1 Chapter 11 Reporting and Interpreting Owners’ Equity Acct 2301 Fall 09

2 Topics on owners’ equity Terminology Authorized, issued, and outstanding shares (additional) Paid-in capital (APIC) Preferred stock, common stock, treasury stock Sale of stock Purchase of stock Dividends Stock dividend and stock split

3 Equity in Corporations The equity section for a corporation is divided into two parts: Retained Earnings -- earnings (net income) the company has earned since it was founded, less any dividends paid Contributed Capital --amount that owners have contributed

4 Presentation of Stockholders’ Equity in Corporations Preferred stock, $10 par value, 100,000 shares authorized, 2,000 shares issued $20,000 Common stock, $1 par value, 1,000,000 shares authorized, 100,000 shares issued 100,000 Paid-in capital (common) 985,000 Less: treasury stock (common) at cost, 5,000 shares (105,000) Retained earnings 670,000 Other comprehensive income 50,000 Total Stockholders’ Equity $ 1,720,000

5 Capital Stock Common Stock Preferred Stock Treasury Stock –Shares, either common stock or preferred stock, repurchased by the corporation

6 Capital Stock Authorized Shares: The maximum number of shares of capital stock that can be sold to the public is called the authorized number of shares. Issued Shares -- shares sold Unissued shares -- shares have never been sold Outstanding shares -- number of shares issued and not retained by the company. Shares in Treasury (treasury shares) -- shares repurchased by the corporation Authorized shares = Issued shares + Unissued shares Issued shares = Outstanding shares + Shares in Treasury

7 Capital Stock Par value: the nominal value per share of capital stock Has no relationship to market value. Serves as the basis for legal capital No-par value is capital stock that does not have an amount per share APIC: Additional Paid-in Capital Also called Paid-in capital or Capital in excess of par

8 Accounting for Sale of Stock Balancing amount is Additional paid-in capital (APIC) Debit Credit Cash$3,600 ABC Co. issued 300 shares of $1 par common stock for $12 per share. Common Stock 300 APIC 3,300

9 Treasury Stock Outstanding (common or preferred) stock that was subsequently reacquired and is still being held by that corporation. Why would a corporation reacquire its own stock?

10 More on Treasury Stock Treasury Stock: is considered issued stock but not outstanding stock has no voting or dividend rights is a contra-equity account on the Balance Sheet is recorded at cost Can be subsequently resold NO gains or losses are recorded on treasury stock

11 Treasury Stock Example ABC Inc. purchased 120 shares of its own common stock from the stock market at $10 per share Debit Credit Treasury Stock$1,200 Cash$1,200

12 Treasury Stock Example Scenario One: Sold 100 shares of Treasury Stock at $13 per share. Cash1,300 APIC300 Treasury Stock1,000 Scenario Two: Sold 100 shares of Treasury Stock at $9 per share. Cash900 APIC 100 Treasury Stock1,000 The treasury stock was resold later DebitCredit

13 Dividends Dividends are declared by board of directors Dividends (both cash and stock) are distributions of earnings to the shareholders –not an expense –based only on shares outstanding Once a dividend is declared, a liability is created Cash dividends require sufficient cash and positive retained earnings (past earnings)

14 Dividend dates Declaration date –Board declares dividend (charge Retained Earnings) –Creates a legal liability (Dividend Payable) Date of Record: who will receive dividend Payment Date

15 Dividend Dates Journal Entries Declaration date: Dr. Retained Earnings Cr. Dividends payable Record date:No entry Payment date: Dr. Dividends payable Cr. Cash

16 Dividends on Preferred Stock Current preferred dividends must be paid before paying any dividends to common stock. If a preferred dividend is not paid, the unpaid amount is either cumulative (a dividend in arrears) or non-cumulative. –Cumulative: Unpaid dividends must be paid before common dividends. –Non-cumulative: Unpaid dividends are lost.

17 Stock Dividends Stock dividends are distributions to stockholders of additional shares of stock. All stockholders receive the same percentage increase in the number of shares they own (pro rata basis). –No change in total stockholders’ equity. –No change in par values. Why issue a stock dividend?

18 ABC Co. declared a 10% stock dividend on its 200 shares of $1 par common stock. The market value is $20 per share. Retained earnings$400 Common stock 20 Additional paid in capital 380 Income Statement: No effect on Income Statement of Changes in Equity: No effect on equity Statement of Cash Flows: No effect on cash flow Accounting for Stock Dividends debit credit

19 2:1 Stock Split 1 share of stock $10 par value Before stock split 2 shares of stock $5 par value After stock split

20 Accounting for Stock Splits Distributions of 100% or more of stock to stockholders Decrease par value of stock Increase number of outstanding shares No change in total stockholders’ equity Thus, no journal entry is needed!