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Chapter 11, Slide #1 Ch.11 Shareholders’ Equity Prof. J. Wang.

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Presentation on theme: "Chapter 11, Slide #1 Ch.11 Shareholders’ Equity Prof. J. Wang."— Presentation transcript:

1 Chapter 11, Slide #1 Ch.11 Shareholders’ Equity Prof. J. Wang

2 Chapter 11, Slide #2 Part I: Introduction Assets = Liabilities + Owners’ Equity

3 Chapter 11, Slide #3 Part I: Introduction Equity v. Debt Financing –Advantage of equity financing: flexibility –Advantage of debt financing: tax deductible, Benefit shareholders if the borrowing rate is lower than the rate of return using the borrowed money Shareholders’ ownership interest is not diluted

4 Chapter 11, Slide #4 Expanded Accounting Equation Assets = Liabilities + Owners’ Equity Assets = Liabilities + Stockholders’ Equity Contributed Capital Retained Earnings Ch.9&10 Ch.11

5 Chapter 11, Slide #5 Part II: Contributed Capital  Common Stock Basic stock of corporation Normally carries voting rights  Preferred Stock Optional No voting rights

6 Chapter 11, Slide #6 Preferred Stock  In exchange for giving up voting rights, have dividend preference over common stock  Stated dividend rate Percentage of the stock’s par value Per-share amount  Preferred dividends usually are cumulative LO2 $100 par, 7% preferred stock

7 Chapter 11, Slide #7

8 Chapter 11, Slide #8 Outstanding: not repurchased or retired Issued: sold or distributed Number of Shares of Stock Authorized 1,000 Maximum Allowable

9 Chapter 11, Slide #9 Par Value  “Legal capital”  Arbitrary amount (usually small) stated on stock certificate  Also called “stated value” Certificate of Stock $1.00 Par Value

10 Chapter 11, Slide #10 Additional Paid-in Capital  Amount received in excess of par when stock was issued Certificate of Stock $1.00 Par Value 15

11 Chapter 11, Slide #11 Stock Issued for Cash Journal entry: Cash 15,000 Common Stock 10,000 Additional Paid-In Capital—Common 5,000 To record the issuance of 1,000 shares of $10 common stock at $15 per share. LO3 1,000 shares of $10 par value stock sold for $15 per share Common Stock $ 10,000 ( $10 par value × 1,000 shares) Additional Paid-In Capital $5,000 (($15 – $10) × 1,000 shares) Example:

12 Chapter 11, Slide #12 Stock Issued for Noncash Consideration  Record at fair market value of consideration given or received, whichever is more readily determinable Certificate of Stock Title to land, building, etc.

13 Chapter 11, Slide #13 Stock Issued for Non-cash Assets Journal entry: Land 15,000 Common Stock 10,000 Additional Paid-In Capital—Common 5,000 To record the issuance of 1,000 shares of $10 common stock for land. LO3 issued1,000 shares of $10 par value stock For land with a fair value of $15,000 Common Stock $ 10,000 ( $10 par value × 1,000 shares) Additional Paid-In Capital $5,000 Example:

14 Chapter 11, Slide #14 Part III: Retained Earnings

15 Chapter 11, Slide #15 Retained Earnings  Net income retained in the business (not paid out as dividends) since its inception  Reinvested in a variety of assets (not necessarily liquid)

16 Chapter 11, Slide #16 Retained Earnings Increases when net income is earned Decreases when dividends are paid

17 Chapter 11, Slide #17 Retained Earnings Connects the Income Statement and the Balance Sheet Statement of Retained Earnings Retained Earnings, Beginning Balance$ xxx Add: Net Income inc Deduct: Dividends xxx Retained Earnings, Ending Balance $ end Balance Sheet Total Assets $ xxx Total Liabilities xxx Stockholders’ Equity xxx Retained Earnings end Total Liabilities and Stockholders' Equity $ xxx Income Statement Revenues$ xxx Less: Expenses xxx Net Income$ inc

18 Chapter 11, Slide #18 Cash Dividend Requirements  Sufficient cash  Positive retained earnings

19 Chapter 11, Slide #19 Cash Dividends Paid to Stockholders on date of record Date of declaration Payment date on dividend check for Date Dept.. of Treasurer Jane Doe

20 Chapter 11, Slide #20 Dividends Journal entry required to record: (1) 12/31/06, $5,000 cash dividends declared (2) 1/15/07, $5,000 cash dividends were paid Reduce retained earnings 12/31/061/15/07 Pay dividends

21 Chapter 11, Slide #21 Recording Cash Dividends Retained Earnings5,000 Cash Dividend Payable 5,000 To record the declaration of a cash dividend on 12/31/06. Cash Dividend Payable 5,000 Cash 5,000 To record the payment of a cash dividend on 1/15/07. dividend check for Date Dept.. of Treasurer Jane Doe

22 Chapter 11, Slide #22 If the company has preferred stocks outstanding then dividends must be divided between common and preferred shareholders If preferred dividends are cumulative, preferred shareholders will receive dividends in arrears and for the current year before common shareholders receive any dividends. If preferred dividends are non-cumulative, preferred shareholders will only receive dividends for the current year before common shareholders receive theirs.

23 Chapter 11, Slide #23 Allocation of Cash Dividends when preferred stock is cumulative 1.Distribute dividends in arrears, if any, to preferred 2.Distribute current year’s dividends to preferred 3.Distribute remainder to common (or to both if preferred is participating) LO5

24 Chapter 11, Slide #24 Cash Dividends Example Stricker Company declares a $70,000 dividend in 2007 (no dividends were paid in 2005 or 2006). There are 10,000 shares of $10 par, 8% preferred stock and 40,000 shares of $5 par common stock outstanding.

25 Chapter 11, Slide #25 Cash Dividends Example To Preferred To Common Step 1: Distribute current-year dividend to preferred (10,000 shares × $10 par × 8% × 1 year) $8,000 Step 2: Distribute remaining dividend to common ($70,000 – $8,000) $62,000 Total allocated $8,000 $62,000 Noncumulative Preferred Stock $0.80 per share $1.55 per share

26 Chapter 11, Slide #26 Cash Dividends Example To Preferred To Common Step 1: Distribute dividends in arrears to preferred (10,000 shares × $10 par × 8% × 2 years) $16,000 Step 2: Distribute current-year dividend to preferred (10,000 shares × $10 par × 8% × 1 year) 8,000 Step 3: Distribute remainder to common ($70,000 – $8,000) $46,000 Total allocated $24,000 $46,000 Cumulative Preferred Stock $0.80 per share $1.55 per share

27 Chapter 11, Slide #27 Stock Dividends  Reasons: Insufficient cash Market price reduction Nontaxable to recipients Certificate of Stock  Issue of additional shares proportionately to existing stockholders LO6

28 Chapter 11, Slide #28 Stockholders’ Equity: Common stock, $10 par, 5,000 shares issued and outstanding $ 50,000 Additional paid-in capital—Common 30,000 Retained earnings 70,000 Total stockholders’ equity $150,000 Assume Shah Company declares a 10% stock dividend; 500 additional shares will be issued. Assume that market value Per share at the time is $40. Before Dividend Small Stock Dividend Example

29 Chapter 11, Slide #29 Assets = Liabilities + Stockholders’ Equity Contributed Capital Retained Earnings +$20,000 - $20,000

30 Chapter 11, Slide #30 Stockholders’ Equity: Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000 Additional paid-in capital—Common 30,000 45,000 Retained earnings 70,000 50,000 Total stockholders’ equity$150,000 $150,000 $20,000 ($40*500) market value deducted from retained earnings; allocated between Common Stock (initially Common Stock Dividend Distributable) ($10*500) and Additional Paid-In Capital ($30*500). Before After Small Stock Dividend Example + + –

31 Chapter 11, Slide #31 Stockholders’ Equity: Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000 Additional paid-in capital—Common 30,000 45,000 Retained earnings 70,000 50,000 Total stockholders’ equity$150,000 $150,000 Before After Small Stock Dividend Example + + – Total S/E is unchanged

32 Chapter 11, Slide #32 Stockholders’ Equity: Common stock, $10 par, 5,000 shares issued and outstanding $ 50,000 Additional paid-in capital—Common 30,000 Retained earnings 70,000 Total stockholders’ equity $150,000 Assume Shah Company declares 100% stock dividend That is, additional 5,000 shares will be issued Before Dividend Large Stock Dividend Example

33 Chapter 11, Slide #33 Stockholders’ Equity: Common stock, $10 par, 10,000 shares$ 50,000 $100,000 Additional paid-in capital—Common 30,00030,000 Retained earnings 70,000 20,000 Total stockholders’ equity$150,000 $150,000 Retained earnings is reduced by the total par value It’s recorded in the Common Stock account at par. Additional Paid-In Capital account is unaffected. Before After Large Stock Dividend Example + –

34 Chapter 11, Slide #34 Stockholders’ Equity: Common stock, $10 par, 10,000 shares $ 50,000 $100,000 Additional paid-in capital—Common 30,000 30,000 Retained earnings 70,000 20,000 Total stockholders’ equity$150,000 $150,000 Before After Large Stock Dividend Example + – Total S/E is unchanged

35 Chapter 11, Slide #35 Stock Splits  Results in additional issuance of shares  Reduces par value per share  No change in Stockholders’ Equity accounts Certificate of Stock $3 par value Certificate of Stock $1 par value LO 7

36 Chapter 11, Slide #36 Stock Splits  Not recorded in accounts  Reduce market price per share and make the stock more accessible to a wider range of investors Disclose in notes

37 Chapter 11, Slide #37 Stockholders’ Equity: Common stock, $10 par, 5,000 shares issued and outstanding $ 50,000 Additional paid-in capital—Common 30,000 Retained earnings 70,000 Total stockholders’ equity $150,000 Assume Shah Company declares 2-for-1 stock split Before Split 2-for-1 Stock Split Example

38 Chapter 11, Slide #38 Stockholders’ Equity: Common stock, $5 par, 10,000 shares $ 50,000 $ 50,000 Additional paid-in capital—Common 30,000 30,000 Retained earnings 70,000 70,000 Total stockholders’ equity$150,000 $150,000 Before After 2-for-1 Stock Split Example All accounts are unchanged Only disclosures are affected

39 Chapter 11, Slide #39 Part IV: Treasury Stock  Company buys back its own stock  Contra-equity account (debit balance)  Not outstanding (no voting rights) Certificate of Stock LO4

40 Chapter 11, Slide #40 Reasons for Repurchasing Stock  Provide for employee bonuses or benefit plans  Maintain a favorable market price  Improve financial ratios  Maintain control of ownership  Prevent unwanted takeover or buyout attempts

41 Chapter 11, Slide #41 For example, the company purchased 100 shares of its own outstanding stock at $25 per share Dr. Treasury Stock 2,500 Cr. Cash Assets = Liabilities + Stockholders’ Equity -$2,500

42 Chapter 11, Slide #42 Presentation of Treasury Stock Common stock, $10 par value, 1,000 shares issued, 900 outstanding $10,000 Additional paid-in capital—Common 12,000 Retained earnings 15,000 Total contributed capital and retained earnings 37,000 Less: Treasury stock, 100 shares at cost ($25 per share) 2,500 Total stockholders’ equity$34,500


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