Chapter 11 Reporting and Interpreting Owners’ Equity.

Chapter 11

Reporting and Interpreting Owners’ Equity

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Understanding The Business

Advantages of a corporation

Simple to become an

owner

Easy to transfer

ownership

Provides limited liability

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Because a corporation is a separatelegal entity, it can . . .

Own assets.

Sue and be sued.

Incur liabilities.

Enter into contracts.

Understanding The Business

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Ownership of a Corporation

Rights

Voting (in person or by proxy).

Proportionate distributions of

profits.

Proportionate distributions of

assets in a liquidation.

Stockholders

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Ownership of a Corporation

Vice President(Production)

V ice President(Ma rketing)

V ice President(F ina nce)

V ice President(C ontro ller)

President

B oa rd of D irectorsInterna l (m a na gers) a ndExterna l (non-m a na gers)

S tockholders(O w ners of voting sha res)

Elected byshareholders

Appointedby directors

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Authorized, Issued, and Outstanding Capital Stock

The maximum number of shares of capital

stock that can be sold to the public.

AuthorizedShares

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Authorized, Issued, and Outstanding Capital Stock

AuthorizedShares

Issued shares are authorized shares of stock that have been

sold.

Unissued shares are authorized shares of stock that

never have been sold.

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Authorized, Issued, and Outstanding Capital Stock

AuthorizedShares

UnissuedShares

TreasuryShares

OutstandingSharesIssued

SharesTreasury shares are

issued shares that have been reacquired by the

corporation.

Outstanding shares are issued shares that are

owned by stockholders.

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Earnings Per share (EPS)

Income

Average Number of Shares OutstandingEPS =

Outback’s income for 2000 is $141,000,000 and the average number of

shares outstanding is 77,500,000.

Outback’s income for 2000 is $141,000,000 and the average number of

shares outstanding is 77,500,000.

Earnings per share is probably the single most widely watched

financial ratio.

Earnings per share is probably the single most widely watched

financial ratio.

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Income

Average Number of Shares OutstandingEPS =

Earnings per share is probably the single most widely watched

financial ratio.

Earnings per share is probably the single most widely watched

financial ratio.

$141,000,000

77,500,000 SharesEPS = = $1.82 per share

Earnings Per share (EPS)

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Outback Ruby Tuesday Wendy's$ 1.82 $ 1.44 $ 0.91

2000 Earnings Per Share

Earnings Per share (EPS)

Earnings per share is probably the single most widely watched

financial ratio.

Earnings per share is probably the single most widely watched

financial ratio.

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Types of Capital Stock

Common Stock

Preferred Stock

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Common Stock

Basic voting stock

Ranks after preferred

stock

Dividend set by board of

directors

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Par Value and No-par Value Stock

Legal capital is the amount of capital, required by the state, that must remain

invested in the business.

Par Value

Nominal value

Legal capital

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Par Value and No-par Value Stock

Par Value

Market Value

I get it!

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No-par Value Stock

Some states do not require that a

par value be stated in the

charter.

Some states do not

require a par value to be

stated in the charter.

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Accounting for Capital Stock

Two primary sources of stockholders’ equity

Retained earnings

Contributed capital

Parvalue

Additional paid-in capital

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Sale and Issuance of Capital Stock

Initial public offering (IPO)

Seasoned new issue

The first time a corporation sells

stock to the public.

Subsequent sales of new stock to the

public.

Outback

issues new stock.

Outback

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Secondary Markets

Transactions between two investors that do not affect the corporation’s accounting

records.

I’d like to sell some of my

Outback stock.

I’d like to buy some of your

Outback stock.

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GENERAL JOURNAL Page 34Date Description Debit Credit

July 6

Sale and Issuance of Capital StockOn July 6, Outback issued 100,000 shares

of $0.01 par value common stock for $22 per share.

Prepare the journal entry to record this transaction.

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GENERAL JOURNAL Page 34Date Description Debit Credit

July 6 Cash 2,200,000

Common Stock 1,000

Capital In Excess of Par Value 2,199,000

Sale and Issuance of Capital Stock

100,000 shares × $22 per share = $2,200,000

100,000 shares × $0.01 par value = $1,000

On July 6, Outback issued 100,000 shares of $0.01 par value common stock for $22

per share.

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Capital Stock Sold for Noncash Assets and/or Services

Record assets or services received at the market value of the stock at the date of the

transaction.

Record assets or services received at the market value of the stock at the date of the

transaction.

Accountant

Provides accounting

services

Issues stock Outback

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Capital Stock Sold for Noncash Assets and/or Services

If the market value of the stock cannot be determined, then the market value of the assets

or services received should be used.

If the market value of the stock cannot be determined, then the market value of the assets

or services received should be used.

Accountant

Provides accounting

services

Issues stock Outback

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GENERAL JOURNAL Page 12Date Description Debit Credit

Mar. 14

Capital Stock Sold for Noncash Assets and/or Services

On March 14, Outback issued 10,000 shares of its $0.01 par value common

stock to the Rose Law firms. The stock was selling for $15 per share.

Prepare the journal entry to record this transaction.

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GENERAL JOURNAL Page 12Date Description Debit Credit

Mar. 14 Legal Fees 150,000

Common Stock 100

Capital In Excess of Par Value 149,900

Capital Stock Sold for Noncash Assets and/or Services

10,000 shares × $15 per share = $150,000

On March 14, Outback issued 10,000 shares of its $0.01 par value common

stock to the Rose Law firms. The stock was selling for $15 per share.

10,000 shares × $0.01 par value = $100

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Stock Options

Management

Management compensation

package includes salary and stock

options.

Stock options allow management to purchase

stock from the corporation at a fraction of the stock’s

value in the secondary market.

If Outback does not have new stock to issue when the stock options are exercised, then . .

Outback

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Treasury StockOutback buys

its own stock in

the secondary market.

(Treasury stock) Stockholders

Management

Management compensation

package includes salary and stock

options.

Stock options allow management to purchase

stock from the corporation at a fraction of the stock’s

value in the secondary market.

Outback

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Treasury Stock

No voting or

dividend rights

Contra equity

account

When stock is reacquired, the corporation records the treasury stock at cost.

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Treasury Stock

GENERAL JOURNAL Page 27Date Description Debit Credit

May 1 Treasury Stock 2,000,000

Cash 2,000,000

100,000 shares × $20 = $2,000,000

On May 1, Outback reacquired 100,000shares of its common stock at $20 per share.

The journal entry for May 1 is . . . .

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GENERAL JOURNAL Page 68Date Description Debit Credit

Dec. 3 Cash 300,000

Treasury Stock 200,000

Capital in Excess of Par 100,000

Treasury Stock

10,000 shares × $30 = $300,000

10,000 shares × $20 cost = $200,000

On December 3, Outback reissued 10,000shares of the treasury stock at $30 per share.

The journal entry for December 3 is . . .

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Accounting for Cash Dividends

Declared by board of directors.

Not legally required.

Creates liability at declaration.

Requires sufficient Retained Earnings

and Cash.

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Dividend DatesDeclaration date

Board of directors declares the dividend.Record a liability.

GENERAL JOURNAL Page 12

Date DescriptionPost. Ref. Debit Credit

Retained Earnings XXX

Dividends Payable XXX

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Dividend Dates

X

Date of RecordStockholders holding shares on this date will

receive the dividend. (No entry)

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Dividend Dates

GENERAL JOURNAL Page 12

Date DescriptionPost. Ref. Debit Credit

Dividends Payable XXX

Cash XXX

Date of PaymentRecord the dividend payment to

stockholders.

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Dividend Yield Ratio

Dividend

Yield

Dividends Per Share

Market Price Per Share=

This ratio is often used to compare the dividend-paying performance of different

investment alternatives.

This ratio is often used to compare the dividend-paying performance of different

investment alternatives.

Outback does not pay a cash dividend. The 2000 market price is $27.

Outback does not pay a cash dividend. The 2000 market price is $27.

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Dividend Yield Ratio

Dividend

Yield

Dividends Per Share

Market Price Per Share=

Dividend

Yield

$0.00

$27.00= = 0.0%

This ratio is often used to compare the dividend-paying performance of different

investment alternatives.

This ratio is often used to compare the dividend-paying performance of different

investment alternatives.

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Dividend Yield Ratio

This ratio is often used to compare the dividend-paying performance of different

investment alternatives.

This ratio is often used to compare the dividend-paying performance of different

investment alternatives.

Outback Ruby Tuesday Wendy's0.0% 0.2% 0.9%

2000 Dividend Yields

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Accounting for Stock Dividends

Distribution of additional sharesof stock to stockholders.

No change in total stockholders’ equity.

All stockholders retain same percentage

ownership.

No change in par values.

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Stock dividend < 25%Stock dividend < 25%

Stock Dividends

Stock dividend > 25%Stock dividend > 25%

Record at currentmarket value

of stock.

Record at currentmarket value

of stock.

Record atpar valueof stock.

Record atpar valueof stock.

Small Large

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Stock Splits

Distributions of 100% or more

of stock to stockholders.

Ice Cream Parlor

Banana Splits On Sale Now

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Stock SplitsAssume that a corporation had 5,000shares 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 Splits

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$

Assume that a corporation had 5,000shares of $1 par value common stock

outstanding before a 2–for–1 stock split.

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Preferred StockPreference

over common stock

Usually hasno voting

rights

Usually has a fixed dividend

rate

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Dividends on Preferred Stock

Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.

Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.

Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

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Dividends on Preferred Stock

If the preferred stock is noncumulative, any dividends not declared in previous years

are lost permanently.

If the preferred stock is noncumulative, any dividends not declared in previous years

are lost permanently.

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Dividends on Preferred Stock

Kites, Inc. has the following stock outstanding:Common stock: $1 par, 100,000 shares

Preferred stock: 3%, $100 par, cumulative, 5,000 shares

Preferred stock: 6%, $50 par, noncumulative, 3,000 shares

Dividends were not paid last year. In the current year, the board of directors declared dividends of

$50,000.

How much will each class of stock receive?

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Dividends on Preferred StockTotal dividend declared 50,000$

Preferred stock (cumulative)

Remainder

Preferred stock (noncumulative)

Remainder

Common stock

Remainder

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Dividends on Preferred StockTotal dividend declared 50,000$

Preferred stock (cumulative)Arrearage ($100 par × 3% × 5,000 shares) 15,000$ Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000

Remainder 20,000$

Preferred stock (noncumulative)

Remainder

Common stock

Remainder

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Dividends on Preferred StockTotal dividend declared 50,000$

Preferred stock (cumulative)Arrearage ($100 par × 3% × 5,000 shares) 15,000$ Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000

Remainder 20,000$

Preferred stock (noncumulative)Current Yr. ($50 par × 6% × 3,000 shares) 9,000

Remainder 11,000$

Common stock

Remainder

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Dividends on Preferred StockTotal dividend declared 50,000$

Preferred stock (cumulative)Arrearage ($100 par × 3% × 5,000 shares) 15,000$ Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000

Remainder 20,000$

Preferred stock (noncumulative)Current Yr. ($50 par × 6% × 3,000 shares) 9,000

Remainder 11,000$

Common stockCurrent Yr. ($11,000 Remainder) 11,000

Remainder 0$

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On June 1, 2003, 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.

Dividends

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On June 1, 2000 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.

GENERAL JOURNAL Page 12Date Description Debit Credit

July 15 Dividends Payable 20,000

Cash 20,000

$100 × 8% = $8 dividend per share

$8 × 2,500 = $20,000 total dividend

Dividends

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Focus on Cash Flows

Outback

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Restrictions on Retained Earnings

If I loan you $150,000, I will want you to restrict your

retained earnings. Why would youwant to do that?

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Restrictions on Retained Earnings

Because I want to restrict the amount you can pay out

in dividends.

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Accounting and Reporting for Three Types of Businesses

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End of Chapter 11

C’mon Chester! With your smarts and my savvy, we

could make a great partnership!!