2 Learning Objectives1. Identify the rights associated with ownership of common and preferred stock.2. Record the issuance of stock for cash, on a subscription basis, and in exchange for noncash assets or for services.3. Use both the cost and par value methods to account for stock repurchases.4. Account for the issuance of stock rights and stock warrants.
3 Learning Objectives5. Explain the difference between the intrinsic value and fair value methods, and use both in accounting for a fixed stock option plan.6. Distinguish between stock conversions that require a reduction in retained earnings and those that do not.7. List the factors that impact the retained earnings balance.
4 Learning Objectives8. Properly record cash dividends, property dividends, small and large stock dividends, and stock splits.9. Explain the background of unrealized gains and losses recorded as direct equity adjustments, and list the major types of equity reserves founds in foreign balance sheets.10. Prepare a statement of changes in stockholders’ equity.
5 Learning Objectives EXPANDED MATERIAL 11. Eliminate a retained earnings deficit through a quasi-reorganization.12. Use both the intrinsic value and fair value methods to account for performance-based stock option plans and plans calling for a cash settlement.
6 Components of Stockholders’ Equity RetainedEarningsContributedCapitalOtherLegalCapitalAdditionalPaid-In
7 Common StockThe owners of common stock of a corporation can be thought of as the true owners of the business.
8 Common StockUnless restricted by terms of the articles of incorporation, the common stockholder has certain basic rights.
9 Common StockThe right to vote in the election of directors and in the determination of certain corporate polices such as the management compensation plan or major corporate acquisitions.The right to maintain one’s proportional interest in the corporation through purchase of additional common stock if and when it is issued.
10 Preferred Stock The title “preferred” stock is somewhat misleading. Preferred isn’t better; it’s different.The title “preferred” stock is somewhat misleading.
11 The protection enjoyed by preferred stockholders is: Preferred stockholders are entitled to receive their full cash dividend before any cash dividend can be issued to common stockholders.If the company goes bankrupt, preferred stockholders are entitled to have their investment repaid in full, before common stockholders receive anything.
12 Preferred StockCumulativeHas the right to receive accumulated dividends before any dividends may be paid to common stockholders.Non-CumulativeHas no right to “passed”dividends.ParticipatingHas claim to a portion ofcommon dividends afterreceiving preferred dividends.
13 Preferred Stock Convertible Callable Redeemable Permits the holder to exchangepreferred stock for common stock.CallablePermits the issuing companyto redeem the preferred stock.RedeemablePermits the holder to redeem thestock--usually with somerestrictions.
14 Issuance of Capital Stock Goode Corporation issued 4,000 shares of $1 par common stock on April 1, 2002, for $45,000 cash.Apr. 1 Cash 45,000Common Stock 4,000Paid-In Capital inExcess of Par 41,000
15 Issuance of Capital Stock Goode Corporation issued 4,000 shares of no-par common stock with a stated value of $1 on April1, 2002, for $45,000 cash.Apr. 1 Cash 45,000Common Stock 4,000Paid-In Capital inExcess of StatedValue 41,000
16 Issuance of Capital Stock On April 1, Goode Corporation issued 4,000 shares of no-par common stock without a stated value on April1, 2002, for $45,000 cash.Apr. 1 Cash 45,000Common Stock 45,000
17 Capital Stock Sold on Subscription On November 1, 2002, a firm received subscriptions for 5,000 shares of $1 par common at $12.50 per share with 50% down, balance due in 60 days.Nov. 1 Cash 31,250Common Stock Subscription Receivable 31,250Common stock Subscribed 5,000Paid-In Capital in Excessof Par 57,500
18 Capital Stock Sold on Subscription On December 9, received balance due on one-half of subscribers and issued stock to fully paid subscribers, 2,500 shares.Dec. 9 Cash 15,625Common Stock Subscription Receivable 15,625Common stock Subscribed 2,500Common Stock 2,500
19 Stock Issued for Consideration Other Than Cash AC Company issues 200 shares of $0.50 par value common stock in return for land. The company’s stock is currently selling for $50 per share.Dec. 5 Land 10,000Common Stock Paid-In Capital in Excess ofPar 9,900
20 Stock Issued for Consideration Other Than Cash Assume that the land has a readily determinable market price of $12,000, but AC Company’s common stock has no established fair market value.Dec. 5 Land 12,000Common Stock Paid-In Capital in Excess ofPar 11,900
21 Stock RepurchasesTo provide shares for incentive compensation and employee savings plans.To obtain shares needed to satisfy requests by holders of convertible securities.To reduce the amount of equity relative to the amount of debt.To invest excess cash temporarily.Why repurchase shares?
22 Stock RepurchasesTo remove some shares from the open market in order to protect against a hostile takeover.To improve per-share earnings by reducing the number of shares outstanding and returning inefficiently used assets to shareholders.To display confidence that the stock is currently undervalued by the market.
23 Treasury StockStock issued by a corporation but subsequently reacquired by the corporation and held for possible future reissuance or retirement.Reported as a contra-equity account, not as an asset.Does not create a gain or loss on reacquisition, reissuance, or retirement.May decrease Retained Earnings, but cannot increase it.
24 Treasury Stock--Example: Both Accounting Methods Issued 100, $10 par value shares at $15 per shareCost MethodCash 1,500Common Stock. 1,000Paid-In Capital inExcess of ParPar Value MethodCash 1,500Common Stock ,000Paid-In Capital inExcess of Par
25 Reacquired ten shares at $16 per share. Treasury Stock--Example: Both Accounting MethodsReacquired ten shares at $16 per share.Cost MethodTreasury Stock 160CashPar Value MethodTreasury Stock 100Paid-In Capital inExcess of Par 50Retained Earnings 10Cash 160
26 Sold two shares of treasury stock at $20 per share. Treasury Stock--Example: Both Accounting MethodsSold two shares of treasury stock at $20 per share.Cost MethodCash 40Treasury StockPaid-In Capitalfrom TreasuryStock 8Par Value MethodCash 40Treasury Stock 20Paid-In Capital inExcess of Par 20
27 Sold five shares of treasury stock at $14 per share. Treasury Stock--Example: Both Accounting MethodsSold five shares of treasury stock at $14 per share.Cost MethodCash 70Paid-In Capital fromTreasury Stock 8Retained Earnings 2Treasury Stock 80Par Value MethodCash 70Treasury Stock 50Paid-In Capital inExcess of Par 20
28 Retired remaining three shares of stock. Treasury Stock--Example: Both Accounting MethodsRetired remaining three shares of stock.Cost MethodCommon Stock 30Paid-In Capital inExcess of Par 15Retained Earnings 3Treasury Stock 48Par Value MethodCommon Stock 30Treasury Stock 30
29 Stock Rights, Warrants, and Options Stock rights--Issued to existing shareholders to permit them to maintain their proportionate ownership interests when new shares are to be issued.Stock warrants--Sold by the corporation for cash, generally in conjunction with the issuance of another security.Stock options--Granted to officers or employees, usually as part of a compensation plan.
30 Stock WarrantsStewart Co. sells 1,000 shares of $50 par preferred stock for $58 per share. Stewart Co. gives the purchaser detachable warrants enabling the holders to subscribe to 1,000 shares of $2 par common stock for $25 per share. Immediately following the issuance of the stock, the warrants are selling for $3, and the fair market value of a preferred share without the warrant attached is $57.
31 Stock Warrants = $3 $57 + $3 Value assigned to warrants Total issue priceMarket value of warrantsx=Market value of security without warrantsMarket value of warrants+$57 + $3Value assigned to warrants=$58,000x$3= $2,900
32 Stock WarrantsThe entry on Stewart’s book to record the sale of the preferred stock with detachable warrants is:Cash 58,000Preferred Stock, $50 par 50,000 Paid-In Capital in Excess ofPar--Preferred Stock 5,100Common Stock Warrants 2,900
33 Stock WarrantsIf the warrants are exercised, the entry to record the issuance of common stock is:Common Stock Warrants 2,900Cash 25,000Common Stock, $2 par 2,000 Paid-In Capital in Excess ofPar--Common Stock 25,900
34 Stock-Based Compensation 3434Stock-Based CompensationYesNoAll employees eligible?NoCompensatory PlanShares offered equally?NoDetermine compensationexpense; amortizeover period employeeis to provide service.Reasonable exercise period?Grant andMeasurementdates same?YesYesNoNoExercise Prices » Market Price?Estimate compensationexpense; amortizeover period employeeis to provide service.NoNumber of sharesand Exercise Priceknown?Non-compen-satory PlanAdapted from Jarnagin, Bill D. Financial Accounting Standards; Explanation and Analysis. 16 ed (CCH Inc., Chicago, Ill. 1994) ppYesRecord sharesissued when stockis purchased.Determine actual expense;amortize over remainingperiod employee is toprovide service.Record shares issuedwhen stock is purchased.Adjust for UnearnedCompensation, if any.
35 Factors Affecting Retained Earnings Error correctionsChanges in accountingprincipleNet incomeQuasi-reorganizationsIncreasesRetainedEarnings
36 Factors Affecting Retained Earnings DecreasesChanges in accountingprinciplesDividendsError correctionsPrior period adjustmentsTreasury stockNet lossRetainedEarnings
37 Accounting for Dividends Declaration date: The date the corporation’s board of directors formally declares a dividend will be paid.Date of record: The date on which stockholders of record are identified as those who will receive a dividend.Date of payment: The date when the dividend is actually distributed to stockholders.
38 Cash DividendABC Corporation declares a $2,000 dividend; the following journal entries should be made:Declaration DateDividends (Retained Earnings) 2,000Dividends Payable ,000Payment DateDividends Payable 2,000Cash ,000
40 Property DividendIt is a distribution to stockholders that is payable in some asset other than cash.
41 Property DividendXYZ Corporation declares a dividend of 1,000 shares of Gondor, Inc. stock (cost $3,000; fair market value, $5,000).Date of DeclarationDividend (or Retained Earnings) 5,000Property Dividends Payable 3,000Gain on Distribution of PropertyDividend 2,000
42 Entry on the Books of a 50% Shareholder Property DividendDate of PaymentProperty Dividends Payable 3,000Investment in Gordor, Inc. Stock 3,000Entry on the Books of a 50% ShareholderInvestment in Gordor, Inc. Stock 2,500Dividend Revenue 2,500
43 Stock Dividends: Small or Large? Less than 20-25% of the outstanding shares.Debit Retained Earnings for the MARKET value of the shares.LargeGreater than 20-25% of the shares outstanding.Debit Retained Earnings for the PAR value of the shares.
44 Example 1: Stock Dividend Assume the following about Gean, Inc.:Common stock ($2 par, 10,000shares outstanding) $20,000Additional paid-in capital $24,200Retained earnings $12,500Stock dividend declared 1,500 sharesMarket price of stock $10/shareAssume the following about Gean, Inc.:Common stock ($2 par, 10,000shares outstanding) $20,000Additional paid-in capital $24,200Retained earnings $12,500Stock dividend declared 1,500 sharesMarket price of stock $10/shareIs this a large or small stock dividend?
45 Example 1: Stock Dividend Because 1,500 shares represent 15% of the outstanding stock, it is a small stock dividend.Assume the following about Gean, Inc.:Common stock ($2 par, 10,000shares outstanding) $20,000Additional paid-in capital $24,200Retained earnings $12,500Stock dividend declared 1,500 sharesMarket price of stock $10/share
46 Example 1: Stock Dividend Declaration DateRetained Earnings 15,000Stock Dividends Distributable 3,000Paid-In Capital in Excess of Par 12,000Issuance DateStock Dividends Distributable 3,000Common Stock 3,000
47 Example 2: Stock Dividend Assume the following about Gimli’s Corp.:Common Stock ($5 par, 20,000shares outstanding) $100,000Additional Paid-In Capital $100,000Retained Earnings $52,000Stock Dividend Declared 10,000 sharesMarket Price of Stock $20/share50% = large dividendIs this a large or small stock dividend?
49 Liquidating DividendA liquidating dividend is a distribution representing a return to stockholders of a portion of contributed capital.
50 Disclosures Related to the Equity Section Capital stock may be:Authorized but unissued.Subscribed for and held for issuance pending receipt of cash for the full amount of the subscription price.Outstanding in the hands of stockholders.Reacquired and held by the corporation for subsequent reissuance.Canceled by appropriate corporate action.
51 Quasi-Reorganization Where state law permits, a company may eliminate a deficit through a restatement of invested capital balances. This provides a fresh start for the company with a zero balance in Retained Earnings.
53 Quasi-Reorganization Quasi-Reorganization Plan for Anon., Inc.Reduce land, building, and equipment to fair market value of $600.Reduce par value of stock to $5; create $500 of “additional paid-in capital.”Apply $450 deficit ($150 from Retained Earnings and $300 from fixed asset revaluation) against Paid-In Capital.
54 Quasi-Reorganization Journal Entries for Anon., Inc.Quasi-ReorganizationFixed Asset RevaluationRetained Earnings 300Accumulated Depreciation 200Land, Building, and Equipment 500
55 Quasi-Reorganization Revalue Common StockCommon Stock, $10 par 1,000Common Stock, $5 par 500Paid-In Capital from StockRevaluation 500Erase DeficitPaid-In Capital 450Retained Earnings 450