Chapter 11

Reporting and Interpreting

Owners’ Equity
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 Business Background

Advantages of
a corporation

Simple to Easy to Provides

become an transfer limited
owner ownership liability

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 Business Background
Because a corporation is a separate legal
entity, it can . . .
Own Incur
assets. liabilities.

Sue and Enter into

be sued. contracts.
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 Ownership of a Corporation
!Voting (in person
or by proxy).
"Proportionate
Rights distributions of
profits.
#Proportionate
Stockholders distributions of
assets in a
liquidation.
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 Ownership of a Corporation
Stockholders
(Owners of voting shares)

Board of Directors
Elected by
Internal (managers) and
External (non-managers)
shareholders
Appointed
by directors
President

Vice President Vice President Vice President Vice President

(Production) (Marketing) (Finance) (Controller)

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 Authorized, Issued, and
Outstanding Capital Stock
Authorized
Shares

The maximum number

of shares of capital
stock that can be sold
to the public.

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 Authorized, Issued, and
Outstanding Capital Stock
Authorized
Shares
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
stock that stock that
have been never have
sold. been sold.

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 Authorized, Issued, and
Outstanding Capital Stock
Outstanding shares are
Authorized issued shares that are
Shares owned by stockholders.

Outstanding
Unissued
Issued Shares
Shares
Shares
Treasury shares are
Treasury
issued shares that have
Shares been reacquired by the
corporation.

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 Types of Capital Stock

Common Preferred
Stock Stock

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 Common Stock
Basic voting
stock

Ranks after Dividend set

preferred by board of
stock directors
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 Par Value and No-par Value
Stock

Par Value

Nominal Legal
value capital
Legal capital is the amount of capital,
required by the state, that must remain
invested in the business.
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 Par Value and No-par Value
Stock

Par
Value ≠ Market
Value
I get it!

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 No-par Value Stock

Some states do
Some
not states
require that a
pardo notbe
value
stated inathe
require par
charter.
value to be
stated in the
charter.

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 Preferred Stock
Preference
over common
stock

Usually has Usually has a

no voting fixed dividend
rights rate
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 Special Features of Preferred
Stock
Convertible
Convertible preferred
preferred stock
stock may
may be
be
exchanged
exchanged for
for common
common stock.
stock.

Callable
Callable preferred
preferred stock
stock may
may be
be
repurchased
repurchased byby the
the corporation
corporation at
at aa
predetermined
predetermined price.
price.

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 Accounting for Capital Stock
Two primary sources of
stockholders’ equity

Contributed Retained
capital earnings

Par Additional
value paid-in
capital
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 Sale and Issuance of Capital
Stock
Initial public Seasoned new
offering (IPO) issue

The first time a Subsequent sales of

corporation sells new stock to the
stock to the public. public.

Wal-Mart
Wal-Mart
issues new
stock.
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 Secondary Markets
Transactions between two investors
that do not affect the corporation’s
accounting records.
I’d like to sell I’d like to buy
some of my some of your
Wal-Mart stock. Wal-Mart stock.

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 Sale and Issuance of Capital
Stock
On July 6, Wal-Mart issued 100,000
shares of $0.10 par value common
stock for $22 per share.
Prepare the journal entry to
record this
GENERAL transaction.
JOURNAL Page 34
Date Description Debit Credit
July 6

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 Sale and Issuance of Capital
Stock
On July 6, Wal-Mart issued 100,000
shares of $0.10 par value common
stock for $22 per share.
100,000 shares × $0.10 par value = $10,000

GENERAL
100,000 shares JOURNAL
× $22 per share = $2,200,000 Page 34
Date Description Debit Credit
July 6 Cash 2,200,000
Common Stock 10,000
Capital In Excess of Par Value 2,190,000
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 Capital Stock Sold for Noncash
Assets and/or Services

Issues stock Wal-Mart

Provides
accounting
services
Accountant
Record
Record assets
assets or
or services
services received
received at
at the
the
market
market value
value of
of the
the stock
stock at
at the
the date
date of
of the
the
transaction.
transaction.
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 Capital Stock Sold for Noncash
Assets and/or Services

Issues stock Wal-Mart

Provides
accounting
services
Accountant
IfIf the
the market
market value
value of
of the
the stock
stock cannot
cannot bebe
determined,
determined, then then the
the market
market value
value of
of the
the assets
assets
or
or services
services received
received should
should be
be used.
used.
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 Capital Stock Sold for Noncash
Assets and/or Services
On March 14, Wal-Mart issued 10,000 shares
of its $0.10 par value common stock to the
Rose Law firms. The stock was selling for
$15 per share.

Prepare the journal entry to record this

GENERAL JOURNAL Page 12
Date
transaction.
Description Debit Credit
Mar. 14

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 Capital Stock Sold for Noncash
Assets and/or Services
On March 14, Wal-Mart issued 10,000 shares
of its $0.10 par value common stock to the
Rose Law firms. The stock was selling for
$15 per share.
10,000 shares × $0.10 par value = $1,000

10,000 shares × $15 per

GENERAL share = $150,000
JOURNAL Page 12
Date Description Debit Credit
Mar. 14 Legal Fees 150,000
Common Stock 1,000
Capital In Excess of Par Value 149,000
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 Stock Options
Wal-Mart If Wal-Mart does not have new
stock to issue when the stock
options are exercised, then . .

Management
Stock options allow
compensation
management to purchase
package includes
stock from the corporation
salary and stock
at a fraction of the stock’s
options.
value in the secondary
market.

Irwin/McGraw-Hill
Management © The McGraw-Hill Companies, Inc., 2001
 Treasury Stock
Wal-Mart buys
Wal-Mart
its own stock in
the secondary
market.
(Treasury stock) Stockholders
Management
Stock options allow
compensation
management to purchase
package includes
stock from the corporation
salary and stock
at a fraction of the stock’s
options.
value in the secondary
market.

Irwin/McGraw-Hill
Management © The McGraw-Hill Companies, Inc., 2001
 Treasury Stock

No voting
Contra
or
equity
dividend
account
rights

When stock is reacquired, the corporation

records the treasury stock at cost.
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 Treasury Stock
On May 1, Wal-Mart reacquired 100,000 shares of
its common stock at $22 per share.
The journal entry for May 1 is . . . .

GENERAL JOURNAL Page 27

Date Description Debit Credit
May 1 Treasury Stock 2,200,000
Cash 2,200,000
100,000 shares × $22 = $2,200,000

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 Treasury Stock
On December 3, Wal-Mart reissued 10,000 shares
of the treasury stock at $30 per share.
The journal entry for December 3 is . . .
10,000 shares × $22 cost = $220,000

10,000 shares × $30 = $300,000

GENERAL JOURNAL Page 68
Date Description Debit Credit
Dec. 3 Cash 300,000
Treasury Stock 220,000
Contributed Capital from
Treasury Stock Transactions 80,000
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 Accounting for Cash Dividends
Declared by board Not legally
of directors. required.

Requires sufficient
Creates liability
Retained Earnings
at declaration.
and Cash.
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 Dividend Dates
Declaration date
$ Board of directors declares the
dividend.
$ Record a liability.

GEN ER AL JOU R N AL Page 12

Post.
Da te De scription Re f. De bit Cre dit
Re ta ine d Ea rnings XXX
Divide nds Pa ya ble XXX

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 Dividend Dates
Date of Record
Stockholders holding shares on this date
will receive the dividend. (No entry)

X
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 Dividend Dates
Date of Payment
Record the payment of the dividend to
stockholders.

GEN ER AL JOU R N AL Page 12

Post.
Da te De scription Re f. De bit Cre dit
Divide nds Pa ya ble XXX
Ca sh XXX

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 Dividends on Preferred Stock
!Current
!Current Dividend
Dividend Preference:
Preference: The
The
current
current preferred
preferred dividends
dividends must
must be
be
paid
paid before
before paying
paying any
any dividends
dividends to
to
common
common stock.
stock.
"Cumulative
"Cumulative Dividend
Dividend Preference:
Preference: Any
Any
unpaid
unpaid dividends
dividends from
from previous
previous years
years
(dividends
(dividends in
in arrears)
arrears) must
must be
be paid
paid
before
before common
common dividends
dividends are
are paid.
paid.

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 Dividends on Preferred Stock

IfIf the
the preferred
preferred stock
stock is
is
noncumulative,
noncumulative, any any dividends
dividends
not
not declared
declared in in previous
previous years
years
are
are lost
lost permanently.
permanently.

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 Dividends on Preferred Stock
Kites, Inc. has the following stock
outstanding:
Common stock: $1 par, 100,000 shares
Preferred stock: 3%, $100 par, cumulative, 5,000 shares
Preferred stock: 6%, $50 par, noncumulative, 3,000 shares

Dividends were not paid last year. In the

current year, the board of directors
declared dividends of $50,000.
How much will each class of stock receive?
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 Dividends on Preferred Stock
Total dividend declared $ 50,000
Preferred stock (cumulative)

Remainder
Preferred stock (noncumulative)

Remainder
Common stock

Remainder

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 Dividends on Preferred Stock
Total dividend declared $ 50,000
Preferred stock (cumulative)
Arrearage ($100 par × 3% × 5,000 shares) $ 15,000
Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000
Remainder $ 20,000
Preferred stock (noncumulative)

Remainder
Common stock

Remainder

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 Dividends on Preferred Stock
Total dividend declared $ 50,000
Preferred stock (cumulative)
Arrearage ($100 par × 3% × 5,000 shares) $ 15,000
Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000
Remainder $ 20,000
Preferred stock (noncumulative)
Current Yr. ($50 par × 6% × 3,000 shares) 9,000
Remainder $ 11,000
Common stock

Remainder

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 Dividends on Preferred Stock
Total dividend declared $ 50,000
Preferred stock (cumulative)
Arrearage ($100 par × 3% × 5,000 shares) $ 15,000
Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000
Remainder $ 20,000
Preferred stock (noncumulative)
Current Yr. ($50 par × 6% × 3,000 shares) 9,000
Remainder $ 11,000
Common stock
Current Yr. ($11,000 Remainder) 11,000
Remainder $ 0

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 Dividends
Question
On June 1, 2000 a corporation’s board of
directors declared a dividend for the 2,500 shares
of its $100 par value, 8% preferred stock. The
dividend will be paid on July 15. Which of the
following will be included in the July 15 entry?

a. Debit Retained Earnings $20,000.

b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
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 Dividends
Question
On June 1, 2000 a corporation’s board of
directors GENERAL
declared a JOURNAL Page 12
dividend for the 2,500 shares
Date
of its $100 parDescription Debit
value, 8% preferred stock. Credit
The
July 15 Dividends
dividend Payable
will be 20,000 of the
paid on July 15. Which
following Cash 20,000
will be included in the July 15 entry?
$100 × 8% = $8 dividend per share
a. Debit Retained
$8 × 2,500Earnings $20,000.
= $20,000 total dividend
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
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 Accounting for Stock Dividends

Distribution of additional shares

of stock to stockholders.

No change in total No change in par

stockholders’ equity. values.

All stockholders
retain same
percentage
ownership.
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 Stock Dividends
Small Large
Stock
Stock dividend
dividend << 25%
25% Stock
Stock dividend
dividend >> 25%
25%

Record
Record at
at current
current Record
Record atat
market
market value
value par
par value
value
of
of stock.
stock. of
of stock.
stock.

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 Stock Splits

Distributions of Ice Cream Parlor

100% or more Banana Splits

of stock to On Sale Now

stockholders.

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 Stock Splits
Assume that a corporation had 5,000 shares
of $1 par value common stock outstanding
before a 2–for–1 stock split.
Before After
Split Split
Common Stock Shares 5,000

Par Value per Share $ 1.00

Total Par Value $ 5,000

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001

 Stock Splits
Assume that a corporation had 5,000 shares
of $1 par value common stock outstanding
before a 2–for–1 stock split.
Before After
Split Split
Common Stock Shares 5,000 10,000 Increase

Par Value per Share $ 1.00 $ 0.50 Decrease

No
Total Par Value $ 5,000 $ 5,000 Change

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 Restrictions on Retained
Earnings
If I loan you $150,000, I will
want you to restrict your
retained earnings. Why would you
want to do that?

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 Restrictions on Retained
Earnings
Because I want to restrict
the amount you can pay
out in dividends.

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 Accounting and Reporting for
Unincorporated Businesses
Corporation Sole Proprietorship Partnership
(Stockholders' Equity) (Owner's Equity) (Partners' Equity)
Equity Capital Stock Doe, Capital Able, Capital
Accounts Baker, Capital
Contributed Capital in Not used Not used
Excess of Par
Retained Earnings Not used Not used
Distributions Dividends Paid Doe, Drawings Able, Drawings
to Owners Baker, Drawings
Closing Income Summary Income Summary Income Summary
Entries (closed to Retained (closed to Doe, Capital) (closed to Able, Capital
Earnings) and Baker, Capital)
Income Revenues, expenses, Same Same
Statement gains and losses
Balance Assets and liabilities Same Same
Sheet

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 C’mon Chester! With your
smarts and my savvy, we
could make a great
partnership!!

End of
Chapter 11

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