Presentation is loading. Please wait.

Presentation is loading. Please wait.

10-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College Copyright ©2015 Pearson Education Inc. All rights reserved.

Similar presentations


Presentation on theme: "10-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College Copyright ©2015 Pearson Education Inc. All rights reserved."— Presentation transcript:

1 10-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College Copyright ©2015 Pearson Education Inc. All rights reserved.

2 Explain the features of a corporation Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.

3 10-3 LO 1 DisadvantagesAdvantages 1.Can raise more capital than a proprietorship or partnership can 2.Continuous life 3.Ease of transferring ownership 4.Limited liability of stockholders 1.Separation of ownership and management 2.Double taxation of distributed profits 3.Government regulation FEATURES OF A CORPORATION Exhibit 10-1 | Advantages and Disadvantages of a Corporation Copyright ©2015 Pearson Education Inc. All rights reserved.

4 10-4 Organizing a Corporation LO 1  Corporate organizers (incorporators) obtain a charter from the state  Charter includes authorization to issue shares of stock  Incorporators:  Pay fees  Sign the charter  File documents with the state  Agree to set of bylaws Copyright ©2015 Pearson Education Inc. All rights reserved.

5 10-5 Exhibit 10-2 | Authority Structure of a Corporation Copyright ©2015 Pearson Education Inc. All rights reserved.

6 Right to voting on matters that come before the stockholders Vote Right to receive a proportionate part of any dividend Dividends Right to receive a proportionate share of any assets remaining after corporation pays its liabilities in liquidation Liquidation Stockholders’ Rights Right to maintain one’s proportionate ownership in the corporation Preemption LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

7 10-7 LO 1 Retained EarningsPaid-in Capital  Also called contributed capital  Amount of equity stockholders have contributed  Includes stock accounts and any additional paid- in capital  Increased by earnings through profitable operations  Reduced by dividends declared Stockholders’ Equity Copyright ©2015 Pearson Education Inc. All rights reserved.

8 10-8 LO 1 Stockholders’ Equity Exhibit 10-3 | The Home Depot, Inc. Stock Certificate Copyright ©2015 Pearson Education Inc. All rights reserved.

9 10-9 LO 1 PreferredCommon  Basic form of stock  Has four basic rights  Shareholders benefit most if corporation succeeds  Take more risk  Advantages  Receive dividends first  Receive assets first in liquidation  Shareholders earn a fixed dividend  Few corporations issue Classes of Stock Copyright ©2015 Pearson Education Inc. All rights reserved.

10 10-10 LO 1 Classes of Stock Exhibit 10-4 | Percentage of Corporations Issuing Preferred Stock Exhibit 10-5 | Comparison of Common Stock, Preferred Stock, and Long-Term Debt Copyright ©2015 Pearson Education Inc. All rights reserved.

11 10-11 Par Value and No-Par LO 1  Arbitrary amount assigned to share of stock  Usually set low to avoid legal issues  Most states do not allow companies to issue stock below par  No-par stock  May have a stated value Copyright ©2015 Pearson Education Inc. All rights reserved.

12 Account for the issuance of stock Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.

13 10-13 ACCOUNT FOR THE ISSUANCE OF STOCK LO 2 Illustration: Home Depot needs to raise $100 million through issuance of stock. Suppose Home Depot’s common stock had carried a par value equal to its issuance price of $10 per share. The entry for issuance of 10 million shares of stock at par would be Common Stock AccountDebitCredit Jan 8Cash (10,000,000 x $10)100,000,000 Common Stock100,000,000 To issue common stock Copyright ©2015 Pearson Education Inc. All rights reserved.

14 10-14 Common Stock Above Par LO 2 Illustration: Home Depot needs to raise $100 million through issuance of stock. Suppose Home Depot’s common stock had a par value of $0.05. The entry for issuance of 10 million shares of stock at $10 per share would be: AccountDebitCredit Jan 8Cash (10,000,000 x $10)100,000,000 Common Stock500,000 Paid-in Capital99,500,000 To issue common stock Common stock = 10,000,000 × $0.05 = $500,000 Copyright ©2015 Pearson Education Inc. All rights reserved.

15 10-15 Common Stock Above Par LO 2 Illustration: Stockholders’ Equity section of The Home Depot, Inc.’s Balance Sheet might appear as follows (figures assumed): Stockholders’ Equity Common stock, $.05 par, 10 billion shares authorized, 10 million shares issued and outstanding $ 500,000 Paid-in Capital 99,500,000 Total paid-in capital 100,000,000 Retained earnings 500,000,000 Total stockholders’ equity $600,000,000 Copyright ©2015 Pearson Education Inc. All rights reserved.

16 10-16 No-Par Common Stock LO 2 Illustration: Apple, Inc., issues 939 million shares of no-par common stock for $16,422 million. Apple’s stock issuance entry is (in millions): AccountDebitCredit Aug 14Cash16,422 Common Stock16,422 To issue no-par common stock Copyright ©2015 Pearson Education Inc. All rights reserved.

17 10-17 Stockholders’ Equity (in millions) Common stock, no par, 1,800 shares authorized, 939 shares issued and outstanding $ 16,422 Retained earnings 101,289 Accumulated other comprehensive income 499 Total stockholders’ equity $ 118,210 No-Par Common Stock LO 2 Illustration: Apple, Inc., reports stockholders’ equity on its balance sheet as follows (in millions): Copyright ©2015 Pearson Education Inc. All rights reserved.

18 10-18 Common Stock Issued for Assets Other Than Cash LO 2 Illustration: On November 12, Kahn Corporation issued 15,000 shares of its $1 par common stock for equipment with a market value of $4,000 and a building with a market value of $120,000. AccountDebitCredit Nov 12Equipment4,000 Building120,000 Common Stock (15,000 x $1) 15,000 Paid-in Capital in Excess of Par-- Common 109,000 ($124,000 - $15,000) To issue common stock Copyright ©2015 Pearson Education Inc. All rights reserved.

19 10-19 Common Stock Issued for Services LO 2 Illustration: Kahn Corporation engages an attorney. The attorney bills the corporation $25,000 for services and agrees to accept 2,500 shares of $1 par common stock, rather than cash, in settlement of the fee. The fair market value of the stock is $10 per share. The journal entry to record the transaction is AccountDebitCredit Legal Expense25,000 Common Stock (2,500 x $1)2,500 Paid-in Capital in Excess of Par-- Common22,500 ($25,000 - $2,500) To issue common stock Copyright ©2015 Pearson Education Inc. All rights reserved.

20 10-20 Preferred Stock LO 2  Follows same pattern as accounting for common stock  May have separate accounts for paid-in capital in excess of par for preferred and common  Can be issued with conversion feature  Allows preferred shareholders to exchange preferred shares for common Copyright ©2015 Pearson Education Inc. All rights reserved.

21 10-21 LO 2 Illustration: Convertible preferred stock $1 par, 50,000 shares issued at par value AccountDebitCredit 2014Cash50,000 Convertible Preferred Stock50,000 Issue convertible preferred stock Preferred Stock Copyright ©2015 Pearson Education Inc. All rights reserved.

22 10-22 LO 2 Illustration: Converted preferred stock to common stock at the rate of 6.25 to 1 (8,000 shares of $1 par-value common stock issued in exchange for 50,000 shares of preferred stock). AccountDebitCredit 2014Convertible Preferred Stock50,000 Common Stock8,000 Paid-in Capital in Excess of Par-- Common42,000 Convert convertible preferred stock into common stock Preferred Stock Copyright ©2015 Pearson Education Inc. All rights reserved.

23 10-23 LO 2 Authorized, Issued, and Outstanding Stock Maximum number of shares the company can issue under its charter Authorized Number of shares the company has issued to its stockholders Issued Number of shares that stockholders own (number of shares in the hands of stockholders) Outstanding Copyright ©2015 Pearson Education Inc. All rights reserved.

24 Show how treasury stock affects a company Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.

25 10-25 SHOW HOW TREASURY STOCK AFFECTS A COMPANY LO 3  Issued shares reacquired by the company  Reasons:  Make shares available for employee stock purchase plans  Plan to “buy low” and “sell high”  Avoid takeover  Increase earnings per share  Use in share repurchase program Copyright ©2015 Pearson Education Inc. All rights reserved.

26 10-26 How Is Treasury Stock Recorded? LO 3  Recorded at cost  Not par value  Classified as a contra-stockholders’ equity account  Debit balance Illustration: The following entry records the repurchase of 74 million shares for $4 billion. AccountDebitCredit 2012Treasury Stock4,000,000,000 Cash4,000,000,000 Copyright ©2015 Pearson Education Inc. All rights reserved.

27 10-27 LO 3 The Home Depot, Inc. Stockholders’ Equity January 29, 2012 (in millions) Common stock 87 Paid-in Capital 6,966 Retained earnings 17,246 Accumulated other comprehensive income 293 Treasury stock (196,000,000 shares) (6,694) Total stockholders’ equity $ 17,898 How Is Treasury Stock Recorded? Copyright ©2015 Pearson Education Inc. All rights reserved.

28 10-28 Retirement of Treasury Stock LO 3  Cancel stock certificates  Stock cannot be reissued  Once shares are repurchased, neither total assets nor total liabilities are affected  Memorandum entry made decreasing number of shares issued in stockholders’ equity Copyright ©2015 Pearson Education Inc. All rights reserved.

29 10-29 LO 3  Increases assets and equity  No gain or loss on transactions involving treasury stock  Amounts received on resale in excess of amounts originally paid for treasury stock are recorded as Paid- in Capital from Treasury Stock Transaction  Amounts received from resale of treasury stock less than amounts originally paid are debited to Paid-in Capital from Treasury Stock Transactions to extent of that balance, and after that, to Retained Earnings Resale of Treasury Stock Copyright ©2015 Pearson Education Inc. All rights reserved.

30 10-30 LO 3 Illustration: On July 22, 2014, Home Depot resold a million shares of treasury stock for $55 per share. Assuming that the average cost of treasury shares is $54.05, the journal entry to record the resale of treasury shares would have been as follows: 2014AccountDebitCredit Jul 22Cash55,000,000 Treasury Stock54,050,000 Paid-in Capital from Treasury Stock Transactions950,000 Sold treasury stock Resale of Treasury Stock Cost of shares sold = 1,000,000 shares × $54.05 = $54,050,000 Copyright ©2015 Pearson Education Inc. All rights reserved.

31 10-31 LO 3 Illustration: At December 31, 2014, Hartnett Corporation reported the stockholders’ equity as follows (in millions): Illustration Common stock $1.50 par value per share, 2,400 million shares issued$ 3,600 Paid-in capital in excess of par value--Common7,200 Retained earnings1,490 Treasury stock, at cost(85) Total stockholders’ equity$12,205 Hartnett’s 2015 transactions included a.Issuance of 16 million shares of common stock for $10.00 per share b.Purchase of 6 million shares of treasury stock for $100 million c.Sold 3 million of the treasury shares purchased in part b for $70 million Copyright ©2015 Pearson Education Inc. All rights reserved.

32 10-32 LO 3 Illustration: Journalize the transaction to record the issuance of 16 million shares of common stock for $10.00 per share. Illustration Advance slide in presentation mode to reveal answers Copyright ©2015 Pearson Education Inc. All rights reserved. AccountDebitCredit Cash (16 million x $10)160,000,000 Common stock (16 million x $1.50)24,000,000 Paid-in Capital in Excess of Par — Common136,000,000

33 10-33 AccountDebitCredit Treasury stock100,000,000 Cash100,000,000 Cash70,000,000 Treasury stock (3 million x $16.67)50,000,000 Paid-in Capital from Treasury Stock20,000,000 LO 3 Illustration: Journalize the transactions to record the purchase of 6 million shares of treasury stock for $100 million and the sale of 3 million of the treasury shares purchased in part b for $70 million. Illustration Treasury stock cost per share = $100 million ÷ 6 million shares = $16.67 Advance slide in presentation mode to reveal answers Copyright ©2015 Pearson Education Inc. All rights reserved.

34 10-34 LO 3 Illustration: Home Depot issued 21 million new (not treasury) shares in conjunction with an employee stock compensation plan. The entry the company made was AccountDebitCredit Compensation Expense679,000,000 Common Stock1,000,000 Paid-in Capital678,000,000 Record stock-based compensation Issuing Stock for Employee Compensation Copyright ©2015 Pearson Education Inc. All rights reserved.

35 10-35 LO 3 The Home Depot, Inc. Stockholders’ Equity February 3, 2013 (in millions) Common stock 88 Paid-in Capital 7,948 Retained earnings 20,038 Accumulated other comprehensive income 397 Treasury stock (at cost) 270 million shares (10,694) Total stockholders’ equity $ 17,777 Stockholders’ Equity on Balance Sheet Copyright ©2015 Pearson Education Inc. All rights reserved.

36 Account for retained earnings, dividends, and splits Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.

37 10-37 ACCOUNT FOR RETAINED EARNINGS, DIVIDENDS, AND SPLITS LO 4 Retained Earnings  Net income  Less net losses  Less declared dividends Credit balance Lifetime earnings Lifetime losses & dividends > Accumulated over corporation’s lifetime Debit balance Lifetime earnings Lifetime losses & dividends < Copyright ©2015 Pearson Education Inc. All rights reserved.

38 10-38 Should the Company Declare and Pay Cash Dividends? LO 4 Dividends  Distribution by a corporation to its stockholders  Usually based on earnings  Usually take one of three forms:  Cash  Stock  Noncash assets Copyright ©2015 Pearson Education Inc. All rights reserved.

39 10-39 Cash Dividends LO 4  Company must have both:  Enough Retained Earnings to declare the dividend  Enough Cash to pay the dividend  Board of directors has authority to declare a dividend  Company not obligated to pay dividend until declared  Three relevant dates:  Declaration date  Date of record (no entry)  Payment date Copyright ©2015 Pearson Education Inc. All rights reserved.

40 10-40 LO 4 Illustration: On June 19, the board of directors declares a $50,000 cash dividend. The company records the dividend as follows: AccountDebitCredit Jun 19Retained Earnings50,000 Dividends Payable50,000 Declared a cash dividend Cash Dividends Declaration Date Copyright ©2015 Pearson Education Inc. All rights reserved.

41 10-41 LO 4 Illustration: On July 10, the company paid the dividend declared on June 19. The entry to record the payment is as follows: AccountDebitCredit Jul 10Dividends Payable50,000 Cash50,000 Paid cash dividend Cash Dividends Payment Date Copyright ©2015 Pearson Education Inc. All rights reserved.

42 10-42 LO 4 Retained Earnings Dividends1,7434,535Net income Analyzing the Stockholders’ Equity Accounts 17,246Beg balance 20,038End. balance Copyright ©2015 Pearson Education Inc. All rights reserved.

43 10-43 LO 4 Illustration: Hartnett Corporation reported stockholders’ equity as follows (in millions): Illustration Common stock $1.50 par value per share, 2,416 million shares issued$ 3,624 Paid-in capital in excess of par value--Common 7,336 Retained earnings1,490 Treasury stock, at cost(135) Paid-in capital from treasury stock80 Total stockholders’ equity$12,315 Journalize the transactions to record the declaration and payment of cash dividends of $32 million. Copyright ©2015 Pearson Education Inc. All rights reserved.

44 10-44 AccountDebitCredit Retained Earnings32,000,000 Dividends Payable32,000,000 Dividends Payable32,000,000 Cash32,000,000 LO 4 Illustration: Journalize the transactions to record the declaration and payment of cash dividends of $32 million. Illustration Advance slide in presentation mode to reveal answers Copyright ©2015 Pearson Education Inc. All rights reserved.

45 10-45 LO 4 Dividends on Preferred Stock  Paid dividends before common stockholders  Stated as a percent of par value or a dollar amount per share  May be cumulative  Passed dividends are owed to preferred shareholders  In arrears  Almo st debt Copyright ©2015 Pearson Education Inc. All rights reserved.

46 10-46 LO 4 Dividends on Preferred Stock Illustration: Assume that the preferred stock of Avant Garde, Inc., is cumulative. Avant Garde passed the preferred dividend of $150,000 in Before paying dividends to common in 2014, Avant Garde must first pay preferred dividends of $150,000 for both 2013 and 2014—a total of $300,000. On September 6, 2014, Avant Garde declares a $500,000 dividend. The entry to record the declaration is as follows: AccountDebitCredit Sep 6Retained Earnings500,000 Dividends Payable, Preferred300,000 Dividends Payable, Common200,000 * $150,000 x 2 = $300,000 * Copyright ©2015 Pearson Education Inc. All rights reserved.

47 10-47 LO 4 Illustration: Arizona Manufacturing, Inc., reported the following at December 31, 2014 and December 31, 2015: Illustration Stockholders’ Equity Preferred stock, cumulative, $1.00 par, 6%, 90,000 shares issued $ 90,000 Common stock, $0.30 par, 9,130,000 shares issued1,490 Arizona Manufacturing has paid all preferred dividends through Requirements 1. Compute the total amounts of dividends to both preferred and common for 2014 and 2015 if total dividends are $90,000 in 2014 and $270,000 in Copyright ©2015 Pearson Education Inc. All rights reserved.

48 10-48 PreferredCommon 2014 Dividends = $90,000 Dividends in arrears (2 years x $5,400)$10,800 Current year5,400 16,200 Remainder to common$73, Dividends = $270,000 Current year5,400 Remainder to common264,600 LO 4 Illustration: Total dividends are $90,000 in 2014 and $270,000 in Illustration Preferred dividend = $1.00 x 6% x 90,000 shares = $5,400 Advance slide in presentation mode to reveal answers Copyright ©2015 Pearson Education Inc. All rights reserved.

49 10-49 LO 4 Stock Dividends  Proportional distribution of stock to shareholders  Increase stock account and decrease Retained Earnings  Total equity is unchanged  Reasons stock dividends are distributed  Continue dividends, but conserve cash  Reduce market price of shares  Size of stock dividend  25% or less, recorded at market value  Greater than 25%, recorded at par value Copyright ©2015 Pearson Education Inc. All rights reserved.

50 10-50 LO 4 Stock Splits  Increase in shares with a proportionate reduction in par value  Decreases market price of shares  No accounts affected Copyright ©2015 Pearson Education Inc. All rights reserved.

51 10-51 LO 4 Summary of the Effects of Stock Transactions on Assets, Liabilities, and Stockholders’ Equity Exhibit 10-7 | Effects of Stock Transactions Copyright ©2015 Pearson Education Inc. All rights reserved.

52 Use stock values in decision making Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.

53 10-53  Stock’s market value, or market capitalization  Market price multiplied by number of shares outstanding  Overall market assessment of the worth of a share of common stock is reflected in the price-earnings ratio LO 5 USE STOCK VALUES IN DECISION MAKING Market, Redemption, Liquidation, and Book Value Copyright ©2015 Pearson Education Inc. All rights reserved.

54 10-54  Redeemable preferred stock requires company to redeem stock at a set price  Liquidation value is amount that a company must pay a preferred stockholder in the event the company goes out of business  Book value per share is amount of common stockholders’ equity on company’s books for each share of its stock LO 5 Market, Redemption, Liquidation, and Book Value Copyright ©2015 Pearson Education Inc. All rights reserved.

55 10-55 DuPont Analysis provides a way to analyze various elements of profitability, as shown in the following diagram: LO 5 ROE: Relating Profitability to Stockholder Investment * minus preferred dividends Copyright ©2015 Pearson Education Inc. All rights reserved.

56 Report stockholders’ equity transactions in the financial statements Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.

57 10-57 Financing transactions that affect both cash and equity fall into three main categories: ■ Issuance of stock ■ Treasury stock ■ Dividends LO 6 REPORT STOCKHOLDERS’ EQUITY TRANSACTIONS Statement of Cash Flows Copyright ©2015 Pearson Education Inc. All rights reserved.

58 10-58 Exhibit 10-9 Copyright ©2015 Pearson Education Inc. All rights reserved.

59 10-59 LO 6 A Detailed Stockholders’ Equity Section Real-World Format Stockholders’ Equity Preferred stock, 8%, $10 par, 30,000 shares authorized, issued, and outstanding$ 330,000 Common stock, $1 par, 100,000 shares authorized, 60,000 shares issued, 58,600 shares outstanding60,000 Additional paid-in capital2,150,000 Retained earnings1,500,000 Less treasury stock, common (1,400 shares at cost)(40,000) Accumulated other comprehensive income200,000 Total stockholders’ equity$4,200,000 Copyright ©2015 Pearson Education Inc. All rights reserved.

60 This work is protected by United States copyright law and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright Copyright ©2015 Pearson Education Inc. All rights reserved.


Download ppt "10-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College Copyright ©2015 Pearson Education Inc. All rights reserved."

Similar presentations


Ads by Google