 4 Differentiate preferred stock from common stock. Preferred Stock

46. Chapter 11-46 Review Question SO 4 Differentiate preferred stock from common stock. Preferred Stock M-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2010. No dividends were declared in 2008 or 2009. If M-Bot wants to pay $375,000 of dividends in 2010, common stockholders will receive: a.$0. b.$295,000. c.$215,000. d.$135,000.

47. Chapter 11-47 A distribution of cash or stock to stockholders on a pro rata (proportional to ownership) basis. Types of Dividends: Dividends SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits. 1. Cash dividends. 2. Property dividends. Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share. 3. Stock dividends. 4. Scrip (promissory note)

48. Chapter 11-48 Cash Dividends 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 SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

49. Chapter 11-49 Dividends require information concerning three dates: Dividends SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

50. Chapter 11-50 Illustration: On Dec. 1, the directors of Media General declare a 50 ¢ 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? December 1 (Declaration Date) Retained earnings 50,000 Dividends payable 50,000 December 22 (Date of Record) January 20 (Payment Date) Dividends Dividends payable 50,000 Cash 50,000 No entry SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

51. Chapter 11-51 Dividends SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits. Review Question Entries for cash dividends are required on the: a.declaration date and the record date. b.record date and the payment date. c.declaration date, record date, and payment date. d.declaration date and the payment date.

52. Chapter 11-52

53. Chapter 11-53 Stock Dividends Pro rata distribution of the corporation ’ s own stock. Dividends Results in decrease in retained earnings and increase in paid-in capital. Illustration 11-10 SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

54. Chapter 11-54 Stock Dividends Reasons why corporations issue stock dividends: 1. 1.To satisfy stockholders ’ dividend expectations without spending cash. 2. 2.To increase the marketability of the corporation ’ s stock. 3. 3.To emphasize that a portion of stockholders ’ equity has been permanently reinvested in the business. Dividends SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

55. Chapter 11-55 Effects of Stock Dividends Changes the composition of stockholders ’ equity. Total stockholders ’ equity remains the same. No effect on the par or stated value per share. Increases the number of shares outstanding. Dividends SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

56. Chapter 11-56 Illustration: Medland Corp. declares a 10% stock dividend on its $10 par common stock when 50,000 shares were outstanding. The market price was $15 per share. Dividends SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits. Illustration 11-9 (Answers on notes page)

57. Chapter 11-57 Stock Split Reduces the market value of shares. No entry recorded for a stock split. Decrease par value and increase number of shares. Dividends SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

58. Chapter 11-58 Illustration: Assuming that instead of issuing a 10% stock dividend, Medland splits its 50,000 shares of common stock on a 2-for-1 basis. Dividends SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits. Illustration 11-11 (Answers on notes page)

59. Chapter 11-59 Differences between the effects of stock dividends and stock splits. Dividends SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits. Illustration 11-12 (Answers on notes page)

60. Chapter 11-60 Review Question Dividends SO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits. Which of these statements about stock dividends is true? a.Stock dividends reduce a company’s cash balance. b.A stock dividend has no effect on total stockholders’ equity. c.A stock dividend decreases total stockholders’ equity. d.A stock dividend ordinarily will increase total stockholders’ equity.

61. Chapter 11-61 Retained earnings is net income that a company retains for use in the business. Net income increases Retained Earnings and a net loss decreases Retained Earnings. Retained earnings is part of the stockholders ’ claim on the total assets of the corporation. A debit balance in Retained Earnings is identified as a deficit. Retained Earnings SO 6 Identify the items that affect retained earnings.

62. Chapter 11-62 Retained Earnings SO 6 Identify the items that affect retained earnings. Illustration 11-14

63. Chapter 11-63 Restrictions can result from: 1. 1.Legal restrictions. 2. 2.Contractual restrictions. 3. 3.Voluntary restrictions. Retained Earnings Restrictions Retained Earnings SO 6 Identify the items that affect retained earnings.

64. Chapter 11-64 Balance Sheet Presentation Presentation of Stockholders’ Equity SO 7 Prepare a comprehensive stockholders ’ equity section. Two classifications of paid-in capital: 1.Capital stock 2.Additional paid-in capital

65. Chapter 11-65 SO 7 Prepare a comprehensive stockholders ’ equity section. Presentation of Stockholders’ Equity Balance Sheet Presentation Illustration 11-16

66. Chapter 11-66 Dividend Record Measuring Corporate Performance SO 8 Evaluate a corporation ’ s dividend and earnings performance from a stockholder ’ s perspective. Illustration: Using the information shown below, calculate the payout ratio for Nike in 2007 and 2006. $357.2 $1,491.5 = 24% $304.9 $1,392.0 = 22% The payout ratio measures the percentage of earnings a company distributes in the form of cash dividends. Illustration 11-18

67. Chapter 11-67 Earnings Performance Measuring Corporate Performance SO 8 Evaluate a corporation ’ s dividend and earnings performance from a stockholder ’ s perspective. Illustration: Calculate Nike’s return on common stockholders’ equity ratios for 2007 and 2006. This ratio shows how many dollars of net income a company earned for each dollar of common stockholders’ equity. Illustration 11-20 (Answers on notes page)

68. Chapter 11-68 Debt Versus Equity Decision Measuring Corporate Performance SO 8 Evaluate a corporation ’ s dividend and earnings performance from a stockholder ’ s perspective. Illustration 11-21

69. Chapter 11-69 Debt Versus Equity Decision Measuring Corporate Performance SO 8 Evaluate a corporation ’ s dividend and earnings performance from a stockholder ’ s perspective. Illustration 11-22

70. Chapter 11-70 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. The entry to record this transaction at the declaration date is: Retained earnings (50,000 x 10% x $15) 75,000 Common stock dividends distributable50,000 Additional paid-in capital 25,000 Entries for Stock Dividends SO 9 Prepare entries for stock dividends. Illustration 11A-1

71. Chapter 11-71 Illustration: When Medland issues the dividend shares, it decreases Common Stock Dividends Distributable and increases Common Stock as follows. Common stock dividends distributable50,000 Common stock50,000 Entries for Stock Dividends SO 9 Prepare entries for stock dividends.

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