Chapter 11, Slide #1 Ch.11 Shareholders’ Equity Prof. J. Wang.
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Transcript of Chapter 11, Slide #1 Ch.11 Shareholders’ Equity Prof. J. Wang.
Chapter 11, Slide #1
Ch.11Shareholders’ Equity
Prof. J. Wang
Chapter 11, Slide #2
Part I: Introduction
Assets = Liabilities + Owners’ Equity
Chapter 11, Slide #3
Part I: Introduction
• Equity v. Debt Financing– Advantage of equity financing:
• flexibility
– Advantage of debt financing: • tax deductible,
• Benefit shareholders if the borrowing rate is lower than the rate of return using the borrowed money
• Shareholders’ ownership interest is not diluted
Chapter 11, Slide #4
Expanded Accounting Equation
Assets = Liabilities + Owners’ Equity
Assets = Liabilities + Stockholders’ Equity
Contributed Capital
RetainedEarningsCh.9&10
Ch.11
Chapter 11, Slide #5
Part II: Contributed Capital
Common Stock• Basic stock of corporation• Normally carries voting rights
Preferred Stock• Optional• No voting rights
Chapter 11, Slide #6
Preferred Stock
In exchange for giving up voting rights, have dividend preference over common stock
Stated dividend rate• Percentage of the
stock’s par value• Per-share amount
Preferred dividends usually are cumulative
LO2
$100 par,
7% preferred stock
Chapter 11, Slide #7
Chapter 11, Slide #8
Outstanding: notrepurchased or retired
Issued: sold or distributed
Number of Shares of StockAuthorized
1,000
MaximumAllowable
Chapter 11, Slide #9
Par Value
“Legal capital” Arbitrary amount
(usually small) stated on stock certificate
Also called “stated value”
Certificate of Stock
$1.00 Par Value
Chapter 11, Slide #10
Additional Paid-in Capital
Amount received in excess of par when stock was issued
Certificate of Stock
$1.00 Par Value
15
Chapter 11, Slide #11
Stock Issued for Cash
Journal entry:Cash 15,000 Common Stock 10,000 Additional Paid-In Capital—Common 5,000To record the issuance of 1,000 shares of $10 common stock at $15 per share.
LO3
1,000 shares of $10 par value
stock sold for $15 per
share
Common Stock $ 10,000( $10 par value × 1,000 shares)
Additional Paid-In Capital $5,000 (($15 – $10) × 1,000 shares)
Example:
Chapter 11, Slide #12
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.
Chapter 11, Slide #13
Stock Issued for Non-cash Assets
Journal entry:Land 15,000 Common Stock 10,000 Additional Paid-In Capital—Common 5,000To record the issuance of 1,000 shares of $10 common stock for land.
LO3
issued1,000 shares of $10 par value
stock For land with a fair
value of $15,000
Common Stock $ 10,000( $10 par value × 1,000 shares)
Additional Paid-In Capital $5,000
Example:
Chapter 11, Slide #14
Part III: Retained Earnings
Chapter 11, Slide #15
Retained Earnings Net income retained in the business
(not paid out as dividends) since its inception
Reinvested in a variety of assets (not necessarily liquid)
Chapter 11, Slide #16
Retained Earnings
• Increases when net income is earned
• Decreases when dividends are paid
Chapter 11, Slide #17
Retained Earnings Connects the Income Statement and the Balance Sheet
Statement of Retained Earnings Retained Earnings, Beginning Balance $ xxxAdd: Net Income incDeduct: Dividends xxxRetained Earnings, Ending Balance $ end
Balance Sheet Total Assets $ xxxTotal Liabilities xxxStockholders’ Equity xxxRetained Earnings endTotal Liabilities and Stockholders' Equity $ xxx
Income Statement Revenues $ xxxLess: Expenses xxxNet Income $ inc
Chapter 11, Slide #18
Cash Dividend Requirements
Sufficient cash Positive retained
earnings
Chapter 11, Slide #19
Cash Dividends
Paidto
Stockholderson date of record
Date of declaration
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Payment date
on1 2 3
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dividend check forDate
Dept.. of Treasurer
Jane Doe
Chapter 11, Slide #20
Dividends
Journal entry required to record:
(1) 12/31/06, $5,000 cash dividends declared
(2) 1/15/07, $5,000 cash dividends were paid
Reduce retained earnings
12/31/06 1/15/07
Paydividends
Chapter 11, Slide #21
Recording Cash Dividends
Retained Earnings 5,000
Cash Dividend Payable 5,000
To record the declaration of a cash dividend on 12/31/06.
Cash Dividend Payable 5,000
Cash 5,000
To record the payment of a cash dividend on 1/15/07.
dividend check forDate
Dept.. of Treasurer
Jane Doe
Chapter 11, Slide #22
• If the company has preferred stocks outstanding then dividends must be divided between common and preferred shareholders
• If preferred dividends are cumulative, preferred shareholders will receive dividends in arrears and for the current year before common shareholders receive any dividends.
• If preferred dividends are non-cumulative, preferred shareholders will only receive dividends for the current year before common shareholders receive theirs.
Chapter 11, Slide #23
Allocation of Cash Dividendswhen preferred stock is cumulative
1. Distribute dividends in arrears, if any, to preferred
2. Distribute current year’s dividends to preferred
3. Distribute remainder to common (or to both if preferred is participating)
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20041 2 3
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20051 2 3
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2006
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2007
LO5
Chapter 11, Slide #24
Cash Dividends Example
Stricker Company declares a $70,000 dividend in 2007 (no dividends were paid in 2005 or 2006). There are 10,000 shares of $10 par, 8% preferred stock and 40,000 shares of $5 par common stock outstanding.
Chapter 11, Slide #25
Cash Dividends Example
To Preferred To Common
Step 1: Distribute current-year dividend to preferred (10,000 shares × $10 par × 8% × 1 year) $8,000Step 2: Distribute remaining dividend to common ($70,000 – $8,000) $62,000Total allocated $8,000 $62,000
Noncumulative Preferred Stock
$0.80per
share
$1.55per
share
Chapter 11, Slide #26
Cash Dividends Example
To Preferred To Common
Step 1: Distribute dividends in arrears to preferred (10,000 shares × $10 par × 8% × 2 years) $16,000Step 2: Distribute current-year dividendto preferred (10,000 shares × $10 par ×8% × 1 year) 8,000Step 3: Distribute remainder to common($70,000 – $8,000) $46,000Total allocated $24,000 $46,000
Cumulative Preferred Stock
$0.80per
share
$1.55per
share
Chapter 11, Slide #27
Stock Dividends
Reasons:• Insufficient cash• Market price reduction• Nontaxable to recipients
Certificate of StockCertificate of Stock
Certificate of StockCertificate of Stock
Certificate of StockCertificate of Stock
Issue of additional shares proportionately to existing stockholders
LO6
Chapter 11, Slide #28
Stockholders’ Equity:Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000Additional paid-in capital—Common 30,000 Retained earnings 70,000
Total stockholders’ equity $150,000
Assume Shah Company declares a 10% stock dividend;500 additional shares will be issued. Assume that market value
Per share at the time is $40.
Before Dividend
Small Stock Dividend Example
Chapter 11, Slide #29
Assets = Liabilities + Stockholders’ Equity
Contributed Capital
RetainedEarnings
+$20,000 - $20,000
Chapter 11, Slide #30
Stockholders’ Equity: Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000Additional paid-in capital—Common 30,000 45,000Retained earnings 70,000 50,000
Total stockholders’ equity $150,000 $150,000
$20,000 ($40*500) market value deducted from retained earnings; allocated between Common
Stock (initially Common Stock Dividend Distributable) ($10*500) and Additional Paid-In
Capital ($30*500).
Before After
Small Stock Dividend Example
++–
Chapter 11, Slide #31
Stockholders’ Equity: Common stock, $10 par, 5,500 shares $ 50,000 $ 55,000Additional paid-in capital—Common 30,000 45,000Retained earnings 70,000 50,000
Total stockholders’ equity $150,000 $150,000
Before After
Small Stock Dividend Example
++–
Total S/E is unchanged
Chapter 11, Slide #32
Stockholders’ Equity:Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000Additional paid-in capital—Common 30,000 Retained earnings 70,000
Total stockholders’ equity $150,000
Assume Shah Company declares 100% stock dividendThat is, additional 5,000 shares will be issued
Before Dividend
Large Stock Dividend Example
Chapter 11, Slide #33
Stockholders’ Equity: Common stock, $10 par, 10,000 shares $ 50,000 $100,000Additional paid-in capital—Common 30,000 30,000Retained earnings 70,000 20,000
Total stockholders’ equity $150,000 $150,000
Retained earnings is reduced by the total par value It’s recorded in the Common Stock account at par. Additional Paid-In Capital account is unaffected.
Before After
Large Stock Dividend Example
+–
Chapter 11, Slide #34
Stockholders’ Equity: Common stock, $10 par, 10,000 shares $ 50,000 $100,000Additional paid-in capital—Common 30,000 30,000Retained earnings 70,000 20,000
Total stockholders’ equity $150,000 $150,000
Before After
Large Stock Dividend Example
+–
Total S/E is unchanged
Chapter 11, Slide #35
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 StockCertificate of Stock
Certificate of Stock$1 par value
LO 7
Chapter 11, Slide #36
Stock Splits
Not recorded in accounts
Reduce market price per share and make the stock more accessible to a wider range of investors Disclose
in notes
Chapter 11, Slide #37
Stockholders’ Equity:Common stock, $10 par, 5,000 shares
issued and outstanding $ 50,000Additional paid-in capital—Common 30,000 Retained earnings 70,000
Total stockholders’ equity $150,000
Assume Shah Company declares 2-for-1 stock split
Before Split
2-for-1 Stock Split Example
Chapter 11, Slide #38
Stockholders’ Equity: Common stock, $5 par, 10,000 shares $ 50,000 $ 50,000Additional paid-in capital—Common 30,000 30,000Retained earnings 70,000 70,000
Total stockholders’ equity $150,000 $150,000
Before After
2-for-1 Stock Split Example
All accounts are unchangedOnly disclosures
are affected
Chapter 11, Slide #39
Part IV: Treasury Stock
Company buys back its own stock Contra-equity account (debit balance) Not outstanding (no voting rights)
Certificate of Stock
LO4
Chapter 11, Slide #40
Reasons for Repurchasing Stock
Provide for employee bonuses or benefit plans
Maintain a favorable market price Improve financial ratios Maintain control of ownership Prevent unwanted takeover or buyout
attempts
Chapter 11, Slide #41
• For example, the company purchased 100 shares of its own outstanding stock at $25 per share
Dr. Treasury Stock 2,500
Cr. Cash 2.500
Assets = Liabilities + Stockholders’ Equity
-$2,500 -$2,500
Chapter 11, Slide #42
Presentation of Treasury Stock
Common stock, $10 par value, 1,000 shares issued, 900 outstanding $10,000
Additional paid-in capital—Common 12,000Retained earnings 15,000Total contributed capital and retained earnings 37,000Less: Treasury stock, 100 shares at cost ($25 per share) 2,500
Total stockholders’ equity $34,500