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Slide 2
The Nature of Shareholders’ Equity The Nature of Shareholders’ Equity
Assets – Liabilities = Shareholders’ Equity
Shareholders’ Equity
Paid-in Capital
Retained Earnings
Amounts earnedby corporation
Amounts investedby shareholders
Accumulated OtherComprehensive Income
Other gains and losses not included in net income
Sources ofShareholders’
Equity
Net Assets
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Slide 3Slide 3
The Corporate OrganizationThe Corporate Organization
ContinuousExistence
Easy ownership
transfer
Limitedliability
Easy toraise capital
Disadvantages of a corporation
Advantages of a corporation
Doubletaxation
Governmentregulation
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Types of CorporationsTypes of Corporations
Not-for-profit corporations includehospitals, charities, and governmentagencies such as FDIC.
Privately-held corporationswhose shares are owned by only a few individuals.
Publicly-held corporationswhose shares are widelyowned by the general public.
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Hybrid OrganizationsHybrid Organizations
S Corporation• Limited liability protection of a corporation. • Maximum number of owners.
Limited liability company• Limited liability protection of a corporation.• All owners may be involved in management
without losing limited liability protection.
• No limit on number of owners.Limited liability partnership
• Owners are liable for their own actions but not entirely liable for actions of other partners.
S Corporation• Limited liability protection of a corporation. • Maximum number of owners.
Limited liability company• Limited liability protection of a corporation.• All owners may be involved in management
without losing limited liability protection.
• No limit on number of owners.Limited liability partnership
• Owners are liable for their own actions but not entirely liable for actions of other partners.
Doubletaxationavoided.
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Slide 6Slide 6
Board of directors appoint officers.
The Model Business Corporation ActThe Model Business Corporation Act
Articles of incorporationare filed with the state.
Board of directors elected by
shareholders.Shares of
stock issued.
State issues a corporate charter.
CorporateCharter
• Nature and location of business activities.• Number and classes of shares authorized.• Number and classes of shares authorized.
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Fundamental Share RightsFundamental Share Rights
Rightto vote.
Right to sharein distribution of
assets if companyis liquidated.
Right to sharein profits whendividends are
declared.
Preemptiveright to maintain
percentageownership.
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Slide 8
Issued shares are authorized shares of stock that have been
sold.
Unissued shares are authorized shares of stock that
never have been sold.
Authorized shares are the maximumnumber of shares of capital stock that
can be sold to the public.
Authorized, Issued, and Outstanding SharesAuthorized, Issued, and Outstanding Shares
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Slide 9
AuthorizedShares
UnissuedShares
TreasuryShares
OutstandingSharesIssued
SharesTreasury shares are issued shares that
have been reacquired by the corporation.
Outstanding shares are issued shares that are
owned by stockholders.
Authorized, Issued, and Outstanding SharesAuthorized, Issued, and Outstanding Shares
RetiredShares
Retired shares have the same
status as authorized but
unissued shares.
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Slide 10
Capital StockCapital StockPar value stock
Dollar amount per share is stated in the corporate charter.
Par value has no relationship to market value.
No-par stock Dollar amount per share
is not designated in corporate charter.
Corporations can assign a stated value per share (treated as if par value).
Legal capital is . . . The portion of shareholders’ equity that must be
contributed to the firm when stock is issued. The amount of capital, required by state law, that must
remain invested in the business. Refers to par value, stated value, or full amount paid for
no-par stock.
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Slide 11
Capital StockCapital StockCommon stock is the basic voting stock of the
corporation. It ranks after preferred stock for dividend and liquidation distribution. Dividends are determined
by the board of directors.
Dividend and liquidation preference overcommon stock.
Generally does nothave voting rights.
Usually has apar or stated value.
May be convertible,callable, and/or
redeemable.
PreferredStock
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Slide 12Slide 12
Preferred Stock DividendsPreferred Stock Dividends
Unpaid dividends must be paid in full beforeany distributions to common stock.
Dividends in arrears are not liabilities, but the pershare and aggregate amounts must be disclosed.
• Are usually stated as a percentage of the par or stated value.
• May be cumulative or noncumulative.
• May be partially participating, fully participating, or nonparticipating.
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Slide 13
Comprehensive IncomeComprehensive Income
Deferred gains (losses) from derivatives.
Deferred gains (losses) from derivatives.
Gains (losses) from and
amendments to post retirement benefit plans.
Gains (losses) from and
amendments to post retirement benefit plans.
Gains (losses) from foreign
currency translations.
Gains (losses) from foreign
currency translations.
Comprehensive income includes four typesof gains and losses that traditionally have
been excluded from net income.
Comprehensive income includes four typesof gains and losses that traditionally have
been excluded from net income.
Net holding gains (losses)
on investments.
Net holding gains (losses)
on investments.
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Slide 14
Comprehensive income is reported periodically as it is created and also is reported as a cumulative amount.
Comprehensive income is reported periodically as it is created and also is reported as a cumulative amount.
Comprehensive IncomeComprehensive Income
There are 3 options for reporting comprehensive income created during the
reporting period.
There are 3 options for reporting comprehensive income created during the
reporting period.
The accumulated amount of comprehensive income is reported as a separate
item of shareholders’ equity in the balance sheet.
The accumulated amount of comprehensive income is reported as a separate
item of shareholders’ equity in the balance sheet.
As a separate statement.
As a separate statement.
As an additional section of the
income statement.
As an additional section of the
income statement.
As part of the statement of
shareholders’ equity.
As part of the statement of
shareholders’ equity.
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Slide 15Slide 15
Shares Issued for CashShares Issued for Cash10,000 shares of stock are issued for $100,000 cash.
$1 Par Value
No ParValue
No Par,$1 Stated
Value
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Slide 16Slide 16
Issuing Stock for Noncash AssetsIssuing Stock for Noncash Assets
Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly
evident.
If market values cannot be determined, use appraised values.
Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly
evident.
If market values cannot be determined, use appraised values.
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Slide 17
More Than One Security IssuedMore Than One Security Issuedfor a Single Pricefor a Single PriceAllocate the lump-sum received based on the relative fair
values of the two securities. If only one fair value is known, allocate a portion of the
lump-sum received based on that fair value and allocate the remainder to the other security.
Toys, Inc. issued 5,000 shares of common stock, $10 par value and 3,000 shares of preferred stock, $5 par value for $450,000. The market values of the common stockand preferred stock were $55 and $75, respectively.
Calculate the additional paid-incapital for each class of stock.
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Slide 18
Market* % Allocation** Par^ Excess^^Common Stock 275,000$ 55% 247,500$ 50,000$ 197,500$ Preferred Stock 225,000 45% 202,500 15,000 187,500
Total 500,000$ 100% 450,000$ 65,000$ 385,000$
* Market Value: ^ Par Value: Common: $55 × 5,000 shares Common: $10 × 5,000 shares Preferred: $75 × 3,000 shares Preferred: $5 × 3,000 shares
**Allocation: ^^Excess: Common: $450,000 × 55% Common: $247,500 - $50,000 par Preferred: $450,000 × 45% Preferred: $202,500 - $15,000 par
More Than One Security IssuedMore Than One Security Issuedfor a Single Pricefor a Single Price
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
Cash 450,000 Common Stock, par $10 50,000 Preferred Stock, par $5 15,000 Additional paid-in capital, Common Stock 197,500 Additional paid-in capital Preferred Stock 187,500
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Slide 19Slide 19
Share Issue CostsShare Issue Costs
Share issue costs reduce net proceedsfrom selling shares, resulting in a loweramount of additional paid-in capital.
• Registration fees• Underwriter commissions• Printing and clerical costs• Legal and accounting fees• Promotional costs
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Slide 20Slide 20
Share BuybacksShare Buybacks A corporation might reacquire shares of its stock to . . .
• support the market price.
• increase earnings per share.
• distribute in stock option plans.
• issue as a stock dividend.
• use in mergers and acquisitions.
• thwart takeover attempts.
A corporation might reacquire shares of its stock to . . .
• support the market price.
• increase earnings per share.
• distribute in stock option plans.
• issue as a stock dividend.
• use in mergers and acquisitions.
• thwart takeover attempts.
I can account for the reacquired shares by retiring them or by holding
them as treasury shares.
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Slide 21Slide 21
Accounting for Retired SharesAccounting for Retired Shares
When shares are formally retired, we reduce the same capital accounts that were increased when the shares were issued –
common or preferred stock, and additional paid-in capital.
5,000 shares of $2 par value stock that were issuedfor $20 per share are reacquired for $17 per share.
Price paid is less than issue price.
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Slide 22Slide 22
Price paid is more than issue price.
Accounting for Retired SharesAccounting for Retired Shares
Reduce Retained Earnings if the Paid-in Capital – Share Repurchase account balance is insufficient.
5,000 shares of $2 par value stock that were issuedfor $20 per share are reacquired for $25 per share.
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Slide 23Slide 23
Accounting for Treasury StockAccounting for Treasury Stock
Acquisition of Treasury Stock•Recorded at cost to acquire.
Resale of Treasury Stock•Treasury Stock credited for cost.•Difference between cost and issuance price is (generally) recorded in paid-in capital – share repurchase.
Treasury stock usually does not have:
•Voting rights.
•Dividend rights.
•Preemptive rights.
•Liquidation rights.Treasury stock is reported as an unallocated reductionof total Shareholders’ Equity.
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Slide 24Slide 24
On 5/1/08, Photos-in-a-Second reacquired 3,000 shares of its common stock at $55 per share. On 12/3/09, Photos-in-a-Second reissued 1,000 shares of the stock at $75 per share. Which of the following would be included in the 12/3/09 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.
Accounting for Treasury StockAccounting for Treasury Stock
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Slide 25Slide 25
Retained EarningsRetained Earnings
Represents the undistributed earnings of the company since its inception.
Balance January 1, 2009 $ 106,500 Net income 25,000 Cash dividends (10,000) Balance December 31, 2009 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.
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Slide 26
Example: Shareholders’ EquityExample: Shareholders’ EquitySection of a Balance SheetSection of a Balance Sheet
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Accounting for Cash DividendsAccounting for Cash Dividends
Declared by board of directors.
Not legally required.
Creates liability at declaration.
Requires sufficient Retained Earnings and
Cash.
Declaration date• Board of directors declares the dividend.
• Record a liability.
Date Description Debit Credit
Retained Earnings XXX
Dividends Payable XXX
GENERAL JOURNAL
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Slide 28Slide 28
Date of Record Stockholders holding shares on this date will receive
the dividend. (No entry)
Dividend DatesDividend Dates
Date of PaymentRecord the dividend payment to stockholders.
Date Description Debit Credit
Dividends Payable XXX
Cash XXX
GENERAL JOURNAL
Ex-dividend date The first day the shares trade without the right to
receive the declared dividend. (No entry)
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Slide 29
Property DividendsProperty Dividends
Distributions of non-cash assets.
Record at fair value of non-cash asset.
Recognize gain or loss for difference between book value and fair value.
Distributions of non-cash assets.
Record at fair value of non-cash asset.
Recognize gain or loss for difference between book value and fair value.
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Slide 30
Accounting for Stock DividendsAccounting for Stock Dividends
Distribution of additional shares of stock to owners.
No change in total stockholders’ equity.
All stockholders retain same percentage ownership.
No change inpar values.
Stock dividend < 25%Stock dividend < 25%
Record at current fairvalue of stock.
Record at current fairvalue of stock.
SmallStock dividend > 25%Stock dividend > 25%
Record at parvalue of stock.Record at parvalue of stock.
Large
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GENERAL JOURNAL Page 21
Date DescriptionPost. Ref. Debit Credit
Retained Earnings 20,000,000
Common Stock 1,000,000
Paid-in Capital in
Excess of Par 19,000,000
CarCo declares and distributes a 20% stock dividend on 5 million common
shares. Par value is $1 and market value is $20. Prepare the required journal entry.
Accounting for Stock DividendsAccounting for Stock Dividends
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Slide 32
Stock splits change the par value per share and the number of shares outstanding, but the total par value is
unchanged, and no journal entry is required.
Stock SplitsStock Splits
Assume that a corporation had 3,000shares of $2 par value common stock outstanding
before a 2–for–1 stock split.
Increase
Decrease
No Change
Before Split
After Split
Common Stock Shares 3,000 6,000
Par Value per Share 2.00$ 1.00$
Total Par Value 6,000$ 6,000$
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Slide 33
Stock Splits Effected in theStock Splits Effected in theForm of Large Stock DividendsForm of Large Stock Dividends
Matrix, Inc. declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend.
The company has 1,000,000, $1 par value common stock outstanding. The stock is trading in the open
market for $14 per share. The per share par value of the shares is not to be changed.
Matrix, Inc. declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend.
The company has 1,000,000, $1 par value common stock outstanding. The stock is trading in the open
market for $14 per share. The per share par value of the shares is not to be changed.
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Slide 34
Appendix 18 ─ Quasi ReorganizationsAppendix 18 ─ Quasi ReorganizationsPurpose
To allow a company undergoing financial difficulty, but with favorable future prospects, to get a fresh start by writing
down inflated assets and eliminating an accumulated balance in retained earnings.
Procedures
• Assets and liabilities are revalued to reflect market values, with corresponding debits and credits to retained earnings.
• The debit balance in retained earnings is eliminated first against additional paid in capital, and then, if necessary, against common stock.
• Retained earnings is dated to indicate when the new accumulation of earnings began.
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Slide 35
Emerson-Walsch Corporation has incurred losses for several years. The board of directors voted to implement a
quasi reorganization, subject to shareholder approval. The balance sheet prior to restatement, in millions, follows :
Quasi ReorganizationsQuasi Reorganizations
(millions)Cash 75$ Receivables 200 Inventory 375 Property, plant, and equipment (net) 400 Total assets 1,050$
Liabilities 400$ Common stock (800 million shares @$1) 800 Additional paid-in capital 150 Retained earnings (deficit) (300) Total liabilities and equity 1,050$
Fair values: Inventory =
$300,000,000 and Property,
plant, and equipment =
$225,000,000.
Let’s prepare the journal entries necessary for the quasi reorganization.
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Slide 36
GENERAL JOURNAL Page 43
Date DescriptionPost. Ref. Debit Credit
Retained Earnings 250
Inventory 75
Property, plant, & equipment 175
To revalue assetsQuasi ReorganizationsQuasi Reorganizations
GENERAL JOURNAL Page 43
Date DescriptionPost. Ref. Debit Credit
Additional paid-in capital 150
Common stock 400
Retained earnings 550
To eliminate the deficit in retained earnings
$300 + $250
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Slide 37Slide 37
Cash 75$ Receivables 200 Inventory 300 Property, plant, and equipment (net) 225 Total assets 800$
Liabilities 400$ Common stock (800 million shares @$.50) 400 Additional paid-in capital 0Retained earnings 0 Total liabilities and equity 800$
Balance sheet immediately after restatement.Balance sheet immediately after restatement.
Quasi ReorganizationsQuasi Reorganizations