13-1 C ORPORATIONS : P AID-IN C APITAL, R ETAINED E ARNINGS, D IVIDENDS, AND T REASURY S TOCK...

13-1

CORPORATIONS: PAID-IN CAPITAL, RETAINED EARNINGS, DIVIDENDS,

AND TREASURY STOCK

CHAPTER 13CHAPTER 13

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Paid-in (Contributed) CapitalPaid-in (Contributed) CapitalRefers to all capital contributedcontributed to a

corporation. Sources are:

Sale of Stock Stock Dividends

Treasury Stock Donated Capital

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Retained EarningsRetained Earnings

DefinitionNet earnings (profits less losses) since

the inception of the corporation less dividends paid since inception.

Normal Balance? Credit

Debit Balance is called?“Deficit”

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Partial Balance SheetStockholders' Equity:Paid-in Capital: Preferred Stock-6%, $100 par value; authorized, issued, and outstanding 4,000 shares 400,000$ Common Stock-no par value; $5 stated value; authorized, issued, and outstanding 400,000 shares 2,000,000 2,400,000$ Paid-in Capital- From Preferred Stock 40,000$ From Common Stock 10,000 50,000 Total Paid-in Capital 2,450,000$ Retained Earnings 500,000 Total Stockholders' Equity 2,950,000$

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DividendsDividends

Distributions of earnings to

stockholders

Not legally required

Liability created at declaration

Declared by board of directors

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Types of dividend distributions: Cash (the norm) Stock (infrequent)

Both types of dividends require the Retained Earnings credit balance be > or = to the amount to be distributed

Cash dividends require sufficient cash to pay the dividend

Dividend dates for both types Date of declaration Date of record Date of payment

DividendsDividends

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Cash DividendsCash Dividends Date of Declaration

Board of directors declares the dividend Corp. records a liability

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Cash DividendsCash Dividends Date of Record

Stockholders owing shares on this date will receive the dividend

No entry is made!

X

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Cash DividendsCash Dividends Date of Payment

Cash paid to stockholders Corp. records the payment

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Cash DividendsCash DividendsQuestionQuestion

On June 1, 1999 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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Cash DividendsCash DividendsQuestionQuestion

On June 1, 1999 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.

July 15 is the date of payment. On this date, the corporation would debit Dividends Payable and credit Cash for $20,000.

$100 × 8% = $8 dividend per share

$8 × 2,500 = $20,000 total dividend

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Stock DividendsStock Dividends

Distributions of additional shares of stock to stockholders

Why issue a stock dividend? Corporation may be low on cash so can’t

issue a cash dividend

To decrease market price of stock

Know complete list of 4 reasons on p. 469

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Effect on Stockholders Receive a percentage increase in the

number of shares they own. e.g., with a 10% stock dividend, if you own

100 shares, you get 10 additional shares

Effect on Corporation No change in total

stockholders’ equity No change in par values

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Recorded by transferring an amount from the retained earnings section of the balance sheet to the paid-in capital

section

(i.e., from the “temporary” part of stockholders’ equity to the

“permanent” part)

This is known as “capitalizing” retained earnings

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Balance Sheet PresentationBalance Sheet Presentation

Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding 1,000,000$ Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding 400,000

Total Paid-in Capital 1,400,000$Retained Earnings 300,000

Total Stockholders' Equity 1,700,000$

Stockholders’ Equity:

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Small Stock DividendsSmall Stock Dividends

Record at current market value of stock

Record at current market value of stock

Stock dividend < 20% to 25%Stock dividend < 20% to 25%

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Large Stock DividendsLarge Stock Dividends

Record at par or stated value of stock

Record at par or stated value of stock

Stock dividend > 20% to 25%Stock dividend > 20% to 25%

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Small Stock Dividend ExampleSmall Stock Dividend ExamplePrepare the journal entries to record the following

stock dividend.

On March 1, 1999, Beachfront Condos, Inc. issued a 15% stock dividend. Beachfront has 3,000

shares of $50 par value common stock outstanding. The market price of the stock just prior to the stock dividend announcement was

$125 per share.

On April 15, 1999, Beachfront Condos, Inc. distributes the stock dividend.

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Small Stock Dividend ExampleSmall Stock Dividend ExampleDeclaration EntryDeclaration Entry

GENERAL JOURNAL Page 34

Date DescriptionPost. Ref. Debit Credit

Mar. 1 Retained Earnings (Market) 56,250

Stock Dividend Distributable (Par) 22,500

Paid-in Capital-Stock Dividend (Plug) 33,750

To record stock dividend declaration

3,000 × 15% = 450 shares

450 × $125 mkt. = $56,250

450 × $50 par = $22,500

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Paid-in Capital Preferred Stock - $100 par, 7%, Cumulative; 10,000 shares authorized, issued, and outstanding 1,000,000$ Common Stock - $10 par, 300,000 shares authorized, 40,000 issued and outstanding 400,000 Paid-in Capital in excess of Par Value

Preferred Stock 100,000$ Common Stock 80,000 180,000



Balance Sheet PresentationBalance Sheet Presentation(BEFORE TRANSFER)(BEFORE TRANSFER)

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Stock dividend distributable 22,500 Paid-in Capital in excess of par Preferred Stock 100,000$ Common Stock 80,000 Stock dividend 33,750 213,750



Balance Sheet PresentationBalance Sheet Presentation (AFTER TRANSFER - similar to p. 477)(AFTER TRANSFER - similar to p. 477)

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Small Stock Dividend ExampleSmall Stock Dividend ExampleDistribution EntryDistribution Entry



Apr. 15 Stock Dividend Distributable 22,500

Common Stock 22,500

To record stock dividend distribution

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Stock dividend distributable - Paid-in Capital in excess of par Preferred Stock 100,000$ Common Stock 80,000 Stock dividend 33,750 213,750



Balance Sheet PresentationBalance Sheet Presentation(AFTER DISTRIBUTION)(AFTER DISTRIBUTION)

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Large Stock DividendLarge Stock DividendExampleExample

Now assume that instead of a 15% stock dividend, Beachfront Condos, Inc. issued a 50% stock

dividend.

Prepare the journal entries for March 1 and April 15.

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3,000 × 50% = 1,500 shares

1,500 × $50 par = $75,000

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13-27

Stock SplitsStock Splits

Distributions of 100% or more

of stock to stockholders

Ice Cream Parlor

Banana Splits On Sale Now

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Stock SplitsStock Splits

Decrease par value of stock

Increase number of outstanding shares

No change in stockholders’ equity - not even in the composition

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[January 29, 1997]

Stock Splits - Real World ExamplesStock Splits - Real World Examples

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Stock SplitStock SplitAssume that a corporation had 5,000 shares of $1 par value common stock outstanding

before a 2–for–1 stock split.

Before Split

After Split

Common Stock Shares 5,000

Par Value per Share 1.00$

Total Par Value 5,000$

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Stock SplitStock SplitAssume that a corporation had 5,000 shares of $1 par value common stock outstanding

before a 2–for–1 stock split.

Increase

Decrease

No Change

Before Split

After Split

Common Stock Shares 5,000 10,000

Par Value per Share 1.00$ 0.50$

Total Par Value 5,000$ 5,000$

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Stock SplitStock SplitAnother ExampleAnother Example

XYZ corporation had 5,000 shares of $60 par value common stock outstanding before a 2-for-1 stock

split.

Prepare the journal entry to record the stock split.



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split.




Common Stock-$60 par 300,000


To record 2 for 1 stock split


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GENERAL JOURNAL




To record 2 for 1 stock split


split.


Before Split

After Split

Common Stock Shares 5,000 10,000

Par Value per Share 60.00$ 30.00$

Total Par Value 300,000$ 300,000$


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Summary of Effects of Stock Summary of Effects of Stock Dividends and Stock SplitsDividends and Stock Splits

Effect on:

Small Stock

Dividend

Large Stock

Dividend

Stock Splits

Total Stockholders'

EquityNo Effect No Effect No Effect

Common Stock

Increases Increases No Effect

Other Paid-in Capital

Increases No Effect No Effect

Retained Earnings

Decreases Decreases No Effect

Number of Shares

OutstandingIncreases Increases Increases

Par Value per Share

No Effect No Effect Decreases

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Retained Earnings Retained Earnings Appropriations Appropriations



Retained Earnings - Unappropriated XXXX

Retained Earnings- Appropriated XXXX

Contractual or voluntary restrictions on retained earnings available for dividends Simply splits one amount into two amounts!! Does not change total retained earnings

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Statement of Retained EarningsStatement of Retained Earnings

One of the four basic financial statements

Summarizes changes in retained earnings for the period

Net Income (+)

Net Losses (-)

Dividends (-)

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R/E - Beginning of Period $ $$$

Add: Net Income for for the Period $$$

Subtract: Dividends for the Period $$$

R/E - End of Period $ $$$

Simple Format: (p. 20)

Complex Format: (p. 474)Not responsible for it!

Statement of Retained EarningsStatement of Retained Earnings

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Treasury StockTreasury Stock

Repurchased shares of a corporation’s own stock.

Why reacquire own stock? To reduce ownership To reissue later at a higher market

price To increase earnings per share To use in employee stock option

programsThis list is in 2nd par. on p. 475

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Repurchased shares of a corporation’s own stock.

Considered issued but not outstanding stock

Has no voting rights Has no dividend rights Reduces stockholders’ equity

on the Balance SheetSee bottom of Illustration 13.7 on p. 477 for typical B/S presentation

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Acquisition of Treasury Stock is recorded at cost to reacquire the stock.



Treasury Stock XXXX

Common Stock-$30 parCash XXXX

(Cost)

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At reissuance of the treasury shares, Treasury Stock is credited at cost.



Cash XXXX

Common Stock-$30 parTreasury Stock XXXX

Paid-in Capital-Treasury Stock XXXX

(Cost)

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Nature of Treasury Stock account Contra Stockholders’ Equity account Shown last in Stockholders’ Equity section

of the Balance Sheet as a deduction Is not an asset account

Sale of Treasury Stock “Gain” is credited to Paid-in Capital-Treasury

Stock Transactions, a new account for us “Loss” is debited to Paid-in Capital-Treasury

Stock Transactions (as long as it does not force this account into a debit balance)


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On May 1, 1997 Photo Inc. reacquired 3,000 shares of its common stock at $55 per share.

Prepare the journal entry.

Treasury StockTreasury StockExampleExample



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On May 1, 1997 Photo Inc. reacquired 3,000 shares of its common stock at $55 per share.





May 1 Treasury Stock 165,000

Common Stock-$30 parCash 165,000

To record repurchase of stock

3,000 × $55 = $165,000

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On December 3, 1999 Photo Inc. reissued 1,000 shares of the stock at $75 per share.





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On December 3, 1999 Photo Inc. reissued 1,000 shares of the stock at $75 per share.





Dec. 3 Cash 75,000

Treasury Stock 55,000

Paid-in Capital-Treasury Stock 20,000

To record stock reissuance

1,000 × $75 = $75,000

1,000 × $55 = $55,000

$75,000 – $55,000 = $20,000

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Net Income Inclusions and Net Income Inclusions and ExclusionsExclusions

Let’s review the income

statement as we currently

know it.

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Net Income Inclusions and Net Income Inclusions and ExclusionsExclusions

Now, let’s see how some

“weird” items will affect the

financial statements.

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Rest of Chapter -Rest of Chapter -4 “Weird” Reporting Situations4 “Weird” Reporting Situations

Extraordinary Items

Discontinued Operations

Cumulative Effect of a Change in Accounting Principles

Prior Period Adjustments

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Income StatementIncome Statement(Top part of ILL. 13.8, p. 479)(Top part of ILL. 13.8, p. 479)

“THE LINE”

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3 Weird Items Shown Below 3 Weird Items Shown Below “The Line” on Income Statement“The Line” on Income Statement

Discontinued Operations

Extraordinary Items

Cumulative Effect of a Change in Accounting Principles

Note: All are shown net of tax effectsnet of tax effects

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Discontinued OperationsDiscontinued Operations

Sale or abandonment of a segment of a business

Sale or abandonment of a segment of a business

e.g., Product Line, Division, Subsidiarye.g., Product Line, Division, Subsidiary

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Must account for two items Profit or loss on the discontinued segment

for the period up to the point of sale Gain or loss on the disposal of the

discontinued segment itself

Remember Both of these must be shown net of any tax

effect

Discontinued OperationsDiscontinued Operations

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Discontinued OperationsDiscontinued OperationsExampleExample

During the year, Gifts Etc. sold an unprofitable segment of the company. The

segment had a net loss for the period of $150,000 and was sold for a gain of

$100,000. All items are taxed at 30%.

How will this appear on Gifts Etc.’s income statement illustrated earlier on slide #49?

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Discontinued OperationsDiscontinued OperationsCalculationsCalculations

Loss on Segment Operations* (150,000)$ Add: Tax Benefit ($150,000 × 30%) 45,000

Net Loss (105,000)$

Gain on Segment Disposal 100,000$ Less: Tax Expense ($100,000 × 30%) (30,000)

Net Gain 70,000$

*Up to point of sale

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Discontinued OperationsDiscontinued OperationsIncome StatementIncome Statement

Income before Discontinued Operations 81,000$ * Discontinued Operations:Loss on Operations (net of $45,000 tax benefit) (105,000)$ Gain on Disposal (net of $30,000 tax expense) 70,000 (35,000)

* Previously shown as “Net Income” on income statement on slide #49

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Extraordinary ItemsExtraordinary Items

Unusual Infrequent

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Two criteria, both of which must be met:

1. Unusual in nature andand

2. Infrequent in occurrence, given the environment in which the company exists

Note, however, that the FASB dictated that gains or losses on early extinguishment (i.e., retirement) of debt must also be reported as extraordinary, even though the above criteria may not be met.

Extraordinary ItemsExtraordinary Items

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Extraordinary ItemsExtraordinary ItemsExampleExample

During the year, Gifts Etc. experienced an extraordinary loss of $75,000 due to an

earthquake. All items are subject to a 30% tax rate.

How would this item appear on Gifts Etc.’s income statement?

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Extraordinary ItemsExtraordinary ItemsCalculationCalculation

Earthquake Loss (75,000)$ Tax Benefit/Savings ($75,000 × 30%) 22,500

Net Loss (52,500)$

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Extraordinary ItemsExtraordinary ItemsIncome StatementIncome Statement

Income before Discontinued Operations 81,000$ Discontinued Operations:Loss on Operations (net of $45,000 tax benefit) (105,000)$ Gain on Disposal (net of $30,000 tax expense) 70,000 (35,000) Extraordinary Items:Earthquake Loss (net of $22,500 tax benefit) (52,500)

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Extraordinary ItemsExtraordinary ItemsAlternative Calculation of Tax Alternative Calculation of Tax SavingsSavings

Tax Liability Calculation:

Income before taxes $500,000 $500,000

Extraordinary Earthquake Loss (75,000) 0 .

Taxable Income 425,000 500,000

Tax Rate 30% 30% .

Tax Liability $127,500 $150,000

Difference due to tax benefit (i.e., savings) of extraord. loss $22,500

Gifts Etc. has Lucky Inc. Extraord. Loss Has No Loss

Therefore, the loss (net of tax savings) is only 52,500 (75,000 - 22,500) as shown on the previous slides.

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Change to

Change in Accounting PrinciplesChange in Accounting Principles

New GAAP Method

Old GAAP Method

Occurs when changing from one GAAP to another GAAP

Examples Double-declining-balance method to

Straight-line method of depreciation Percentage-of-Sales to Percentage-of-

Receivables for Uncollectible Accounts

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Fact that a change occurred must be disclosed in notes to financial statements

Cumulative effect of change must be shown on income statement

i.e., the change must be reflected on the financial statements as if the company had always been using the new method

Change in Accounting PrinciplesChange in Accounting Principles

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Change in Accounting PrinciplesChange in Accounting PrinciplesExampleExample

During the year, Gifts Etc. decided to change from the double-declining-balance

method to the straight-line method for depreciation. The net effect of this change is an increase in net income of $65,000. All

items are subject to a 30% tax rate.

How would this item appear on Gifts Etc.’s income statement?

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Change in Accounting PrinciplesChange in Accounting PrinciplesCalculationCalculation

Increase in Net Income 65,000$ Less: Tax Expense ($65,000 × 30%) (19,500)

Net Increase 45,500$

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Change in Accounting PrinciplesChange in Accounting PrinciplesIncome StatementIncome Statement

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Prior Period AdjustmentsPrior Period Adjustments

Appear on the Statement of Retained Earnings as an adjustment to beginning

retained earnings balance

Corrections of errors from a previous period

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Only two situations qualify as prior period adjustments Misapplications of GAAP Mathematical mistakes

Must be shown net of income tax effects Do corrections have to be made for bad

estimates in prior years?

Prior Period AdjustmentsPrior Period Adjustments

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Prior Period AdjustmentsPrior Period AdjustmentsExampleExample

While reviewing the depreciation entries for 1995-1998, the controller found that in 1997

depreciation expense was incorrectly debited for $150,000 when in fact it should have been debited $125,000. All items are

taxed at 30%.

Prepare the necessary journal entry in 1998 to correct this prior period error.

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To correct this entry, can we just reverse it?

Why or why not?



1997 Entry Made:

Depreciation Expense 150,000

Accumulated Depreciation 150,000

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1998 Correcting Entry:


We can debit Accumulated Depreciation since it is a permanent account.

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Retained Earnings

However, we can’t credit Depreciation Expense since it

was closed to Income Summary and then to Retained Earnings.

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Federal Income Taxes 7,500

Retained Earnings 17,500

Remember to consider the tax effects:$25,000 × 30% = $7,500 taxes payable

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Earnings Per (Common) ShareEarnings Per (Common) Share Is one of the “gods” of the stock market Calculated only for common stock Calculated for each major item on the

income statement Income from Continuing Operations Discontinued Operations Extraordinary Items Cumulative Effect of a Change in Accounting

Principle Net Income

(See bottom of ILL. 13.8, p. 478)

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Calculated as Net Income - Dividends to Preferred Stockholders

Average Number of CommonCommon Shares Outstanding

Pronouncements were 17 & 100 pages...

Earnings Per (Common) ShareEarnings Per (Common) Share

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13-1 C ORPORATIONS : P AID-IN C APITAL, R ETAINED E ARNINGS, D IVIDENDS, AND T REASURY S TOCK...

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