© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Corporations: Stock Values, Dividends, Treasury Stock, & Retained Earnings Chapter 19

Learning Objective 1 Calculating the book value of preferred and common stock © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Stock Values Redemption value - price per share a corporation pays to redeem or retire capital stock Market value - price a buyer pays to purchase shares of capital stock in the open market Book value per share - the total of stockholders’ equity divided by the number of shares issued. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Calculating Book Value Per Share With only one class of stock: Total Stockholders’ Equity Total Shares Outstanding © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Calculating Book Value Per Share With both preferred and common stock: Book value preferred = Redemption Value + Dividends in Arrears # of Shares Preferred Stock Outstanding © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Calculating Book Value Per Share With both preferred and common stock: Book value common = Stockholders’ Equity – Amount Assigned to Preferred # of Shares Common Stock Outstanding © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Problem 19B-1 (1) Book value preferred = Redemption Value + Dividends in Arrears # of Shares Preferred Stock Outstanding (1,000 shares x $105) / 1,000 shares $105,000 / 1,000 shares = $105 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Calculating Book Value Per Share Book value common = Stockholders’ Equity – Amount Assigned to Preferred # of Shares Common Stock Outstanding ($1,150,000 – 105,000) / 8,000 shares $1,045,000 / 8,000 = $ © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Problem 19B-1 (2) Book value preferred = Redemption Value + Dividends in Arrears # of Shares Preferred Stock Outstanding (1,000 x $105) + ($100,000 x 12% x 2) / 1,000 $129,000 / 1,000 shares = $129 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Calculating Book Value Per Share Book value common: Stockholders’ Equity – Amount Assigned to Preferred # of Shares Common Stock Outstanding ($1,150,000 – 129,000) / 8,000 shares $1,021,000 / 8,000 = $ © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

Learning Objective 2 Journalizing entries to record issuance of a cash dividend and a stock dividend We will use Problem 19B-2 to apply these concepts. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Dividend Cash or other assets that a corporation distributes as earnings to stockholders Only board of directors can declare a dividend © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Cash Dividends Three important dates Date of declaration ◦ Reduces Retained Earnings ◦ Increases a liability – Dividends Payable Date of record ◦ Date established by board which determines which stockholders will receive the dividend Date of payment ◦ Date dividend is actually paid © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Problem 19B-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Reasons for Stock Dividends Stock that is distributed to stockholders instead of cash or other assets Benefits: ◦ To satisfy expectations ◦ Stockholders make no new investment ◦ Increase permanent capital in the business ◦ Can reduce market value of stock ◦ Avoid income tax until stock received is sold © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Stock Dividend Date of declaration ◦ Reduces Retained Earnings ◦ Increases Paid-in Capital New stockholders’ equity accounts ◦ Stock Dividend Distributable ◦ Paid-in Capital in Excess of Par Value - Stock Dividend © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Problem 19B-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Shares to be issued (200,000 shares x.05) 10,000 Market value per share X $14 Debit to Retained Earnings $140,000 LO-2 Shares to be issued (200,000 shares x.05) 10,000 Par value per share X $10 Credit to stock Dividends Distributable $100,000

Problem 19B-2 Shares issued and outstanding as of Sept. 29: 200, ,000 = 210,000 shares © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Problem 19B-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Shares to be issued (210,000 shares x.10) 21,000 Market value per share X $17 Debit to Retained Earnings $357,000 LO-2 Shares to be issued (210,000 shares x.10) 21,000 Par value per share X $10 Credit to stock Dividends Distributable $210,000

Stock Split Issuance of additional stock to stockholders ◦ Causes a proportionate drop in the market price of outstanding stock ◦ Total par value remains the same ◦ Retained Earnings is not affected ◦ Par value per share is reduced ◦ Number of shares authorized, issued, and outstanding increase © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

Learning Objective 3 Journalizing the purchase and sale of treasury stock © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

Treasury Stock Stock that has been issued but has been bought back by the corporation or received as a gift New account – Treasury stock – contra-stockholders’ equity account © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

Treasury Stock Why acquire? ◦ Need to issue more stock for stock option plans or for use in acquiring other companies ◦ Desire to reduce number of shares outstanding ◦ Anticipation of opportunity to reissue stock at a higher price at a later date © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

Treasury Stock Characteristics 1.Does not change amount of issued stock 2.Does reduce outstanding stock 3.Does not have rights to dividends or voting situations 4.Contra-stockholders’ equity account 5.When bought, it is recorded at purchase price 6.Many state laws restrict amount of retained earnings available for dividends if treasury stock exists © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

Sale of Treasury Stock When reissued at price above cost ◦ New account – Paid-in Capital from Treasury Stock – stockholders’ equity account When reissued at price below cost ◦ Decrease paid-in capital from treasury stock until the balance is -0- ◦ Any further decrease, debit Retained Earnings © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

Exercise 19-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

Exercise 19-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

Learning Objective 4 Preparing a statement of Retained Earnings © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

Appropriated Retained Earnings Retained Earnings that are not available for declaration of dividends Can be voluntary or contractual Some companies are required to keep a minimum amount in Retained Earnings Most companies use a footnote to the Retained Earnings account to inform stockholders © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

Statement of Retained Earnings Reports the changes in Retained Earnings for a particular period of time Changes result from: ◦ Net income or loss ◦ Dividends declared ◦ Effects of prior period adjustments © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

Prior Period Adjustment Correction made in current year of a mistake made in previous years Updated on the statement of Retained Earnings beginning balance Only made if error is considered material © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

Exercise 19-5 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater End of Chapter 19