Chapter 10 Stockholders’ Equity This chapter is divided into 3 parts

Chapter 10 Stockholders’ Equity This chapter is divided into 3 parts
Part A: Invested Capital Part B: Earned Capital Part C: Reporting and Analyzing Stockholders’ Equity Besides this, the chapter includes an appendix on equity investments. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.

Participation Questions – Chapter 10
How much did Facebook (the company itself, not the owners) receive in cash proceeds in their May 2012 IPO? $38 $180,000,000 $6,840,000,000 $19,000,000,000 Which of the company balance sheets reviewed at the beginning of Chapter 10 PowerPoints actually showed the treasury stock account on the balance sheet: Apple Computers; Walgreens; or Tutor Perini Construction Which country is the “pre-emptive” right example from? United States; Mexico; France; Argentina In the financial world, a tombstone means what? Details for issuance of new shares of stock The paperwork showing when a company files bankruptcy A marker showing when a bond issue has been paid off. A type of pizza. As of April 2014, Apple Computers stock repurchase program had been authorized by the board of directors to repurchase (treasury stock) up to $90,000,000,000 in common stock. T/F

Announcements Assignments – Due 11/27/16
Chapter 10 Homework (Connect) – unlimited attempts Participation questions for Chapter 10 (Webcourses) – 1 attempt Definitions Quiz (Webcourses) – 2 attempts Assignments – Due 12/4/16 Chapter 11 Homework (Connect) – unlimited attempts SEC Financial Statement Assignment (Webcourses) – 1 attempt Learn Smart Extra Credit for Block 3 - Chapters 8 – 11 closes on 12/6/16 at 11:59 PM. Final Exam 12/7 – 12/8

Questions to be Answered
Chapter 10 – How and what types of stocks do organizations issue to raise funds for asset purchase, expansion, etc.; Can organizations repurchase their own stock, How do organizations pay owners some of the retained profits (earnings) - dividends? What are the impacts to the income statement and balance sheet?

Chapter 10 Stockholders’ Equity
Impact to Financial Statements SELLER BUYER Matchmaker.com + Investment Investor Banker Investor + Stock Exchange Investor Investor + Stock Exchange Matchmaker.com $ Value of Transaction

Why? In 2012, they crossed the threshold of 500 investors.
FACEBOOK IPO Why? In 2012, they crossed the threshold of 500 investors. Share breakdown 2.16 billion shares - Effective number of Class A shares outstanding as of 12/31/12 180 million shares in 2012 IPO IPO Share Price was $38 Initial Public Offering In May 2012, we completed our IPO in which we issued and sold 180,000,000 shares of Class A common stock at a public offering price of $38.00 per share and the selling stockholders sold 241,233,615 shares of Class A common stock. We did not receive any proceeds from the sale of shares by the selling stockholders. The total net proceeds received from the IPO were $6.8 billion after deducting underwriting discounts and commissions of $75 million and other offering expenses of approximately $7 million.

Stockholders’ Equity Paid-in capital
Earned Capital - Retained Earnings Treasury Stock – Contra Equity TOTAL amount stockholders have invested in the corporation Amount of earnings the corporation has retained Corporation’s stock that is reacquired Common Stock Preferred Stock Stated another way, equity is equal to what we own (assets) minus what we owe (liabilities). Because assets represent resources of the company and liabilities are creditors’ claims to those resources, equity represents the owners’ residual claim to those resources. Stockholders’ equity consists of three primary sections: paid-in capital, retained earnings, and treasury stock. Paid-in capital is the amount stockholders have invested in the corporation. Retained earnings is the amount of earnings the corporation has retained, that is, the earnings not paid out in dividends. Treasury stock is the corporation’s own stock that it has reacquired. 10-8

Tutor Perini – Balance Sheet (Partial)
Why statement of financial position?

Walgreens Balance Sheet (Partial)

APPLE COMPUTERS CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Millions, except Share data in Thousands, unless otherwise specifies

Part A Paid-in-captial 10-12
First, lets look at transactions involving “invested capital”. 10-12

Advantages and Disadvantages of a Corporation
Limited liability Ability to raise capital Lack of mutual agency Additional taxes More paperwork A corporation offers three primary advantages: Limited Liability - Because of limited liability, even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the corporation. Ability to Raise Capital - A corporation is better suited to raising capital than is a sole proprietorship or a partnership. Attracting outside investment is easier for a corporation. Lack of Mutual Agency - Another favorable aspect of investing in a corporation is the lack of "mutual agency." Individual partners in a partnership each have the power to bind the business to a contract. A corporation has two primary disadvantages: Additional Taxes - Corporations have double taxation. As a legal entity separate from its owners, a corporation pays income taxes on its earnings. Then, when it distributes the earnings to stockholders in dividends, the stockholders—the company’s owners—pay taxes a second time on the corporate dividends they receive. More Paperwork - To protect the rights of those who buy a corporation’s stock or who lend money to a corporation, the federal and state governments impose expensive reporting requirements on the corporation. 10-13

Advantages and Disadvantages of Equity Financing Over Loans – Informational Purposes Only
Advantages to equity financing: It's less risky than a loan because you don't have to pay it back, You tap into the investor's network - add credibility. Investors take a long-term view No loan repayment. More cash on hand for expanding the business. No requirement to pay back the investment if the business fails. Disadvantages to equity financing: It may require returns that could be more than the rate you would pay for a bank loan. The investors will require some ownership of your company and a percentage of the profits. You will have to consult with investors before making some decisions. Investors may fire you.

What are we doing today??? Paid-in-Capital
Classes of stock that can be issued and features/rights of stock (Common & Preferred) Stock issuance – JE and how many share issued, outstanding, authorized Stock buyback (Treasury Stock) Earned Capital Retained Earnings Dividends Cash & Stock

Classes of Stock, Rights, and Features

Stockholder 4 Basic Rights
Whether public or private, stockholders are the owners of the corporation and have certain rights: Right to vote Right to receive dividends (if they are declared) Right to share in distribution of assets Preemptive right – allows a stockholder to maintain his or her percentage share of ownership. Whether public or private, stockholders are the owners of the corporation and have certain rights. These are: Right to Vote—Stockholders have the right to vote on matters that come before the stockholders, including the election of corporate directors. Right to Receive Dividends—Stockholders have the right to share in profits when the corporation declares dividends. The percentage of shares a stockholder owns determines his or her share of the dividends distributed. Right to Share in Distribution of Assets—Stockholders share in the distribution of assets if the corporation is liquidated. The percentage of shares a stockholder owns determines his or her share of the assets, which are distributed after creditors and preferred stockholders are paid. Preemptive Right—The preemptive right allows a stockholder to maintain his or her percentage share of ownership when new shares are issued. Each stockholder is offered the opportunity to buy a percentage of any new shares issued equal to the percentage of shares he or she owns at the time. However, most corporations have dropped this right due to difficulties it causes corporations when they issue new shares. 10-17

Preemptive Right Example
BUENOS AIRES, Argentina, /PRNewswire/ -- Pampa Energia S.A. (NYSE: PAM; Buenos Aires Stock Exchange: PAMP 'Pampa' or the 'Company') informs that, on October 3 past, Petrolera Pampa S.A., a subsidiary of PESA (hereinafter, "PEPASA"), reported to the Company that it would call a Shareholders' Meeting to increase its stock capital so as to raise up to $100,000,000 (One Hundred Million Pesos) in order to consolidate its financial position and thus access more easily to the financial markets and carry into effect PEPASA's proposed investments (hereinafter, "PEPASA's Capital Increase") according to its business plans for the exploration and exploitation of hydrocarbons. On the date hereof, the Company's Board of Directors has resolved to assign its preemptive subscription right in connection with PEPASA's Capital Increase to all those of PESA's shareholders who are registered by Caja de Valores S.A.

Classes of Stock COMMON PREFERRED Basic form of stock
Has four basic rights Shareholders benefit most if corporation succeeds Take more risk Has four basic rights Has advantages over common Receive dividends first Receive assets first in liquidation Shareholders earn a fixed dividend Very few corporations issue Corporations issue different types of stock to appeal to a variety of investors. The stock of a corporation may be either: ■ Common or preferred ■ Par or no-par Every corporation issues common stock, the basic form of capital stock. Unless designated otherwise, the word stock is understood to mean “common stock.” Common stockholders have the four basic rights of stock ownership, unless a right is specifically withheld. The common stockholders are the owners of the corporation. They stand to benefit the most if the corporation succeeds because they take the most risk by investing in common stock. Preferred stock gives its owners certain advantages over common stockholders. Preferred stockholders receive dividends before the common stockholders and they also receive assets before the common stockholders if the corporation liquidates. Owners of preferred stock also have the four basic stockholder rights, unless a right is specifically denied. Companies may issue different classes of preferred stock. Each class of stock is recorded in a separate account. The most preferred stockholders can expect to earn on their investments is a fixed dividend. Preferred stock is a hybrid between common stock and long-term debt. Like debt, preferred stock pays a fixed dividend. But like stock, the dividend is not required to be paid unless the board of directors declares the dividend. Also, companies have no obligation to pay back true preferred stock. Preferred stock that must be redeemed (paid back) by the corporation is a liability masquerading as a stock. Preferred stock is rare. A recent survey of 600 corporations revealed that only 9% of them had preferred stock . All corporations have common stock. 19 19

Stock Classes (cont.) Common – if corporation has no other stock, it is usually classified as common. Stock with No ‘Par’ Value Stock with a ‘Par’ Value Preferred Par or no par stock Other characteristics Redeemable Convertible Cumulative Stock may be par-value stock or no-par stock. Par value is an arbitrary amount assigned by a company to a share of its stock. Most companies set the par value of their common stock low to avoid legal difficulties from issuing their stock below par. Most states require companies to maintain a minimum amount of stockholders’ equity to protect creditors. For corporations with par-value stock, legal capital is the par value of the shares issued. No-par stock does not have par value. But some no-par stock has a stated value, which makes it similar to par-value stock. The stated value is an arbitrary amount similar to par value. 20 20

Par Value Par value stock has no relation to market value and, as a concept, is somewhat archaic. The par value of a share of stock is the value stated in the corporate charter below which shares of that class cannot be sold upon initial offering; the issuing company promises not to issue further shares below par value, so investors can be confident that no one else will receive a more favorable issue price. Thus, par value is the nominal value of a security which is determined by the issuing company to be its minimum price. This was far more important in unregulated equity markets than in the regulated markets that exist today Par Arbitrary amount assigned to share of stock – no relation to market value of stock Usually set low to avoid legal issues Most states do not allow companies to issue new stock below par Stock may be par-value stock or no-par stock. Par value is an arbitrary amount assigned by a company to a share of its stock. Most companies set the par value of their common stock low to avoid legal difficulties from issuing their stock below par. Most states require companies to maintain a minimum amount of stockholders’ equity to protect creditors. For corporations with par-value stock, legal capital is the par value of the shares issued. No-par stock does not have par value. But some no-par stock has a stated value, which makes it similar to par-value stock. The stated value is an arbitrary amount similar to par value. 21 21

Features of Preferred Stock
Flexibility allowed in its contractual provisions Convertible Redeemable Cumulative Shares can be exchanged for common stock Shares can be returned to the corporation at a fixed price Shares receive priority for future dividends, if dividends are not paid in a given year Preferred stock is especially interesting due to the flexibility allowed in its contractual provisions. Preferred stock might be convertible, redeemable, and/or cumulative. First, Preferred stock may be convertible, which allows the stockholder to exchange shares of preferred stock for common stock at a specified conversion ratio. Occasionally, preferred stock is redeemable at the option of either (1) stockholders or (2) the corporation. A redemption privilege might allow preferred stockholders the option, under specified conditions, to return their shares for a predetermined redemption price. Preferred stock usually is cumulative, which means that if the specified dividend is not paid in a given year, unpaid dividends (called dividends in arrears) accumulate, and the firm must pay them in a later year before paying any dividends on common stock. 10-22

Stock – How many share in investors Hands???
Type of Stock Definition Authorized Shares available to sell (issued and unissued) Issued Shares actually sold (includes treasury stock) Outstanding Shares held by investors (excludes treasury stock) Issued = Authorized – Unissued Outstanding = Issued – Treasury Stock Dividend Payment is based on shares Outstanding If a corporation has only one kind of stock, it usually is labeled as common stock. A common has three types: authorized, issued and outstanding stock Authorized stock is the total number of shares available to sell, stated in the company’s articles of incorporation. Issued stock is the number of shares that have been sold to investors. Outstanding stock is the number of shares held by investors. Review - Articles of Incorporation 10-24

APPLE COMPUTERS CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Millions, except Share data in Thousands, unless otherwise specifies

Target ($ in millions, shares as stated)
Common stock account 669,292,929 x = $56 million Authorized – unissued = issued Issued – treasury stock = outstanding 669,292,929 – 0 = 669,292,929

FYI Only - Financing Comparison
Comparison of common stock, preferred stock, and bonds Factor Common Stock Preferred Stock Bonds Voting rights Yes Usually No No Risk to the investor Highest Middle Lowest Expected return to the investor Risk of contract violations Preference for payments Tax deductibility of payments (by corporation) Preferred stock is “preferred” over common stock in two ways: Preferred stockholders usually have first rights to a specified amount of dividends (a stated dollar amount per share or a percentage of par value per share). If the board of directors declares dividends, preferred shareholders will receive the designated dividend before common shareholders receive any. Preferred stockholders receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved. Preferred stock actually has a mixture of attributes somewhere between common stock (equity) and a bond (liability). The table provides a comparison of common stock, preferred stock, and bonds along several dimensions. Note that preferred stock falls in the middle between common stock and bonds for each of these factors. 10-27

Check-in’s If an organization has issued 1,000 shares and they are getting ready to issue an additional 1,000 shares, how many shares need to be offered to a current owner with a 10% stake based on the pre-emptive right? The par value of a stock is based on an algorithm designed by NASA True of False (Please circle correct answer) A company has 1,000,000 shares authorized, 100,000 in treasury stock, and 500,000 shares issued. How many shares would currently receive dividends?

Issuance of Stock

Steps for recording Common Stock issues
No par Stock Calculate cash received from sale of stock Formula = number of shares sold * sales price per share Journal Entry Cash – debit for amount of cash received Common Stock – credit for amount of cash received Par Stock Calculate par value of stock issuance Formula = shares issued * par value Common Stock – credit for amount of the par value calculated above Additional Paid-in-Capital - credit based on the difference between cash received and par value of issuance

Accounting for Common Stock Issues
When a corporation receives cash from issuing common stock, it debits cash. If it issues no-par value stock, the corporation credits the equity account entitled common stock. Cash (1,000 shares x $30) 30,000 Common Stock (Issue no-par value common stock) When a corporation receives cash from issuing common stock, it debits cash. If it issues no-par value stock, the corporation credits the equity account entitled common stock. The journal entry reflects that the corporation issues 1,000 shares of no-par value common stock at $30 per share. The entry changes slightly if the corporation issues par value stock rather than no-par value stock. In that case, we credit two equity accounts. We credit the common stock account for the number of shares issued times the par value per share and we credit additional paid-in capital for the portion of the cash proceeds above par value. Lets assume that the corporation issues 1,000 shares of its $0.01 par value common stock at $30 per share. The journal entry for the same is given. Notice that the corporation credits additional paid-in capital for the portion of the cash proceeds above par value. 10-31

Accounting for Common Stock Issues – Par Value
The entry changes slightly if the corporation issues par value stock rather than no-par value stock. In that case, we credit common stock and additional paid-in capital. Cash (1,000 shares x $30) 30,000 Common Stock (1,000 shares x $0.01) 10 Additional Paid-in Capital (difference) 29,990 (Issue common stock above par) When a corporation receives cash from issuing common stock, it debits cash. If it issues no-par value stock, the corporation credits the equity account entitled common stock. The journal entry reflects that the corporation issues 1,000 shares of no-par value common stock at $30 per share. The entry changes slightly if the corporation issues par value stock rather than no-par value stock. In that case, we credit two equity accounts. We credit the common stock account for the number of shares issued times the par value per share and we credit additional paid-in capital for the portion of the cash proceeds above par value. Lets assume that the corporation issues 1,000 shares of its $0.01 par value common stock at $30 per share. The journal entry for the same is given. Notice that the corporation credits additional paid-in capital for the portion of the cash proceeds above par value. 10-32

Accounting for Preferred Stock Issues
The entries to record the issuance of preferred stock are similar to those for the issue of common stock Cash (1,000 shares x $40) 40,000 Preferred Stock (1,000 shares x $30 par) 30,000 Additional Paid-in Capital 10,000 (Issue preferred stock above par) The entries to record the issuance of preferred stock are similar to those for the issue of common stock. Assume that the corporation issues 1,000 shares of $30 par value preferred stock for $40 per share. The entry to record the transaction is given. 10-33

Target ($ in millions, shares as stated) – from financial notes
Common stock account 669,292,929 x = $56 million Authorized – unissued = issued Issued – treasury stock = outstanding 669,292,929 – 0 = 669,292,929

Based on Targets Financial Notes from the previous page – record transactions for 1.) issuance of 1,000 of Target Common Stock sold for $100 per share or 2.) 1,000 shares of Target Preferred Stock at $100 per share. Par values are and .01 for CS and PS, respectively.

LO4 Treasury Stock - Contra Equity
Definition - A corporation’s own stock that it has previously issued and subsequently reacquired (in the open market) Contra equity = Normal Debit balance & companion is typically common stock Treasury stock is the name given to a corporation’s own stock that it has reacquired. The question that arises out of this concept is “Why Corporations Repurchase Their Stock?” The reasons are: 1. To boost under-priced stock. When corporation management feels the market price of its stock is too low, it may attempt to support the price by decreasing the supply of stock in the market place. 2. To distribute surplus cash without paying dividends. While dividends usually are a good thing, investors do pay personal income tax on them. Another way for a firm to distribute surplus cash to shareholders without giving them taxable dividend income is to use the excess cash to repurchase its own stock. 3. To boost earnings per share. Earnings per share is calculated as earnings divided by the number of shares outstanding. Stock repurchases reduce the number of shares outstanding, thereby increasing earnings per share. However, with less cash in the corporation, it’s more difficult for companies to maintain the same level of earnings following a share repurchase. 4. To offset issuance of shares under stock-based compensation plans. Perhaps the primary motivation for stock repurchases is to offset the increase in the number of shares created by employee stock award and stock option compensation programs. 10-36

Treasury Stock (Cont.) Why corporations repurchase their stock
To boost earnings per share. To boost under-priced stock. To distribute surplus cash without paying dividends. To offset issuance of shares under stock-based compensation plans.

LO4 Treasury Stock (Cont.)
Par value of stock is not considered in treasury stock transaction. Steps for initial stock repurchase (Par is not considered for treasury stock transactions) Calculate cost of repurchase Number of shares repurchased * purchase price of stock Debit treasury stock Credit Cash Steps for re-issuing treasury stock Calculate proceeds from reissue Number of shares reissued * sales price of stock Debit Cash Credit treasury stock account based on the original cost for the share of treasury stock. Difference between the debit to cash and credit to treasury stock record in additional paid-in-capital (either as a debit or credit). Treasury stock is the name given to a corporation’s own stock that it has reacquired. The question that arises out of this concept is “Why Corporations Repurchase Their Stock?” The reasons are: 1. To boost under-priced stock. When corporation management feels the market price of its stock is too low, it may attempt to support the price by decreasing the supply of stock in the market place. 2. To distribute surplus cash without paying dividends. While dividends usually are a good thing, investors do pay personal income tax on them. Another way for a firm to distribute surplus cash to shareholders without giving them taxable dividend income is to use the excess cash to repurchase its own stock. 3. To boost earnings per share. Earnings per share is calculated as earnings divided by the number of shares outstanding. Stock repurchases reduce the number of shares outstanding, thereby increasing earnings per share. However, with less cash in the corporation, it’s more difficult for companies to maintain the same level of earnings following a share repurchase. 4. To offset issuance of shares under stock-based compensation plans. Perhaps the primary motivation for stock repurchases is to offset the increase in the number of shares created by employee stock award and stock option compensation programs. 10-38

Apple stock repurchase
In 2012, the Company’s Board of Directors authorized a program to repurchase up to $10 billion of the Company’s common stock beginning in The Company’s Board of Directors increased the share repurchase program authorization to $60 billion in April 2013 and to final total of $90 billion in April Apple reported a spike in its capital return program, spending $17 billion in Q This is the largest open market stock buyback the company has ever made, a notable figure given that Apple has regularly been setting records in the arena of massive stock buybacks ever since it began its capital return program three years ago. CUPERTINO, California—April 27, 2015—Apple® today announced that its Board of Directors has authorized an increase of more than 50 percent to the Company’s program to return capital to shareholders. Under the expanded program, Apple plans to utilize a cumulative total of $200 billion of cash by the end of March 2017.

APPLE COMPUTERS Comprehensive income is the sum of net income and other items that must bypass the income statement because they have not been realized, including items like an unrealizedholding gain or loss from available for sale securities and foreign currency translation gains or losses. These items are not part of net income, yet are important enough to be included in comprehensive income, giving the user a bigger, more comprehensive picture of the organization as a whole.

APPLE STATEMENT OF STOCKHOLDERS’ EQUITY

Accounting for Treasury Stock
Treasury stock is reported as a contra-equity (negative equity account). When a corporation repurchases its own stock, it increases, or debits treasury stock and vice versa when it sells. Treasury Stock (100 shares x $30) 3,000 Cash (Repurchase treasury stock) Cash (100 shares x $35) 3,500 Additional Paid-in Capital (difference) 500 (Reissue treasury stock above cost) Cost Reissue price Treasury stock is reported as a contra-equity, or negative amount, since treasury stock reduces total stockholders’ equity. When a corporation repurchases its own stock, it increases, or debits treasury stock. Let’s assume that the corporation repurchases 100 shares of its own $0.01 par value common stock at $30 per share. The entry to record this transaction is given. Notice that we record treasury stock at the cost of the shares reacquired i.e. $30 per share in this case. Now, assume that the corporation later reissues the 100 shares of treasury stock for $35. These shares originally were purchased for $30 per share, so the $35 reissue price represents a $5 per share increase in additional paid-in capital. It’s not recorded as a $5 per share gain in the income statement, as we would for the sale of an investment in another corporation, since the corporation is reissuing its own stock. The entry to record this transaction is given. We debit cash at $35 per share to record the inflow of cash from reissuing treasury stock. We recorded the 100 shares of treasury stock in the accounting records at a cost of $30 per share at the time of purchase. Now, when we reissue the treasury shares, we must reduce the treasury stock account at the same $30 per share. We record the $500 difference (=100 shares x $5 per share) as additional paid-in capital. 10-42

Accounting for Treasury Stock
What if the stock price goes down and we reissue the treasury stock for less than we paid to buy back the shares? Reissue price Cash (100 x $25) 2,500 Additional Paid-in Capital (100 x $5) 500 Treasury Stock (100 x $30) 3,000 (Sell treasury stock below cost) Cost What if the stock price goes down and we reissue the treasury stock for less than we paid to buy back the shares? Let’s assume the corporation later reissues the 100 shares of treasury stock for only $25 rather than $35. The entry to record this transaction is given. By repurchasing 100 shares of its own stock for $30 per share and reselling them for only $25 per share, the corporation experienced a decrease in additional paid-in capital. This is reflected in the entry as a debit to the additional paid-in capital account. It’s not recorded as a $5 per share loss in the income statement, as we would for the sale of an investment in another corporation, since the corporation is reissuing its own stock. 10-43 43

Exercise – Jan 17 Issued 2,200 shares of $2
Exercise – Jan 17 Issued 2,200 shares of $2.50 par common stock at $10 per share. May 23 Purchased 300 shares of treasury stock at $12 per share. Jul 11 Sold 200 shares of treasury stock at $20 per share.

Effect on Stockholders’ Equity
Exercise Effect on Stockholders’ Equity 1-17 Common stock issued $22,000 5-23 Purchase of treasury stock (3,600) 6-11 Sale of treasury stock 4,000 Total change to SE $22,400 What was the overall effect of these transactions on stockholders’ equity? The issuance of stock increased total equity by $22, Treasury stock decreased equity by its cost. Treasury stock is a contra-equity account. The sale of treasury stock increased equity by decreasing contra-equity. In addition, paid-in capital from treasury stock transactions increased by the amount received above cost. Overall, stockholders’ equity decreased by $22,400. 45 45

Earned Capital Part B In Part A of the chapter, we discussed transactions involving “invested capital,” because when investors buy a corporation’s stock, they are investing in the company. Here, in Part B, we examine transactions involving retained earnings. Similarly, we might refer to this source of stockholders’ equity as “earned capital,” because it represents the net assets of the company that have been earned for the stockholders rather than invested by the stockholders. 10-46

LO5 Retained Earnings and Dividends
Definition - the earnings retained in the corporation – earnings not paid out as dividends to stockholders. Equals all net income, less all dividends, since the corporation began. Has a normal credit balance consistent with other stockholders’ equity accounts. FYI - If losses exceed income since the corporation began, retained earnings will have a debit balance and is called an accumulated deficit. JC Penney 10-47

Dividends Distribution to the shareholders of a corporation usually based on earnings Company not obligated to pay dividend even if preferred, unless it is declared by Board of Directors Types of dividends Cash Common stock and Preferred stock Stock Other Assets

Steps in Distributing Cash Dividends
Declaration Date - Board of Directors declares the distribution of a dividend and the type of dividend. Important - Dividends are only paid on shares outstanding Dividend – debit Dividend Payable - credited Date of Record – all stockholders as of a certain date (date of record) will receive dividend. No journal entry required. Payment Date – the date the dividend is actually distributed, either in cash, stock, or other asset. Dividends Payable – debit Cash – credit

Debit and Credit Effects on Accounts in the Expanded Accounting Equation
Remember that accounts on the left side of the accounting equation (assets) increase with debits or the left side of an account. Accounts on the right side of the accounting equation (liabilities and stockholders’ equity) increase with credits or the right side of an account. We can expand the basic accounting equation to include the components of stockholders’ equity (common stock and retained earnings) and the components of retained earnings (revenues, expenses, and dividends). Because common stock and retained earnings are part of stockholders’ equity, it follows directly that we increase both with a credit. Revenues increase retained earnings (“there’s more to keep”). Retained earnings is a credit account, so we increase revenues with a credit. Expenses, on the other hand, decrease retained earnings (“there’s less to keep”). Thus, we do the opposite of what we do with revenues: We increase expenses with a debit. A debit to an expense is essentially a debit to retained earnings, decreasing the account. Similarly, dividends decrease retained earnings, so we also record an increase in dividends with a debit. 2-50

Cash Dividends Lets consider the following dividend example
A corporation declares a $0.25 per share dividend on its 2,000 outstanding shares March 15 (declaration date) Dividends (2,000 shares x $0.25) 500 Dividends Payable (Declaration of cash dividends) March 31 (No entry for Record date) April 15 (payment date) Dividends Payable (2,000 shares x $0.25) 500 Cash (Payment of cash dividends) Now, lets consider the journal entries to record on these dates. Assume that on March 15, the corporation declares a $0.25 per share dividend on its 2,000 outstanding shares, 1,000 shares of common stock and 1,000 shares of preferred stock. The entry to record the declaration of cash dividends is given. Notice the debit to retained earnings. The dividend is paid on April 15 to stockholders of record at the close of business on March 31. We make no entry on March 31, the date of record. 10-51

Check in’s UCF decides that the student union should be owned by students, so they complete an initial public offering of 100,000 $10 with a par value of $1. How much is the credit to additional paid-in-capital? An increase to the treasury stock account, will increase or decrease the overall amount of stockholders’ equity on the balance sheet? (please circle correct answer) After 4 years of student ownership of the Union, the BOD decides to repurchase 10,000 shares of stock from graduating students for $10 per share. This stock is then re-issued to new students at $15 per share. If 100 shares are re-issued, what is the credit to treasury stock? The BOD at the Union decides to issue a dividend of $100 per share. There are 1,000,000 shares authorized, 100,000 issued and 9,900 shares of treasury stock. What is the credit amount to dividends payable?

Stock Dividends and Stock Splits
Sometimes, corporations distribute to shareholders additional shares of the companies’ own stock rather than cash. These are known as stock dividends or stock splits depending on the size of the stock distribution. You own 100 shares and assume a You will get 10% stock dividend 10 additional shares 20% stock dividend 20 additional shares 100% stock dividend 100 additional shares Large stock dividend or stock split (2-for-1) Small stock dividend Cash dividends provide investors something with substance—cash. Sometimes, though, corporations distribute to shareholders additional shares of the companies’ own stock rather than cash. These are known as stock dividends or stock splits depending on the size of the stock distribution. Suppose you own 100 shares of stock. Assuming a 10% stock dividend, you’ll get 10 additional shares. If it’s a 20% stock dividend, you’ll get 20 more shares. A 100% stock dividend, equivalent to a 2-for-1 stock split, means 100 more shares. U.S. accounting standards distinguish between large stock dividends (25% or higher) and small stock dividends (less than 25%). Large stock dividends are more common in practice. A stock distribution of 25% or higher, although it’s technically a “large” stock dividend, is more often referred to as a stock split. 10-56

Example: 1,000 Shares outstanding, 10% dividend, $30 market value
Stock Dividends Since the corporation’s shares double following a 100% stock dividend, we make an entry to reflect the increase in the par value of the common shares. Example: 1,000 shares outstanding, Par = $0.01 Retained Earnings (1,000 shares x $0.01) 10 Common Stock (100% stock dividend, large stock dividend) Small stock dividends are recorded by debiting retained earnings for the market value, rather than the par value, per share. Example: 1,000 Shares outstanding, 10% dividend, $30 market value Retained Earnings (1,000 x 10% x $30) 3,000 Common Stock (1,000 x 10% x $0.01) 1 Additional Paid-In Capital (difference) 2,999 (10% stock dividend, small stock dividend) 10-57

Stock Splits A stock distribution of 25% or higher, although it’s technically a “large” stock dividend, is more often referred to as a stock split. A 100% stock dividend is effectively the same as a 2-for-1 stock split, although the accounting for a 100% stock dividend and a 2-for-1 stock split differs. Make no journal entry to record a stock split. After a 2-for-1 stock split, the common stock account balance (total par) represents twice as many shares and the par value per share is reduced by one-half. A stock distribution of 25% or higher, although it’s technically a “large” stock dividend, is more often referred to as a stock split. Thus, a 100% stock dividend is effectively the same as a 2-for-1 stock split, although the accounting for a 100% stock dividend and a 2-for-1 stock split differs. In the previous section, we noted the journal entry used to record a stock dividend. On the other hand, we make no journal entry to record a stock split. After a 2-for-1 stock split, the common stock account balance (total par) represents twice as many shares. As a result, the par value per share is reduced by one-half. 10-58

Stock Split

Practice Questions from Connect for Chapter 10.
Gothic Architecture is a new chain of clothing stores specializing in the color black. Gothic issues 1,200 shares of its $3 par value common stock at $22 per share. 1.) Record the issuance of the stock. 2.) How would the entry differ if Gothic issued no-par value stock? Review of Stock Issuance and Treasury Stock

Practice Questions from Connect for Chapter 10 (Cont.)
Equinox Outdoor Wear issues 1,700 shares of its $.02 par value preferred stock for cash at $29 per share. Record the issuance of the preferred shares.

California Surf Clothing Company issues 1,400 shares of $4 par value common stock at $21 per share. Later in the year, the company decides to repurchase 150 shares at a cost of $50 per share. Record the transaction if California Surf reissues the 75 shares of treasury stock at $56 per share Chapter 10 (Cont.)

California Surf Clothing Company issues 1,400 shares of $4 par value common stock at $21 per share. Later in the year, the company decides to repurchase 150 shares at a cost of $50 per share. How would the entry be different if the shares reissue at $28 per share rather than at $56 per share

Divine Apparel has 4,400 shares of common stock outstanding. On October 1, the company declares a $1.40 per share dividend to stockholders of record on October 15. The dividend is paid on October 31. Record all transactions on the appropriate dates for cash dividends

Chapter 10 (Cont.) On June 30, the board of directors of Sandals, Inc., declares a 100% stock dividend on its 33,000, $3 par, common shares. The market price of Sandals common stock is $150 on June 30. Record the stock dividend On June 30, the board of directors of Sandals, Inc., declares a 3-for-1 stock split on its 33,000, $8 par, common shares. The market price of Sandals common stock is $200 on June 30. What are the number of shares, par value per share, and market price per share immediately after the 3-for-1 stock split?

End of chapter 10 10-66

Chapter 10 Stockholders’ Equity This chapter is divided into 3 parts

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Chapter 10 Stockholders’ Equity This chapter is divided into 3 parts

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