Reporting and Analyzing Stockholders' Equity: Kimmel Weygandt Kieso Accounting, Sixth Edition

11
Reporting and Analyzing

Stockholders’ Equity
Kimmel ● Weygandt ● Kieso

Accounting, Sixth Edition
11-1
CHAPTER OUTLINE
LEARNING OBJECTIVES
1 Discuss the major characteristics of a corporation.
Explain how to account for the issuance of common

2 and preferred stock, and the purchase of treasury
stock.
Explain how to account for cash dividends and

3 describe the effect of stock dividends and stock splits.
Discuss how stockholders’ equity is reported and

4 analyzed.
11-2
Discuss the major characteristics of a
LEARNING
OBJECTIVE 1 corporation.
An entity separate and distinct from its owners.

Classified by Purpose Classified by Ownership
 Not-for-Profit  Publicly held
 For Profit  Privately held
► Salvation Army ► Facebook ► Cargill Inc.

► American Cancer ► IBM
Society ► Caterpillar
► General Electric
11-3 LO 1
CHARACTERISTICS OF A CORPORATION
Characteristics that distinguish corporations from

proprietorships and partnerships.
 Separate Legal Existence
 Limited Liability of Stockholders
 Transferable Ownership Rights
 Ability to Acquire Capital Advantages
 Continuous Life
 Corporation Management
 Government Regulations
Disadvantages
 Additional Taxes
11-4 LO 1

Corporation acts
 Separate Legal Existence under its own name
 Limited Liability of Stockholders rather than in the
name of its
stockholders.
 Ability to Acquire Capital
 Continuous Life
11-5 LO 1

Limited to their
investment.
 Continuous Life
11-6 LO 1

Shareholders may
sell their stock.
 Continuous Life
11-7 LO 1

 Transferable Ownership Rights Corporation can
 Ability to Acquire Capital obtain capital
through the issuance
 Continuous Life
of stock.
11-8 LO 1

 Transferable Ownership Rights Continuance as a
 Ability to Acquire Capital going concern is not
affected by the
 Continuous Life
withdrawal, death, or
 Corporation Management incapacity of a
 Government Regulations stockholder, employee,
or officer.
11-9 LO 1

 Ability to Acquire Capital Separation of
ownership and
 Continuous Life
management
 Corporation Management prevents owners from
 Government Regulations having an active role
in managing the
 Additional Taxes company.
11-10 LO 1

 Continuous Life
11-11 LO 1

 Ability to Acquire Capital Corporations pay
income taxes as a
 Continuous Life
separate legal entity
 Corporation Management and in addition,
 Government Regulations stockholders pay
taxes on cash
 Additional Taxes dividends.
11-12 LO 1
Stockholders
ILLUSTRATION 11-1
Corporation organization chart
Chairman and
Board of
Directors
President and
Chief Executive
Officer
General Vice President Vice President

Vice President Vice President
Counsel/ Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources
Treasurer Controller
11-13 LO 1
Other Forms of Business Organization
 Limited partnerships
 Limited liability partnerships (LLPs)
 Limited liability companies (LLCs)
 S Corporation
► No double taxation.
► Cannot have more than 100 shareholders.
11-15 LO 1
FORMING A CORPORATION
Initial Steps:
 File application with the Secretary of State.
 State grants charter.
 Corporation develops by-laws.
Companies generally incorporate in a state whose laws are

favorable to the corporate form of business (Delaware, New
Jersey).
Corporations engaged in interstate commerce must obtain a
license from each state in which they do business.
11-16 LO 1
STOCKHOLDER RIGHTS
1. Vote in election of board of

directors and on actions that
require stockholder approval.
2. Share the corporate earnings

through receipt of dividends.
ILLUSTRATION 11-3
Ownership rights of stockholders
11-17 LO 1
STOCK ISSUE CONSIDERATIONS
Par and No-Par Value Stocks

 Par value stock is capital stock that has been
assigned a value per share.
 Years ago, par value determined the legal capital per
share that a company must retain in the business for
the protection of corporate creditors.
 Many states do not require a par value.
 No-par value stock is fairly common.
 In many states the board of directors assigns a
stated value to no-par shares.
11-24 LO 1
Review Question
Which of these statements is false?
a. Ownership of common stock gives the owner a

voting right.
b. The stockholders’ equity section begins with paid-in

capital.
c. The authorization of capital stock does not result in a

formal accounting entry.
d. Legal capital is intended to protect stockholders.
11-25 LO 1
CORPORATE CAPITAL
Common
CommonStock
Stock
Paid-in
Paid-inCapital
Capital Account
Account Paid-in
Paid-inCapital
Capital
(Contrib.
(Contrib. in
inExcess
ExcessofofPar
Par
Capital)
Capital) Account
Preferred Account
PreferredStock
Stock
Account
Account
Two Primary Retained

Retained
Sources of Earnings
Earnings
Equity Account
Account
Paid-in capital (contributed capital) is the total amount of

cash and other assets paid in to the corporation by stockholders in
exchange for shares of ownership.
11-26 LO 1
CORPORATE CAPITAL
Common
CommonStock
Stock
Account
Account Paid-in
Paid-inCapital
Capital
Paid-in
Paid-inCapital
Capital in
inExcess
ExcessofofPar
Par
Account
Account
Preferred
PreferredStock
Stock
Account
Account

Retained
Sources of Earnings
Earnings
Equity Account
Account
Retained earnings is net income that a corporation retains for

future use in the business.
11-27 LO 1
DO IT! 1 Corporate Organization
Indicate whether each of the following statements is true or false.

1. Similar to partners in a partnership, stockholders of
a corporation have unlimited liability. False
2. It is relatively easy for a corporation to obtain capital

through the issuance of stock. True
3. The separation of ownership and management is an

advantage of the corporate form of business.
False
4. The journal entry to record the authorization of

capital stock includes a credit to the appropriate False
capital stock account.
5. All states require a par value per share for capital
False
stock.
11-28 LO 1
Explain how to account for the issuance of
LEARNING
OBJECTIVE 2 common and preferred stock, and the
purchase of treasury stock.
ACCOUNTING FOR COMMON STOCK

Primary objectives:
1) Identify the specific sources of paid-in capital.
2) Maintain the distinction between paid-in capital and

retained earnings.
Other than consideration received, the issuance of

common stock affects only paid-in capital accounts.
11-29 LO 2
Issuing Par Value Common Stock for Cash
Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of

$1 par value common stock. Prepare Hydro-Slide’s journal entry if
(a) 1,000 share are issued for $1 per share, and (b) 1,000 shares
are issued for $5 per share.
(a) Cash 1,000

Common Stock (1,000 x $1) 1,000
(b) Cash 5,000

Common Stock (1,000 x $1) 1,000
Paid-in Capital in Excess of Par Value 4,000
11-30 LO 2
Issuing Par Value Common Stock for Cash
Stockholders’ equity section assuming Hydro-Slide, Inc. has

retained earnings of $27,000.
ILLUSTRATION 11-5
Stockholders’ equity—paid-in capital in excess of par value
11-31 LO 2
Review Question
ABC Corp. issues 1,000 shares of $10 par value common
stock at $12 per share. When the transaction is recorded,
credits are made to:
a. Common Stock $10,000 and Paid-in Capital in Excess
of Stated Value $2,000.
b. Common Stock $12,000.
c. Common Stock $10,000 and Paid-in Capital in Excess
of Par Value $2,000.
d. Common Stock $10,000 and Retained Earnings
$2,000.
11-32 LO 2
ACCOUNTING FOR PREFERRED STOCK
Typically, preferred stockholders have a priority in relation to

1. dividends and
2. assets in the event of liquidation.
However, they sometimes do not have voting rights.
Each paid-in capital account title should identify the stock to

which it relates:
 Paid-in Capital in Excess of Par Value—Preferred Stock
 Paid-in Capital in Excess of Par Value—Common Stock
11-33 LO 2
ACCOUNTING FOR PREFERRED STOCK
Illustration: Stine Corporation issues 10,000 shares of

$10 par value preferred stock for $12 cash per share. Journalize
the issuance of the preferred stock.
Cash 120,000
Preferred Stock (10,000 x $10) 100,000
Paid-in Capital in Excess of Par –
Preferred Stock 20,000
Preferred stock may have a par value or no-par value.
11-34 LO 2
INVESTOR INSIGHT How to Read Stock Quotes
Organized exchanges trade the stock of publicly held companies at dollar

prices per share established by the interaction between buyers and sellers.
For each listed security, the financial press reports the high and low prices
of the stock during the year, the total volume of stock traded on a given
day, the high and low prices for the day, and the closing market price, with
the net change for the day. Facebook is listed on the Nasdaq exchange.
Here is a recent listing for Facebook:
These numbers indicate the following. The high and low market prices for
the last 52 weeks have been $86.07 and $54.66. The trading volume for
the day was 54,156,600 shares. The high, low, and closing prices for that
date were $85.59, $83.11, and $84.63, respectively. The net change for the
day was a decrease of $0.629 per share.
11-35 LO 2
DO IT! 2 Issuance of Stock
Cayman Corporation begins operations on March 1 by issuing 100,000

shares of $1 par value common stock for cash at $12 per share. On
March 28, Cayman issues 1,500 shares of $10 par value preferred
stock for cash at $30 per share. Journalize the issuance of the common
and preferred shares.
Mar. 1 Cash 1,200,000

Common Stock (100,000 × $1) 100,000
Paid-in Capital in Excess of Par Value—
Common Stock 1,100,000
Mar. 28 Cash 45,000

Preferred Stock (1,500 × $10) 15,000
Paid-in Capital in Excess of Par Value—
Preferred Stock 30,000
11-36 LO 2
TREASURY STOCK
Common
CommonStock
Stock
Account
Account Paid-in
Paid-inCapital
Capital
Paid-in
Paid-inCapital
Capital in
inExcess
ExcessofofPar
Par
Account
Account
Preferred
PreferredStock
Stock
Account
Account

Retained
Sources of Earnings
Earnings
Equity Account
Account
Less:
Less:
Treasury
TreasuryStock
Stock
Account
Account
11-37 LO 2
TREASURY STOCK
Treasury stock is a corporation’s own stock that has been

reacquired by the corporation and is being held for future use.
Corporations purchase their outstanding stock:
1. To reissue shares to officers and employees under bonus
and stock compensation plans.
2. To increase trading of the company’s stock in the securities
market.
3. To have additional shares available for use in acquiring
other companies.
4. To increase earnings per share.
Another infrequent reason is to eliminate hostile shareholders.
11-38 LO 2
TREASURY STOCK
Purchase of Treasury Stock

 Generally accounted for by the cost method.
 Debit Treasury Stock for the price paid.
 Treasury stock is a contra stockholders’ equity
account, not an asset.
 Treasury Stock decreases by the same amount when
the company later sells the shares.
11-39 LO 2
Purchase of Treasury Stock ILLUSTRATION 11-6
Stockholders’ equity with
no treasury stock
Illustration: On February 1, 2017, Mead acquires 4,000 shares of

its stock at $8 per share. Prepare the entry.
Treasury Stock (4,000 x $8) 32,000
Cash 32,000
11-40 LO 2
Purchase of Treasury Stock ILLUSTRATION 11-7
Stockholders’ equity with
treasury stock
Both the number of shares issued (100,000), outstanding (96,000),

and the number of shares held as treasury (4,000) are disclosed.
11-41 LO 2
Purchase of Treasury Stock
Review Question
Treasury stock may be repurchased:
a. to reissue the shares to officers and employees under
bonus and stock compensation plans.
b. to signal to the stock market that management believes
the stock is underpriced.
c. to have additional shares available for use in the
acquisition of other companies.
d. More than one of the above.
11-42 LO 2
DO IT! 2b Treasury Stock
Santa Anita Inc. purchases 3,000 shares of its $50 par value
common stock for $180,000 cash on July 1. It expects to hold the
shares in the treasury until resold. Journalize the treasury stock
transaction.
July 1 Treasury Stock 180,000

Cash 180,000
11-43 LO 2
Explain how to account for cash dividends
LEARNING
OBJECTIVE 3 and describe the effect of stock dividends and
stock splits.
A dividend is a distribution to stockholders on a pro rata

(proportional to ownership) basis.
Types of Dividends:
1. Cash dividends. 3. Stock dividends.
2. Property dividends. 4. Scrip (promissory note)
Dividends expressed: (1) as a percentage of the par or stated

value, or (2) as a dollar amount per share.
11-44 LO 3
CASH DIVIDENDS
For a corporation to pay a cash dividend, it must have:

1. Retained earnings - Payment of dividends from
retained earnings is legal in all states.
2. Adequate cash.
3. Declaration by the Board of Directors.
11-45 LO 3
Entries for Cash Dividends
Dividends require information concerning three dates:
11-46 LO 3
Illustration: On December 1, the directors of Media General declare

a $0.50 per share cash dividend on 100,000 shares of $10 par value
common stock. The dividend is payable on January 20 to
shareholders of record on December 22:
December 1 (Declaration Date)

Cash Dividends 50,000
Dividends Payable 50,000
December 22 (Record Date) No entry
January 20 (Payment Date)

Dividends Payable 50,000
Cash 50,000
11-47 LO 3
Review Question
Entries for cash dividends are required on the:
a. declaration date and the record date.
b. record date and the payment date.
c. declaration date, record date, and payment date.
d. declaration date and the payment date.
11-48 LO 3
ACCOUNTING ACROSS THE ORGANIZATION
Up, Down, and ??
The decision whether to pay a dividend, and how much to pay, is a very important
management decision. As the chart below shows, from 2002 to 2007, many companies
substantially increased their dividends, and total dividends paid by U.S. companies hit
record levels. One reason for the increase is that Congress lowered, from 39% to 15%,
the tax rate paid by investors on dividends
received, making dividends more
attractive to investors. Then the
financial crisis of 2008 occurred.
As a result, in 2009, 804 companies
cut their dividends (see chart),
the highest level since Standard &
poor’s started collecting data in 1995.
In 2010, more companies started to
increase their dividends. However,
potential higher taxes on dividends
coming in the future and the possibility
of a low growth economy may stall any
significant increase.
11-49 LO 3
DIVIDEND PREFERENCES
 Preferred stockholders have the 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 – holders of preferred stock must
be paid their annual dividend plus any dividends in
arrears before common stockholders receive dividends.
 Preference on corporate assets if the corporation fails.
 Preference may be for the par value of the shares or for a
specified liquidating value.
11-50 LO 3
Dividend Preferences
• Cumulative-dividend preference
– The right of preferred stockholders to receive
current dividends PLUS all dividends in
arrears before common stockholders receive
any dividends.
• Dividends in arrears (Cumulative PS only)
– Missed dividends for past years that
cumulative preferred stockholders have a
right to receive if and when dividends are
declared.
51
• Calculate the amount of the preferred dividend
and the common dividend for each case.
Case Preferred Dividend Years Total Preferred Common

Feature in Dividend Dividend Dividend
Arrears
1 5%, Noncumulative N/A $ 1,500
2 5%, Noncumulative N/A 3,000
3 5%, Cumulative 2 5,000
52

Arrears
1 5%, Noncumulative N/A $ 1,500 $1,500 $ 0
2 5%, Noncumulative N/A 3,000
53

Arrears
2 5%, Noncumulative N/A 3,000 2,000 1,000
54

Arrears
3 5%, Cumulative 2 5,000 5,000 0
55

Arrears
3 5%, Cumulative 2 5,000 5,000 0
4 5%, Cumulative 2 11,000 6,000 5,000
56
DO IT! 3a Preferred Stock Dividends
MasterMind Corporation has 2,000 shares of 6%, $100 par value

preferred stock outstanding at December 31, 2017. At December
31, 2017, the company declared a $60,000 cash dividend.
Determine the dividend paid to preferred stockholders and
common stockholders under each of the following scenarios.
1. The preferred stock is noncumulative, and the company
has not missed any dividends in previous years.
SOLUTION
Preferred stockholders (2,000 x .06 x $100) $ 12,000
Common stockholders ($60,000 - $12,000) 48,000
Total dividends $60,000
11-59 LO 3

2. The preferred stock is noncumulative, and the company
did not pay a dividend in each of the two previous years.
SOLUTION
Preferred stockholders (2,000 x .06 x $100) $ 12,000
11-60 LO 3

3. The preferred stock is cumulative, and the company did
not pay a dividend in each of the two previous years.
SOLUTION
Preferred stockholders (3 x 2,000 x .06 x $100) $ 36,000
11-61 LO 3
STOCK DIVIDENDS
Pro rata distribution of the corporation’s own stock.
ILLUSTRATION 11-10
Effect of stock split for stockholders
11-62 LO 3
STOCK DIVIDENDS
 Pro rata distribution of the corporation’s own stock.

 Results in decrease in retained earnings and
increase in paid-in capital.
Reasons why corporations issue stock dividends:

1. Satisfy stockholders’ dividend expectations without
spending cash.
2. Increase the marketability of the corporation’s stock.
3. Emphasize that a portion of stockholders’ equity has

been permanently reinvested in the business.
11-63 LO 3
Effects of Stock Dividends
 Changes the composition of stockholders’ equity.

 Total stockholders’ equity remains the same.
 No effect on the par or stated value per share.
 Increases the number of shares outstanding.
11-64 LO 3
Dividends
Dividends
Illustration: Medland Corp. declares a 10% stock dividend on

its $10 par common stock when 50,000 shares were
outstanding. The market price was $15 per share.
Illustration 11-9
SO 5 Prepare the entries for cash dividends and understand the

11-65
effect of stock dividends and stock splits.
STOCK SPLITS ▼ HELPFUL HINT
A stock split changes the
par value per share but
does not affect any
 Reduces the market value of shares. balances in stockholders’
equity.
 No entry recorded for a stock split.
 Decrease par value and increase number of shares.
ILLUSTRATION 11-10
Effect of stock split for
stockholders
11-67 LO 3
Dividends
Dividends
Illustration: Assuming that instead of issuing a 10% stock dividend,

Medland splits its 50,000 shares of common stock on a 2-for-1 basis.
Illustration 11-11

11-68
Dividends
Dividends
Differences between the effects of stock dividends and stock

splits.
Illustration 11-12

11-70
STOCK DIVIDENDS vs STOCK SPLITS
Differences between the effects of stock dividends and stock

splits.
ILLUSTRATION 11-12
Effects of stock splits and stock dividends differentiated
11-71 LO 3
STOCK DIVIDENDS
Review Question
Which of these statements about stock dividends is true?
a. Stock dividends reduce a company’s cash balance.
b. A stock dividend has no effect on total stockholders’
equity.
c. A stock dividend decreases total stockholders’
equity.
d. A stock dividend ordinarily will increase total
stockholders’ equity.
11-72 LO 3

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11

Reporting and Analyzing

Kimmel ● Weygandt ● Kieso

1 Discuss the major characteristics of a corporation.

Explain how to account for the issuance of common

Explain how to account for cash dividends and

Discuss how stockholders’ equity is reported and

An entity separate and distinct from its owners.

► Salvation Army ► Facebook ► Cargill Inc.

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

Characteristics that distinguish corporations from

General Vice President Vice President

Companies generally incorporate in a state whose laws are

1. Vote in election of board of

2. Share the corporate earnings

Par and No-Par Value Stocks

a. Ownership of common stock gives the owner a

b. The stockholders’ equity section begins with paid-in

c. The authorization of capital stock does not result in a

d. Legal capital is intended to protect stockholders.

Two Primary Retained

Paid-in capital (contributed capital) is the total amount of

Two Primary Retained

Retained earnings is net income that a corporation retains for

Indicate whether each of the following statements is true or false.

2. It is relatively easy for a corporation to obtain capital

3. The separation of ownership and management is an

4. The journal entry to record the authorization of

ACCOUNTING FOR COMMON STOCK

2) Maintain the distinction between paid-in capital and

Other than consideration received, the issuance of

Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of

(a) Cash 1,000

(b) Cash 5,000

Stockholders’ equity section assuming Hydro-Slide, Inc. has

Typically, preferred stockholders have a priority in relation to

Each paid-in capital account title should identify the stock to

Illustration: Stine Corporation issues 10,000 shares of

Preferred stock may have a par value or no-par value.

Organized exchanges trade the stock of publicly held companies at dollar

Cayman Corporation begins operations on March 1 by issuing 100,000

Mar. 1 Cash 1,200,000

Mar. 28 Cash 45,000

Two Primary Retained

Treasury stock is a corporation’s own stock that has been

Purchase of Treasury Stock

Illustration: On February 1, 2017, Mead acquires 4,000 shares of

Both the number of shares issued (100,000), outstanding (96,000),

July 1 Treasury Stock 180,000

A dividend is a distribution to stockholders on a pro rata

Dividends expressed: (1) as a percentage of the par or stated

For a corporation to pay a cash dividend, it must have:

3. Declaration by the Board of Directors.

Dividends require information concerning three dates:

Illustration: On December 1, the directors of Media General declare

December 1 (Declaration Date)