Stockholders’ Equity Ch 15 Intermediate Accounting

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					                     Stockholders’ Equity


               Chapter
                     15
             Intermediate Accounting
                   12th Edition
          Kieso, Weygandt, and Warfield



Chapter
 15-‹#›         Prepared by Coby Harmon, University of California, Santa Barbara
                        Corporate Capital

                              Common Stock
                                  Account
          Contributed                                     Additional Paid-
            Capital                                         in Capital
                                                               Account
                            Preferred Stock
                                  Account


   Two Primary
    Sources of              Retained Earnings
                                  Account
      Equity                                                 Assets –
                                                           Liabilities =
                                  Less:
                              Treasury Stock
                                                              Equity
                                   Account


Chapter
 15-‹#›                 LO 2 Identify the key components of stockholders’ equity.
          The Corporate Form of Organization

      State Corporate Law
      Corporations must submit a Corporate Charter to
      the desired State of incorporation.
      A Corporate Charter includes 1) Articles of
      Incorporation and 2) ByLaws


           General Motors - incorporated in Delaware.
           U.S. Steel - incorporated in New Jersey.

Chapter
 15-‹#›      LO 1 Discuss the characteristics of the corporate form of organization.
           The Corporate Form of Organization

      Common Stock - represent owners’ shares or interests
      in the business. Shareholders bear ultimate risk of loss
      & benefits. Common Stockholders’ rights include:

          1. To share proportionately in profits and losses.
          2. To share proportionately in management (the right
             to vote on major issues).
          3. To share proportionately in assets upon liquidation.
          4. To share proportionately in any new issues of stock
             of the same class—called the preemptive right.

Chapter
 15-‹#›        LO 1 Discuss the characteristics of the corporate form of organization.
          The Corporate Form of Organization

      Par Value - Nominal value per share of Common Stock
      established in the Corporate Charter - *No relation to market
      value

          • The initial sale of stock cannot be below Par Value. The
          secondary market, however, can sell for whatever the
          market demands.

          • Par value was originally established to protect creditors.
          Owners could not withdraw ownership interests below Par
          Value of stock “Legal Capital”.

          • Today many states permit No-Par Stock. State law will
          establish the requirements.

Chapter
 15-‹#›       LO 1 Discuss the characteristics of the corporate form of organization.
            The Corporate Form of Organization


   Ex) Assume a Corporation issues 100,000
     shares of $10 par value Common Stock for $32
     per share, prepare the necessary journal entry.

                                       DR          CR
          Cash                      3,200,000
             Common Stock                       1,000,000
             Paid In Capital – CS               2,200,000



Chapter
 15-‹#›
           The Corporate Form of Organization


   Ex) Assume a Corporation issues 100,000
     shares of No Par value Common Stock for $32
     per share, prepare the necessary journal entry.

                               DR          CR
          Cash              3,200,000
             Common Stock               3,200,000




Chapter
 15-‹#›
            The Corporate Form of Organization

          Authorized Shares – Maximum number of shares to be issued per the
          charter. Selling more than Authorized amount requires a vote by the
          Board of Directors.

          Unissued Shares – Total number of shares that have never been
          issued.

          Issued Shares – Total number of shares that have been Issued
          [Outstanding Shares and Treasury Shares].

          Outstanding Shares – Total shares of stock owned by stockholders on
          a given date.

          Treasury Shares – Stock that has once been issued and since
          purchased back by the company. Treasury stock is considered issued
          stock that is currently inactive.

Chapter
 15-‹#›          LO 1 Discuss the characteristics of the corporate form of organization.
          The Corporate Form of Organization



 Authorized Shares = Issued Shares + Unissued Shares



                  Outstanding + Treasury Shares




Chapter
 15-‹#›     LO 1 Discuss the characteristics of the corporate form of organization.
                      Corporate Capital
     Treasury Shares
     Treasury stock is considered inactive Issued Stock
     The Treasury stock account is a Contra Equity account
     reducing the overall value of equity

            Equity:
              Common Stock                           $100,000
               ($1 Par 100,000 shares issued
                      98,000 shares OS)
              Additional PIC                          264,000
              Retained Earnings                        411,000
              Treasury Stock (2,000 shares)           (75,000)

            Total Equity:                            $700,000

Chapter
 15-‹#›                        LO 4 Describe the accounting for treasury stock.
                      Corporate Capital

      Treasury Shares (Reacquisition of Shares)
          Corporations purchase their outstanding stock:
             • To improve the EPS and ROE ratios
             • To have shares available to distribute
               through Employee Benefit Plans
             • To maintain control of ownership in the
               company [perhaps to prevent an unwanted
               takeover]
             • To make a market in their stock

Chapter
 15-‹#›                       LO 4 Describe the accounting for treasury stock.
                         Corporate Capital
          Common Stock                                      $100,000
           [$5 par value, 500,000 shares authorized]
           [? shares issued, ? shares OS]
          Paid in Capital - Common Stock                    $400,000
          Retained Earnings                                 $500,000
          Treasury Stock [2,000 shares]                     ($36,000)
          Total Stockholders' Equity                        $964,000

          How many Common Stock shares are issued?
          $100,000/$5 p/s = 20,000 shares issued

          How many Common Stock shares are outstanding?
          20,000 issued – 2,000 Treasury = 18,000 shares outstanding

          What is the average market price per share of Issued Common Stock?
Chapter   ($100,000 + $400,000)/20,000 = $25 p/s
 15-‹#›
                      Preferred Stock

      Preferred Stock


      A special class of stock with specific rights over
      Common Stock


      Preferred Stock has some characteristics of Debt
      And some characteristics of Equity



Chapter
 15-‹#›        LO 5 Explain the accounting for and reporting of preferred stock.
                        Preferred Stock

      Preferred Stock
          1. Has no voting Rights
          2. Raises equity funds without diluting Common
             stockholders’ voting control
          3. Has a fixed dividend rate which takes
             priority over Common stockholders when
             dividends are declared
          4. Has priority over Common stockholders in
             case of asset liquidation.

Chapter
 15-‹#›          LO 5 Explain the accounting for and reporting of preferred stock.
                  Preferred Stock


   Example of Fixed Dividend Rate on Preferred
     Stock:

   If a company has $500,000 of 6% Preferred Stock
      outstanding, the Fixed Dividend Rate is:

           $500,000 * .06 = $30,000 per year



Chapter
 15-‹#›
                         Preferred Stock

      Specific Features of Preferred Stock
          Ø Cumulative
                                         A corporation may attach
          Ø Participating
                                         whatever preferences or
          Ø Convertible                  restrictions, as long as it
          Ø Callable                     does not violate its state
                                             incorporation law.
          Ø Redeemable

           Accounting for preferred stock at issuance is
           similar to that for common stock.
Chapter
 15-‹#›           LO 5 Explain the accounting for and reporting of preferred stock.
                          Preferred Stock

      Cumulative Preferred Stock - requires that if a corporation
      fails to pay a dividend in any year, it must make it up in a later
      year before paying any dividends to common stockholders.


      Participating Preferred Stock – shares ratably with the
      common stockholders in any profit distribution beyond the
      prescribed preferred stock rate. That is, 5 percent preferred
      stock, if fully participating, will receive not only its 5 percent
      return, but also dividends at the same rates as those paid to
      common stockholders if paying amounts in excess of 5 percent of
      par or stated value to common stockholders.



Chapter
 15-‹#›            LO 5 Explain the accounting for and reporting of preferred stock.
                         Preferred Stock

      Convertible Preferred Stock – allows stockholders, at their
      option, to exchange preferred shares for common stock at a
      predetermined ratio.

      Callable Preferred Stock - permits the corporation at its
      option to call or redeem the outstanding preferred shares at
      specified future dates and at stipulated prices.


      Redeemable Preferred Stock – has a mandatory redemption
      period or a redemption feature that the issuer cannot control.
      This type of Preferred Stock is more like debt than equity
      because it is a legal obligation to pay by a deadline date. FASB
      now requires this type of Preferred Stock to be reported as a
      liability.
Chapter
 15-‹#›           LO 5 Explain the accounting for and reporting of preferred stock.
            Types of Dividends



          1. Cash dividends.
          2. Property dividends.
          3. Liquidating dividends.
          4. Stock dividends.




Chapter
 15-‹#›       LO 7 Identify the various forms of dividend distributions.
                   Types of Dividends

     Cash Dividends
          Board of directors vote on the declaration
          of cash dividends.
          A declared cash dividend is a liability.
          Companies do not declare or pay cash
          dividends on Treasury Stock.




Chapter
 15-‹#›               LO 7 Identify the various forms of dividend distributions.
                   Types of Dividends

     Property Dividends
          Dividends payable in assets other than cash.
          Before distribution, the company must
          restate at fair value the property it will
          distribute, recognizing any gain or loss.




Chapter
 15-‹#›               LO 7 Identify the various forms of dividend distributions.
                  Types of Dividends

     Liquidating Dividends
          Dividends that reduce stockholders’
          Additional Paid In Capital
          If a company distributes a dividend in
          EXCESS of earnings, it will reduce
          Contributed Capital of stockholders [PIC
          account]



Chapter
 15-‹#›              LO 7 Identify the various forms of dividend distributions.
                     Types of Dividends

   Stock Dividends
          Issuance of own stock to stockholders on a pro rata
          basis, without receiving any consideration.
          Stock dividends are the redistribution of Equity
          between Retained Earnings and Contributed Capital
          When a stock dividend is less than 25 percent of
          the common shares outstanding, a company
          transfers the fair market value of the stock from
          retained earnings (small stock dividend).

Chapter                     LO 8 Explain the accounting for small and large
 15-‹#›
                                 stock dividends, and for stock splits.
                    Types of Dividends

    Stock Dividends
          A stock dividend of more than 25 percent of the
          number of shares previously outstanding is called
          a large stock dividend.
          With a large stock dividend, transfer from
          retained earnings to capital stock the par value
          of the stock issued.



Chapter                    LO 8 Explain the accounting for small and large
 15-‹#›
                                stock dividends, and for stock splits.
                   Types of Dividends

     Stock Splits
          Reduces the market value of shares
          proportionally.
          No entry recorded for a stock split.
          Decreases par value and increases number of
          shares outstanding proportionally.




Chapter                   LO 8 Explain the accounting for small and large
 15-‹#›
                               stock dividends, and for stock splits.
                            Terminology
                         US GAAP vs IFRS

   US GAAP                             IFRS
   Common Stock                        Share Capital

   Paid-In-Capital In Excess of Par/   Share Premium
   Additional Paid In Capital

   Preferred Stock                     Preference Shares

   Retained Earnings/                  Retained Earnings/ Retained Profits
   Reinvested Earnings                 Accumulated Profit and Loss

   Accumulated Other Comprehensive     General Reserve & Other Reserve
   Income                              Accounts

Chapter
 15-‹#›

				
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