Accounting for Corporations Chapter 11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written.

Accounting for Corporations

Chapter 11

Copyright © 2016 McGraw-Hill Education.  All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition

Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition

11-C1: Characteristics of Corporations

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Privately HeldPrivately Held

Publicly HeldPublicly Held

Ownership can be

Corporate Form of Organization

Existence is separate from

owners

Existence is separate from

owners

An entity created by law

An entity created by law

Has rights and privileges

Has rights and privileges

C 13

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Characteristics of CorporationsAdvantages

Separate legal entity Limited liability of stockholders Transferable ownership rights Continuous life Lack of mutual agency for stockholders Ease of capital accumulation

Disadvantages Governmental regulation Corporate taxation

C 14

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Corporate Organization and Management

C 1

Corporate governance is the system by which

companies are directed and controlled.

Board of Directors

Stockholders

President, Vice President, and other Officers

Employees of the Corporation

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C orpo ra te O rgan iza tion C hart

Secretary V ice P residentF inance

V ice P residentP roduction

V ice P residentM arketing

President

Board of D irectors

S tockholdersUltimate control

Selected by a vote of the

stockholders

Overall responsibility for managing the company

Corporate Organization and Management

C 1

Stockholders usually meet once a year

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Rights of Stockholders Vote at stockholders’ meetings (or

register proxy votes electronically) Sell stock Purchase additional shares of stock Receive dividends, if any Share equally in any assets remaining

after creditors are paid in a liquidation

C 17

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Each unit of ownership is

called a share of stock.

A stock certificate serves as proof

that a stockholder has purchased

shares.

Stock Certificates and Transfer

When the stock is sold, the stockholder signs a transfer endorsement on the back of the stock certificate.

C 18

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Stockholders' EquityCommon Stock, par value $0.01; authorized 250,000,000 shares; issued and outstanding 92,556,295 shares $925,563

Basics of Capital StockTotal amount of stock that a

corporation’s charter authorizes it to sell.

Total amount of stock that has been issued or sold to stockholders.

C 19

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Par value is an arbitrary amount assigned to each

share of stock when it is authorized.

Market price is the amount that each share of stock will

sell for in the market.Basics of Capital Stock

Classes of Stock

Par Value

No-Par Value

Stated Value

C 110

11-P1: Common Stock

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Par Value Stock

On June 5, Dillon Snowboard’s, Inc. issued 30,000 shares of $10 par value stock for $12 per share.

Let’s record this transaction.

Issuing Par Value Stock

June 5 Cash 360,000 Common Stock, $10 par value 300,000 Paid-in Capital in Excessof Par Value, Common 60,000

Issued 30,000 shares of common stock.

P 112

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Stockholders' Equity with Common StockStockholders' Equity Common Stock - $10 par value; 50,000 shares authorized; 30,000 shares issued and outstanding 300,000$ Paid-In Capital in Excess of Par 60,000 Retained earnings 65,000 Total stockholders' equity 425,000$

Issuing Par Value Stock

P 113

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Issuing Stock for Noncash AssetsPar Value Stock

On June 10, 4,000 shares of $20 par value stock for land valued at $105,000. Let’s record this

transaction.

Dr Cr June 10 Land 105,000

Common Stock, $2 par value 80,000 Paid-in Capital in Excess 25,000 of Par Value, Common

Exchanged 100,000 common shares for land.

P 114

Prepare journal entries to record the following four separate issuances of stock.

1) A corporation issued 80 shares of $5 par value common stock for $700 cash.

2) A corporation issued 40 shares of no-par common stock to its promoters in exchange for their efforts,estimated to be worth $800. The stock has a $1 per share stated value.

3) A corporation issued 40 shares of no-par common stock in exchange for land, estimated to be worth$800. The stock has no stated value.

4) A corporation issued 20 shares of $30 par value preferred stock for $900 cash.

Debit Credit1) Cash 700

Common Stock, $5 par value (80 shares x $5) 400Paid-in Capital in excess of par value, Common stock 300

2) Organization expenses 800Common Stock, $1 stated value (40 shares x $1) 40Paid-in Capital in excess of stated value, Common stock 760

3) Land 800Common Stock, No-par value 800

4) Cash 900Preferred Stock, $30 par value (20 shares x $30) 600Paid-in Capital in excess of par value, Preferred stock 300

General Journal

NEED-TO-KNOW

P 115

11-P2: Dividends

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Dividends Stockholders

Cash Dividends

Corporation

To pay a cash dividend, the corporation must have:

1. A sufficient balance in retained earnings; and

2. The cash necessary to pay the dividend.

75%

22%

0%

20%

40%

60%

80%

100%

Common Preferred

%of Corporations Paying Divends

Regular cash dividends provide a return to investors and almost always affect the stock’s market value.

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Accounting for Cash Dividends

Three Important Dates

Date of Declaration

Record liabilityfor dividend.

Date of Record

No entryrequired.

Date of Payment

Record payment ofcash to stockholders.

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Date of Declaration

Record liabilityfor dividend.

Dr Cr Jan. 9 Retained Earnings 5,000

Common Dividend Payable 5,000 Declared $1 per share cash dividend.

Accounting for Cash DividendsOn January 9, a $1 per share cash dividend is declared

on Z-Tech, Inc.’s 5,000 common shares outstanding. Thedividend will be paid on February 1 to stockholders of

record on January 22.

P 219

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No entry required on January 22, the date of record.

Dr Cr Feb. 1 Common Dividends Payable 5,000

Cash 5,000 Paid $1 per share cash dividend.

Date of PaymentRecord payment of cash to stockholders.

Accounting for Cash DividendsOn January 9, a $1 per share cash dividend is declared

on Z-Tech, Inc.’s 5,000 common shares outstanding. Thedividend will be paid on February 1 to stockholders of

record on January 22.

P 220

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Stockholders' Equity

5,000 shares authorized and outstanding 50,000$ (6,000) 44,000$

Retained earnings deficitTotal stockholders' equity

Common stock $10 par value,

Deficits and Cash DividendsA deficit is created when a company incurs cumulative losses or pays dividends greater

than total profits earned in other years.

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Stock Dividends

Why a stock dividend? Can be used to keep the market price on the stock affordable. Can provide evidence of management’s confidence that

the company is doing well.

A distribution of a corporation’s own shares to its stockholders without receiving any payment in return.

Small Stock DividendDistribution is £ 25% of the previously outstanding shares.

Large Stock DividendDistribution is > 25% of the previously outstanding shares.

P 222

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Recording a Small Stock DividendQuest has 10,000 shares of $1 par value stock outstanding. On December 31, Quest declared a 10% stock dividend, when the stock was selling for

$15 per share. The stock will be distributed to stockholders on January 20. Let’s prepare the December 31 entry.

Dec. 31 Retained Earnings 15,000 Common Stock Dividend Distributable 10,000 Paid-In Capital in Excessof Par Value 5,000

Declared a 1,000 share (10%) stock dividend.

1,000 × $10 par

Capitalize retained earnings for the market value of the shares to be distributed.

(10,000 × 10% = 1,000 × $15 = $15,000)

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Before thestock

dividend.

After thestock

dividend.

P 224

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Recording a Small Stock DividendQuest has 10,000 shares of $1 par value stock outstanding. On December 31, Quest declared a 10% stock dividend, when the stock was selling for

$15 per share. The stock will be distributed to stockholders on January 20. Let’s prepare the January 20 entry.

Jan. 20 Common Stock Dividend Distributable 10,000 Common Stock $10 Par Value 10,000 Paid-In Capital in Excess

P 225

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Recording a Large Stock Dividend

Dr CrDec. 31 Retained Earnings 30,000

Common Stock Dividend Distributable 30,000 Declared a 10,000 share (30%) stock dividend.

Capitalize retained earnings for the minimum amount required by state law, usually par or stated value of the shares.

(10,000 × 30% = 3,000 shares × $10 par value = $30,000)

Quest, Inc. has 10,000 shares of $1 par value stock outstanding. On December 31, Quest declared a 30% stock

dividend. The stock will be distributed to stockholders on January 20, 2014. Let’s prepare the December 31 entry.

P 226

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Common Stock

$20 par value

100,000 shares

OldShares

NewShares Common Stock

$10 par value

200,000 shares

Stock SplitsA distribution of additional shares of stock to

stockholders according to their percent ownership.

P 227

NEED-TO-KNOW

A company began the current year with the following balances in its Stockholders’ Equity accounts.

Common Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding $2,000Paid-in capital in excess of par, Common Stock 1,000Retained earnings 5,000

Total $8,000

Jan. 10 The board declared a $0.10 cash dividend per share to shareholders of record on Jan. 28.Feb. 15 Paid the cash dividend declared on January 10.Mar. 31 Declared a 20% stock dividend. The market value of the stock is $18 per share.May 1 Distributed the stock dividend declared on March 31.Dec. 1 Declared a 40% stock dividend. The market value of the stock is $25 per share.Dec. 31 Distributed the stock dividend declared on December 1.

All outstanding common stock was issued for $15 per share when the company was created. Preparejournal entries to account for the following transactions during the current year.

P 228

NEED-TO-KNOWCommon Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding $2,000Paid-in capital in excess of par, Common Stock 1,000

Retained earnings 5,000Total $8,000

Jan. 10 The board declared a $0.10 cash dividend per share to shareholders of record on Jan. 28.Feb. 15 Paid the cash dividend declared on January 10.Mar. 31 Declared a 20% stock dividend. The market value of the stock is $18 per share.May 1 Distributed the stock dividend declared on March 31.Dec. 1 Declared a 40% stock dividend. The market value of the stock is $25 per share.Dec. 31 Distributed the stock dividend declared on December 1.

Debit CreditJan. 10 Retained earnings (200 shares x $0.10) 20

Common dividend payable 20

Jan. 28 No journal entry on the date of record

Feb. 15 Common dividend payable 20Cash 20

Mar. 31 Retained earnings (200 shares x 20% = 40 shares x $18 mkt.) 720Common Stock dividend distributable (40 shares x $10 par) 400Paid-in Capital in excess of par value, Common Stock 320

May 1 Common Stock dividend distributable (40 shares x $10 par) 400Common Stock, $10 par value (40 shares x $10 par) 400

General Journal

P 229

NEED-TO-KNOWCommon Stock- $10 par, 500 shares authorized, 200 shares issued and outstanding $2,000Paid-in capital in excess of par, Common Stock 1,000Retained earnings 5,000

Total $8,000

Jan. 10 The board declared a $0.10 cash dividend per share to shareholders of record Jan. 28.Feb. 15 Paid the cash dividend declared on January 10.Mar. 31 Declared a 20% stock dividend. The market value of the stock is $18 per share.May 1 Distributed the stock dividend declared on March 31.Dec. 1 Declared a 40% stock dividend. The market value of the stock is $25 per share.Dec. 31 Distributed the stock dividend declared on December 1.

Debit CreditMay 1 Common Stock dividend distributable (40 shares x $10 par) 400

Common Stock, $10 par value (40 shares x $10 par) 400

Dec. 1 Retained earnings (240 shares x 40% = 96 shares x $10 par) 960Common Stock dividend distributable (96 shares x $10 par) 960

Dec. 31 Common Stock dividend distributable (96 shares x $10 par) 960Common Stock, $10 par value (96 shares x $10 par) 960

General Journal

P 230

11-C2: Issuance of Preferred Stock

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Preferred Stock A separate class of stock, typically having priority over

common shares in . . .– Dividend distributions– Distribution of assets in case of liquidation

Usually has a stated dividend rate

Normally has novoting rights

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vs. NoncumulativeCumulative

Dividends in arrears must be paid before dividends may be paid on common

stock. (Normal case)

Undeclared dividends from current and prior years do

not have to be paid in future years.

Preferred Stock

Common stock, $50 par value; 4,000 shares authorized, issued and outstanding 200,000$ Preferred stock, 9%, $100 par value; 1,000 shares authorized, issued and outstanding 100,000 Total Paid-In capital 300,000$

Consider the following Stockholders’ Equity section of the Balance Sheet. The Board of Directors declares $5,000 of

dividends in 2014. In 2015, the Board declared and paid cash dividends of $42,000.

C233

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Preferred Stock

C234

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vs. NonparticipatingParticipating

Dividends may exceed a stated amount once common

stockholders receive a dividend equal to the preferred stated

rate.

Dividends are limited to a maximum amount each year. The

maximum is usually the stated dividend rate.(Normal case)

Preferred Stock

Reasons for Issuing Preferred Stock

To raise capital without sacrificing control To boost the return earned by common stockholders through

financial leverage To appeal to investors who may believe the common stock is

too risky or that the expected return on common stock is too low

C235

NEED-TO-KNOW

Total20X1 $15 20X2 5 20X3 200 Total $220

Par value per preferred share $5Dividend % 5%Dividend per preferred share $0.25Number of preferred shares 80Annual preferred dividend $20

Total Preferred Common20X1 $15 $15 $0 20X2 5 5 0 20X3 200 20 180 Total $220 $40 $180

Part 1. Determine the amount of dividends paid each year to each of the two classes of stockholders: preferred and common. Also compute the total dividends paid to each class for the three years.

A company’s outstanding stock consists of 80 shares of noncumulative 5% preferred stock with a $5 par value and also 200 shares of common stock with a $1 par value. During its first three years of operation, the corporation declared and paid the following total cash dividends:

Annual preferred dividend

C236

NEED-TO-KNOW

Total Preferred Arrears Common20X1 $15 $15 $5 $0 20X2 5 5 20 0 20X3 200 40 0 160 Total $220 $60 $160

A company’s outstanding stock consists of 80 shares of noncumulative 5% preferred stock with a $5 par value and also 200 shares of common stock with a $1 par value. During its first three years of

operation, the corporation declared and paid the following total cash dividends:

Part 2. Determine the amount of dividends paid each year to each of the two classes of stockholders assuming that the preferred stock is cumulative. Also determine the total dividends paid to each class

for the three years combined.

Par value per preferred share $5Dividend % 5%Dividend per preferred share $0.25Number of preferred shares 80Annual preferred dividend $20

Annual preferred dividend

C237

11-P3: Treasury Stock

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Treasury StockTreasury stock represents shares of a company’s own stock that has been acquired. A corporation might acquire its own stock to:1. Use its shares to buy other companies.2. Avoid a hostile takeover.3. Reissue to employees as compensation.4. Support the market price.

Corporations and Treasury Stock

No Treasury Stock38%

With Treasury Stock62%

P 339

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Purchasing Treasury Stock

Treasury stock is shown as a reduction in totalstockholders’ equity on the balance sheet.

Treasury stock is shown as a reduction in totalstockholders’ equity on the balance sheet.

May 1 Treasury Stock, Common 11,500 Cash 11,500

Purchased 1,000 treasury shares at $11.50 per share

On May 1, Cyber, Inc. purchased 1,000 of its ownshares of stock in the open market for $11.50 per

share.

P 340

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Selling Treasury Stock at Cost

May 21 Cash 1,150 Treasury Stock, Common 1,150

Sold 100 shares of treasury for $11.50 per share.

On May 21, Cyber sold 100 shares ofits treasury stock for $11.50 per share.

P 341

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Shares Per Share Total

Sale 400 12.00$ 4,800$ Cost 400 11.50 4,600 Paid-In Capital 200$

Selling Treasury StockAbove Cost

June 3 Cash 4,800 Treasury Stock, Common 4,600 Paid-In Capital, Treasury Stock 200

Sold 400 treasury shares for $12 per share.

On June 3, Cyber, Inc. sold an additional 400shares of its treasury stock for $12 per share.

P 342

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Selling Treasury Stock Below Cost

Shares Per Share Total

Cost 500 11.50$ 5,750$ Sale 500 10.00 5,000 Difference 750$

July 10 Cash 5,000

200 Retaine 550

Treasury Stock, Common 5,750 Sold 500 treasury shares for $10 per share.

Paid-in Captial, Treasury Stock

On July 10, Cyber sold an additional 500 shares of its treasury stock for $10 per share.

P 343

NEED-TO-KNOWA company began the current year with the following balances in its stockholders’ equity accounts.

Common Stock - $10 par, 500 shares authorized, 200 shares issued and outstanding $2,000Paid-in capital in excess of par, Common Stock 1,000Retained earnings 5,000

Total $8,000

Jul. 1 Purchased 30 shares of treasury stock at $20 per share.Sep. 1 Sold 20 treasury shares at $26 cash per share.Dec. 1 Sold the remaining 10 shares of treasury stock at $7 cash per share.

All outstanding common stock was issued for $15 per share when the company was created. Preparejournal entries to account for the following transactions during the current year.

P 344

NEED-TO-KNOWCommon Stock - $10 par, 500 shares authorized, 200 shares issued and outstanding $2,000Paid-in capital in excess of par, Common Stock 1,000Retained earnings 5,000

Total $8,000

Jul. 1 Purchased 30 shares of treasury stock at $20 per share.Sep. 1 Sold 20 treasury shares at $26 cash per share.Dec. 1 Sold the remaining 10 shares of treasury stock at $7 cash per share.

Debit CreditJul. 1 Treasury Stock (30 shares x $20 cost) 600

Cash 600

Sep. 1 Cash (20 shares x $26) 520Treasury Stock (20 shares x $20 cost) 400Paid-in Capital, Treasury Stock 120

Dec. 1 Cash (10 shares x $7) 70Paid-in Capital, Treasury Stock (Available balance) 120Retained Earnings 10

Treasury Stock (10 shares x $20 cost) 200

General Journal

P 345

11-C3: Statement of Retained Earnings

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Statement of Retained EarningsRetained earnings is the total cumulative amount of

reported net income less any net losses and dividends declared since the company started operating.

Legal RestrictionMost states restrict

the amount oftreasury stock

purchases to theamount of retained

earnings.

Contractual RestrictionLoan agreements

can includerestrictions on paying

dividends below acertain amount ofretained earnings.

Restricted Retained Earnings

C 347

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Prior Period AdjustmentsPrior period adjustments are corrections of material errors in past years’ financial statements that result in a change in the beginning

balance of retained earnings.

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Statement of Stockholders’ Equity

This is a more inclusive statement than the statement of retained earnings.

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Optionpurchaseprice $30 per share.

Stock Options

Marketprice of

stock $75 per share.

The right to purchase common stock at a fixed price over a specified period of time. As the stock’s price rises above the fixed option price, the value of the option increases.

Options are given to key employees to motivate them to: focus on company performance, take a long-run perspective, and remain with the company.

C 350

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Global ViewU.S. GAAP and IFRS have similar procedures for issuing common stock at par, at a premium, at a discount, and for noncash assets.

Accounting for and reporting cash dividends, stock dividends, and stock splits, are consistent under both U.S. GAAP and IFRS.

Accounting for treasury stock is consistent under both U.S. GAAP and IFRS. Companies do not report gains or losses on transactions

involving their own stock.

Preferred stock that is redeemable at the option of the preferred stockholder is reported between liabilities and equity under U.S. GAAP,

but it is reported as a liability under IFRS. Also, the issue price of convertible preferred stock (and bonds) is recorded entirely under preferred stock (or bonds) and none is assigned to the conversion

feature under U.S. GAAP. However, IFRS requires that a portion of the issue price be allocated to the conversion feature when it exists.

51

11-A1: Earnings Per Share

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Earnings Per Share

Basicearningsper share

= Net income - Preferred dividendsWeighted-average common shares outstanding

Earnings per share is one of the most widely cited accounting statistics.

A 153

11-A2: Price-Earnings Ratio

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Price-Earnings Ratio

Price–earnings

ratio= Market value (price) per share

Earnings per share

This ratio reveals information about the stock market’s expectations for a company’s future growth

in earnings, dividends, and opportunities.

A 255

11-A3: Dividend Yield

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Dividend Yield

Dividendyield

= Annual cash dividends per share

Market value per share

Tells us the annual amount of cash dividends distributed to common stockholders relative to

the stock’s market price.

A 357

11-A4: Book Value Per Share

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Book Value per Common Share

Book value percommon share =

Stockholders’ equity applicable to common sharesNumber of commonshares outstanding

Reflects the amount of stockholders’ equityapplicable to common shares on a per share basis.

A 459

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Book Value per Preferred Share

Book value perpreferred share =

Stockholders’ equity applicable to preferred shares

Number of preferred shares outstanding

Reflects the amount of stockholders’ equity applicable to preferred shares on a per share basis.

A 460

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End of Chapter 11

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