UGBA 120AB Chapter 18 With Solutions Spring 2020

Please keep your video screen on during
class.
Please keep your mic muted when not

Classroom speaking.
(Zoom)
For Q&A, please either unmute your mic
Guidelines and respond verbally or type in the chat
box.
Please vote in the Polls provided for

Concept Checks.
bCourses Announcement on Course FLow
Shareholders’ Equity
Chapter 18
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of McGraw-Hill Education.
Questions to get you thinking…
§ What are the elements of shareholders’ equity?
§ What types of corporations are there? Other business structures?
§ What are two reasons a corporation would buy back its stock?
What are three of the elements of shareholders’ equity?
§ Paid in Capital (Common and Preferred Stock and Additional PIC)

§ Retained Earnings (or Accumulated Deficit)
§ Accumulated Other Comprehensive Income (AOCI)
§ Treasury Stock
§ Noncontrolling Interest
What types of corporations are there? Other business

structures?
§ For profit (public and private)

§ Not for profit
§ Partnerships
§ Sole proprietorship
What are two reasons a corporation would buy back its stock?
• Viewed as a way to “distribute” company profits without paying dividends
• Decreasing the supply of shares in the marketplace supports (or enhances)
the price of remaining shares
• Increase earnings per share
• Purchase of a company’s own shares does not create an asset (nor a gain or
loss), so can buy low and sell high
• Taxed at lower capital gains rate for shareholders, vs. dividends as ordinary
income rate
• To offset the increase in shares issued to employees in compensation plans
• To use in mergers and acquisition
• Can thwart takeover attempts (by keeping shares in treasury stock)
The Nature of Shareholders’ Equity
External = Debt + Equity

Financing
Creditors’ Owners’
Interest Interest
Assets − Liabilities = Shareholders’

Equity
Net Assets
Walkthrough a real world
Balance Sheet Shareholders’ Equity Section and
a Shareholders’ Equity Statement
SYMANTEC CORPORATION
CONSOLIDATED BALANCE SHEETS

March 29, March 30,
2013 2012
(In millions, except
par value)
ASSETS
Current assets:
Cash and cash equivalents $ 4,685 $ 3,162
Short-term investments 62 49
Trade accounts receivable, net 1,031 940
Inventories 24 28
Deferred income taxes 198 205
Other current assets 315 249
Total current assets 6,315 4,633
Property and equipment, net 1,122 1,100
Intangible assets, net 977 1,337
Goodwill 5,841 5,826
Other long-term assets 124 124
Total assets $ 14,379 $ 13,020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 334 $ 324
Accrued compensation and benefits 422 416
Deferred revenue 3,496 3,444
Current portion of long-term debt 997 —
Other current liabilities 313 321
Total current liabilities 5,562 4,505
Long-term debt 2,094 2,039
Long-term deferred revenue 521 529
Long-term deferred tax liabilities 403 288
Long-term income taxes payable 318 393
Other long-term obligations 60 94
Total liabilities 8,958 7,848
Commitments and contingencies (Note 8)
Stockholders’ equity:
Symantec Corporation stockholders’ equity:
Common stock (par value: $0.01, 3,000 shares authorized; 912 and 938 shares issued at March 29, 2013 and
March 30, 2012; 698 and 724 shares outstanding at March 29, 2013 and March 30, 2012) 7 7
Additional paid-in capital 7,313 7,773
Accumulated other comprehensive income 197 173
Accumulated deficit (2,096) (2,859)
Total Symantec Corporation stockholders’ equity 5,421 5,094
Noncontrolling interest in subsidiary — 78
Total stockholders’ equity 5,421 5,172
Total liabilities and stockholders’ equity $ 14,379 $ 13,020
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
SYMANTEC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Accumulated
Additional Other Accumulated Total Symantec Noncontrolling Total
Common Stock Comprehensive Stockholders’
Corporation
Paid-In Earnings Stockholders’ Interest in
Shares Amount Capital Income (Deficit) Equity Subsidiary Equity
Balance as of April 2, 2010 798 $ 8 $ 8,990 $ 159 $ (4,609) $ 4,548 $ — $ 4,548
Components of comprehensive income:
Net income (loss) — — — — 597 597 (4) 593
Other comprehensive income — — — 12 — 12 — 12
Issuance of common stock under
employee stock plans 7 — 122 — — 122 — 122
Repurchases of common stock (57) — (870) — — (870) (2) (872)
Tax payments related to restricted stock
units 5 — (28) — — (28) — (28)
Stock-based compensation, net of
estimated forfeitures 5 — 146 — — 146 — 146
Noncontrolling interest in subsidiary — — — — — — 84 84
Dividend declared to noncontrolling
interest in subsidiary — — — — — — (1) (1)
Adjustments to goodwill related to stock
options assumed in business
combination — — 1 — — 1 — 1
Balances as of April 1, 2011 758 8 8,361 171 (4,012) 4,528 77 4,605
Cumulative effect adjustment to retained
earnings (19) (19) — (19)
Beginning balance as adjusted 4,509 77 4,586
Net income — — — — 1,172 1,172 — 1,172
Other comprehensive income — — — 2 — 2 2 4
employee stock plans 11 — 147 — — 147 — 147
Repurchases of common stock (51) (1) (892) — — (893) — (893)
units 6 — (41) — — (41) — (41)
estimated forfeitures — — 161 — — 161 — 161
Income tax benefit from employee stock
transactions — — 30 — — 30 — 30
Dividend declared to noncontrolling
interest in subsidiary — — — — — — (1) (1)
Adjustments to goodwill related to stock
options assumed in business
combination — — 7 — — 7 — 7
Balances as of March 30, 2012 724 7 7,773 173 (2,859) 5,094 78 5,172
Net income — — — — 765 765 — 765
Other comprehensive income (loss) — — — 24 — 24 (2) 22
employee stock plans 17 — 281 — 281 — 281
Repurchase of common stock (49) — (826) — — (826) — (826)
units 5 — (36) — — (36) — (36)
estimated forfeitures — — 165 — — 165 — 165
Income tax benefit from employee stock
transactions — — (11) — — (11) — (11)
Purchase of additional equity interest in
subsidiary — — (33) — (2) (35) (76) (111)
Balances as of March 29, 2013 697 $ 7 $ 7,313 $ 197 $ (2,096) $ 5,421 $ — $ 5,421
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
The Nature of Shareholders’ Equity (continued)
Ownership
earned by the
invested by
shareholders Interest corporation
Paid-in Retained
Capital Earnings
The shareholders’ equity title has several aliases:
rs’ E q ui t y
ers
’
h a re owne lectric) Stockhol
ld S ralE
ho ent (Gene ders
re
Sha estm ) Investme ’
nt
Inv rget (FedEx)
(Ta
de rs’ Shareholders’
khol Shareh
c
Sto Equity t ) Equity olders’
Equity
lM ar
a (Apple
(W )
Exposition Corporation
Balance Sheet
Assets December 31, 2018
($ in millions)
$3,000 Stockholders’ Equity
Liabilities Paid-in capital
$1,000 Capital stock (par): Detailed
Preferred stock, 10%, $10 par, cumulative, nonparticipating $100
Common stock, $1 par 55 Shareholders’
Common stock, dividends distributable 5
Additional paid-in capital:
Equity
Paid-in capital—excess of par, preferred
Paid-in capital—excess of par, common
50
260
Presentation
Paid-in capital—share purchase 8 It’s unlikely that any
Paid-in capital—conversion of bonds 7 one company would
Paid-in capital—stock options 9 have shareholders’
Paid-in capital—restricted stock 5 equity from all of
Paid-in capital—lapse of stock options 1 these sources at any
Total paid-in capital $500 one time.
Retained earnings 1,670
Accumulated other comprehensive income:
Net unrealized holding gains (losses) on investments (85)
Net unrealized gain (loss) on pensions (75)
Deferred gains (losses) on derivatives (4)
Adjustments from foreign currency translation -0- (164
Treasury stock (at cost) (6)
Total shareholders’ equity $2,000
Summarized Shareholders’ Equity Presentation
Preferred stock, 10%, $10 par, cumulative, nonparticipating $100

Common stock, $1 par 60
Additional paid-in capital 340
Accumulated other comprehensive income:
Net unrealized holding losses on investments (85)
Net unrealized loss on pensions (75)
Deferred losses on derivatives (4)
Treasury stock (6)
Total shareholders’ equity $2,000
Financial Reporting Overview
Paid-in Capital
Shareholders’ Equity Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income
Let’s review each element…
Components of Shareholders’ Equity
Paid-in Capital
• Consists primarily of amounts:
– Invested by shareholders when they purchase shares of
stock from the corporation or
– Arise from the company buying back some of those
shares or
– From share-based compensation activities
Retained Earnings
• Earnings accumulated on behalf of the shareholders and not
(yet) distributed as dividends
Treasury Stock
• Shares previously sold to shareholders that are bought back
by the corporation
Concept Check:
Components of Paid-In Capital
Which of the following is not a component of paid-in capital?
a. Amounts invested by shareholders when they purchase
shares of stock from the corporation
b. The cost of shares previously sold to shareholders that
are bought back by the corporation
c. Amounts arising from share-based compensation
activities
d. Amounts arising from share repurchases
USE ZOOM POLL 1
Concept Check:
Components of Paid-In Capital
Which of the following is not a component of paid-in capital?
a. Amounts invested by shareholders when they purchase
shares of stock from the corporation
b. The cost of shares previously sold to shareholders that
are bought back by the corporation
c. Amounts arising from share-based compensation
activities
d. Amounts arising from share repurchases
The correct answer is b.

Shares previously sold to shareholders that were bought back by the
organization are a component of Shareholders’ Equity (Treasury Stock) but
not paid-in capital.
Accumulated Other Comprehensive Income (AOCI)
AOCI includes four types of gains and losses excluded

from net income. AOCI is total nonowner change in
equity or all changes in equity other than those from
transactions with owners (i.e. dividends or repurchases)
Net holding gains

Deferred gains
(losses) on
(losses) from
investments.
derivatives.
Gains (losses) from

Gains (losses)
and amendments to
from foreign
post retirement
currency
benefit plans.
translations.
Statement of Comprehensive Income
We report two attributes of OCI:
– Components of comprehensive income created during the reporting period in the
statement of comprehensive income
– The comprehensive income accumulated (AOCI) over the current and prior periods in the
balance sheet
($ in millions)
Net income $XXX

Other comprehensive income
Net unrealized holding gains (losses) on available-for-sale
investments in debt securities (net of tax) $ X
Gains (losses) from and amendments to postretirement (X)

benefit plans (net of tax)
Deferred gains (losses) on derivatives (net of tax) (X)

Adjustments from foreign currency translation (net of tax) X XX
Comprehensive income $XXX
Typical Presentation Format
—Abercrombie & Fitch
Companies keep track of individual additional paid-in capital accounts
in company records but they report these amounts as a single subtotal
called additional paid-in capital
LO18-2
Statement of Stockholders’ Equity—Walmart
Reports the transactions

that cause changes in
shareholders’ equity
account balances
International Financial Reporting Standards—
Terminology
U.S. GAAP IFRS
Use of the term “reserves” and other terminology differences
Capital stock: Share capital:
Common stock Ordinary shares
Preferred stock Preference shares
Paid-in capital—excess of par, common Share premium, ordinary shares
Paid-in capital—excess of par, preferred Share premium, preference shares
Accumulated other comprehensive income: Reserves:
Net gains (losses) on investments—AOCI Investment revaluation reserve
Net gains (losses) foreign currency
translation—AOCI Translation reserve
{N/A: adjusting P,P, & E to fair value
not permitted} Revaluation reserve
Retained earnings Retained earnings
Total shareholders’ equity Total equity
Presented after liabilities Often presented before liabilities
E18-3. Indicate by letter whether each of the items listed below most likely is reported in the
income statement as Net Income (NI) or in the statement of comprehensive income as Other
Comprehensive Income (OCI).
_____ 1. Increase in the fair value of available-for-sale debt securities

_____ 2. Gain on sale of land
_____ 3. Loss on pension plan assets (actual return less than expected)
_____ 4. Adjustment for foreign currency translation
_____ 5. Increase in the fair value of investments in common stock securities
_____ 6. Loss from revising an assumption related to a pension plan
_____ 7. Loss on sale of patent
_____ 8. Prior service cost in defined benefit pension plan
_____ 9. Increase in the fair value of bonds outstanding due to change in general interest
rates; fair value option
_____ 10. Gain on postretirement plan assets (actual return more than expected)
SOLUTION
E18-3. Indicate by letter whether each of the items listed below most likely is
reported in the income statement as Net Income (NI) or in the statement of
comprehensive income as Other Comprehensive Income (OCI).
OCI 1. Increase in the fair value of available-for-sale debt securities
NI2. Gain on sale of land
OCI3. Loss on pension plan assets (actual return less than expected)
OCI4. Adjustment for foreign currency translation
NI5. Increase in the fair value of investments in common stock securities
OCI6. Loss from revising an assumption related to a pension plan
NI7. Loss on sale of patent
OCI8. Prior service cost in defined benefit pension plan
NI 9. Increase in the fair value of bonds outstanding; fair value option
OCI 10. Gain on postretirement plan assets (actual return more than expected)
Types of Businesses
The Corporate Organization—Advantages
Limited Liability
• A corporation is a separate legal entity, responsible for its own
debts
– The owners are not personally liable for debts of a
corporation
• Shareholders’ liability is limited to the amounts they invest in
the company when they purchase shares
Ease of Raising Capital and Ownership Transfer
• Corporations sell ownership interest in the form of shares of
stock and hence ownership rights are easily transferred
The Corporate Organization—Disadvantages
• The federal government imposes expensive reporting

requirements
– Primarily the required paperwork is intended to ensure adequate
disclosure of information needed by investors and creditors
• Double taxation
– Corporations first pay income taxes on their earnings
– Then, when those earnings are distributed as cash dividends,
shareholders pay personal income taxes on the previously taxed
earnings
Types of Corporations
• Not-for-profit corporations may be owned:
– By the public sector
– By a governmental unit
Examples: Churches, hospitals, universities, and charities; Government-
owned—like the Federal Deposit Insurance Corporation (FDIC)
• Corporations organized for profit may be:
– Publicly held: Stock of publicly held corporations is available for
purchase by the general public
– Privately held: Shares are owned by only a few individuals (perhaps a
family) and are not available to the general public
• Frequently, companies begin as privately held corporations and then go
public. Example: Facebook
Hybrid Organizations
Have characteristics of both regular corporations and partnerships
Limited liability companies
• Owners are not liable for the debts of the business, except to the extent
of their investment (i.e. stock ownership)
• All members can be involved with managing the business without losing
liability protection
• Income and expenses (and taxes on the net) are passed through Double
to the owners as in a partnership taxation
avoided.
• There are no limitations on the number of owners
Limited liability partnerships
• Partners are liable for their own actions but not entirely liable for the
actions of other partners
LO18-3
The Model Business Corporation Act

• Designed to serve as a guide to states in the development of
their corporation statutes
• Variations among state laws influence GAAP pertaining to
shareholders’ equity transactions
The Articles of Incorporation (Corporate Charter)
• Describe:
– The nature and location of the firm’s business activities
– The shares authorized (maximum) and issued (sold)
– The composition of the initial board of directors
Your goal is not to learn diverse procedures caused by peculiarities of state laws, but to
understand the broad concepts of accounting for shareholders’ equity that can be applied to any
specific circumstance.
Incorporation
ü Articles of incorporation are filed with the state.

ü State issues a corporate charter.
ü Shares of stock are issued.
ü Board of directors is elected by shareholders.
ü Board of directors appoints officers.
• Nature and location of business activities

Corporate • Number and classes of shares authorized and issued
Charter • Composition of the board of directors
Fundamental Share Rights
• Shareholders are the owners of a corporation

• Common shares: Ownership rights held by common shareholders,
unless specifically withheld by agreement with the shareholders,
are:
– The right to vote on matters that come before the shareholders,
including the election of corporate directors (1 share, 1 vote)
– The right to share in profits when dividends are declared
– The right to share in the distribution of assets if the company is
liquidated (once creditors and preferred shareholders are paid)
• Preemptive right: Right to maintain one’s percentage share of
ownership when new shares are issued (10% when there are 1000 shares and 10% when
there are 100,000 shares)
Distinguishing Classes of Shares
• If more than one class of shares is authorized by the articles of

incorporation, the specific rights of each must be stated (e.g., the
right to vote, residual interest in assets, and dividend rights)
• Terminologies of different share types:

– Class A, class B, and so on (Tyson Foods)
– Preferred stock, common stock, and class B stock (Hershey’s)
– Common and preferred (HP)
– Capital stock (Reader’s Digest)
– Common and serial preferred (Smucker’s)
Typical Rights of Preferred Shares
Often, shares with certain preferences or features that distinguish
them from common shares are designated as preferred shares
Rights include one or both of the following:
If the board of directors declares Preferred shareholders customarily

dividends, preferred shareholders have a preference over common
will receive the designated dividend shareholders as to the distribution of
before any dividends are paid to assets in the event the corporation is
common shareholders dissolved
Preferred shareholders sometimes have the right of conversion to common stock, a redemption
privilege (option to return shares), or may be redeemed/called by the corporation
Preferred Stock Dividends
• Usually stated as a percentage of the par or stated value of the stock
(e.g. 8%, $100 per share par value = $8 dividend)
• May be cumulative (right to current and prior dividends ) or noncumulative (current only)
• May be partially participating (limit on additional dividends), fully participating (pro
rata share in additional dividends (RARE)), or nonparticipating (no additional dividends)
Unpaid preferred dividends must be paid in full before

any distributions to common stockholders
Dividends in arrears are not liabilities, but the per
share and aggregate amounts must be disclosed
Is It Equity or Is It Debt?
• Preferred shares are somewhat hybrid securities — a cross
between equity and debt
• Equity because preferred shareholders receive dividends each
year the company pays dividends
• Most preferred shares are classified as equity
• Debt because the company is obligated to pay cash (or other
assets) at a fixed or determinable rate in the future
Mandatorily redeemable preferred shares, when the company is

obligated to buy back the shares at a specified future date, must be
reported in the balance sheet as a liability, not as shareholders’ equity
The Concept of Par Value
• Most shares continue to bear arbitrarily designated par values
• Par value has little significance other than historical. Par value
originally indicated the real value of shares. All shares were issued at
that price
• Shares with nominal par amounts (e.g. 1¢, $1) became common to
avoid elaborate statutory rules
• In some early corporation laws, par meant the amount of net assets not available for
distribution to shareholders
• Concepts of par value and legal capital have been eliminated entirely
from most states’ incorporation rules, but previously establish
companies have par value stock
Accounting uses par value concepts, so be aware
Concept Check: Dividends in Arrears
The shareholders’ equity of FSU Industries includes $200,000 of $1 par
common stock and $400,000 par value of 6% cumulative preferred stock.
The board of directors declared cash dividends of $50,000 in 2018 after
paying $20,000 cash dividends in 2017 and $40,000 in 2016. What is the
amount of dividends common shareholders will receive in 2018?
a. $18,000
b. $22,000
c. $26,000
d. $28,000
USE ZOOM POLL 2
Concept Check: Dividends in Arrears
The shareholders’ equity of FSU Industries includes $200,000 of $1 par
common stock and $400,000 par value of 6% cumulative preferred stock.
The board of directors declared cash dividends of $50,000 in 2018 after
paying $20,000 cash dividends in 2017 and $40,000 in 2016. What is the
amount of dividends common shareholders will receive in 2018?
a. $18,000 The correct answer is b:
b. $22,000 Preferred Common

2016 $24,000* $16,000 (remainder)
c. $26,000 2017 20,000** 0
d. $28,000 2018 28,000*** $22,000 (remainder)
* $24,000 current preference (6% × $400,000)

** $24,000 current preference, thus $4,000 dividends in
arrears
*** $4,000 dividends in arrears plus the $24,000 current
preference
$50,000 − 28,000 = $22,000

Terminology: Authorized, Issued, and Outstanding Shares
Authorized shares are the maximum

number of shares of capital stock that Stated at
incorporation
can be sold to the public.
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
stock that stock that
have been never have
sold. been sold.
Terminology: Authorized, Issued, and Outstanding Shares
Outstanding shares are issued

Authorized shares that are owned by
Shares stockholders.
Outstanding Unissued
Issued Shares Shares
Shares
Treasury Treasury shares are issued
Retired shares Shares shares that have been
have the same reacquired by the
status as Retired corporation.
authorized but Shares
unissued shares.
Shares Sold for Cash
• Dow Industrial sells 100,000 of its common shares, $1
par per share, for $10 per share:
($ in thousands)
Journal Entry Debit Credit
Cash 1,000
Common stock 100
Paid-in capital—excess of par 900
• If the shares are no-par, the entry is as follows:

($ in thousands)
Cash 1,000
Common stock 1,000
Shares Issued for Noncash Consideration
• A company might issue its shares for consideration other than cash. That is:
– May be to pay for promotional and legal services with shares rather than
with cash
– Shares may be given in payment for land, or for equipment, or for some
other noncash asset
• Issuance of shares should be recorded at fair value
Best evidence of fair value might be:

• A quoted market price for the shares
• A selling price established in a recent issue of shares for cash
• The amount of cash that would have been paid in a cash
purchase of the asset or service
• An independent appraisal of the value of the asset received
• Other available evidence
LO18-4
Shares Sold for Noncash Consideration
DuMont Chemicals issues 1 million of its common shares, $1 par

per share, in exchange for a custom-built factory for which no
cash price is available. Today’s issue of The Wall Street Journal
lists DuMont’s stock at $10 per share.
($ in millions)
Property, plant, and equipment 10
Common stock 1
• The quoted market price for the shares issued might be

the best evidence of fair value
Please keep your video screen on during
class.
Classroom Please keep your mic muted when not

(Zoom) speaking.
Guidelines
For Q&A, please either unmute your mic
and respond verbally or type in the chat
box.
Today and beyond…
• Remainder of Chapter 18
• If we do not finish the whole chapter, I’ll record it and post it during
break for your viewing
• Please use the Discussion boards for any questions not addressed in
class
• Look for more updates from me via bCourses Announcements
• Stay safe and get plenty of rest over Spring Break!
• Now, onto Class…

More Than One Security Issued for a Single Price
• Cash received usually is the sum of the separate

market values of the two securities
• If only one security’s value is known, the second
security’s market value is inferred from the total
selling price
More Than One Security Sold for a Single Price
AP&P issues 4 million of its common shares, $1 par per share, and 4
million of its preferred shares, $10 par, for $100 million. Today’s
issue of The Wall Street Journal lists AP&P’s common at $10 per
share. There is no established market for the preferred shares.
4 million shares @ $10 / sh. = $40 million ($ in millions)
Cash 100
Common stock 4
Paid-in capital—excess of par, common 36
Preferred stock (4 million shares x $10 par) 40
Paid-in capital—excess of par, preferred 20
$100 million − $40 million = $60 million

Share Issue Costs
§ Registration fees
§ Underwriter commissions
§ Printing and clerical costs
§ Legal and accounting fees
§ Promotional costs
Share issue costs reduce net proceeds

from selling shares, resulting in a lower
amount of paid-in capital.
Share Issue Costs
In 2018, AveXis, Inc., sold 4,509,840 shares of its $0.0001 par common stock at
$102 per share. The company received net proceeds from the public offering of
$431,857,000, after deducting underwriting discounts and commissions and
other offering expenses. AveXis’s entry to record the sale was as follows:
($ in millions)
4,509,840
shares x $102 Journal Entry Debit Credit
par =
$460,003,680 – Cash 431,857,000
$451 stock at Common stock (4,509,840 x $0.0001) 451
par = Paid-in capital—excess of par
$28,147,131
431,856,549
share issue
costs • Reduce the net cash proceeds from selling the shares and thus
paid-in capital—excess of par
• The cash proceeds is the net amount received after paying
share issue costs 18-57
Concept Check:
Shares Issued for Cash
Beamer Co. issued 50,000 shares of $0.01 par common stock
for $230,000. Which of the following will Beamer Co. record
as part of the journal entry for this transaction:
a. Credit to Paid-in capital-excess of par for $230,000
b. Credit to Common stock for $229,500
c. Credit to Paid-in capital-excess of par for $500
d. Credit to Common stock for $500
USE ZOOM POLL 3
18-59
Concept Check:
Shares Issued for Cash
Beamer Co. issued 50,000 shares of $0.01 par common stock
for $230,000. Which of the following will Beamer Co. record
as part of the journal entry for this transaction:
a. Credit to Paid-in capital-excess of par for $230,000
b. Credit to Common stock for $229,500
c. Credit to Paid-in capital-excess of par for $500
d. Credit to Common stock for $500
The correct answer is d.
The entry to record this transaction would be as follows:
Cash 230,000
Common stock 500*
Paid-in capital-excess of par 229,500
*(50,000 shares x $0.01) 18-60
E18-4. The following is a news item reported by Reuters:
WASHINGTON, Jan 29 (Reuters)—Wright Medical Group, a
maker of reconstructive implants for knees and hips, on
Tuesday filed to sell 3 million shares of common stock.
In a filing with the U.S. Securities and Exchange Commission, it

said it plans to use the proceeds from the offering for general
corporate purposes, working capital, research and
development, and acquisitions.
After the sale there will be about 31.5 million shares

outstanding in the Arlington, Tennessee-based company,
according to the SEC filing.
Wright shares closed at $17.15 on Nasdaq. "National Association

of Securities Dealers Automated Quotations"
The common stock of Wright Medical Group has a par of $0.01 per share.
Prepare the journal entry to record the sale of the shares assuming the
price existing when the announcement was made and ignoring share
issue costs.
E18-4. SOLUTION
Cash (3 million shares x $17.15 per share) 51,450,000
Common stock (3 million shares x $.01 par per share) 30,000

Paid-in capital—excess of par (remainder) 51,420,000
Share Buybacks – WHY?
• Viewed as a way to “distribute” company profits without paying dividends
• Decreasing the supply of shares in the marketplace supports (or enhances) the price of
remaining shares
• Increase earnings per share
• Purchase of a company’s own shares does not create an asset (nor a gain or loss), so can buy low
and sell high
• Taxed at lower capital gains rate for shareholders, vs. dividends as ordinary income rate
• To offset the increase in shares issued to employees in compensation plans (see Microsoft Note
below)
• To use in mergers and acquisition
• Can thwart takeover attempts (by keeping shares in treasury stock)
Share Buybacks: Decision Maker’s Perspective
Stock dividend
Shares might be Proposed merger
reacquired
to distribute in a Defense against a hostile
takeover
How to account for the

buyback?
Shares can be Shares can be called

formally retired treasury stock
Comparison of Share Retirement and Treasury
Stock Accounting—Share Buybacks
American Semiconductor’s balance sheet included the following:
Shareholders’ Equity ($ in millions)
Common stock, 100 million shares at $1 par $ 100
Paid-in capital—share repurchase 2
Reacquired 1 million of its common shares
When cash is paid to retire stock, the effect is to

decrease both cash and shareholders’ equity
The size of the company literally is reduced.
Market Capitalization = Shares outstanding x Price per share
Stock Accounting—Share Buybacks, Case 1
We credit PIC—share repurchase for the amount
needed to make debits equal credits in the entry.
We reduce common stock and PIC—excess of par the same amounts
they were increased when the shares were issued:
Cash 10
Common stock 1
PIC—excess of par 9
Case 1: Shares repurchased at $7 per share (less than original of $10)

Retirement
Common stock ($1 par × 1 million shares) Effectively 1
Paid-in capital—excess of par ($9 per sh.) eliminating 9
the shares
Paid-in capital—share repurchase (difference) 3
Cash 7
Treasury Stock
Treasury stock (cost) 7
Cash 7
Stock Accounting—Share Buybacks, Case 2
*Because there is a $2 million credit balance.
OR
Case 2: Shares repurchased at $13 per share (more than original of $10)
Retirement
Common stock ($1 par × 1 million shares) Effectively 1
Paid-in capital—excess of par ($9 per sh.) eliminating 9
Paid-in capital—share repurchase* the shares 2
and paying a
Retained earnings (difference) “dividend” 1
Cash 13
Treasury Stock
Cash 13
Accounting for Treasury Stock (T-stock)
• Purchase of treasury stock is viewed as a temporary reduction

of shareholders’ equity
• Cost of acquiring the shares is “temporarily” debited to the
treasury stock account
• Shares are considered to be issued, but not outstanding
• Purchase of treasury stock and its subsequent resale is
considered to be a “single transaction”
• This approach to accounting for treasury stock is referred to as
the “cost method”
• T-stock creates financial flexibility since t-shares can be sold to
raise cash if needed
Balance Sheet Effect
Formally retiring shares restores the balances in both the Common

stock account and Paid-in capital—excess of par to what those
Any net in assets balances would have been if the shares never had been issued at all
Paid-in capital—share
repurchase
Resulting from the sale and
subsequent repurchase is
reflected as
A reduction in
retained earnings
Any net in assets Any net decrease in assets resulting from the sale and subsequent
repurchase is reflected as a reduction in retained earnings.
Reporting Share Buyback in the Balance Sheet
American Semiconductor’s balance sheet included the following:
Shareholders’ Equity ($ in millions)
Common stock, 100 million shares at $1 par $ 100
Case 2: Reacquired 1 million of its common shares at $13 per share
($ in millions)
Shares Retired Treasury Stock
Shareholders’ Equity
Paid-in capital:
Common stock, 100 million shares at $1 par (1 less) $99 $100
Paid-in capital—excess of par (9 less) 891 900
Paid-in capital—share repurchase (2 less) 2
Retained earnings (1 less) 1,999 2,000
Less: Treasury stock, 1 million shares (at cost) (13)
Total shareholders’ equity $2,989 $2,989
Resale of Shares
• Subsequent sale of shares after shares are retired is recorded

exactly like any sale of shares
• Resale of treasury shares is viewed as the consummation of the

“single transaction” begun when the treasury shares were
purchased
• Allocating the cost of treasury shares occurs when the shares are
resold
• No income statement impact: A corporation’s buying and selling of

its own shares are transactions between the corporation and its
owners and not part of the earnings process
Stock Accounting—Subsequent Sale of Shares
American Semiconductor sold 1 million shares after
reacquiring shares at $13 per share.
Retirement
Sold 1 million shares
Case A: Shares sold at $14 per share
Cash 14
Common stock (par) 1
Treasury Stock
Cash 14
Comparison of Share Retirement and Treasury Stock
Accounting—Subsequent Sale of Shares (continued)
American Semiconductor sold 1 million shares after reacquiring
shares at $13 per share.
Retirement
Case B: Shares sold at $10 per share
Cash 10
Common stock (par) 1
Treasury Stock
Cash 10
Retained earnings (to balance) 1
Paid-in capital—Share repurchase* 2
*Because there is a $2 million credit balance to begin with.
Could alsoCopyright
be a© 2018
debit to Retained earnings if no PIC.
McGraw-Hill Education. All rights reserved. No reproduction or distribution without prior written consent of McGraw-Hill Education.
Concept Check: Treasury Stock Accounting and Subsequent
Sale of Shares
In 2018, Broyles, Inc. reacquired 3,000 shares of its common stock at $55 per
share. In 2019, Broyles, Inc. reissued 1,000 shares of the stock at $75 per share.
Which of the following would be included in the 2019 entry?
a. Credit Cash for $165,000
b. Debit Treasury Stock for $75,000
c. Credit Treasury Stock for $55,000
d. Credit Cash for $75,000
SEE ZOOM POLL 4
Concept Check: Treasury Stock Accounting and Subsequent
Sale of Shares
In 2018, Broyles, Inc. reacquired 3,000 shares of its common stock at $55 per
share.
In 2019, Broyles, Inc. reissued 1,000 shares of the stock at $75 per share.
Which of the following would be included in the 2019 entry?
a. Credit Cash for $165,000
b. Debit Treasury Stock for $75,000
c. Credit Treasury Stock for $55,000
d. Credit Cash for $75,000 The correct answer is c:
2018
Treasury Stock 165,000
Cash 165,000
2019
Cash 75,000 ($75x1000)
Treasury stock ($165M/3 or $55x1000)) 55,000
PIC—share repurchase (difference) 20,000
Concept Check: Reporting Share Buyback
The balance sheet of Chunn Industries included the following shareholders’ equity section
at December 31, 2018 ($ in millions):
Common stock ($1 par value, authorized 100M shares,

issued and outstanding 90M shares) $ 90
Retained earnings 280
Total shareholders’ equity $910
On January 5, 2019, Chunn purchased and retired 1 million shares for $9 million.
Immediately after the purchase of the shares, the balances in the paid-in capital—excess
of par and retained earnings accounts are:
Paid-in capital Retained

—excess of par earnings
a. $540 $280
b. $540 $272
USE ZOOM POLL 5
c. $534 $278
d. $532 $280
Concept Check: Reporting Share Buyback
The balance sheet of Chunn Industries included the following shareholders’ equity section
at December 31, 2018 ($ in millions):
Common stock ($1 par value, authorized 100M shares,

issued and outstanding 90M shares) $ 90 Originally $7
per share.
Paid-in capital—excess of par 540 (90+540)/90
Total shareholders’ equity $910
On January 5, 2019, Chunn purchased and retired 1 million shares for $9 million.
Immediately after the purchase of the shares, the balances in the paid-in capital—excess
of par and retained earnings accounts are:
Paid-in capital Retained The correct answer is c. Retirement entry is:

—excess of par earnings
Common stock (cost) 1
a. $540 $280 PIC—excess of par ($540/90) 6
b. $540 $272 Retained earnings (difference) 2
c. $534 $278 Cash 9
d. $532 $280
E18-12. In 2018, Western Transport Company entered
into the treasury stock transactions described
below.
In 2016, Western Transport had issued 140 million
shares of its $1 par common stock at $17 per share.
Prepare the appropriate journal entry for each of
the following transactions:
1. On January 23, 2018, Western Transport
reacquired 10 million shares at $20 per share.
2. On September 3, 2018, Western Transport sold 1
million treasury shares at $21 per share.
3. On November 4, 2018, Western Transport sold 1
million treasury shares at $18 per share.
E18-12. SOLUTION
1. January 23, 2018 ($ in millions)
Treasury stock (10 million shares x $20) 200
Cash 200
2. September 3, 2018
Cash (1 million shares x $21) 21
Paid-in capital—share repurchase (remainder) 1
3. November 4, 2018
Cash (1 million shares x $18) 18
Paid-in capital—share repurchase
(available balance from 2.) 1
Retained earnings (remainder) 1
Characteristics of Retained Earnings
• Retained earnings represents a corporation’s accumulated,
undistributed net income (or net loss)
• A more descriptive title would be reinvested earnings
Retained earnings
Credit balance Debit balance
Indicates a dollar amount of Indicates deficit

assets previously earned and
reinvested (i.e. not paid in
What could cause this?
dividends) by the firm
Retained Earnings
Represents the undistributed earnings of the
company since its inception.
Balance January 1, 2017 $ 106,500

Net income 25,000
Cash dividends (10,000)
Balance December 31, 2017 $ 121,500
§ The statement of retained earnings may also contain the

correction of an accounting error that occurred in the financial
statements of a prior period, called a prior period adjustment
§ Any restrictions on retained earnings must be disclosed in the
notes to the financial statements (e.g. unavailable for dividends)
E18-17. Shown below in T-account format are the changes affecting the
retained earnings of Brenner-Jude Corporation during 2018. At January 1,
2018, the corporation had outstanding 105 million common shares, $1 par
per share.
Retained Earnings ($ in millions)
90 Beginning balance
Retirement of 5 million common
shares for $22 million 2
88 Net income for the year
Declaration and payment of a $0.33
per share cash dividend 33
Declaration and distribution of a
4% stock dividend 20
123 Ending balance
1. From the information provided by the account changes, you should be able to
recreate the transactions that affected Brenner-Jude’s retained earnings during
2018. Prepare the journal entries that Brenner-Jude must have recorded during
the year for these transactions.
2. Prepare a statement of retained earnings for Brenner-Jude for the year ended
2018.
E18-17. SOLUTION
Retirement of common shares ($ in millions)

Common stock (5 million shares x $1 par per share) 5
Paid-in capital—excess of par ($22 – 5 – 2) 15
Retained earnings (given) 2
Cash (given) 22
Net income closed to retained earnings

Income summary 88
Declaration and payment of a cash dividend

Cash 33
Declaration and distribution of a stock dividend

Common stock ([105 – 5 retired] x 4%) million shares at $1 par per share) 4
Paid-in capital—excess of par (difference) 16
E18-17. SOLUTION
BRENNER-JUDE CORPORATION
Statement of Retained Earnings
FOR THE YEAR ENDED DECEMBER 31, 2018
($ in millions)
Balance at January 1 $90
Net income for the year 88
Deductions:
Retirement of common stock (2)
Cash dividends of $.33 per share (33)
4% stock dividend (20)
Balance at December 31 $123
Dividends
• Distributions of assets the company has earned on behalf of
its shareholders
• Most companies view retained earnings as the amount
available for dividends
• If dividend exceeds the balance in retained earnings, the
excess is referred to as a liquidating dividend. Management
is returning to shareholders a portion of their investments
(RARE)
• Any portion of a dividend not representing a distribution of
earnings should be debited to additional paid-in capital
Cash Dividends
• No legal obligation exists for paying dividends to shareholders

• Liability is not recorded until a company’s board of directors
votes to declare a dividend, though, corporations ordinarily try
to maintain a stable dividend pattern over time
Directors declare Retained Liability is

a cash dividend earnings is recorded
reduced
Before the payment actually can be made, a listing must be

assembled of shareholders entitled to receive the dividend
Cash Dividends (continued)
• Date of record
– Stated specific date as to when the determination
will be made of the recipients of the dividends
– Registered owners of shares of stock on this date
are entitled to receive the dividend
To be a Investor must purchase the shares

registered before the ex-dividend date
owner
Usually is two business days before

the date of record
Cash Dividends (concluded)
On June 1, the board of directors of Craft Industries declares a
cash dividend of $2 per share on its 100 million shares, payable
to shareholders of record June 15, to be paid July 1:
($ in millions)
June 1—Declaration Date
Cash dividends payable 200
June 13—Ex-Dividend Date
No entry
June 15—Date of Record
No entry
July 1—Payment Date
Cash dividends payable 200
Cash 200
Dividends on Preferred Shares
The shareholders’ equity section of Corbin Enterprises includes the items shown below. The
board of directors declared dividends of $360,000, $500,000, and $700,000 in its first three
years of operation—2017, 2018, and 2019 respectively.
Common stock $ 3,000,000

Paid-in capital—excess of par, common 9,800,000
Preferred stock, 8% 6,000,000
Paid-in capital—excess of par, preferred 780,000
Determine the amount of dividends to be paid to preferred and common shareholders in each
of the three years, assuming that the preferred stock is cumulative and nonparticipating.
Preferred Common
Annual
Preferred 2017 (still owe 120K) $360,000 $0
dividend: 2018 (still owe 100K) 500,000 0
6Mx8%=
480,000 2019 (caught up, 580,000 120,000
excess to common) (700K-580K)
Concept Check: Dividends
Ellsworth Corporation was organized on January 1, 2018. The firm was
authorized to issue 150,000 shares of $1 par common stock. During 2018,
Ellsworth had the following transactions relating to shareholders’ equity:
• Issued 20,000 shares of common stock at $7 per share
• Issued 20,000 shares of common stock at $8 per share
• Reported a net income of $100,000
• Paid dividends of $50,000
• Purchased 3,000 shares of treasury stock at $10
What was total shareholders’ equity at the end of 2018?
a. $270,000
b. $350,000
SEE ZOOM POLL 6
c. $320,000
d. $380,000
Concept Check: Dividends
Ellsworth Corporation was organized on January 1, 2018. The firm was
authorized to issue 150,000 shares of $1 par common stock. During 2018,
Ellsworth had the following transactions relating to shareholders’ equity:
• Issued 20,000 shares of common stock at $7 per share (140K)
• Issued 20,000 shares of common stock at $8 per share (160K)
• Reported a net income of $100,000
• Paid dividends of $50,000
• Purchased 3,000 shares of treasury stock at $10 (30K)
What was total shareholders’ equity at the end of 2018?
The correct answer is c:
a. $270,000
b. $350,000 Issue of stock (20,000 × $7) $ 140,000
c. $320,000 Issue of stock (20,000 × $8) 160,000
Net income 100,000
d. $380,000 Dividends (50,000)
Treasury stock (3,000 × $10) (30,000)
$320,000
The Remainder of Chapter 18
see extra Zoom recording in bCourses

Stock Dividends
• Distribution of additional shares of stock to current

shareholders of the corporation
• Affects neither the assets (e.g. cash) nor the liabilities of the
firm
• Shareholders’ proportional interest in the firm remains
unchanged (e.g. was 2% ownership, remains 2% ownership)
Stock Dividends (continued)
Craft declares and distributes a 10% common stock dividend (10
million shares) of its $1 par common stock when the market
value is $12 per share.
($ in millions)
Common stock 10
10 million shares at $12 per share (market value)

10 million shares at $1 par per share
Remainder
Reasons for Stock Dividends
• Company tries to give shareholders the illusion that they are

receiving a real dividend
• Take advantage of the accepted accounting practice of capitalizing
retained earnings (i.e. buying their own stock with earned capital)
• Reduce an existing balance in retained earnings—otherwise
available for cash dividends—so it can reinvest the earned assets
Stock Market Reaction to Stock Distributions
• Market price per share will decline in proportion to the increase in
the number of shares distributed in a stock dividend (supply and demand)
• Early accounting rule-makers erroneously felt that per share market
prices do not adjust in response to an increase in the number of
shares and recorded “small” stock dividends (<25%) as if cash
dividends at market value
• A corporation cannot increase its market value simply by

distributing additional stock certificates
($ market capitalization = $ share price down x # shares outstanding up)
Same whole pie, no matter how you slice it
Stock Splits
Objective:
• To induce the per share market price decline that follows
• The motivation for reducing the per share market price is to
increase the stock’s marketability by making it attractive to a
larger number of potential investors
Example:
• After a company declares a 100% stock dividend on 100 million
shares of common stock, with a per share market price of $12, it
then has 200 million shares, each with an approximate market
value of $6
Stock Splits (continued)
• A stock distribution of 25% or higher can be accounted for in one of two ways:
– As a “large” stock dividend (stock split effected in the form of a stock dividend)
or
– As a stock split (thus, a 100% stock dividend could be labeled a 2-for-1 stock split
and accounted for as such)
• Accounting treatment of a stock split is to make no journal entry
• Since the total par represents twice as many shares in a 2-for-1 stock split, the
par value per share will reduce by one-half
• All records that refer to the previous amount must be changed to reflect the
new amount
• Account for the “large” stock distribution as stock split effected in the form
of a stock dividend avoids the change to the records by recording an entry to
change the balance in the stock account
Stock Split Effected in the Form of a Stock Dividend
(to avoid changing the par value per share)
Craft declares and distributes a 2-for-1 stock split effected in the
form of a 100% stock dividend (100 million shares) when the
market value of the $1 par common stock is $12 per share:
100 million shares at $1 par per share
($ in millions)
Common stock 100
OR 100 million shares × $1 par per share

($ in millions)
Common stock 100
Stock Split Disclosure—Netflix
Dropped the price of Netflix shares from about

$700 down to about $100
Reverse Stock Split
• Occurs when a company decreases its outstanding shares

• No journal entry is necessary
• Market price per share theoretically would increase
• Often done by struggling companies trying to increase the stock price,
so they are not delisted If a company trades for less than $1 per
share for 30 consecutive trading days
For example: After a 1-for-4 reverse stock split, for example, 100 million
shares, $1 par per share, would become 25 million shares, $4 par per share.
Fractional Shares
• Typically, a stock dividend or stock split results in some

shareholders being entitled to fractions of whole shares
• Cash payments usually are made when shareholders are entitled to
fractions of whole shares
• Called “cash in lieu of payments”
For example, for a 25% stock dividend, if the market price at declaration
is $12 per share, the shareholder with 15 shares would receive 3
additional shares (15 x .25 = 3 ¾) and $9 in cash ($12 × 3/4).
E18-20. Hanmi Financial Corporation is the parent company of
Hanmi Bank. The company’s stock split was announced in the
following wire:
LOS ANGELES Jan. 20 BUSINESS WIRE —Hanmi Financial Corporation
(Nasdaq), announced that the Board of Directors has approved a two-for-
one stock split, to be effected in the form of a 100 percent common stock
dividend. Hanmi Financial Corporation stockholders of record at the
close of business on January 31 will receive one additional share of
common stock for every share of common stock then held. Distribution of
additional shares issued as a result of the split is expected to occur on or
about February 15.
At the time of the stock split, 24.5 million shares of common stock, $.001 par per
share, were outstanding.
1. Prepare the journal entry, if any, that Hanmi recorded at the time of the stock
split.
2. What is the probable motivation for declaring the 2-for-1 stock split to be
effected by a dividend payable in shares of common stock?
3. If Hanmi’s stock price had been $36 at the time of the split, what would be its
approximate value after the split (other things equal)?
E18-20. SOLUTION
1. Paid-in capital—excess of par** 24,500
Common stock (24.5 million shares* x $.001 par per share) 24,500
* 100% x 24.5 million shares = 24.5 million shares

**alternatively, retained earnings may be debited
2. If the per share par value of the shares is not to be changed, the stock
distribution is referred to as a "stock split effected in the form of a stock dividend."
In that case, the journal entry in 1. increases the common stock account by the par
value of the additional shares. This prevents the increase in shares from reducing
(by half in this case) the par per share. No adjustment to par is needed.
Could reduce the stock price, as there is now more supply.
3. If Hanmi’s stock price had been $36 at the time of the split, its approximate value
after the split (other things equal) would be $18. The same pie is sliced into twice
as many pieces, so each piece is worth half as much (and is more affordable).
Concept Check: Cash and Stock Dividends
The following data were reported in the shareholders’ equity section of the Brandon
Industries’ comparative balance sheets for the years ended December 31 ($ in
millions):
2018 2017
Common stock, $1 par per share $306 $300
Paid-in capital—excess of par 174 150
Retained earnings 314 300
During 2018, Brandon declared and paid cash dividends of $45 million. The company
also issued a stock dividend. No other changes occurred in shares outstanding during
2018. What was Brandon’s net income for 2018?
a. $14 million
b. $59 million HINT: LET’S RECONCILE YEAR OVER YEAR RETAINED EARNINGS.
c. $65 million WHAT BESIDES NET INCOME CHANGES RETAINED EARNINGS?
d. $89 million
Concept Check: Cash and Stock Dividends
The following data were reported in the shareholders’ equity section of the Brandon
Industries’ comparative balance sheets for the years ended December 31 ($ in
millions):
2018 2017
Common stock, $1 par per share $306 $300
Paid-in capital—excess of par 174 150
Retained earnings 314 300
During 2018, Brandon declared and paid cash dividends of $45 million. The company
also issued a stock dividend. No other changes occurred in shares outstanding during
Retained earnings (total)
2018. What was Brandon’s net income for 2018? 30
Common stock ($306 − 300) 6
a. $14 million
PIC ($174 − 150) 24
b. $59 million
The correct answer is d:
c. $65 million
RE (2017) 300
d. $89 million Net income ? 89
Cash dividend (45)
Stock dividend (30)
RE (2018) 314
Convertible Preferred Shares Redeemable Preferred Shares
• Preferred shares are • Preferred shares are
convertible to common redeemable for cash by the
shares at the investor's issuing company at their
discretion. discretion.
• Similar to converting bonds to • Like bonds being redeemed by
common stock. the company.
• There is a set conversion • There is a set cash redemption
value when the preferred price when the preferred stock
stock is issued. is issued.
The details of each would be spelled out in the specific preferred stock offering and
will differ from company to company.
E18-8. Ozark Distributing Company is primarily engaged in the wholesale distribution of consumer products in
the Ozark Mountain regions. The following disclosure note appeared in the company’s 2018 annual report:
Note 5. Convertible Preferred Stock (in part):
The Company has the following Convertible Preferred Stock outstanding as of September 2018: 1. What amount of dividends is paid
Date of issuance: June 17, 2015 annually to a preferred shareholder
owning 100 shares of the Series A
Optionally redeemable beginning: June 18, 2017 preferred stock?
Par value (gross proceeds): $2,500,000

Number of shares: 100,000 2. If dividends are not paid in 2019 and
2020, but are paid in 2021, what amount
Liquidation preference per share: $25.00 of dividends will the shareholder
receive?
Conversion price per share: $30.31
Number of common shares in which to be
converted: 82,481 3. If the investor chooses to convert
the shares in 2019, how many shares of
Dividend rate: 6.785% common stock will the investor receive
for his/her 100 shares?
The Preferred Stock is convertible at any time by the holders into a number of shares of Ozark’s common stock
equal to the number of preferred shares being converted times a fraction equal to $25.00 divided by the
conversion price ($30.31 above). The conversion prices for the Preferred Stock are subject to customary 4. If Ozark chooses to redeem the
adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. shares on June 18, 2019, what amount
Cumulative dividends for the Preferred Stock are payable in arrears, when, as, and if declared by the Board of will the investor be paid for his/her 100
shares?
Directors, on March 31, June 30, September 30, and December 31 of each year.
The Preferred Stock is optionally redeemable by the Company beginning on various dates, as listed above, at
redemption prices equal to 112% of the liquidation preference. The redemption prices decrease 1% annually
thereafter until the redemption price equals the liquidation preference, after which date it remains the
liquidation preference.
annually to a preferred shareholder
Date of issuance: June 17, 2015 owning 100 shares of the Series A
preferred stock?
Optionally redeemable beginning: June 18, 2017
At issuance: $2,500,000 ÷ 100,000
Par value (gross proceeds): $2,500,000 shares = $25 par value per share
Number of shares: 100,000 Annually: $25 x 100 shares x 6.785%
dividend rate= $169.625 payment
Liquidation preference per share: $25.00
2. If dividends are not paid in 2019 and
Conversion price per share: $30.31 2020, but are paid in 2021, what amount
of dividends will the shareholder
Number of common shares in which to be receive?
converted: 82,481
Dividend rate: 6.785% 3. If the investor chooses to convert
the shares in 2019, how many shares of
The Preferred Stock is convertible at any time by the holders into a number of shares of Ozark’s common stock common stock will the investor receive
for his/her 100 shares?
conversion price ($30.31 above). The conversion prices for the Preferred Stock are subject to customary
adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. 4. If Ozark chooses to redeem the
Cumulative dividends for the Preferred Stock are payable in arrears, when, as, and if declared by the Board of shares on June 18, 2019, what amount
Directors, on March 31, June 30, September 30, and December 31 of each year. will the investor be paid for his/her 100
The Preferred Stock is optionally redeemable by the Company beginning on various dates, as listed above, at shares?
preferred stock?
Optionally redeemable beginning: June 18, 2017
At issuance: $2,500,000 ÷ 100,000
Par value (gross proceeds): $2,500,000 shares = $25 par value per share
Conversion price per share: $30.31 2020, but are paid in 2021, what amount
of dividends will the shareholder
Number of common shares in which to be receive?
converted: 82,481 Paid in 2021: Cumulative, therefore
$169.625 x 3 years = $508.875 payment
Dividend rate: 6.785%
3. If the investor chooses to convert
The Preferred Stock is convertible at any time by the holders into a number of shares of Ozark’s common stock the shares in 2019, how many shares of
common stock will the investor receive
equal to the number of preferred shares being converted times a fraction equal to $25.00 divided by the for his/her 100 shares?
adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock.
Cumulative dividends for the Preferred Stock are payable in arrears, when, as, and if declared by the Board of 4. If Ozark chooses to redeem the
Directors, on March 31, June 30, September 30, and December 31 of each year. shares on June 18, 2019, what amount
The Preferred Stock is optionally redeemable by the Company beginning on various dates, as listed above, at will the investor be paid for his/her 100
shares?
Optionally redeemable beginning: June 18, 2017 preferred stock?
At issuance: $2,500,000 ÷ 100,000 shares =
Par value (gross proceeds): $2,500,000 $25 par value per share
Conversion price per share: $30.31 2020, but are paid in 2021, what amount of
dividends will the shareholder receive?
converted: 82,481 Paid in 2021: Cumulative, therefore
$169.625 x 3 years = $508.875 payment
Dividend rate: 6.785%
3. If the investor chooses to convert the
shares in 2019, how many shares of
The Preferred Stock is convertible at any time by the holders into a number of shares of Ozark’s common stock common stock will the investor receive for
equal to the number of preferred shares being converted times a fraction equal to $25.00 divided by the his/her 100 shares?
If converted: $25 ÷ $30.31 conversion price
adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. x 100 shares = 82.48 shares of common
Cumulative dividends for the Preferred Stock are payable in arrears, when, as, and if declared by the Board of stock (.48 of share likely paid in cash)
Directors, on March 31, June 30, September 30, and December 31 of each year.
4. If Ozark chooses to redeem the shares
The Preferred Stock is optionally redeemable by the Company beginning on various dates, as listed above, at on June 18, 2019, what amount will the
redemption prices equal to 112% of the liquidation preference. The redemption prices decrease 1% annually investor be paid for his/her 100 shares?
preferred stock?
Optionally redeemable beginning: June 18, 2017 At issuance: $2,500,000 ÷ 100,000 shares =
$25 par value per share
Par value (gross proceeds): $2,500,000
Annually: $25 x 100 shares x 6.785%
Number of shares: 100,000
Liquidation preference per share: $25.00 2020, but are paid in 2021, what amount of
dividends will the shareholder receive?
Conversion price per share: $30.31 Paid in 2021: Cumulative, therefore
$169.625 x 3 years = $508.875 payment
3. If the investor chooses to convert the
converted: 82,481 shares in 2019, how many shares of
common stock will the investor receive for
Dividend rate: 6.785% his/her 100 shares?
If converted: $25 ÷ $30.31 conversion price
The Preferred Stock is convertible at any time by the holders into a number of shares of Ozark’s common stock x 100 shares = 82.48 shares of common
stock (.48 of share likely paid in cash)
conversion price ($30.31 above). The conversion prices for the Preferred Stock are subject to customary 4. If Ozark chooses to redeem the shares
on June 18, 2019, what amount will the
adjustments in the event of stock splits, stock dividends and certain other distributions on the Common Stock. investor be paid for his/her 100 shares?
Cumulative dividends for the Preferred Stock are payable in arrears, when, as, and if declared by the Board of Redemption price per share: $27.50 = $25
Directors, on March 31, June 30, September 30, and December 31 of each year. x 110% (original 112% reduced by 2% for 2
years after the initial redemption date).
The Preferred Stock is optionally redeemable by the Company beginning on various dates, as listed above, at $27.50 x 100 = $2750
Reading and Exercises
§ Read Chapter 18
§ In class exercises: E18-3, E18-4, E18-8, E18-12, E18-17, E18-20
§ Discussion exercises: BE18-1, BE18-7, BE18-10, BE18-11
§ On Your Own exercises: BE18-2, BE18-8, BE18-13

Any Questions?

UGBA 120AB Chapter 18 With Solutions Spring 2020

Uploaded by

Copyright:

Available Formats

UGBA 120AB Chapter 18 With Solutions Spring 2020

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

UGBA 120AB Chapter 18 With Solutions Spring 2020

Uploaded by

Copyright:

Available Formats

Please keep your video screen on during

Please keep your mic muted when not

Please vote in the Polls provided for

§ What are the elements of shareholders’ equity?

§ What types of corporations are there? Other business structures?

§ Paid in Capital (Common and Preferred Stock and Additional PIC)

§ What are the elements of shareholders’ equity?

§ What types of corporations are there? Other business structures?

What types of corporations are there? Other business

§ For profit (public and private)

§ What are the elements of shareholders’ equity?

§ What types of corporations are there? Other business structures?

External = Debt + Equity

Assets − Liabilities = Shareholders’

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Preferred stock, 10%, $10 par, cumulative, nonparticipating $100

Shareholders’ Equity Retained Earnings

Accumulated Other Comprehensive Income

Let’s review each element…

USE ZOOM POLL 1

The correct answer is b.

AOCI includes four types of gains and losses excluded

Net holding gains

Gains (losses) from

Net income $XXX

Gains (losses) from and amendments to postretirement (X)

Deferred gains (losses) on derivatives (net of tax) (X)

Reports the transactions

_____ 1. Increase in the fair value of available-for-sale debt securities

• The federal government imposes expensive reporting

The Model Business Corporation Act

ü Articles of incorporation are filed with the state.

• Nature and location of business activities

• Shareholders are the owners of a corporation

• If more than one class of shares is authorized by the articles of

• Terminologies of different share types:

Rights include one or both of the following:

If the board of directors declares Preferred shareholders customarily

Unpaid preferred dividends must be paid in full before

Mandatorily redeemable preferred shares, when the company is

USE ZOOM POLL 2

a. $18,000 The correct answer is b:

b. $22,000 Preferred Common

* $24,000 current preference (6% × $400,000)

$50,000 − 28,000 = $22,000

Authorized shares are the maximum

Outstanding shares are issued

• If the shares are no-par, the entry is as follows:

Best evidence of fair value might be:

Shares Sold for Noncash Consideration

DuMont Chemicals issues 1 million of its common shares, $1 par

• The quoted market price for the shares issued might be

Classroom Please keep your mic muted when not

• Stay safe and get plenty of rest over Spring Break!

• Now, onto Class…

• Cash received usually is the sum of the separate

$100 million − $40 million = $60 million

Share issue costs reduce net proceeds

USE ZOOM POLL 3