Directory UMM :wiley:Public:college:accounting:kimmel:
Financial Accounting:
Tools for Business Decision Making
Kimmel, Weygandt, Kieso
S
EL
Chapter
11
`
Chapter 11
Reporting and Analyzing
Stockholders’ Equity
After studying Chapter 11, you should be
able to:
Identify and discuss the major characteristics of a
corporation.
Record the issuance of common stock.
Explain the accounting for purchase of treasury stock.
Differentiate preferred stock from common stock.
Prepare the entries for cash dividends and stock dividends.
Identify the items that affect retained earnings.
Prepare a comprehensive stockholders' equity section.
Evaluate a corporation's dividend and earnings
performance from a stockholder's perspective.
3
Corporation
Possess legal entity
Created by law
Has most of the rights and privileges of a
person
Classified by purpose and ownership
Purpose - profit or nonprofit
Ownership - publicly or privately held
4
Publicly Held Corporation
May have thousands of stockholders
and its stock is regularly traded on
national securities markets
5
Privately Held Corporation
May have few stockholders and does
not offer its stock for sale to general
public
6
Characteristics of a Corporation
Separate legal existence
Limited liability of stockholders
Transferable ownership rights
Ability to acquire capital
Continuous life
Corporation management
Government regulations
Additional taxes
7
Separate Legal Existence
Separate and distinct from owners
Acts under its own name - not
name of stockholders
May buy, own, and sell property;
borrow money; enter into legally
binding contracts; may sue or be
sued; pays its own taxes
Owners (stockholders) cannot
bind corporation unless owners
are agents of the corporation
8
Limited Liability of Stockholders
Creditors have recourse only to
corporate assets to satisfy claims.
Liability of stockholders
limited to investment in
corporation.
Creditors have no legal
claim on personal assets
of owners unless fraud
has occurred.
9
Transferable Ownership Rights
Ownership evidenced by shares of stock.
Transfer of ownership among stockholders has
no effect on corporation’s
operating activities or
assets, liabilities and total
stockholders' equity.
Corporation does not
participate in transfer of
ownership rights after
10
original sale.
Ability to Acquire Capital
Limited liability of
stockholders coupled
with transferable
ownership rights
make it easy
to raise
capital
11
Continuous Life
Life of corporation stated in charter - may be
perpetual or limited to specific number of
years (can be extended)
Corporation is separate
legal entity, thus life not
affected by withdrawal,
death, or incapacity of
stockholder
12
Corporation Management
Stockholders manage corporation indirectly
through board of directors.
Board of directors
formulates operating policies
selects officers to execute policy and to
perform daily management functions
13
Page 490 in Book
Corporate
Organization
Chart
Page 491in Book
Additional Taxes
Corporations pay federal and state income taxes.
Stockholders pay taxes on cash dividends.
Corporate income is taxed twice - at the
corporate level and at the individual level.
With proprietorships and
partnerships, the owner's
share of earnings is
reported on his personal
income tax return.
16
Forming a Corporation
States grant corporate charters.
Although a corporation may have
operating divisions in a number of states,
it will be incorporated in only one state.
Some states have laws favorable to the
corporate form of business organization.
17
Forming a Corporation
The corporation establishes by-laws for
conducting its affairs upon receipt of its
charter from the state of incorporation.
A corporation must obtain a license subjecting the corporation's operating
activities to the general corporation
laws of the state - from each state in
which it does business.
18
Page 492 in Book
Stockholder Rights
Once it is chartered, the corporation sells
stock.
When a corporation has only one class of
stock it is common stock.
Ownership rights are specified in the
articles of incorporation or in the by-laws.
Proof of stock ownership is evidenced by a
printed or engraved form known as a stock
certificate.
20
Stock Certificate Shows...
name of the corporation
stockholder's name
class and special features of the stock
the number of shares owned
the signatures of
duly authorized
corporate officials
21
Questions in Issuing Stock
How many shares should be authorized
for sale?
How should the stock be issued?
At what price should the shares be
issued?
What value should be assigned to the
stock?
22
Authorized Stock
The amount of stock a corporation is
authorized to sell as indicated in the
corporate charter.
Disclose the number of shares
authorized in the stockholders' equity
section of the balance sheet.
23
Corporations Can Issue Stock
Directly to investors (typical in closely
held corporations)
Indirectly through an investment
banking firm (customary with publicly
held corporations)
24
Factors Involved in Setting Price of
Stock
Company's anticipated future
earnings
Its expected dividend rate per share
Its current financial position
Current state of the economy
Current state of the securities market
25
Par Value Stock
Is capital stock that has been assigned an
arbitrary value per share in the corporate
charter.
Par value is usually low because some states
levy a tax on the corporation based on par
value.
26
Par Value
Represents the legal capital per share
that must be retained in the business.
Is the amount that is not available for
withdrawal by stockholders.
27
Legal Capital
Is the amount per share of stock that
must be retained in the business for
the protection of corporate creditors.
28
No-Par Value Stock
Is capital stock that has not been assigned
a value per share in the corporate
charter.
May have a stated value assigned to it by
board of directors, which then becomes
the legal capital per share.
29
Stated Value of No-Par Stock
Is the amount per share assigned by
the board of directors to no-par stock.
Does not indicate or correspond to the
market value of the stock.
30
Relationship of Par and No-Par
Value to Legal Capital
Stock
Legal Capital Per Share
Par value
Par value
No-par value with
stated value
No-par value without
stated value
Stated value
Entire proceeds
31
Stockholders’ Equity Section of a
Corporation’s Balance Sheet...
Two Parts:
Paid-in (contributed) capital
Retained earnings (earned capital)
The distinction between paid-in capital and
retained earnings is important from a legal
and an economic point of view.
32
Paid-in Capital
Is the amount paid in to the
corporation by stockholders in
exchange for shares of ownership.
33
Retained Earnings
Is earned capital held for future use in the
business.
34
Accounting for
Common Stock Issues
The issue of common stock affects only
paid-in capital accounts.
When the issuance of common stock for
cash is recorded, the par value of the
shares is credited to Common Stock.
The portion of the proceeds above or
below par value is recorded in a
separate paid-in capital account.
35
Issuing Stock at Par
Assume Hydro-Slide, Inc., issues 1,000 shares of $1
par value of common stock at par for cash.
Cash
Stock
1,000
1,000
Common
36
Issuing Stock Above Par
If Hydro-Slide, Inc., issues an additional 1,000
shares of the $1 par value common stock for cash
at $5 per share, the entry is:
Cash
Common Stock
Paid-in Capital in
Excess of Par Value
5,000
1,000
4,000
37
Page 496 in Book
Hydro-Slide, Inc.
Partial Balance Sheet
Stockholders' equity
Paid-in capital
Common stock
Paid-in capital in excess of par
Total paid-in capital
Retained earnings
Total stockholders' equity
$ 2,000
4,000
$ 6,000
27,000
$33,000
Treasury Stock
Is a corporation's own stock
that has been issued
fully paid for
reacquired by the corporation
held in its treasury for future use
39
Corporations Acquire Treasury
Stock to...
Reissue the shares to officers and employees under
bonus and stock compensation plans.
Increase trading of the company's stock in the
securities market in the hopes of enhancing its
market value.
Have additional shares available for use in the
acquisition of other companies.
Reduce the number of shares outstanding and
thereby increase earnings per share.
Prevent a hostile takeover.
40
Mead, Inc.
Partial Balance Sheet
Stockholders' equity
Paid-in capital
Common stock,$5par value,
100,000 shares issued and
96,000 outstanding
Retained Earnings
Total stockholders’ equity
Page 498 in Book
$ 500,000
200,000
$ 700,000
Purchase of Treasury Stock
On February 1, 1998, Mead acquires 4,000 shares of
its stock at $8 per share.
Treasury Stock
Cash
32,000
32,000
42
Treasury Stock
The Treasury Stock account would increase by
the cost of the shares purchased - $32,000.
The original paid-in capital account, Common
Stock, would not be affected because the
number of issued shares does not change.
Treasury stock is deducted from total paid-in
capital and retained earnings in the
stockholders' equity section of the balance sheet.
43
Mead, Inc.
Partial Balance Sheet
Stockholders' equity
Paid-in capital
Common stock,$5par value,
100,000 shares issued and
96,000 outstanding
Retained Earnings
Total stockholders’ equity
700,000
Less: Treasury Stock
Total stockholders’ equity
Page 499 in Book
$ 500,000
200,000
32,000
$ 668,000
Outstanding Stock
The number of shares of issued stock
that are being held by stockholders.
45
Preferred Stock
Is capital stock that has contractual
preferences over common stock in certain
areas.
Preferred Stock may have priority to:
Dividends
Assets in the event of liquidation
Preferred stockholders do not
have voting rights.
46
Preferred Stock
Assume Stine Corporation issues 10,000 shares of
$10 par value preferred stock for $12 cash per share.
Cash
120,000
Preferred Stock
100,000
Paid-in Capital in Excess
20,000
of Par Value - Preferred Stock
(Preferred stock may have either a par value or nopar value.)
47
Dividend Preferences
Preferred stockholders have the right to
share in the distribution of corporate income
before common stockholders.
If the dividend rate of preferred stock is $5
per share, common shareholders will not
receive any dividends in the current year
until preferred stockholders have received $5
per share.
The first claim to dividends does not
guarantee dividends.
48
Cumulative Dividend
A feature of preferred stock entitling
the stockholder to receive current
and unpaid prior-year dividends
before common stockholders receive
any dividends
49
Dividends in Arrears
Are preferred dividends that were
scheduled to be declared but were not
declared during a given period.
50
Dividends in Arrears
Scientific-Leasing has 5,000 shares of 7%, $100
par value cumulative preferred stock
outstanding.
The annual dividend is $35,000 (5,000 x $7 per
share).
Dividends are 2 years in arrears.
Dividends in arrears ($35,000 x 2 years)
70,000 Current-year dividends
35,000 Total preferred dividends
$ 105,000
$
51
Dividends in Arrears
Not a liability because no obligation
exists until a dividend is declared by
the board of directors
Must be disclosed in the notes to the
financial statements
52
Liquidation Preference
Is a feature that gives preferred
stockholders preference to corporate
assets in the event of liquidation.
53
Dividend
A distribution by a corporation to its
stockholders on a pro rata basis
Pro rata means that if you own 10% of the
common shares, you will receive 10% of the
dividend.
Dividend forms:
cash
property
script (promissory note to pay cash)
stock
54
Cash Dividend
A pro rata distribution of cash
to stockholders.
55
Cash Dividend
For a corporation to pay a cash
dividend, it must have the following:
Retained earnings
Adequate cash
Declared dividends
56
Cash Dividend
In many states, payment of dividends from
legal capital is illegal.
Payment of dividends from paid-in capital
in excess of par is legal in some states.
Payment of dividends from retained
earnings is legal in all states.
Companies are frequently constrained by
agreements with lenders to pay dividends
only from retained earnings.
57
Entries for Cash Dividends
Three dates are important in
connection with dividends:
the declaration date
the record date
Month a nd ye a r
the payment date
Monday
Tue sday
Wedne sday
Thurs day
Friday
Saturday
Sunday
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58
00
The Declaration Date
The date the board of directors
formally declares the cash dividend and
announces it to stockholders
Commits the corporation to a binding
legal obligation that cannot be
rescinded
An entry is required to recognize the
decrease in retained earnings and the
increase in the liability - Dividends
Payable
59
The Declaration Date
On December 1, 1998, the directors of Media
General declare a $0.50 per share cash dividend
on 100,000 shares of $10 par value common
stock.
The dividend is $50,000 (100,000 x $0.50).
12/1
Retained Earnings
Dividends Payable
50,000
50,000
60
The Record Date
The date when ownership of the
outstanding shares is determined for
dividend purposes.
No Entry Necessary
61
The Payment Date
The date dividend checks are mailed to the
stockholders.
January 20 is the payment date for
Media General.
Dividends Payable
Cash
50,000
50,000
62
Stock Dividends
A pro rata distribution of the corporation's own
stock to stockholders
Paid in stock
Results in a decrease in retained earnings and an
increase in paid-in capital
Does not decrease total stockholders' equity or
total assets
Often issued by companies that do not have
adequate cash to issue a cash dividend.
63
Stock Dividends
You have a 2% ownership interest in Cetus, Inc.,
owning 20 of its 1,000 shares of common stock.
In a 10% stock dividend, 100 shares (1,000 x
10%) of stock would be issued. You would
receive two shares (2% x 100), but your
ownership interest would remain at 2% (22/
1,100).
You now own more shares of stock, but your
ownership interest has not changed.
64
Reasons for Stock Dividends
To satisfy stockholders' dividend expectations
without spending cash
To increase the marketability of its stock by
increasing the number of shares outstanding and
thereby decreasing the market price per share
To emphasize that a portion of stockholders'
equity has been permanently reinvested in the
business and, therefore, is unavailable for cash
dividends
65
Stock Dividends
A small stock dividend (less than 20%
-25% of the corporation's issued stock) is
recorded at the fair market value per
share.
A large stock dividend (greater than 20%
- 25% of the corporation's issued stock) is
recorded at par or stated value per share.
66
Stock Dividends
Medland Corporation has $300,000 in retained
earnings and declares a 10% stock dividend on
its 50,000 shares of $10 par value common stock.
The current fair market value of the stock is $15
per share.
The number of shares to be issued is 5,000
(50,000 x 10%).
Retained Earnings will be decreased by $75,000
(5,000 x $15).
67
Stock Dividends
Retained Earnings
75,000
Common Stock Dividends
50,000
Distributable
Paid-in Capital in Excess 25,000
of Par Value
The Common Stock Dividends Distributable is
an equity account; not a liability account - because
assets will not be used to pay the dividend.
68
Stock Split
The issuance of additional shares
of stock to stockholders
accompanied by a reduction in the
par or stated value.
69
Stock Split
In a stock split, the number shares is
increased in the same proportion that the
par or stated value per share is decreased.
A stock split does not have any effect on
total paid-in capital, retained earnings, and
total stockholders' equity.
With a stock split the number of shares
increases.
70
Stock Split
Because a stock split does not affect
the balances in stockholders' equity
accounts, it is not necessary to
journalize a stock split.
71
Retained Earnings
Net income that is retained in the
business
The balance in retained earnings is
part of the stockholders' claim on the
total assets of the corporation.
Retained earnings does not represent a
claim on any specific asset.
72
Deficit
A debit balance in retained
earnings and reported as a
deduction in the stockholders'
equity section of the balance sheet
73
Retained Earnings Restrictions
Legal, contractual, or voluntary
circumstances that make a
portion of retained earnings
currently unavailable for dividends
74
KNIGHT-RIDDER, INC.
Partial Balance Sheet
(in millions)
Page 510 in Book
Stockholders' equity
Common stock, $.02 1/2 par value;
shares authorized -- 250,000,000;
shares issued-- 93,340,652
1,945
Additional paid-in capital
308,320
Retained earnings
821,243
Total stockholders' equity
$1,131,508
$
75
The Payout Ratio =
TOTAL CASH DIVIDENDS PAID ON COMMON STOCK
NET INCOME
Measures the percentage of earnings
distributed in the form of cash dividends to
common stockholders
76
The Dividend Yield =
DIVIDENDS PAID PER SHARE
STOCK PRICE AT END OF YEAR
Reports the rate of return an
investor earned from dividends.
77
Earnings Per Share =
NET INCOME - PREFERRED STOCK DIVIDENDS
AVERAGE COMMON SHARES OUTSTANDING
Measures the net income earned on each share
of common stock.
78
Price-Earnings Ratio =
MARKET PRICE PER SHARE OF STOCK
EARNINGS PER SHARE
In order to make a meaningful comparison of
earnings across firms, use the price-earnings
ratio.
The price-earnings ratio reflects the investors'
assessment of a company's future earnings.
79
Return on Common
Stockholders’ Equity Ratio =
NET INCOME -PREFERRED STOCK
DIVIDENDS
AVERAGE COMMON STOCKHOLDERS’
EQUITY
Measures the profitability from the
stockholders’ point of view.
80
COP Y R I GHT
Copyright © 1999, John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
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Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
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for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
81
Tools for Business Decision Making
Kimmel, Weygandt, Kieso
S
EL
Chapter
11
`
Chapter 11
Reporting and Analyzing
Stockholders’ Equity
After studying Chapter 11, you should be
able to:
Identify and discuss the major characteristics of a
corporation.
Record the issuance of common stock.
Explain the accounting for purchase of treasury stock.
Differentiate preferred stock from common stock.
Prepare the entries for cash dividends and stock dividends.
Identify the items that affect retained earnings.
Prepare a comprehensive stockholders' equity section.
Evaluate a corporation's dividend and earnings
performance from a stockholder's perspective.
3
Corporation
Possess legal entity
Created by law
Has most of the rights and privileges of a
person
Classified by purpose and ownership
Purpose - profit or nonprofit
Ownership - publicly or privately held
4
Publicly Held Corporation
May have thousands of stockholders
and its stock is regularly traded on
national securities markets
5
Privately Held Corporation
May have few stockholders and does
not offer its stock for sale to general
public
6
Characteristics of a Corporation
Separate legal existence
Limited liability of stockholders
Transferable ownership rights
Ability to acquire capital
Continuous life
Corporation management
Government regulations
Additional taxes
7
Separate Legal Existence
Separate and distinct from owners
Acts under its own name - not
name of stockholders
May buy, own, and sell property;
borrow money; enter into legally
binding contracts; may sue or be
sued; pays its own taxes
Owners (stockholders) cannot
bind corporation unless owners
are agents of the corporation
8
Limited Liability of Stockholders
Creditors have recourse only to
corporate assets to satisfy claims.
Liability of stockholders
limited to investment in
corporation.
Creditors have no legal
claim on personal assets
of owners unless fraud
has occurred.
9
Transferable Ownership Rights
Ownership evidenced by shares of stock.
Transfer of ownership among stockholders has
no effect on corporation’s
operating activities or
assets, liabilities and total
stockholders' equity.
Corporation does not
participate in transfer of
ownership rights after
10
original sale.
Ability to Acquire Capital
Limited liability of
stockholders coupled
with transferable
ownership rights
make it easy
to raise
capital
11
Continuous Life
Life of corporation stated in charter - may be
perpetual or limited to specific number of
years (can be extended)
Corporation is separate
legal entity, thus life not
affected by withdrawal,
death, or incapacity of
stockholder
12
Corporation Management
Stockholders manage corporation indirectly
through board of directors.
Board of directors
formulates operating policies
selects officers to execute policy and to
perform daily management functions
13
Page 490 in Book
Corporate
Organization
Chart
Page 491in Book
Additional Taxes
Corporations pay federal and state income taxes.
Stockholders pay taxes on cash dividends.
Corporate income is taxed twice - at the
corporate level and at the individual level.
With proprietorships and
partnerships, the owner's
share of earnings is
reported on his personal
income tax return.
16
Forming a Corporation
States grant corporate charters.
Although a corporation may have
operating divisions in a number of states,
it will be incorporated in only one state.
Some states have laws favorable to the
corporate form of business organization.
17
Forming a Corporation
The corporation establishes by-laws for
conducting its affairs upon receipt of its
charter from the state of incorporation.
A corporation must obtain a license subjecting the corporation's operating
activities to the general corporation
laws of the state - from each state in
which it does business.
18
Page 492 in Book
Stockholder Rights
Once it is chartered, the corporation sells
stock.
When a corporation has only one class of
stock it is common stock.
Ownership rights are specified in the
articles of incorporation or in the by-laws.
Proof of stock ownership is evidenced by a
printed or engraved form known as a stock
certificate.
20
Stock Certificate Shows...
name of the corporation
stockholder's name
class and special features of the stock
the number of shares owned
the signatures of
duly authorized
corporate officials
21
Questions in Issuing Stock
How many shares should be authorized
for sale?
How should the stock be issued?
At what price should the shares be
issued?
What value should be assigned to the
stock?
22
Authorized Stock
The amount of stock a corporation is
authorized to sell as indicated in the
corporate charter.
Disclose the number of shares
authorized in the stockholders' equity
section of the balance sheet.
23
Corporations Can Issue Stock
Directly to investors (typical in closely
held corporations)
Indirectly through an investment
banking firm (customary with publicly
held corporations)
24
Factors Involved in Setting Price of
Stock
Company's anticipated future
earnings
Its expected dividend rate per share
Its current financial position
Current state of the economy
Current state of the securities market
25
Par Value Stock
Is capital stock that has been assigned an
arbitrary value per share in the corporate
charter.
Par value is usually low because some states
levy a tax on the corporation based on par
value.
26
Par Value
Represents the legal capital per share
that must be retained in the business.
Is the amount that is not available for
withdrawal by stockholders.
27
Legal Capital
Is the amount per share of stock that
must be retained in the business for
the protection of corporate creditors.
28
No-Par Value Stock
Is capital stock that has not been assigned
a value per share in the corporate
charter.
May have a stated value assigned to it by
board of directors, which then becomes
the legal capital per share.
29
Stated Value of No-Par Stock
Is the amount per share assigned by
the board of directors to no-par stock.
Does not indicate or correspond to the
market value of the stock.
30
Relationship of Par and No-Par
Value to Legal Capital
Stock
Legal Capital Per Share
Par value
Par value
No-par value with
stated value
No-par value without
stated value
Stated value
Entire proceeds
31
Stockholders’ Equity Section of a
Corporation’s Balance Sheet...
Two Parts:
Paid-in (contributed) capital
Retained earnings (earned capital)
The distinction between paid-in capital and
retained earnings is important from a legal
and an economic point of view.
32
Paid-in Capital
Is the amount paid in to the
corporation by stockholders in
exchange for shares of ownership.
33
Retained Earnings
Is earned capital held for future use in the
business.
34
Accounting for
Common Stock Issues
The issue of common stock affects only
paid-in capital accounts.
When the issuance of common stock for
cash is recorded, the par value of the
shares is credited to Common Stock.
The portion of the proceeds above or
below par value is recorded in a
separate paid-in capital account.
35
Issuing Stock at Par
Assume Hydro-Slide, Inc., issues 1,000 shares of $1
par value of common stock at par for cash.
Cash
Stock
1,000
1,000
Common
36
Issuing Stock Above Par
If Hydro-Slide, Inc., issues an additional 1,000
shares of the $1 par value common stock for cash
at $5 per share, the entry is:
Cash
Common Stock
Paid-in Capital in
Excess of Par Value
5,000
1,000
4,000
37
Page 496 in Book
Hydro-Slide, Inc.
Partial Balance Sheet
Stockholders' equity
Paid-in capital
Common stock
Paid-in capital in excess of par
Total paid-in capital
Retained earnings
Total stockholders' equity
$ 2,000
4,000
$ 6,000
27,000
$33,000
Treasury Stock
Is a corporation's own stock
that has been issued
fully paid for
reacquired by the corporation
held in its treasury for future use
39
Corporations Acquire Treasury
Stock to...
Reissue the shares to officers and employees under
bonus and stock compensation plans.
Increase trading of the company's stock in the
securities market in the hopes of enhancing its
market value.
Have additional shares available for use in the
acquisition of other companies.
Reduce the number of shares outstanding and
thereby increase earnings per share.
Prevent a hostile takeover.
40
Mead, Inc.
Partial Balance Sheet
Stockholders' equity
Paid-in capital
Common stock,$5par value,
100,000 shares issued and
96,000 outstanding
Retained Earnings
Total stockholders’ equity
Page 498 in Book
$ 500,000
200,000
$ 700,000
Purchase of Treasury Stock
On February 1, 1998, Mead acquires 4,000 shares of
its stock at $8 per share.
Treasury Stock
Cash
32,000
32,000
42
Treasury Stock
The Treasury Stock account would increase by
the cost of the shares purchased - $32,000.
The original paid-in capital account, Common
Stock, would not be affected because the
number of issued shares does not change.
Treasury stock is deducted from total paid-in
capital and retained earnings in the
stockholders' equity section of the balance sheet.
43
Mead, Inc.
Partial Balance Sheet
Stockholders' equity
Paid-in capital
Common stock,$5par value,
100,000 shares issued and
96,000 outstanding
Retained Earnings
Total stockholders’ equity
700,000
Less: Treasury Stock
Total stockholders’ equity
Page 499 in Book
$ 500,000
200,000
32,000
$ 668,000
Outstanding Stock
The number of shares of issued stock
that are being held by stockholders.
45
Preferred Stock
Is capital stock that has contractual
preferences over common stock in certain
areas.
Preferred Stock may have priority to:
Dividends
Assets in the event of liquidation
Preferred stockholders do not
have voting rights.
46
Preferred Stock
Assume Stine Corporation issues 10,000 shares of
$10 par value preferred stock for $12 cash per share.
Cash
120,000
Preferred Stock
100,000
Paid-in Capital in Excess
20,000
of Par Value - Preferred Stock
(Preferred stock may have either a par value or nopar value.)
47
Dividend Preferences
Preferred stockholders have the right to
share in the distribution of corporate income
before common stockholders.
If the dividend rate of preferred stock is $5
per share, common shareholders will not
receive any dividends in the current year
until preferred stockholders have received $5
per share.
The first claim to dividends does not
guarantee dividends.
48
Cumulative Dividend
A feature of preferred stock entitling
the stockholder to receive current
and unpaid prior-year dividends
before common stockholders receive
any dividends
49
Dividends in Arrears
Are preferred dividends that were
scheduled to be declared but were not
declared during a given period.
50
Dividends in Arrears
Scientific-Leasing has 5,000 shares of 7%, $100
par value cumulative preferred stock
outstanding.
The annual dividend is $35,000 (5,000 x $7 per
share).
Dividends are 2 years in arrears.
Dividends in arrears ($35,000 x 2 years)
70,000 Current-year dividends
35,000 Total preferred dividends
$ 105,000
$
51
Dividends in Arrears
Not a liability because no obligation
exists until a dividend is declared by
the board of directors
Must be disclosed in the notes to the
financial statements
52
Liquidation Preference
Is a feature that gives preferred
stockholders preference to corporate
assets in the event of liquidation.
53
Dividend
A distribution by a corporation to its
stockholders on a pro rata basis
Pro rata means that if you own 10% of the
common shares, you will receive 10% of the
dividend.
Dividend forms:
cash
property
script (promissory note to pay cash)
stock
54
Cash Dividend
A pro rata distribution of cash
to stockholders.
55
Cash Dividend
For a corporation to pay a cash
dividend, it must have the following:
Retained earnings
Adequate cash
Declared dividends
56
Cash Dividend
In many states, payment of dividends from
legal capital is illegal.
Payment of dividends from paid-in capital
in excess of par is legal in some states.
Payment of dividends from retained
earnings is legal in all states.
Companies are frequently constrained by
agreements with lenders to pay dividends
only from retained earnings.
57
Entries for Cash Dividends
Three dates are important in
connection with dividends:
the declaration date
the record date
Month a nd ye a r
the payment date
Monday
Tue sday
Wedne sday
Thurs day
Friday
Saturday
Sunday
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
00
58
00
The Declaration Date
The date the board of directors
formally declares the cash dividend and
announces it to stockholders
Commits the corporation to a binding
legal obligation that cannot be
rescinded
An entry is required to recognize the
decrease in retained earnings and the
increase in the liability - Dividends
Payable
59
The Declaration Date
On December 1, 1998, the directors of Media
General declare a $0.50 per share cash dividend
on 100,000 shares of $10 par value common
stock.
The dividend is $50,000 (100,000 x $0.50).
12/1
Retained Earnings
Dividends Payable
50,000
50,000
60
The Record Date
The date when ownership of the
outstanding shares is determined for
dividend purposes.
No Entry Necessary
61
The Payment Date
The date dividend checks are mailed to the
stockholders.
January 20 is the payment date for
Media General.
Dividends Payable
Cash
50,000
50,000
62
Stock Dividends
A pro rata distribution of the corporation's own
stock to stockholders
Paid in stock
Results in a decrease in retained earnings and an
increase in paid-in capital
Does not decrease total stockholders' equity or
total assets
Often issued by companies that do not have
adequate cash to issue a cash dividend.
63
Stock Dividends
You have a 2% ownership interest in Cetus, Inc.,
owning 20 of its 1,000 shares of common stock.
In a 10% stock dividend, 100 shares (1,000 x
10%) of stock would be issued. You would
receive two shares (2% x 100), but your
ownership interest would remain at 2% (22/
1,100).
You now own more shares of stock, but your
ownership interest has not changed.
64
Reasons for Stock Dividends
To satisfy stockholders' dividend expectations
without spending cash
To increase the marketability of its stock by
increasing the number of shares outstanding and
thereby decreasing the market price per share
To emphasize that a portion of stockholders'
equity has been permanently reinvested in the
business and, therefore, is unavailable for cash
dividends
65
Stock Dividends
A small stock dividend (less than 20%
-25% of the corporation's issued stock) is
recorded at the fair market value per
share.
A large stock dividend (greater than 20%
- 25% of the corporation's issued stock) is
recorded at par or stated value per share.
66
Stock Dividends
Medland Corporation has $300,000 in retained
earnings and declares a 10% stock dividend on
its 50,000 shares of $10 par value common stock.
The current fair market value of the stock is $15
per share.
The number of shares to be issued is 5,000
(50,000 x 10%).
Retained Earnings will be decreased by $75,000
(5,000 x $15).
67
Stock Dividends
Retained Earnings
75,000
Common Stock Dividends
50,000
Distributable
Paid-in Capital in Excess 25,000
of Par Value
The Common Stock Dividends Distributable is
an equity account; not a liability account - because
assets will not be used to pay the dividend.
68
Stock Split
The issuance of additional shares
of stock to stockholders
accompanied by a reduction in the
par or stated value.
69
Stock Split
In a stock split, the number shares is
increased in the same proportion that the
par or stated value per share is decreased.
A stock split does not have any effect on
total paid-in capital, retained earnings, and
total stockholders' equity.
With a stock split the number of shares
increases.
70
Stock Split
Because a stock split does not affect
the balances in stockholders' equity
accounts, it is not necessary to
journalize a stock split.
71
Retained Earnings
Net income that is retained in the
business
The balance in retained earnings is
part of the stockholders' claim on the
total assets of the corporation.
Retained earnings does not represent a
claim on any specific asset.
72
Deficit
A debit balance in retained
earnings and reported as a
deduction in the stockholders'
equity section of the balance sheet
73
Retained Earnings Restrictions
Legal, contractual, or voluntary
circumstances that make a
portion of retained earnings
currently unavailable for dividends
74
KNIGHT-RIDDER, INC.
Partial Balance Sheet
(in millions)
Page 510 in Book
Stockholders' equity
Common stock, $.02 1/2 par value;
shares authorized -- 250,000,000;
shares issued-- 93,340,652
1,945
Additional paid-in capital
308,320
Retained earnings
821,243
Total stockholders' equity
$1,131,508
$
75
The Payout Ratio =
TOTAL CASH DIVIDENDS PAID ON COMMON STOCK
NET INCOME
Measures the percentage of earnings
distributed in the form of cash dividends to
common stockholders
76
The Dividend Yield =
DIVIDENDS PAID PER SHARE
STOCK PRICE AT END OF YEAR
Reports the rate of return an
investor earned from dividends.
77
Earnings Per Share =
NET INCOME - PREFERRED STOCK DIVIDENDS
AVERAGE COMMON SHARES OUTSTANDING
Measures the net income earned on each share
of common stock.
78
Price-Earnings Ratio =
MARKET PRICE PER SHARE OF STOCK
EARNINGS PER SHARE
In order to make a meaningful comparison of
earnings across firms, use the price-earnings
ratio.
The price-earnings ratio reflects the investors'
assessment of a company's future earnings.
79
Return on Common
Stockholders’ Equity Ratio =
NET INCOME -PREFERRED STOCK
DIVIDENDS
AVERAGE COMMON STOCKHOLDERS’
EQUITY
Measures the profitability from the
stockholders’ point of view.
80
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81