1 Chapter 12 Contributed Capital Certificate of Stock Adapted from Financial Accounting 4e by Porter...

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Chapter 12

Contributed Capital

Certificate of Stock

Adapted from Financial Accounting 4e by Porter and Norton

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Disadvantages

Advantages

Equity Financing: Issue Stock

Dividend flexibility

Ready markets Often provides

higher ROI than debt financing

Borrowing may not be feasible

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Equity Financing: Issue Stock

Less control Dividends not tax deductible Hurts some financial ratios

Disadvantages

Advantages

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Expanded Accounting Equation

Assets = Liabilities + Owners’ Equity

Assets = Liabilities + Stockholders’ Equity

Contributed Capital

RetainedEarnings

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Relationships among Financial Statements – Winnebago Industries, Inc.

Statement of Change in Stockholders’ Equity for 2001Beginning balance, reinvested income $ 195,556Add: Net income 42,704Deduct: Cash dividends ( 4,121)Ending balance, reinvested income $ 234,139

Balance Sheet as of August 25, 2001Total Assets $ xxxTotal Liabilities xxxCapital Stock xxxReinvested Earnings 234,139Total Liabilities & Stockholders' Equity $ xxx

Income Statement for 2001Revenues $ xxxLess: expenses xxxNet income $ 42,704

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Stockholders’ Equity Components

Preferred Stock

Common Stock

Addt’l.Paid-In Cap.

Retained Earnings

DonatedCapital

OtherMisc.

Deduct:Treasury

Stock

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Shareholders' equity:Preferred stock, 20 million shares authorized; none

issued -- --Common stock, $1 par value, 750 million shares

authorized; 182,278,766 shares issued 182 182Additional paid-in capital 2,865 2,911Treasury shares at cost: 2001 – 27,794,380; 2000 – 30,216,218 (1,716) (1,865)Accumulated other comprehensive loss (146) (2)Retained earnings 4,188 5,950

Total shareholders' equity 5,373 7,176

AMR Corporation’sPartial Balance Sheet

(in millions)2001 2000

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Contributed Capital

Common Stock» basic stock of corporation» has voting rights» represents ownership interest

Preferred Stock» optional» tailored to meet specific needs» provides dividend returns with less risk


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Outstanding - notrepurchased or retired

Issued -sold & distributed

Number of Shares of Stock

Authorized

1,000

MaximumAllowable

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Par Value

“Legal capital” Arbitrary amount

stated on stock certificate

also called “stated value”


$1.00 Par Value

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Additional Paid-in Capital

Amount received in excess of par or stated value of stock

Certificate of Stock$1.00 Par Value

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Retained Earnings

Net income retained in business (not paid out as dividends) since inception

Reinvested in a variety of assets (not necessarily liquid)

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Preferred Stock

Can tailor to specific needs of firm Stated dividend rate Often carries dividend preference over

common stock

$100 par,7% Preferred Stock

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Preferred Stock Features

Callable

Convertible

1 2 3

4 5 6 7 8 9 10

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19941 2 3

4 5 6 7 8 9 10

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19951 2 3

4 5 6 7 8 9 10

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25 26 28 29 30 3127

1996

Preferred Common

Cumulative

Participating

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Stock Issued for Cash

Journal Entry:Cash 15,000 Common Stock 10,000 Additional Paid-In Capital – Common 5,000

1,000 shares of $10 par value stock

sold for $15 per share

Common Stock $ 10,000( $10 par value x 1,000 shares)

Addt’l Paid-In Cap. $5,000 (($15 - $10) x 1,000 shares)

Example:

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Stock Issued for Noncash Consideration

Record at fair market value of consideration given or received, whichever is more readily determinable

Certificate of StockTitle

to land, building,

etc.

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Treasury Stock

Company buys back its own stock Contra-equity account (debit balance) Not outstanding (no voting rights)


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Reasons for Repurchasing Stock

Provide for bonus or benefit plans Maintain favorable market value Improve financial ratios Maintain control of ownership Cash in on future price increases

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Presentation of Treasury Stock

Common stock, $10 par, 1,000 shares issued, 900 outstanding $ 10,000

Additional paid-in capital 12,000Retained earnings 15,000

37,000Less: Treasury stock, 100 shares at cost ($25 per share) ( 2,500)

Total stockholders’ equity $34,500

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Cash Dividends

Paidto

Stockholderson date of record

Date of declaration

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Payment date

on1 2 3

4 5 6 7 8 9 10

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dividend check forDate

Dept.. of Treasurer

Jane Doe

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Dividends

Record dividends when declared; not when paid

Reduce retained earnings

12/31/03 1/15/04

Paydividends

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Recording Cash Dividends

Retained Earnings XXX

Cash Dividend Payable XXX

To record the declaration of a cash dividend.

Cash Dividend Payable XXX

Cash XXX

To record dividend payment. dividend check forDate

Dept.. of Treasurer

Jane Doe

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Dividend Requirements

Sufficient cash Positive retained

earnings

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Dividend Payout Ratio

Annual dividendNet income

The % of earnings paid as dividends

Dividend check forDate

Dept.. of Treasurer

Jane DoeI.M. Treasurer

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Allocation of Cash Dividends

1) Distribute dividends in arrears, if any, to preferred

2) Distribute current dividends to preferred

3) Distribute remainder to common (or to both if preferred is participating)

1 2 3

4 5 6 7 8 9 10

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18 19 20 21 22 23 24

25 26 28 29 30 3127

19981 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

19991 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

2000

1 2 3

4 5 6 7 8 9 10

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18 19 20 21 22 23 24

25 26 28 29 30 3127

2001

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Cash Dividends Example

Stricker Company declares a $70,000 dividend for 2004 (no dividends were paid in 2002 or 2003).

There are 10,000 shares of $10 par, 8% preferred stock and 40,000 shares of $5 par common stock outstanding.

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Preferred Common

Step 1: Distribute current-year dividend to

preferred (10,000 shares x $10 par x 8% x 1 yr.) $8,000

Step 2: Distribute remaining dividend to common

($70,000 - $8,000) $62,000

Total allocated $8,000 $62,000

Noncumulative Preferred Stock

$0.80per

share

$1.55per

share

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Preferred Common

Step 1: Distribute dividends in arrears to

preferred (10,000 shares x $10 par x 8% x 2 yrs.) $16,000

Step 2: Distribute current-year dividend to

preferred (10,000 shares x $10 par x 8% x 1 yr.) 8,000

Step 3: Distribute remaining dividend to common

($70,000 - $24,000) $46,000

Total allocated $24,000 $46,000

Cumulative Preferred Stock

$2.40per

share

$1.15per

share

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Preferred CommonStep 1: Distribute dividend in arrears topreferred (10,000 shares x $10 x 8% x 2 yrs.) $16,000Step 2: Distribute current-year dividend to preferred (10,000 shares x $10 par x 8% x 1 yr.) 8,000Step 3: Distribute equal percentage to common(40,000 shares x $5 x 8%) $16,000Step 4: Remainder to preferred and common onbasis of total par value 10,000 20,000Total allocated $34,000 $36,000

Cumulative and Participating Preferred Stock

$3.40per

share

$0.90per

share

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Stock Dividends

Reasons: insufficient cash market price reduction nontaxable to recipients

Certificate of StockCertificate of Stock



Issue of additional shares proportionately to existing stockholders

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Stockholders’ Equity:Common stock, $10 par, 5,000 shares $ 50,000Additional paid-in cap. 30,000 Retained earnings 70,000

Total $150,000

Assume Shah Company declares 10% stock dividend;500 shares @ $40 per share market value

BeforeDividend

Small Stock Dividend Example

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Stockholders’ Equity:Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000Additional paid-in cap. 30,000 45,000Retained earnings 70,000 50,000

Total $ 150,000 $150,000

$40 market value deducted from retained earnings; allocated between Common Stock (initially Common Stock Dividend Distributable) and Additional Paid-In Capital.

Before After


++-

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Before After

Total S/E is unchanged


++-

Stockholders’ Equity:Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000Additional paid-in cap. 30,000 45,000Retained earnings 70,000 50,000

Total $ 150,000 $150,000

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Total $150,000

Assume Shah Company declares 100% stock dividend

BeforeDividend

Large Stock Dividend Example

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Stockholders’ Equity:Common stock, $10 par, 10,000 shares $ 50,000 $100,000Additional paid-in cap. 30,000 30,000Retained earnings 70,000 20,000

Total $ 150,000 $150,000

Dividend deducted from retained earnings and recorded in the Common Stock account at par. Additional Paid-In Capital account is unaffected.

Before After


+

-

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Stockholders’ Equity:Common stock, $10 par, 10,000 shares $ 50,000 $100,000Additional paid-in cap. 30,000 30,000Retained earnings 70,000 20,000

Total $ 150,000 $150,000

Before After

Total S/E is unchanged


+

-

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Stock Splits

Results in additional issuance of shares Reduces par value per share No change in Stockholders’ Equity

accounts

Certificate of Stock$3 par value


Certificate of Stock$1 par value

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Stock Splits

Not recorded in accounts

Splits reduce market value per share and make stock more affordable to a wider range of investors Disclose

in notes

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Total $ 150,000

BeforeSplit

2-for-1 Stock Split Example

Assume Shah Company declares 2-for-1 stock split.

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Stockholders’ Equity:Common stock, $5.00 par, 10,000 shares $ 50,000 $ 50,000Additional paid-in cap. 30,000 30,000Retained earnings 70,000 70,000

Total $ 150,000 $150,000

Before After

All accounts are unchanged

2-for-1 Stock Split Example

Only disclosures are affected

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Statement of Stockholders’ Equity

Shows changes in all equity accounts including» Sales and Purchases of capital stock

Includes:Statement of Retained Earnings

Beginning retained earningsAdd: Net incomeSubtract: Dividends= Ending retained earnings

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Statement of Comprehensive Income

Income Statement

For Year Ended Dec. 31, 20xx

Revenues xxx

Expenses xxx

Other gains and losses xxx

Income before tax xxx

Income tax expense xxx

Net income xxx

Statement of Comprehensive IncomeFor Year Ended Dec. 31, 20xx

Net income xxxForeign currency translation adjustment xxxUnrealized holding gains/losses xxxMinimum pension liability adjustment xxxOther comprehensive income xxxComprehensive income xxx

Comprehensive income – the total change in net assets from all sources except investments by or distributions to the owners

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Analyzing Owners’ Equity

Book value per share » rights of each share to net

assets of corporation

Market value per share » price at which stock is

currently selling

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Book Value per Share

Rights of common stockholders in event of liquidation

Generally represents “floor” price of stock

Total Common Stockholders’ Equity

# of Common Shares Outstanding

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Book Value vs. Market Value

Which value would you expect to pay for a share of Wrigley stock?

What factors account for the difference between the two values?

From Delta's 2001 annual report:

Book value per share: $26.91

Market value per share

in 2001: $38.24 (avg.)

Stockholders’ Equity Items on the Statement of Cash Flows

Operating Activities

Net income xxx

Investing Activities

Financing Activities

Issuance of stock +

Retirement or repurchase of stock -

Payment of dividends -

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Appendix

Accounting Tools:

Unincorporated Businesses

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Sole Proprietorships

Not a separate legal entity so owner has unlimited liability

Must keep personal and business records separate

Business income is declared on the owner’s personal tax return and taxed at personal tax rate

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Sole Proprietorships

Owner’s withdrawal of assets from business:

Peter Tom, Drawing 6,000

Equipment 6,000

Owners’ drawing or withdrawal accounts are contra-equity accounts

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Sole Proprietorships Drawing or withdrawal and income

summary accounts are closed to the owner’s capital account

Owner’s Equity section of the balance sheet consists of the capital account:

Beginning balance $ 0Plus: Investments 10,000

Net Income 4,000Less: Withdrawals (6,000)Ending balance $ 8,000

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Partnerships

Unlimited liability Limited life – partnership agreements can

and do end Not taxed as a separate entity

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Partnerships

Distribution of income: Equal distribution Stated ratio Other allocation

» For example, based on salaries, interest on invested capital, and a stated ratio

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End of Chapter 12


1 Chapter 12 Contributed Capital Certificate of Stock Adapted from Financial Accounting 4e by Porter...

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Transcript of 1 Chapter 12 Contributed Capital Certificate of Stock Adapted from Financial Accounting 4e by Porter...