Transcript Here
Slide 13-1 Financial Accounting, Seventh Edition
Chapter
11
Corporations: Organization, Stock Transactions, Dividends,and Retained Earnings
The Corporate Form of Organization
Slide 13-2 Characteristics
that distinguish corporations from proprietorships and partnerships.
Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporate Management Government Regulations Additional Taxes Advantages Disadvantages
Consolidated Statement of Retained Earnings
2012 2011 2010
Retained Earnings, at the beginning of year Net Earnings $114,269 52,004 $135,866 43,938 $147,687 53,063
Slide 13-3
Cash Dividends Stock Dividends Retained Earnings at the end of the year (47,729) (38,334) $80,210 (18,360) (47,175) $114,269 (18,078) (46,806) $135,866 3
Components of Stockholders’ Equity
Authorized Shares: Total amount of stock that a corporation’s charter authorized it to sell.
SHAREHOLDERS’ EQUITY: (in thousands of dollars)
Common Stock, $0.69-4/9 par value — 120,000,000 shares authorized— 36,649,000 and 36,479,000 respectively, issued Class B common stock, $.69-4/9 par value — 40,000,000 shares authorized — 21,627,000 and 21,025,000 respectively, issued Capital in excess of par value Retained earnings, per accompanying statement Accumulated other comprehensive loss Treasury stock (at cost) – 73,000 shares and 71,000 shares respectively Total shareholders’ equity
Dec 31, 2012
$ 25,450 15,018 547,576 80,210 (16,447) (1,992) $ 649,815
Dec 31, 2011
$ 25,333 14,601 533,677 114,269 (19,953) (1,992) $ 665,935
Issued Shares: TOTAL shares that have been issued to stockholders.
Treasury Stock: Shares which were purchased and are currently held by the company Slide 13-4 OUTSTANDING Shares = Issued Shares – Treasury Shares (NOTE: Dividends are ONLY paid on outstanding shares)
Slide 13-5
Stock Issue Considerations
Authorized Stock
Charter indicates the amount of stock that a corporation is authorized to sell.
Number of authorized shares is often reported in the stockholders’ equity section.
Stock Issue Considerations
Issuance of Stock
Corporation can issue common stock directly to investors or indirectly through an investment banking firm.
Factors in setting price for a new issue of stock: 1. the company’s anticipated future earnings 2. its expected dividend rate per share 3. its current financial position 4. the current state of the economy 5. the current state of the securities market An investment in GROUPON of $1,000 on
Slide
November 4, 2011 (Price
13-6
per share = $26.11) Is worth $235.54 on April 10, 2013 (Price per share = $6.15)
Slide 13-7
Stock Issue Considerations
Market Value of Stock
Stock of publicly held companies is traded on organized exchanges. Interaction between buyers and sellers determines the prices per share. Prices set by the marketplace tend to follow the trend of a company’s earnings and dividends. Factors beyond a company’s control, may cause day-to day fluctuations in market prices.
Par Value and Market Value
Par value
is an arbitrary amount assigned to each share of stock when it is authorized.
Market value
market.
is the amount that each share of stock will sell for in the
Slide 13-8
Par Value = $0.001
Market Price (on April 10, 2, 2013) : $791.00
Corporate Capital
Paid-in Capital Common Stock
Account
Paid-in Capital in Excess of Par
Account
Preferred Stock
Account
Two Primary Sources of Equity Retained Earnings
Account Slide 13-9 Paid-in capital
paid in to the corporation by stockholders in exchange for capital stock.
is the total amount of cash and other assets
Retained earnings
for future use.
is net income that a corporation retains
Accounting for Common Stock Issuance
Issuing Par Value Common Stock for Cash
Rose Company issued 1,000 shares of common stock of $1 par value at par. Record the transaction.
Slide 13-10
Rose Company issued 1,000 shares of $1 par value common stock for $70 per share. Record the transaction.
Slide 13-11
Accounting for Common Stock Issuance
Issuing Common Stock for Services or Noncash Assets
Corporations also may issue stock for: Services (attorneys or consultants). Noncash assets (land, buildings, and equipment).
Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable.
Slide 13-12
Accounting for Common Stock Issuance
Illustration:
Assume that attorneys have helped Tulips Company incorporate. They have billed the company $50,000 for their services, and agree to accept 5,000 shares of $1 par value common stock in payment of their bill. At the time of the exchange, there is no established market price for the stock. Prepare the journal entry for this transaction.
Slide 13-13
Accounting for Common Stock Issues
Daffodils Company exchanged 4,000 shares of $4 par common stock for a building. Market value of the building is $80,000. Record the transaction.
Accounting for Common Stock Issuance
Issuing No-Par Common Stock for Cash
Assume that Jasmine Company issues 10,000 shares of $5 stated value no-par common stock for $18 per share. Record the journal entry.
Slide 13-14
Prepare the entry assuming there is no stated value:
Knowledge Check Question 1:
Northern Company purchased a building in exchange for 20,000 shares of common stock with a par value of $1 per share. The building has a market value of $350,000, but has an outstanding mortgage balance of $250,000 (which is now being taken over by Northern). As result of this transaction, Northern Company’s accounting equation will NOT 1. Show an increase in Assets of $350,000 2. Show an increase in Contributed Capital of $20,000 3. Show an increase in Stockholders’ Equity of $100,000 4. Show an increase in Liabilities of $250,000
Slide 13-15
Accounting for Treasury Stock
Slide 13-16 Treasury stock
- corporation’s own stock that it has reacquired from shareholders, but not retired.
Corporations purchase their outstanding stock: 1. To reissue the shares to officers and employees under bonus and stock compensation plans.
2. To enhance the stock’s market value. 3. To have additional shares available for use in the acquisition of other companies.
4. To increase earnings per share. 5. To rid the company of disgruntled investors, perhaps to avoid a takeover.
Slide 13-17
Accounting for Treasury Stock
Purchase of Treasury Stock
Debit Treasury Stock for the price paid to reacquire the shares.
Treasury stock is a contra stockholders’ equity account, not an asset.
Purchase of treasury stock
reduces stockholders’ equity
.
Accounting for Treasury Stock
Magnolia Company Stockholders' Equity 31-Dec-11 Common stock - $1 par value, 250,000 shares authorized, 100,000 shares issued and outstanding Paid-in capital in excess of par value Total paid-in capital Retained earnings Total stockholders' equity $ 100,000 400,000 $ 500,000 $ 535,000 On January 1, 2012, Magnolia Company purchased 1,000 shares of its own $1 par common stock for $8 per share. Record the transaction.
Slide 13-18
Accounting for Treasury Stock
Magnolia Company Stockholders' Equity 2-Jan-12 Common stock - $1 par value, 250,000 shares authorized, 100,000 shares issued and 99,000 shares outstanding Paid-in capital in excess of par value Total paid-in capital Retained earnings Total Paid in Capital and Retained Earnings Less: Treasury Stock (1,000 shares) Total Stockholders' Equity $ 100,000 400,000 $ 500,000 35,000 $535,000 (8,000) $527,000 Slide 13-19 Treasury Stock is shown as a reduction in Stockholders’ Equity on the balance sheet.
The number of shares issued (100,000), number of shares outstanding (99,000), and the number of shares held as treasury (1,000) are disclosed in the Stockholder’s Equity section.
Accounting for Treasury Stock
Disposal of Treasury Stock
Above Cost Below Cost
Both increase total assets and stockholders’ equity
.
Slide 13-20
Selling Treasury Stock Above Cost
On March 1, 2012, Magnolia Company reissued 500 shares of treasury stock (originally purchased for $8 a share) for $12 per share. Record the transaction.
Slide 13-21
A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.
Selling Treasury Stock Below Cost
On April 1, 2012, Magnolia Company reissued 300 shares of treasury stock (originally purchased for $8 per share) for $3 per share. Record the transaction.
Slide
Magnolia uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares.
13-22
Slide 13-23
Selling Treasury Stock Below Cost
On May 1, 2012, Magnolia Company reissued the remaining 200 shares of treasury stock (originally purchased for $8 per share) for $1 per share. Record the transaction.
Knowledge Check Question 2:
Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31, 2012 showed the following: Common Stock, $1 par value, 20,000 shares authorized and issued $20,000 Paid-in-Capital in excess of par – Common Stock 80,000 Treasury Stock, common, 2,000 shares (at cost) (40,000) Paid-in-Capital, Treasury Stock 10,000 Retained Earnings 130,000 Total Stockholders’ Equity $200,000 On January 1, 2013, Northern Company reissued 2,000 shares of Treasury stock at a market price of $12 per share. The resulting journal entry will: 1. Debit Cash by $40,000 2. Debit Treasury Stock by $24,000 3. Debit Paid-in-Capital, Treasury Stock by $20,000 4. Debit Retained Earnings by $6,000 Slide 13-24
Preferred Stock
Features often associated with preferred stock.
1.
2.
3.
Preference as to dividends.
Preference as to assets in liquidation.
Nonvoting.
Slide 13-25
Accounting for preferred stock at issuance is similar to that for common stock.
Preferred Stock
Illustration:
Dahlia Corporation issues 10,000 shares of $10 par value preferred stock for $25 cash per share. Journalize the issuance of the preferred stock.
Slide 13-26
Preferred stock may have a par value or no-par value.
Slide 13-27
Preferred Stock
Dividend Preferences
Right to receive dividends before common stockholders.
Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount.
Cumulative dividend
dividends.
– holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive
Dividends
A distribution of cash or stock to stockholders on a pro rata (proportional) basis. Common types of Dividends : 1.
2.
Cash dividends.
Stock dividends.
Cash Dividends may be expressed as: (1) as a percentage of the par or stated value, or
Slide 13-28
(2) as a dollar amount per share.
A Dividend Announcement Example (Source: investor.apple.com)
On October 25, 2012, Apple’s Board of Directors declared a cash dividend of $2.65 per share of the Company’s common stock. The dividend is payable on November 15, 2012, to shareholders of record as of the close of business on November 12, 2012.
Excerpted from APPLE INC’s 10K Statement dated September 29, 2012: Shareholders’ Equity: Sep 29, 2012 Common stock, no par value; 1,800,000,000 shares authorized; 939,208,000 shares issued and outstanding 16,422 million Slide 13-29
APPLE, Inc’s Dividend Entries:
Oct 25, 2012 (Date of Declaration): November 12, 2012 (Date of Record): Slide 13-30 November 15 , 2012 (Date of Payment):
Dividends for Mr. Bill Gates?
(Source: http://www.microsoft.com/investor/proxy) Microsoft Press Release:
REDMOND, Wash. — Mar. 11, 2013 —
Microsoft Corp. today announced that its board of directors declared a quarterly dividend of $0.23 per share. The dividend is payable June 13, 2013 to shareholders of record on May 16, 2013.
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS William H. Gates III, (Chairman): (for one quarter only): 460,984,209 (5.47%) So, Cash Dividends to be paid to Mr. Gates on June 13, 2013 460,984,209 shares * $0.23 per share ~ $106 million
Slide 13-31
Slide 13-32
Cash Dividends
Allocating Cash Dividends Between Preferred and Common Stock
Holders of
cumulative
preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends.
Slide 13-33
Cumulative vs Noncumulative Dividends
Cumulative
Dividends in arrears
must be paid before dividends may be paid on common stock.
Vs. Noncumulative
Undeclared dividends from current and prior years do not have to be paid in future years.
Most preferred stock is
cumulative
.
Cumulative vs Noncumulative Dividends
Example: Consider the following partial Statement of Stockholders’ Equity Common stock, $5 par value; 40,000 shares authorized, issued and outstanding Preferred stock, 9%, $100 par value; 1,000 shares authorized, issued and outstanding Total contributed capital $ 200,000 100,000 $ 300,000 Slide The Board of Directors did not declare or pay dividends in 2011. In 2012, the Board of Directors declare and pay total cash dividends of $30,000 13-34
Cumulative vs Noncumulative Dividends
If Preferred Stock is NonCumulative: Preferred Dividends Common Dividend Year 2011: Year 2012: Slide 13-35 If Preferred Stock is Cumulative: Preferred Dividends Year 2011: Year 2012: Common Dividends
Knowledge Check Question 3
Jordan Company has 1,000 shares of $50 par value, 4.5% cumulative and nonparticipating preferred stock and 10,000 shares of $10 par value common stock outstanding. The company paid total cash dividends of $1,000 in its first year of operation, and declared total cash dividends of $5,000 in its second year of operation. The cash dividend paid to common stockholders in the second year will be:
1.
2.
3.
Slide 13-36 4.
$1,500. $3,500. $2,250. $2,750.
Stock Dividends
Stock Dividends
Reasons why corporations issue stock dividends: 1. To satisfy stockholders ’ spending cash.
dividend expectations without 2. To increase the marketability of the corporation ’ s stock. 3. To emphasize that a portion of stockholders ’ been permanently reinvested in the business.
equity has Results in decrease in retained earnings and increase in paid-in capital.
Slide 13-37
Stock Dividends
Size of Stock Dividends Small stock dividend
(less than 20 – 25% of the corporation ’ s issued stock, recorded at
fair market value
) *
Large stock dividend
(greater than 20 – 25% of issued stock, recorded at
par value
)
Slide 13-38
* This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares.
Stock Dividends
Illustration:
Lily Corp. has 50,000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share. Record the relevant journal entries.
Journal entry to declare a 10% stock dividend: Slide 13-39 Journal entry when the stocks are issued:
Stock Dividends
Illustration:
Violet Corp. has 50,000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share. Record the relevant journal entries.
Journal entry to declare a 50% stock dividend: Slide 13-40 Journal entry when the stocks are issued:
Slide 13-41
Stock Dividends
Stockholders’ Equity with Dividends Distributable Lily Corporation
Balance Sheet (partial)
Stockholders' equity
Paid-in capital Common stock
Common stock dividends distributable Total stockholders' equity
$ 50,000
5,000
$ 55,000
Stock Dividends
Effects of Stock Dividends on Stockholders’ Equity: Slide 13-42
Knowledge Check Question 4:
Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31, 2012 showed the following: Common Stock, $1 par value, 20,000 shares authorized and issued $20,000 Paid-in-Capital in excess of par – Common Stock 80,000 Treasury Stock, common, 2,000 shares (at cost) (40,000) Paid-in-Capital, Treasury Stock 10,000 Retained Earnings 130,000 Total Stockholders’ Equity $200,000 On January 1, 2013, Northern Company declared a 10% stock dividend, when the market price per share was $30 per share. The resulting journal entry will: 1.
2.
3.
4.
Debit Stock Dividends by $60,000 Credit Common Stock Dividends Distributable by $20,000 Credit Paid-in-Capital, Common Stock by $52,200 Credit Common Stock by $2,000 Slide 13-43
Knowledge Check Question 5:
Southern Company’s Stockholders’ Equity section of its Balance Sheet on December 31, 2012 showed the following: Common Stock, $1 par value, 20,000 shares authorized and issued $20,000 Paid-in-Capital in excess of par – Common Stock 80,000 Treasury Stock, common, 2,000 shares (at cost) (40,000) Paid-in-Capital, Treasury Stock 10,000 Retained Earnings 130,000 Total Stockholders’ Equity $200,000 On January 1, 2013, Northern Company declared a 30% stock dividend, when the market price per share was $30 per share. The resulting journal entry will: 1.
2.
3.
4.
Debit Stock Dividends by $162,000 Credit Common Stock Dividends Distributable by $5,400 Credit Paid-in-Capital, Common Stock by $156,600 Credit Common Stock by $6,000 Slide 13-44
Slide 13-45
Stock Splits
Stock Split
Reduces the market value of shares.
No entry recorded for a stock split.
Decrease par value and increase number of shares .
Stock Splits
Illustration:
Assume Daisy Corporation splits its 50,000 shares of common stock on a 2-for-1 basis.
Slide 13-46
Results in a reduction of the par or stated value per share.
The Implication of Stock Splits
Price of 1 share of Microsoft common stock on March 13, 1986 = $28.00
Price of 1 share of Microsoft common stock on April 10, 2013 = $30.12
Split
Microsoft's initial public offering (IPO) was March 13, 1986
Payable Date Split Type Equivalent # of Shares
First Second Third Fourth Sept. 18, 1987 April 12, 1990 June 26, 1991 June 12, 1992 2 for 1 2 for 1 3 for 2 3 for 2 1 x 2 = 2 2 x 2 = 4 4 x 1.5 = 6 6 x 1.5 = 9 Fifth Sixth May 20, 1994 December 6, 1996 2 for 1 2 for 1 9 x 2 = 18 18 x 2 = 36 Seventh February 20, 1998 2 for 1 36 x 2 = 72 Eighth Ninth March 26, 1999 February 18, 2003 2 for 1 2 for 1 72 x 2 = 144 144 x 2 = 288
This means, 1 share of Microsoft in 1986 = 288 shares today 13-47
What happens when a stock does NOT split?
BERKSHIRE HATHAWAY, Inc. Class A (CEO: Mr. Warren Edward Buffet)
Slide 13-48 Stock price on October 14, 1976 = $67 Stock price on April 10, 2013 = $158,846 (Shares outstanding = 1.65 million)
Slide 13-49