Accounting and Reporting of Stockholders' Equity

Accounting and Reporting of
Stockholders’ Equity
Chapter
15
Chapter
15-1
Learning Objectives
1. Discuss the characteristics of the corporate form of

organization.
2. Identify the key components of stockholders’ equity.
3. Explain the accounting procedures for issuing shares of stock.
4. Describe the accounting for treasury stock.
5. Explain the accounting for and reporting of preferred stock.
6. Describe the policies used in distributing dividends.
7. Identify the various forms of dividend distributions.
8. Explain the accounting for small and large stock dividends, and
for stock splits.
9. Indicate how to present and analyze stockholders’ equity.
Chapter
15-2
Stockholders’ Equity
The Corporate Corporate Presentation

Preferred Stock Dividend Policy
Form Capital and Analysis
State Issuance of Features Financial Presentation

corporate law stock Accounting condition and Analysis
Capital stock Reacquisition for and dividend
or share of shares reporting distributions
system preferred Types of
Variety of stock dividends
ownership Stock split
interests Disclosure of
restrictions
Chapter
15-3
The Corporate Form of Organization
Three primary forms of business organization
Proprietorship Partnership Corporation
Special characteristics of the corporate form:

1. Influence of corporate law.
2. Use of capital stock or share system.
3. Development of a variety of ownership interests.
Chapter
15-4 LO 1 Discuss the characteristics of the corporate form of organization.
Capital Stock or Share System

In the absence of restrictive provisions, each share
carries the following rights:
• To share proportionately in profits and losses.
• To share proportionately in management
• To share proportionately in assets upon liquidation.
• To share proportionately in any new issues of stock
of the same class—called the preemptive right.
Chapter
Variety of Ownership Interests

Common stock represents basic ownership interest.
Bears ultimate risks of loss.
Receives the benefits of success.
Not guaranteed dividends nor assets upon
dissolution.
Preferred stock is created by contract, when
stockholders’ sacrifice certain rights in return for
other rights or privileges, usually dividend preference.
Chapter
Corporate Capital
Common Stock
Account
Contributed Additional Paid-
Capital in Capital
Account
Preferred Stock
Account
Two Primary
Sources of Retained Earnings
Account
Equity Assets –
Liabilities =
Less:
Treasury Stock
Equity
Account
Chapter
15-7 LO 2 Identify the key components of stockholders’ equity.
Corporate Capital
Issuance of Stock
Shares authorized - Shares sold - Shares issued
Accounting problems:
1. Par value stock.
2. No-par stock.
3. Stock issued with other securities.
4. Stock issued in noncash transactions.
5. Costs of issuing stock.
Chapter
15-8 LO 3 Explain the accounting procedures for issuing shares of stock.
Corporate Capital
Par Value Stock

Low par values help companies avoid a contingent
liability.
Corporations maintain accounts for:

Preferred Stock or Common Stock.
Additional Paid-in Capital
Chapter
Corporate Capital
BE15-1: Lost Vikings Corporation issued 300 shares

of $10 par value common stock for $4,100. Prepare
Lost Vikings’ journal entry.
Journal entry:
Cash 4,100
Common stock (300 x $10) 3,000
Additional paid-in capital 1,100
Chapter
Corporate Capital
No-Par Stock
Reasons for issuance:
Avoids contingent liability.
Avoids confusion over recording par value
versus fair market value.
Chapter
Corporate Capital
BE15-2: Shinobi Corporation issued 600 shares of no-

par common stock for $10,200. Prepare Shinobi’s journal
entry if (a) the stock has no stated value, and (b) the
stock has a stated value of $2 per share.
Journal entry:
a. Cash 10,200
Common stock 10,200
b. Cash 10,200
Chapter
Corporate Capital
Stock Issued with Other Securities
Two methods of allocating proceeds:

• the proportional method and
• the incremental method.
Chapter
Corporate Capital
BE15-4: Primal Rage Corporation issued 300 shares of $10
par value common stock and 100 shares of $50 par value
preferred stock for a lump sum of $14,200. The common
stock has a market value of $20 per share, and the preferred
stock has a market value of $90 per share.
Number Amount Total Percent

Common stock 300 x $ 20.00 = $ 6,000 40%
Preferred stock 100 x 90.00 9,000 60%
Fair Market Value $ 15,000 100%
Allocation: Common Preferred

Issue price $ 14,200 $ 14,200 Proportional
Allocation % 40% 60% Method
Total $ 5,680 $ 8,520
Chapter
Corporate Capital
BE15-4: Primal Rage Corporation issued 300 shares of $10
par value common stock and 100 shares of $50 par value
preferred stock for a lump sum of $14,200. The common
stock has a market value of $20 per share, and the preferred
stock has a market value of $90 per share.
Journal entry (Proportional):

Cash 14,200
Preferred stock (100 x $50) 5,000
Additional paid-in capital-preferred 3,520
Additional paid-in capital-common 2,680
Chapter
Corporate Capital
BE15-4: (Variation) Primal Rage Corporation issued 300
shares of $10 par value common stock and 100 shares of $50
par value preferred stock for a lump sum of $14,200. The
common stock has a market value of $20 per share, and the
value of the preferred stock is unknown.
Number Amount Total

Common stock 300 x $ 20.00 = $ 6,000
Preferred stock 100 x -
Fair Market Value $ 6,000
Allocation:
Issue price
Common
$
Preferred
14,200
Incremental
Common (6,000) Method
Total $ 6,000 $ 8,200
Chapter
Corporate Capital
BE15-4: (Variation) Primal Rage Corporation issued 300
shares of $10 par value common stock and 100 shares of $50
par value preferred stock for a lump sum of $14,200. The
common stock has a market value of $20 per share, and the
value of the preferred stock is unknown.
Journal entry (Incremental):

Cash 14,200
Preferred stock (100 x $50) 5,000
Additional paid-in capital-preferred 3,200
Additional paid-in capital-common 3,000
Chapter
Corporate Capital
Stock Issued in Noncash Transactions
The general rule: Companies should record

stock issued for services or property other
than cash at either the:
fair value of the stock issued or
fair value of the noncash consideration
received,
whichever is more clearly determinable.
Chapter
Corporate Capital
E15-2: Kathleen Battle Corporation was organized on
January 1, 2007. It is authorized to issue 500,000 shares
of no par common stock with a stated value of $1 per
share. Prepare the journal entry to record the following.
April 1 Issued 24,000 shares of common stock for land.

The asking price of the land was $90,000; the fair
market value of the land was $80,000.
Land 80,000
Common stock (24,000 x $1) 24,000
Chapter
Corporate Capital
E15-2: Kathleen Battle Corporation was organized on
January 1, 2007. It is authorized to issue 500,000 shares
of no par common stock with a stated value of $1 per
share. Prepare the journal entry to record the following.
Aug. 1 Issued 10,000 shares of common stock to

attorneys in payment of their bill of $50,000 for services
rendered in helping the company organize.
Organization expense 50,000

Common stock (10,000 x $1) 10,000
Chapter
Corporate Capital
Costs of Issuing Stock

Direct costs incurred to sell stock, such as
underwriting costs,
accounting and legal fees,
printing costs, and
taxes,
should be reported as a reduction of the
amounts paid in (additional paid-in capital).
Chapter
Corporate Capital
Reacquisition of Shares
Corporations purchase their outstanding stock:
To provide tax-efficient distributions of excess
cash to shareholders.
To increase earnings per share and return on equity.
To provide stock for employee stock compensation
contracts or to meet potential merger needs.
To thwart takeover attempts or to reduce the
number of stockholders.
To make a market in the stock.
Chapter
15-22 LO 4 Describe the accounting for treasury stock.
Corporate Capital
Purchase of Treasury Stock
Two acceptable methods:

• Cost method (more widely used).
• Par or Stated value method.
Treasury stock, reduces stockholders’ equity.
Chapter
Corporate Capital
Illustration: UC Company originally issued 15,000 shares

of $1 par, common stock for $25 per share. Record the
journal entry for the following transaction:
April 1st the company re-acquired 1,000 shares for $28
per share.
Treasury stock (1,000 x $28) 28,000

Cash 28,000
Chapter
Corporate Capital
Sale of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders’

equity.
Chapter
Corporate Capital

June 1st Sold 500 shares of its Treasury Stock for $30
per share.
Cash (500 x $30) 15,000

Treasury stock (500 x $28) 14,000
Paid-in capital treasury stock 1,000
Chapter
Corporate Capital

Oct. 15th Sold 300 shares of its Treasury Stock for $9
per share.
Cash (300 x $9) 2,700

Paid-in capital treasury stock 1,000 Limited
to
Retained earnings 4,700 balance
on hand
Chapter
Corporate Capital

Oct. 30th Sold 100 shares of its Treasury Stock for $11
per share.
Cash (100 x $11) 1,100

Retained earnings 1,700
Chapter
Corporate Capital

Nov. 10th Retired remaining 100 shares of its Treasury
Stock.
Common stock (100 x $1) 100

Paid-in capital common (100 x $24) 2,400
Retained earnings 300
Chapter
Corporate Capital
Illustration 15-4
Stockholders’ Equity with No Treasury Stock
Chapter
Corporate Capital
Illustration 15-5
Stockholders’ Equity with Treasury Stock
Chapter
Preferred Stock
Features often associated with preferred stock.

1. Preference as to dividends.
2. Preference as to assets in liquidation.
3. Convertible into common stock.
4. Callable at the option of the corporation.
5. Nonvoting.
Chapter
15-32 LO 5 Explain the accounting for and reporting of preferred stock.
Preferred Stock
Specific Features of Preferred Stock

 Cumulative
A corporation may attach
 Participating
whatever preferences or
 Convertible restrictions, as long as it
 Callable does not violate its state
incorporation law.
 Redeemable
Accounting for preferred stock at issuance is

similar to that for common stock.
Chapter
15-33 LO 5 Explain the accounting for and reporting of preferred stock.
Dividend Policy
Dividend distributions generally are based on

accumulated profits (retained earnings).
Few companies pay dividends in amounts equal to

their legally available retained earnings. Why?
Maintain agreements with creditors.
 Meet state incorporation requirements.
 To finance growth or expansion.
 To smooth out dividend payments.
 To build up a cushion against possible losses.
Chapter
15-34 LO 6 Describe the policies used in distributing dividends.
Types of Dividends
1. Cash dividends. 1. Liquidating dividends.

2. Property dividends. 2. Stock dividends.
Dividends require information concerning three

dates:
a. Date of declaration
b. Date of record
c. Date of payment
Chapter
15-35 LO 7 Identify the various forms of dividend distributions.
Types of Dividends
Cash Dividends
Board of directors vote on the declaration
of cash dividends.
A declared cash dividend is a liability.
Companies do not declare or pay cash

dividends on treasury stock.
Chapter
Cash Dividend
Illustration What would be the journal entries
made by a corporation that declared a $50,000
cash dividend on March 10, payable on April 6 to
shareholders of record on March 25?
Debit Credit
March 10 (Declaration Date)
Dividends payable 50,000
March 25 (Date of Record) No entry
April 6 (Payment Date)

Cash 50,000
Chapter
Types of Dividends
Property Dividends
Dividends payable in assets other than cash.
Restate at fair value the property it will

distribute, recognizing any gain or loss.
Chapter
Property Dividend
Illustration A dividend is declared Jan. 5th and paid
Jan. 25th, in bonds held as an investment; the bonds
have a book value of $100,000 and a fair market
value of $135,000.
Debit Credit
Date of Declaration
Investment in bonds 35,000
Gain on investment 35,000
and
Property dividend payable 135,000
Date of Issuance
Property dividend payable 135,000
Investment in bonds 135,000
Chapter
Types of Dividends
Liquidating Dividends
Any dividend not based on earnings reduces
corporate paid-in capital.
Chapter
Liquidating Dividend
BE15-12 Radical Rex Mining Company declared, on April 20,
a dividend of $700,000 payable on June 1. Of this amount,
$125,000 is a return of capital. Prepare the April 20 and
June 1 entries for Radical Rex.
Debit Credit
April 20 (Declaration Date)
June 1 (Payment Date)

Cash 700,000
Chapter
Types of Dividends
Stock Dividends
 Issuance of own stock to stockholders on a
pro rata basis, without receiving any
consideration.
 When stock dividend is less than 20–25
percent of the common shares outstanding,
company transfers fair market value from
retained earnings (small stock dividend).
Chapter LO 8 Explain the accounting for small and large

15-42
stock dividends, and for stock splits.
Stock Dividend
Illustration HH Inc. has 5,000 shares issued and
outstanding. The per share par value is $1, book value
$32 and market value is $40.
Debit Credit
10% stock dividend is declared
Common stock dividend distributable 500
Stock issued
Common stock div. distributable 500
Common stock 500

15-43
Types of Dividends
Stock Split
To reduce the market value of shares.
No entry recorded for a stock split.
Decrease par value and increased number of

shares.

15-44
Stock Dividend

outstanding. The per share par value is $1, book
value $32 and market value is $40.
2 for 1 Stock Split
No Entry -- Disclosure that par is now $.50 and

shares outstanding are 10,000.

15-45
Types of Dividends
Stock Split and Stock Dividend Differentiated

 If the stock dividend is large, it has the same
effect on market price as a stock split.
 A stock dividend of more than 20–25 percent of
the number of shares previously outstanding is
called a large stock dividend.
 With a large stock dividend, transfer from
retained earnings to capital stock the par value
of the stock issued.
15-46
Stock Dividend

outstanding. The per share par value is $1, book
value $32 and market value is $40.
Debit Credit
50% stock dividend is declared
Common stock dividend distributable 2,500
Stock issued
Common stock dividend distributable 2,500
Common stock 2,500

15-47
Presentation of Stockholders’ Equity
Presentation Illustration 15-13
Balance Sheet
Chapter
15-48 LO 9 Indicate how to present and analyze stockholders’ equity.
Presentation of Stockholders’ Equity
Presentation Statement of Stockholders’ Equity Illustration 15-14
Chapter
15-49 LO 9 Indicate how to present and analyze stockholders’ equity.

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Accounting and Reporting of

1. Discuss the characteristics of the corporate form of

The Corporate Corporate Presentation

State Issuance of Features Financial Presentation

Three primary forms of business organization

Proprietorship Partnership Corporation

Special characteristics of the corporate form:

Capital Stock or Share System

Variety of Ownership Interests

Par Value Stock

Corporations maintain accounts for:

BE15-1: Lost Vikings Corporation issued 300 shares

BE15-2: Shinobi Corporation issued 600 shares of no-

Stock Issued with Other Securities

Two methods of allocating proceeds:

Number Amount Total Percent

Allocation: Common Preferred

Journal entry (Proportional):

Number Amount Total

Journal entry (Incremental):

Stock Issued in Noncash Transactions

The general rule: Companies should record

April 1 Issued 24,000 shares of common stock for land.

Aug. 1 Issued 10,000 shares of common stock to

Organization expense 50,000

Costs of Issuing Stock

Purchase of Treasury Stock

Two acceptable methods:

Treasury stock, reduces stockholders’ equity.

Illustration: UC Company originally issued 15,000 shares

Treasury stock (1,000 x $28) 28,000

Sale of Treasury Stock

Both increase total assets and stockholders’

Illustration: UC Company originally issued 15,000 shares

Cash (500 x $30) 15,000

Illustration: UC Company originally issued 15,000 shares

Cash (300 x $9) 2,700

Illustration: UC Company originally issued 15,000 shares

Cash (100 x $11) 1,100

Illustration: UC Company originally issued 15,000 shares

Common stock (100 x $1) 100

Features often associated with preferred stock.

Specific Features of Preferred Stock

Accounting for preferred stock at issuance is

Dividend distributions generally are based on

Few companies pay dividends in amounts equal to

1. Cash dividends. 1. Liquidating dividends.

Dividends require information concerning three

A declared cash dividend is a liability.

Companies do not declare or pay cash

March 25 (Date of Record) No entry

April 6 (Payment Date)

Restate at fair value the property it will

June 1 (Payment Date)

Chapter LO 8 Explain the accounting for small and large

Chapter LO 8 Explain the accounting for small and large

No entry recorded for a stock split.

Decrease par value and increased number of

Chapter LO 8 Explain the accounting for small and large