1. Cash, Short-term Investments and Accounts Receivable
Chapter 4
Cash, Short-term Investments and Accounts Receivable
Chapter 4

2. Chapter 8
Stockholder’s Equity

3. Chapter 8 Learning Objectives
Describe the important characteristics, advantages, and disadvantages of a corporation.
Identify the key rights and privileges of common and preferred stockholders.
Account for the issuance of corporate stock.
Account for treasury stock transactions, cash and stock dividends, and stock splits.
Understand how Retained Earnings is affected by net income (loss), dividends and prior period adjustments.
Prepare a statement of stockholders’ equity.
Define the key information needs of decision makers regarding stockholders’ equity, including dividend yield and return on equity.
Chapter 8
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4. Key Advantages of the Corporation
Limited Liability
Transfer of Ownership
Ability to generate large amounts of Capital
Ability to retain professional management teams
Chapter 8

5. Benefits of Listing on a Stock Exchange
Chapter 8

6. Key Disadvantages of Corporations
Double Taxation of Corporate Profit
Governmental Regulation
Difficulty in Borrowing Funds
Chapter 8

7. STOCK TERMS Common Stock Preferred Stock Authorized Issued Outstanding
Treasury
Par Value
Chapter 8

8. Rights of Shareholders
Voting
Preemptive right to receive distributions – Dividends
Proportionate share of net assets after liquidation
Chapter 8

9. Relationships Among Stock Categories
Chapter 8

10. The Three C’s of Preferred Stock
Cumulative
Callable
Convertible
Chapter 8

11. Stock Issuances
Corporations issue stock in many different transactions and for many different amounts per share.
If the stock has a par value, the balance of the stock account is only the total par value of the number of shares issued.
Because corporations can’t recognize gains or losses on the sale of their own stock, any proceeds above par value are credited to Additional Paid-In Capital on Common Stock, which is a stockholders’ account.
Chapter 8

12. Stock Issuance Example
Moonbeam Corporations issues 100 shares of $10 par-value common stock for $18 per share and prepares the following entry.
Chapter 8

13. Review
Gilbert Company issues 50,000 shares of $5 par value common stock for $7 per share. Gilbert will credit Additional PIC on Common Stock for
$250,000.
$350,000.
$100,000.
$50,000.
Chapter 8
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14. Review
Gilbert Company issues 50,000 shares of $5 par value common stock for $7 per share. Gilbert will credit Additional PIC on Common Stock for
$250,000.
$350,000.
$100,000.
$50,000.
Chapter 8
Chapter 8 14

15. Consolidate Ownership
Treasury Stock
ESOPS
Good Investment
Increase Price
Consolidate Ownership
Chapter 8

16. Treasury Stock Transaction Examples
Chapter 8

17. Review Treasury Stock for $1,000.
Gilbert Company sells 50 shares of treasury stock to employees for $20 per share. The treasury stock has a cost of $17 per share. Gilbert will credit
Treasury Stock for $1,000.
Additional PIC on TS-Common for $1,000.
Additional PIC on TS-Common for $150.
Additional PIC on TS-Common for $850.
Chapter 8
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18. Review Treasury Stock for $1,000.
Gilbert Company sells 50 shares of treasury stock to employees for $20 per share. The treasury stock has a cost of $17 per share. Gilbert will credit
Treasury Stock for $1,000.
Additional PIC on TS-Common for $1,000.
Additional PIC on TS-Common for $150.
Additional PIC on TS-Common for $850.
Chapter 8
Chapter 8 18

19. Stock Transactions
Chapter 8

20. Problem Review
Heedy Company issued 5,000 shares of $5 par value, common stock on March 1 for $20 per share. On June 30, Heedy Company acquires 2,000 treasury shares for $7 per share. On October 31, Heedy company sells 1,000 shares of treasury stock for $8 per share.
Prepare entries needed for the above transactions.
Chapter 8
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21. Problem Review Solution
Date
Description
Debit
Credit
March 1
Cash
100,000
Common Stock
25,000
Add’l PIC on Common Stock
75,000
June 30
Treasury Stock
14,000
Oct. 31
8,000
7,000
Add’l PIC on TS-Common
1,000
Chapter 8
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22. Dividends – the Three D’s
Date of Record
Declaration
Distribution
Chapter 8

23. Dividends Cash Dividend Property Dividend Stock Dividend Stock Split
Liquidating Dividend
Dividend Reinvestment Plan
Chapter 8

24. Cash Dividends Example
Assume on May 31, the board of directors of Catlin Corporation decided to declare an annual dividend.
There are 1,900 shares of preferred stock and 153,940 shares of common stock outstanding.
The board declares a $2 dividend on the preferred stock and a $0.25 per share dividend on the common stock.
Date of payment is June 25.
Catlin Corporation records the following entries to declare and pay the cash dividend.
Chapter 8

25. Cash Dividends Example Continued
Chapter 8

26. Review decrease on April 5. decrease on March 25.
On March 25, Gilbert Company declares a total cash dividend of $5,700 to stockholders on record April 5, with a payment date of April 20. The Cash account will
decrease on April 5.
decrease on March 25.
increase on April 20.
decrease on April 20.
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27. Review decrease on April 5. decrease on March 25.
On March 25, Gilbert Company declares a total cash dividend of $5,700 to stockholders on record April 5, with a payment date of April 20. The Cash account will
decrease on April 5.
decrease on March 25.
increase on April 20.
decrease on April 20.
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28. Stock Dividend Example
Assume that on October 5, the board of directors of Melbourne, Inc. declares a 10% stock dividend. The company has 1,000,000 shares of $3 par value common stock outstanding.
The stock is selling for $16 per share on October 5.
On November 21, the additional shares of stock are distributed to the stockholders.
Melbourne prepares the following entries to record declaring and distributing the stock dividend.
Chapter 8

29. Stock Dividend Example Continued
Chapter 8

30. Stock Dividend Example Continued
Chapter 8

31. Review decrease on April 5. not change. increase on April 20.
On March 25, Gilbert Company declares a 10% stock dividend to stockholders on record April 5, with a distribution date of April 20. Total stockholders’ equity will
decrease on April 5.
not change.
increase on April 20.
decrease on April 20.
Chapter 8
Chapter 8 31

32. Review decrease on April 5. not change. increase on April 20.
On March 25, Gilbert Company declares a 10% stock dividend to stockholders on record April 5, with a distribution date of April 20. Total stockholders’ equity will
decrease on April 5.
not change.
increase on April 20.
decrease on April 20.
Chapter 8
Chapter 8 32

33. Dividends Recap
Chapter 8

34. Stock Splits
A stock split increases the number of shares of a company’s stock through a proportionate reduction in the stock’s par value.
Splits typically have a similar effect on the stock’s market value.
Assume the board of directors of Melbourne, Inc. declares a 2-for-1 stock split on December 5.
Prior to the split, there are 1,100,000 shares of $3 par value common stock outstanding.
After the split, Melbourne, Inc. will have 2,200,000 shares of $1.50 par value common stock outstanding.
No journal entry is required for a stock split.
Chapter 8

35. Effects of Dividends and Splits
Chapter 8

36. Problem Review
Heedy Company declares a 15% stock dividend on March 15 to stockholders of record on March 31, to be distributed on April 10. Heedy currently has 20,000 shares of $5 par value common stock outstanding. The stock is currently selling for $8 per share.
Prepare entries needed for the above transactions.
Chapter 8
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37. Problem Review Solution
Date
Description
Debit
Credit
March 15
Stock Dividends-CS
24,000
CS Dividends Distributable
15,000
Add’l PIC on Common Stock
9,000
April 10
Common Stock
Chapter 8
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38. Adjustments to Retained Earnings
Net Income/Loss
Dividends
Prior Period Adjustments
Loss due to Sale of Treasury Stock
Chapter 8

39. Statement of Changes in Stockholders’ Equity Example
Chapter 8

40. Return on Equity
Book value per share = Total common Stockholders’ Equity
Total Shares of Common Stock Outstanding
Return on Equity = (Net Income - Preferred Stock Dividends)
Average Common Stockholders' Equity
Chapter 8

41. THE END!
Chapter 8
Chapter 8 41