Shareholders Equity

Stockholders’
Stockholders’ Equity
Equity
Chapter
15
Intermediate Accounting
12th Edition
Kieso, Weygandt, and Warfield
Chapter
15-1 Prepared by Coby Harmon, University of California, Santa Barbara
Stockholders’
Equity
The Corporate Corporate Preferred Dividend Presentation

Form Capital Stock Policy 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
15-2
The
The Corporate
Corporate Form
Form of
of Organization
Organization
Three primary forms of business organization
Proprietorship Partnership Corporation
Special characteristics of the corporate form:

1. Influence of state corporate law.
2. Use of capital stock or share system.
3. Development of a variety of ownership interests.
Chapter
15-3 LO 1 Discuss the characteristics of the corporate form of organization.
The
The Corporate
Corporate Form
Form of
of Organization
Organization
State Corporate Law

Corporation must submit articles of incorporation
to the state in which incorporation is desired.
General Motors - incorporated in Delaware.
U.S. Steel - incorporated in New Jersey.
Accounting for stockholders’ equity follows the

provisions of each states business incorporation act.
Chapter
The
The Corporate
Corporate Form
Form of
of Organization
Organization
Capital Stock or Share System

In the absence of restrictive provisions, each share
carries the following rights:
1. To share proportionately in profits and losses.
2. To share proportionately in management (the right
to vote for directors).
3. To share proportionately in assets upon liquidation.
4. To share proportionately in any new issues of stock
of the same class—called the preemptive right.
Chapter
The
The Corporate
Corporate Form
Form of
of Organization
Organization
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
Corporate Capital
Capital
Common
CommonStock
Stock
Account
Account
Contributed
Contributed Additional
AdditionalPaid-
Paid-
Capital
Capital in
inCapital
Capital
Account
Account
Preferred
PreferredStock
Stock
Account
Account
Two Primary
Sources of Retained
RetainedEarnings
Earnings
Account
Account
Equity Assets –
Liabilities =
Less:
Less:
Treasury
Equity
TreasuryStock
Stock
Account
Account
Chapter
15-7 LO 2 Identify the key components of stockholders’ equity.
Corporate
Corporate Capital
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
Corporate Capital
Capital
Par Value Stock

Corporations maintain accounts for:
Preferred Stock or Common Stock.
Additional Paid-in Capital
Chapter
Corporate
Corporate Capital
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
Corporate Capital
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
Corporate Capital
Capital
Stock Issued with Other Securities
Two methods of allocating proceeds:

1. the proportional method and
2. the incremental method.
Chapter
Corporate
Corporate Capital
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
Corporate Capital
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
Corporate Capital
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
Corporate Capital
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
Corporate Capital
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
Corporate Capital
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
Corporate Capital
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
Corporate Capital
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
Corporate Capital
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 reduce takeover attempts or to reduce the
number of stockholders.
To make a market in the stock.
Chapter
15-21 LO 4 Describe the accounting for treasury stock.
Corporate
Corporate Capital
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
Corporate Capital
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
Corporate Capital
Capital
Sale of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders’

equity.
Chapter
Corporate
Corporate Capital
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
Corporate Capital
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
Corporate Capital
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
Corporate Capital
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
Corporate Capital
Capital
Illustration 15-4
Stockholders’ Equity with No Treasury Stock
Chapter
Corporate
Corporate Capital
Capital
Illustration 15-5
Stockholders’ Equity with Treasury Stock
Chapter
Preferred
Preferred Stock
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
15-31 LO 5 Explain the accounting for and reporting of preferred stock.
Preferred
Preferred Stock
Stock
Specific Features of Preferred Stock

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

similar to that for common stock.
Chapter
15-32 LO 5 Explain the accounting for and reporting of preferred stock.
Dividend
Dividend Policy
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
15-33 LO 6 Describe the policies used in distributing dividends.
Types
Types of
of Dividends
Dividends
1. Cash dividends. 3. Liquidating dividends.

2. Property dividends. 4. Stock dividends.
Dividends require information concerning three

dates:
a. Date of declaration
b. Date of record
c. Date of payment
Chapter
15-34 LO 7 Identify the various forms of dividend distributions.
Types
Types of
of Dividends
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
Cash Dividend
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
Types of
of Dividends
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
Property Dividend
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
Types of
of Dividends
Dividends
Liquidating Dividends
Any dividend not based on earnings reduces
corporate paid-in capital.
Chapter
Liquidating
Liquidating Dividend
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
Types of
of Dividends
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

15-41
stock dividends, and for stock splits.
Stock
Stock Dividend
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

15-42
Types
Types of
of Dividends
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.

15-43
Stock
Stock Dividend
Dividend
2 for 1 Stock Split
No Entry -- Disclosure that par is now $.50 and

shares outstanding are 10,000.

15-44
Types
Types of
of Dividends
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.
15-45
Stock
Stock Dividend
Dividend
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

15-46
Presentation
Presentation and
and Analysis
Analysis of
of
Stockholders’
Equity
Presentation Illustration 15-13
Balance Sheet
Chapter
15-47 LO 9 Indicate how to present and analyze stockholders’ equity.
Presentation
Presentation and
and Analysis
Analysis of
of
Stockholders’
Equity
Presentation Statement of Stockholders’ Equity Illustration 15-14
Chapter
Presentation
Presentation and
and Analysis
Analysis of
of
Stockholders’
Equity
Analysis
Rate of
Net income – Preferred dividends
Return on =
Common Stock Average common stockholders’ equity
Equity
Ratio shows how many dollars of net income the

company earned for each dollar invested by the
owners.
Chapter
Presentation
Presentation and
and Analysis
Analysis of
of
Stockholders’
Equity
Analysis
Cash dividends
Payout Ratio =
Net income – Preferred dividends
It is important to some investors that the payout

be sufficiently high to provide a good yield on the
stock.
Chapter
Presentation
Presentation and
and Analysis
Analysis of
of
Stockholders’
Equity
Analysis
Book Value Common stockholders’ equity

=
Per Share
Outstanding shares
The amount each share would receive if the

company were liquidated on the basis of amounts
reported on the balance sheet.
Chapter

Shareholders Equity

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Stockholders’

The Corporate Corporate Preferred Dividend Presentation

State Issuance of Features Financial Presentation

Three primary forms of business organization

Proprietorship Partnership Corporation

Special characteristics of the corporate form:

State Corporate Law

Accounting for stockholders’ equity follows the

Capital Stock or Share System

Variety of Ownership Interests

Preferred stock is created by contract, when

Par Value Stock

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.

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

Sale of Treasury Stock

Both increase total assets and stockholders’

Cash (500 x $30) 15,000

Cash (300 x $9) 2,700

Cash (100 x $11) 1,100

Common stock (100 x $1) 100

Features often associated with preferred stock.

Specific Features of Preferred Stock

Accounting for preferred stock at issuance is

1. Cash dividends. 3. Liquidating dividends.

Dividends require information concerning three

March 25 (Date of Record) No entry

April 6 (Payment Date)

June 1 (Payment Date)

Chapter LO 8 Explain the accounting for small and large

Chapter LO 8 Explain the accounting for small and large

Chapter LO 8 Explain the accounting for small and large

2 for 1 Stock Split

No Entry -- Disclosure that par is now $.50 and

Chapter LO 8 Explain the accounting for small and large

Stock Split and Stock Dividend Differentiated

Chapter LO 8 Explain the accounting for small and large

Presentation Illustration 15-13

Ratio shows how many dollars of net income the

It is important to some investors that the payout

Book Value Common stockholders’ equity

The amount each share would receive if the

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