McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 Stockholders’ Equity PowerPoint Authors: Brandy Mackintosh.

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 11

Stockholders’ Equity

PowerPoint Authors:Brandy MackintoshLindsay Heiser

11-2

Learning Objective 11-1

Explain the role of stock in financing a corporation

11-3

Corporate OwnershipThe major advantage of the corporate form of business

is the ease of raising capital as both large and small investors can participate in corporate ownership.

Simple to become an

owner

Easy to transfer

ownership

Provides limited liability

Because a corporation is a separate legal entity, it can Own assets. Incur liabilities. Sue and be sued. Enter into contracts.

11-4

Voting rights.

Dividends.

Residual claims.StockholderBenefits

Corporate Ownership

Preemptive rights.

11-5

Corporate Ownership

11-6

Equity Versus Debt Financing

Advantages of equity • Equity does not have to

be repaid.

• Dividends are optional.

Advantages of debt• Interest on debt is tax

deductible.

• Debt does not change stockholder control.

Advantages of equity and debt financing.Advantages of equity and debt financing.

11-7


Explain and analyze common stock transactions.

11-8

Common Stock Transactions


Contributed Capital

Retained Earnings

Treasury Stock

Accumulated Other

Comprehensive Income

11-9

Authorization, Issuance, and Repurchase of Stock

The maximum number of shares of capital stock that can be

issued to the public.

Issued shares are authorized shares of stock that have been

distributed to stockholders.

Unissued shares of stock are

shares that have never

been distributed to stockholders.

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.

AuthorizedShares

11-10

Authorization, Issuance, and Repurchase of Stock

11-11

Par value is typically a very nominal amount such a $0.01

per share.

Stock Authorization

Par value is an arbitrary amount assigned to each

share of stock when it is authorized.

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.

11-12

Some states do not

require a par value to be

stated in the charter.

No-par Stock

Stock Authorization

11-13

Stock Issuance

Initial public offering (IPO)

The first time a corporation issues stock to the public.

Seasoned new issue

Subsequent issues of new stock to the

public.

National Beverage

issues stock.

11-14

Most issues of stock to the public are cash transactions.

Stock Issuance

National Beverage issued 100,000 shares of$0.01 par value common stock for $10 per share.

1 Analyze

LiabilitiesAssets = Stockholders’ Equity+

Cash +1,000,000 Common Stock +1,000Additional Paid-InCapital +999,000

2 Record

dr Cash (+A) (100,000 x $10) cr Common Stock (+SE) (100,000 x $0.01) cr Additional Paid-In Capital (+SE) (1,000,000 – 1,000)

1,000

999,000

1,000,000

11-15

Stock Exchanged between Investors

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

I’d like to sell 100 shares of National Beverage stock.

I’d like to buy 100 shares of National

Beverage stock.

11-16

Stock Used to Compensate Employees

Employees pay packages can include stock

options

Gives the employees the option to acquire company stock at a predetermined price

If the employees work hard and meet the corporation’s goals the stock price will increase.

Employees can then exercise their option to acquire stock at the lower predetermined price

and sell it at the higher price for a profit.

11-17

Repurchase of Stock

A corporation repurchases its stock to: Distribute excess cash to stockholders. Send a signal that the company believes

its stock is worth acquiring. Obtain shares to reissue for the purchase

of other companies. Obtain shares to reissue to employees as

part of stock option plans.

11-18

Repurchase of StockNational Beverage

repurchases its own stock

(Treasury stock)

Stockholders

Stock options allow employees to purchase

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

market price.

Employee

Employee compensation

package includes salary plus stock

options.

11-19

No voting or

dividend rights

Contra equity

account

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

Treasury stock is not

an asset.

Repurchase of Stock

11-20

National Beverage reacquired 50,000 sharesof its common stock at $25 per share.

Repurchase of Stock

1 Analyze


Cash -1,250,000 TreasuryStock (+xSE) -1,250,000

2 Record

dr Treasury Stock (+xSE, -SE) cr Cash (-A) 1,250,000

1,250,000

11-21

Reissuance of Treasury Stock

National Beverage reissued 5,000 sharesof the Treasury Stock at $28 per share.

No profit or loss is recognized on treasury stock transactions.

1 Analyze


Cash +140,000 Treasury Stock (-xSE) +125,000Additional Paid-InCapital +15,000

2 Record

dr Cash (+A) (5,000 x $28) cr Treasury Stock (-xSE, +SE) (5,000 x $25) cr Additional Paid-In Capital (+SE) [5,000 x ($28 - $25)]

125,000

15,000

140,000

11-22


Explain and analyze cash dividends, stock dividends, and stock split transactions.

11-23

Dividends on Common Stock

Declared by board of directors.

Not legally required.

Creates liability at declaration.

Requires sufficient Retained Earnings and Cash.

11-24

Dividends Dates

11-25

Dividends Dates

National Beverage declares an $2.30 dividend on each share of its 46,200,000 shares of common stock outstanding.

1 Analyze


DividendsPayable +106,260,000

DividendsDeclared (+D) -106,260,000

2 Record

dr Dividends Declared (+D, -SE) cr Dividends Payable (+L) 106,260,000

106,260,000

11-26

Dividends Dates

National Beverage paid the previously declared $2.30dividend on its shares of common stock outstanding.

1 Analyze


Cash -106,260,000 DividendsPayable -106,260,000

2 Record

dr Dividends Payable (-L) cr Cash (-A) 106,260,000

106,260,000

11-27

No change in total stockholders’ equity.

No change inpar values.

All stockholders retain same percentage ownership.

Stock Dividends

Corporations issue stock dividends to: Remind stockholders of the accumulating wealth in the company. Reduce the market price per share of stock. Signal that the company expects strong financial performance

in the future.

Distribution of additional sharesof stock to stockholders.

11-28

Record at currentmarket value

of stock.

Record atpar valueof stock.

Small Large

The journal entry moves an amount fromRetained Earnings to other equity accounts.

Stock Dividends

Stock dividend > 20 – 25%Stock dividend < 20 – 25%

11-29

National Beverage issued a 20 percent stock dividend on 38,000,000 outstanding shares of its $0.01 par value common stock and accounted for it as a large stock

dividend.

Stock Dividends

1 Analyze


Retained Earnings -76,000Common Stock +76,000

2 Record

dr Retained Earnings (-SE) cr Common Stock (+SE) 76,000

76,000

11-30

Stock Splits

An increase in the number of shares and a corresponding decreasein par value per share. Retained earnings is not affected.

A stock split creates more pieces of the same pie.

Assume that a corporation had 1,000,000 shares of $0.01 par value common stock outstanding before a 2–for–1 stock split.

11-31

Comparison of Distributionsto Stockholders

11-32


Describe the characteristics of preferred stock and analyze

transactions affecting preferred stock.

11-33

Preferred Stock Issuance

National Beverage issued 10,000 shares of its$1 par value preferred stock for $5 per share.

Usually has no voting rights

Usually has a fixed dividend ratePreferred Stock

Priority over common stock

1 Analyze


Cash +50,000

Preferred Stock +10,000 Additional Paid-In Capital Preferred +40,000

2 Record

dr Cash (+A) (10,000 x $5) cr Preferred Stock (+SE) (10,000 x $1) cr Additional Paid-In Capital – Preferred (+SE)

10,00040,000

50,000

11-34

Preferred Stock Dividends

• 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.

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

permanently.

11-35

Assume the preferred stock of Flavoria carries only a current dividend preference and that the company declares dividends totaling $8,000 in 2012 and $10,000 in 2013. How much would

the preferred and common stockholders receive in 2012 and 2013?


11-36


11-37

Assume that Flavoria Company has the same amount of stock outstanding. However assume that dividends are in arrears for 2010 and 2011.

How much would the preferred and common stockholders receive in 2012 and 2013?


11-38


11-39

Retained EarningsTotal cumulative amount of reported net income less any

net losses and dividends declared since the company started operating.

Baker Company incurred a loss of $120,000 in 2013 thatresulted in an Accumulated Deficit in Retained Earnings.

Baker CompanyComparative Balance Sheets (Partial)

For Year Ended December 31

Stockholders’ Equity Common Stock Additional Paid-in Capital Retained Earnings (Deficit) Total Stockholders’ Equity

2014

$ 100,000750,000 50,000900,000

2013

$ 100,000750,000(70,000) 780,000

11-40


Analyze the earnings per share (EPS), return on equity

(ROE), and price/earnings (P/E) ratios.

11-41

Net Income

Average Number of Common Shares OutstandingEPS =

National Beverage’s income for 2011 was $40,800,000 and the average number of shares

outstanding during the year was 46,200,000.

Earnings per share is probably the single most widely watched financial ratio.

Earnings Per Share (EPS)

$40,800,000

46,200,000 SharesEPS = = $0.88 per share

11-42

Return on Equity (ROE)

Net Income

Average Stockholders’ EquityROE =

National Beverage’s income for 2011 was $40,800,000 and the average Stockholders’

Equity was $110,950,000.

Return on equity is the amount earned for each dollar invested by stockholders.

$40,800,000

$110,950,000ROE = = 36.8 percent

11-43

Price/Earnings (P/E) Ratio

Current Stock Price (per share)

Earnings Per Share (annual)P/E =

The P/E ratio is a measure of the value that investors place on a company’s common stock.

National Beverage’s stock price was $15.10 whenthe company reported its 2011 EPS of $0.88.

$ 15.10

$ 0.88P/E = = 17.2

11-44

Comparison of EPS, ROE,and P/E Ratios


Supplement 11A

Owners’ Equity for Other Forms of Business

11-46

Owner’s Equity for a Sole Proprietorship

Only two owner’sequity accounts.

A Withdrawal accountto record the owner’swithdrawals of assets.

A Capital account to recordthe owner’s investmentsand the periodic income

or loss.

Closed to the capital accountat the end of each period.

No separate retainedearnings account.

11-47

Accounting for Owner’s Equityfor a Sole ProprietorshipTo record a $150,000 investment by H. Simpson, the owner.

To record H. Simpson’s $1,000 monthly withdrawal.

11-48

Accounting for Owner’s Equityfor a Sole Proprietorship

To close revenue and expense accounts to capital.

To close the $1,000 monthly drawings to capital.

11-49

Accounting for assets, liabilities, revenues and expenses follows the same accounting principles as

any other form of business.

Accounting for partners’ equity follows the same pattern as for a sole proprietorship.

Separate Capital and Drawings accounts are maintained for each partner.

Accounting for Partnership Equity

11-50


To record investments by partners Able and Bakerwho will divide net income as follows: Able, 60

percent and Baker 40 percent.

To record the partners’ monthly withdrawal.

11-51


To close revenue and expense accounts to partners’ capital.

To close the monthly drawings to partners’ capital.

11-52

Other Business Forms

Limited Liability

Partnership(LLP)

• Protects innocent partners from malpractice or negligence claims.

• Most states hold all partners personally liable for partnership debts.

Limited Liability

Company(LLC)

• Owners have same limited liability feature as owners of a corporation.

• A limited liability company typically has a limited life.


Chapter 11Solved Exercises

M11-4, M11-8, E11-3, E11-6, E11-8, E11-11, E11-19

11-54

M11-4 Analyzing and Recording the Issuance of Common StockTo expand operations, Aragon Consulting issued 1,000 shares of previously unissued common stock with a par value of $1. The price for the stock was $50 per share. Analyze the accounting equation effects and record the journal entry for the stock issuance.

1 Analyze


Cash +50,000

Common Stock +1,000 Additional Paid-InCapital +49,000

2 Record

dr Cash (+A) cr Common Stock (+SE) cr Additional Paid-In Capital (+SE)

1,00049,000

50,000

11-55

M11-4 Analyzing and Recording the Issuance of Common StockWould your answer be different if the par value were $2 per share? If, so, analyze the accounting equation effects and record the journal entry for the stock issuance with a par value of $2.

The effects on total assets and total stockholders’ equity would not differ, but the amounts within the individual stockholders’ equity accounts would differ.

1 Analyze


Cash +50,000

Common Stock +2,000 Additional Paid-InCapital +48,000

2 Record

dr Cash (+A) cr Common Stock (+SE) cr Additional Paid-In Capital (+SE)

2,00048,000

50,000

11-56

M11-8 Determining the Amount of a DividendNetpass Company has 300,000 shares of common stock authorized, 270,000 shares issued, and 100,000 shares of treasury stock. The company’s board of directors declares a dividend of $1 per share of common stock. What is the total amount of the dividend that will be paid?

Dividends are paid on shares that are issued and outstanding.Dividends are not paid on treasury stock.

Shares issued

Less treasury stock

Shares outstanding

Dividend per share

Total dividends paid

270,000

100,000

170,000

x $ 1.00

$170,000

11-57

E11-3 Preparing the Stockholders’ Equity Section of the Balance SheetNorth Wind Aviation received its charter during January 2013. The charter authorized the following capital stock:

During 2013, the following transactions occurred in the order given:a. Issued a total of 40,000 shares of the common stock for $15 per share.b. Issued 10,000 shares of the preferred stock at $16 per share.c. Issued 3,000 shares of the common stock at $20 per share and 1,000 shares of the preferred stock at $16.d. Net income for the first year was $48,000.Required:Prepare the stockholders’ equity section of the balance sheet at December 31, 2013.

11-58

E11-3 Preparing the Stockholders’ Equity Section of the Balance Sheet

North Wind Aviation


December 31, 2013

Contributed Capital:

Preferred Stock, 8%, $10 par, 20,000 shares authorized,

43,000 shares issued and outstanding

$ 430,000

North Wind Aviation


December 31, 2013




Additional Paid-in Capital, Preferred

$ 430,000

66,000

10,000 shares × ($16 – $10) + 1,000 shares × ($16 – $10)

North Wind Aviation


December 31, 2013





Common Stock, $1 par, 50,000 shares authorized,


Additional Paid-in Capital, Common

$ 430,000

66,000

43,000

617,000

40,000 shares × ($15 – $1) + 3,000 shares × ($20 – $1)

North Wind Aviation


December 31, 2013





Common Stock, $1 par, 50,000 shares authorized,


Additional Paid-in Capital, Common

Total Contributed Capital

Retained Earnings

Total Stockholders’ Equity

$ 110,000

66,000

43,000

617,000

836,000

48,000

$ 884,000

11-59

E11-6 Recording and Reporting Stockholders’ Equity TransactionsAvA School of Learning obtained a charter at the start of 2013 that authorized 50,000 shares of no-par common stock and 20,000 shares of preferred stock, par value $10. During 2013, the following selected transactions occurred:a. Collected $40 cash per share from four individuals and issued 5,000 shares of common stock to each.b. Issued 6,000 shares of common stock to an outside investor at $40 cash per share.c. Issued 8,000 shares of preferred stock at $20 cash per share.Required:1. Give the journal entries indicated for each of these transactions.2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2013. At the end of 2013, the accounts reflected net income of $36,000. No dividends were declared.

11-60

E11-6 Recording and Reporting Stockholders’ Equity Transactions

Required:1. Give the journal entries indicated for each of these transactions.

(a) Collected $40 cash per share from four individuals and issued 5,000 shares of common stock to each.

(b) Issued 6,000 shares of common stock to an outside investor at $40 cash per share.

dr Cash (+A) (5,000 x $40 x 4) cr Common Stock (+SE) 800,000

800,000

dr Cash (+A) (6,000 x $40) cr Common Stock (+SE) 240,000

240,000

11-61

E11-6 Recording and Reporting Stockholders’ Equity Transactions

Required:1. Give the journal entries indicated for each of these transactions.

(c) Issued 8,000 shares of preferred stock at $20 cash per share.

dr Cash (+A) (8,000 x $20) cr Preferred Stock (+SE) cr Additional Paid-in Capital, Preferred (+SE)

80,00080,000

160,000

11-62

E11-6 Recording and Reporting Stockholders’ Equity TransactionsRequired:2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2013. At the end of 2013, the accounts reflected net income of $36,000. No dividends were declared.

AvA School of Learning


December 31, 2013


Preferred Stock, $10 par, 20,000 shares authorized,


$ 80,000



December 31, 2013





$ 80,000

80,000

8,000 shares x ($20 - $10)



December 31, 2013





Common Stock, no par, 50,000 shares authorized,


$ 80,000

80,000

1,040,000

(20,000 shares × $40) + (6,000 shares × ($40)



December 31, 2013





Common Stock, no par, 50,000 shares authorized,


Total Contributed Capital

Retained Earnings

Total Stockholders’ Equity

$ 80,000

80,000

1,040,000

1,200,000

36,000

$1,236,000

11-63

E11-8 Recording Treasury Stock Transactions and Analyzing Their ImpactDuring 2013, the following selected transactions affecting stockholders’ equity occurred for Corner Corporation:Feb. 1 Purchased 400 shares of the company’s own common stock at $20 cash per share.Jul. 15 Issued 100 of the shares purchased on February 1, for $30 cash per share.Sept. 1 Issued 60 more of the shares purchased on February 1, for $15 cash per share.Required:1. Show the effects of each transaction on the accounting equation.2. Give the indicated journal entries for each of the transactions.3. What impact does the purchase of treasury stock have on dividends paid?4. What impact does the issuance of treasury stock for an amount higher than the purchase price have on net income?

11-64

E11-8 Recording Treasury Stock Transactions and Analyzing Their ImpactRequired:1. Show the effects of each transaction on the accounting equation.

1 Analyze

Date Assets = Stockholders’ Equity+

Cash - 8,000

Treasury Stock (+xSE) - 8,000

Liabilities

Feb. 1

1 Analyze


Cash - 8,000

Cash + 3,000


Treasury Stock (-xSE) + 2,000Additional Paid-in Capital – treasury + 1,000

Liabilities

Feb. 1

Jul. 15

1 Analyze


Cash - 8,000

Cash + 3,000

Cash + 900


Treasury Stock (-xSE) + 2,000Additional Paid-in Capital – treasury + 1,000

Treasury Stock (-xSE) + 1,200Additional Paid-in Capital – treasury - 300

Liabilities

Feb. 1

Jul. 15

Sept. 1

11-65

E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact

Required:2. Give the indicated journal entries for each of the transactions.

2 Record Feb. 1

dr Treasury Stock (+xSE) cr Cash (-A) (400 x $20) 8,000

8,000

2 Record July 15

dr Cash (+A) (100 x $30) cr Treasury Stock (-xSE, +SE) cr Additional Paid-In Capital – Treasury (+SE)

2,0001,000

3,000

2 Record Sept. 1

dr Cash (+A) (60 x $15)dr Additional Paid-in Capital - Treasury (-SE) cr Treasury Stock (-xSE, +SE) (60 x $20) 1,200

900300

11-66

E11-8 Recording Treasury Stock Transactions and Analyzing Their ImpactRequired:3. What impact does the purchase of treasury stock have on dividends paid?

4. What impact does the issuance of treasury stock for an amount higher than the purchase price have on net income?

Dividends are not paid on treasury stock. Therefore, the total amount of cash dividends paid is reduced when treasury stock is purchased.

The sale of treasury stock for more or less than its original purchase price does not have an impact on net income. The transaction affects only balance

sheet accounts.

11-67

E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained EarningsThe 2012 annual report for Sneer Corporation disclosed that the company declared and paid preferred dividends in the amount of $100,000 in 2012. It also declared and paid dividends on common stock in the amount of $2 per share. During 2012, Sneer had 1,000,000 common shares authorized; 300,000 shares had been issued; 100,000 shares were in treasury stock. The balance in Retained Earnings was $800,000 on December 31, 2011, and 2012 Net Income was $300,000.Required:1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.2. Using the information given above, prepare a Statement of Retained Earnings for the year ended December 31, 2013.

11-68

E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings

1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.

a. Preferred Stock

Declaration

dr Dividends Declared (-SE) cr Dividends Payable (+L) 100,000

100,000

Payment

dr Dividends Payable (-L) cr Cash (-A) 100,000

100,000

11-69



b. Common Stock

Dividends are paid on shares that are issued and outstanding.Dividends are not paid on treasury stock.

Shares issued

Less treasury stock

Shares outstanding

Dividend per share

Total dividends paid

300,000

100,000

200,000

x $ 2.00

$400,000

11-70



b. Common Stock

Declaration

dr Dividends Declared (-SE) cr Dividends Payable (+L) 400,000

400,000

Payment

dr Dividends Payable (-L) cr Cash (-A) 400,000

400,000

11-71


2. Using the information given above, prepare a Statement of Retained Earnings for the year ended December 31, 2013.

Sneer Corporation

Statement of Retained Earnings

For Year Ended December 31, 2013

Retained Earnings, January 1, 2013

Plus: Net Income

Less: Dividends declared on Preferred Stock

Dividends declared on Common Stock

Retained Earnings, December 31, 2013

$ 800,000

300,000

(100,000)

(400,000)

$ 600,000

11-72

E11-19 Determining the Effect of a Stock Repurchase on EPS and ROESwimtech Pools Inc. (SPI) reported the following in its financial statements for the quarter ended March 31, 2013.

During the quarter ended March 31, 2013, SPI reported Net Income of $5,000 and declared and paid cash dividends totaling $5,000.Required:1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31, 2013.

Net Income

Average Number of Common Shares OutstandingEPS =

$5,000

50,000 SharesEPS = = $0.10 per share

11-73

E11-19 Determining the Effect of a Stock Repurchase on EPS and ROE

Required:1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31, 2013.

Net Income

Average Stockholders’ EquityROE =

$5,000

$100,000ROE = = 5.0 percent

11-74


Required:2. Assume SPI repurchases 10,000 of its common stock at a price of $2 per share on April 1, 2013. Also assume that during the quarter ended June 30, 2013, SPI reported Net Income of $5,000, and declared and paid cash dividends totaling $5,000. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2013.

$5,000

40,000 SharesEPS = = $0.125 per share

If 10,000 shares are repurchased on April 1, 2013, only 40,000shares would be outstanding from April 1 – June 30, 2013.

11-75

$5,000

$80,000ROE = = 6.25 percent

10,000 shares are repurchased for $20,000 on April 1, 2013, resulting in a Stockholders’ Equity balance of $80,000 from

April 1 – June 30, 2013.


Required:2. Assume SPI repurchases 10,000 of its common stock at a price of $2 per share on April 1, 2013. Also assume that during the quarter ended June 30, 2013, SPI reported Net Income of $5,000, and declared and paid cash dividends totaling $5,000. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2013.

11-76

E11-19 Determining the Effect of a Stock Repurchase on EPS and ROESwimtech Pools Inc. (SPI) reported the following in its financial statements for the quarter ended March 31, 2013.

Required:3. Based on your calculations in requirements 1 and 2, what can you conclude about the impact of a stock repurchase on EPS and ROE?

By repurchasing stock, a company can increase both its EPS and ROE.

11-77

End of Chapter 11

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 Stockholders’ Equity PowerPoint Authors: Brandy Mackintosh.

Documents

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