1. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-1 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-1 1 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin © 2011 The McGraw-Hill Companies, Inc., All Rights Reserved.

2. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-2 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-2 2 Accounting for and Presentation of Owners’ Equity Chapter 8 Accounting for and Presentation of Owners’ Equity LEARNING OBJECTIVES To understand: 1. The characteristics of common stock and how common stock is presented in the balance sheet. 2. What preferred stock is, what its advantages and disadvantages to the corporation are, and how it is presented in the balance sheet. 3. The accounting for a cash dividend and the dates involved in dividend transactions. 4. What stock dividends and stock splits are and why each is used. 5. What the components of accumulated other comprehensive income (loss) are and why these items appear in owners’ equity. 6. What treasury stock is, why it is acquired, and how treasury stock transactions affect owners’ equity. 7. How owners’ equity transactions for the year are reported in the financial statements. 8. How the presence of a noncontrolling (minority) interest affects the presentation of consolidated financial statements.

3. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-3 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-3 3 Nature of Owners’ Equity Retained Earnings Par or Stated Value Additional Paid-In Capital Par or Stated Value Additional Paid-In Capital Treasury Stock Less Total Owners’ Equity Paid-in Capital Preferred Stock Common Stock

4. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-4 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-4 4 Owners’ Equity Section LO 1

5. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-5 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-5 5 Paid-in Capital Common Stock On January 1, 2010, Matrix, Inc. issued 100,000 of its $3 par value common stock for $14 per share. The following entry is recorded: This transaction has the following effect on the financial statements of Matrix: LO 1

6. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-6 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-6 6 Common Stock Authorized Shares Issued shares that are owned by stockholders. Issued shares that have been reacquired. Issued shares include outstanding and treasury shares. LO 1

7. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-7 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-7 7 Preferred Stock Normally no voting rights, but dividend payment has preference over common stock. Has a par or stated value with dividend expressed as a percent of par. If callable, may be retired. If convertible, may be exchanged for common shares. LO 2

8. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-8 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-8 8 Preferred Stock Normally, preferred stock is cumulative meaning that all dividends must be paid before any dividends can be paid to common shareholders. Preferred may be noncumulative. If dividends are not paid, the company is not required to make-up the missed dividends. Normally, preferred stock is cumulative meaning that all dividends must be paid before any dividends can be paid to common shareholders. Preferred may be noncumulative. If dividends are not paid, the company is not required to make-up the missed dividends. Matrix, Inc. has 50,000, $100 par value, 6%, cumulative preferred stock outstanding. Calculate the annual dividend on the stock. 50,000 × $100 = $5,000,000 total par × 6% = $300,000 dividend LO 2

9. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-9 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-9 9 Preferred Stock Versus Bonds LO 2

10. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-10 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-10 10 Additional Paid-in Capital Represents the excess of the amount received from the sale of preferred or common stock over par (or stated) value. LO 2

11. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-11 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-11 11 Retained Earnings Represents the cumulative earnings of a corporation less the cumulative dividends paid since the business started operations. Retained earnings is NOT cash. LO 2

12. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-12 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-12 12 Cash Dividends Dividends must be declared by the board of directors before they can be legally paid. The company is not legally required to pay dividends, but once declared a legal liability is created. The company must have sufficient cash and retained earnings to pay the dividend. LO 3

13. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-13 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-13 13 Cash Dividend On January 5, 2010, the Board of Directors of Matrix, Inc. declares a cash dividend of $1 per share on the 500,000 shares of common stock outstanding. The dividend is payable to stockholders of record on February 5, and will be paid on March 5. Date of declaration – Jan. 5 LO 3

14. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-14 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-14 14 Cash Dividend On January 5, 2010, the Board of Directors of Matrix, Inc. declares a cash dividend of $1 per share on the 500,000 shares of common stock outstanding. The dividend is payable to stockholders of record on February 5, and will be paid on March 5. Date of record – Feb. 5 LO 3

15. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-15 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-15 15 Cash Dividend On January 5, the Board of Directors of Matrix, Inc. declares a cash dividend of $1 per share on the 500,000 shares of common stock outstanding. The dividend is payable to stockholders of record on February 5, and will be paid on March 5. Date of payment – Mar. 5 LO 3

16. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-16 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-16 16 Stock Dividends No change in par value of stock or in total stockholders’ equity. Stockholders retain percentage ownership in the company (preemptive right) Distribution of additional shares of stock to stockholders. Reasons for stock dividends:  Preserve cash.  Decrease market price of stock.  Reduce retained earnings. Reasons for stock dividends:  Preserve cash.  Decrease market price of stock.  Reduce retained earnings. LO 4

17. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-17 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-17 17 Stock Dividend Record at current market value of stock. Small Stock Dividend Stock dividend less than 25% of outstanding shares. Record at par or stated value of stock. Stock dividend more than 25% or the outstanding shares. Large Stock Dividend LO 4

18. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-18 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-18 18 Stock Dividend On May 10, 2010, Matrix, Inc. declares and distributes a 2% stock dividend on its 500,000 common shares outstanding. Par value is $1.00 per share and the current market value is $17 per share. On May 10, 2010, Matrix, Inc. declares and distributes a 2% stock dividend on its 500,000 common shares outstanding. Par value is $1.00 per share and the current market value is $17 per share. LO 4

19. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-19 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-19 19 Stock Dividend On May 10, 2010, Matrix, Inc. declares and distributes a 2% stock dividend on its 500,000 common shares outstanding. Par value is $1.00 per share and the current market value is $17 per share. On May 10, 2010, Matrix, Inc. declares and distributes a 2% stock dividend on its 500,000 common shares outstanding. Par value is $1.00 per share and the current market value is $17 per share.

20. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-20 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-20 20 Stock Split No change to total stockholders’ equity. No journal entry required. Decrease the par value per share. Increase the number of shares outstanding. LO 4

21. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-21 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-21 21 Stock Split Matrix, Inc. has 300,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split. × 2 ÷ 2 LO 4

22. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-22 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-22 22 Other Comprehensive Income A new category in owners’ equity called accumulated other comprehensive income (loss) includes the following unrealized changes to owners’ equity: A new category in owners’ equity called accumulated other comprehensive income (loss) includes the following unrealized changes to owners’ equity: 1.Cumulative foreign currency translation adjustments; 2.Unrealized gains or losses on available-for-sale investments, net of related income taxes; and 3.Additional minimum pension liability adjustments, net of related income taxes. A new category in owners’ equity called accumulated other comprehensive income (loss) includes the following unrealized changes to owners’ equity: A new category in owners’ equity called accumulated other comprehensive income (loss) includes the following unrealized changes to owners’ equity: 1.Cumulative foreign currency translation adjustments; 2.Unrealized gains or losses on available-for-sale investments, net of related income taxes; and 3.Additional minimum pension liability adjustments, net of related income taxes. LO 5

23. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-23 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-23 23 Treasury Stock On July 25, 2010, Matrix, Inc. repurchases 5,000 of its common shares in the open market for $30 per share. Contra owners’ equity account LO 6

24. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-24 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-24 24 Treasury Stock On Aug. 30, 2010, Matrix, Inc. resells 2,000 of its treasury stock in the open market for $35 per share. 2,000 × $30 cost per share LO 6

25. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-25 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-25 25 Learning Objective 7 Understand how owners’ equity transactions for the year are reported in the financial statements. Understand how owners’ equity transactions for the year are reported in the financial statements.

26. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-26 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-26 26 Proprietorships and Partnerships Proprietorships (single owner) and partnerships (two or more owners) do not issue stock. Proprietorship Partnership Drawing accounts are distributions to owners similar to dividends. Net income and drawing accounts are transferred to capital accounts at the end of the period. LO 7

27. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-27 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-27 27 Not-for-Profit Organizations Owners’ equity in not-for-profit and governmental organizations are referred to as fund balances. Individual resource providers do not have specific claims against an organization’s assets. LO 7

28. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-28 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-28 28 Noncontrolling Interest Noncontrolling interest is also known as a minority interest. It is the portion of equity in a subsidiary not attributable to the parent company. The balance sheet model can be expanded as follows: ASSETS = LIABILITIES+(OWNERS’ EQUITY + NON-OWNERS’ EQUITY) LO 8

29. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-29 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 8-29 29 End of Chapter 8