Financial Accounting: Tools for Business

Decision Making
Ninth Edition
Kimmel ● Weygandt ● Kieso

Chapter 11
Reporting and Analyzing
Stockholders’ Equity
Prepared Please
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Chapter Outline:
Learning Objectives
LO 1 Discuss the major characteristics of a corporation.
LO 2 Explain how to account for the issuance of
common, preferred, and treasury stock.
LO 3 Explain how to account for cash dividends, stock
dividends, and stock splits.
LO 4 Discuss how stockholders’ equity is reported and
analyzed.

Copyright ©2019 John Wiley & Sons, Inc. 2

Learning Objective 1
Discuss the Major Characteristics of a
Corporation

LO1 Copyright ©2019 John Wiley & Sons, Inc. 3

Corporate Form of Organization
An entity separate and distinct from its owners.

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Characteristics of a Corporation (1 of 2)
Characteristics that distinguish corporations from
proprietorships and partnerships
Advantages
• Separate legal existence
• Limited liability of stockholders
• Transferable ownership rights
• Ability to acquire capital
• Continuous life
• Corporation management
LO1 Copyright ©2019 John Wiley & Sons, Inc. 5
Characteristics of a Corporation (2 of 2)
Characteristics that distinguish corporations from
proprietorships and partnerships.
Disadvantages
• Corporation management
• Government regulations
• Additional taxes

LO1 Copyright ©2019 John Wiley & Sons, Inc. 6

Corporation Organization Chart

LO1 Copyright ©2019 John Wiley & Sons, Inc. 7

Other Forms of Business Organization
• Limited partnerships
• Limited liability partnerships (LLPs)
• Limited liability companies (LLCs)
• S Corporations
 No double taxation
 Cannot have more than 100 shareholders

LO1 Copyright ©2019 John Wiley & Sons, Inc. 8

Forming a Corporation
• Initial steps of forming
• File application with Secretary of State
• State grants charter
• Corporation develops by-laws
• Companies generally incorporate in a state whose laws
are favorable to the corporate form of business.
• Corporations engaged in interstate commerce must
obtain a license from each state in which they do
business.
LO1 Copyright ©2019 John Wiley & Sons, Inc. 9
Stockholder Rights (1 of 3)
1. Vote in election of
board of directors and
on actions that require
stockholder approval

2. Share the corporate

earnings through
receipt of dividends

LO1 Copyright ©2019 John Wiley & Sons, Inc. 10

Stockholder Rights (2 of 3)
3. Keep the same percentage ownership when new
shares of stock are issued (preemptive right)

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Stockholder Rights (3 of 3)
4. Share in assets upon liquidation in proportion to their
holdings
• Called a residual claim

LO1 Copyright ©2019 John Wiley & Sons, Inc. 12

Stock Certificate

LO1 Copyright ©2019 John Wiley & Sons, Inc. 13

Stock Issue Considerations (1 of 5)
Authorized Stock
• Charter indicates the number of shares of stock that a
corporation is authorized to sell
• Number of authorized shares is often reported in
stockholders’ equity section

LO1 Copyright ©2019 John Wiley & Sons, Inc. 14

Stock Issue Considerations (2 of 5)
Issuance of Stock
• Corporation can issue common stock
 Directly to investors or
 Indirectly through an investment banking firm

LO1 Copyright ©2019 John Wiley & Sons, Inc. 15

Stock Issue Considerations (3 of 5)
Par and No-Par Value Stocks
• Par value stock has been assigned a value per share
• Years ago, par value determined legal capital per
share that a company must retain in business for
protection of corporate creditors
• Many states do not require a par value
• No-par value stock is fairly common
• In many states, the board of directors assigns a stated
value to no-par shares

LO1 Copyright ©2019 John Wiley & Sons, Inc. 16

Stock Issue Considerations (4 of 5)
Review Question
Which of these statements is false?
a. Ownership of common stock gives the owner a
voting right.
b. The stockholders’ equity section begins with paid-
in capital.
c. The authorization of capital stock does not result in
a formal accounting entry.
d. Legal capital is intended to protect stockholders.

LO1 Copyright ©2019 John Wiley & Sons, Inc. 17

Stock Issue Considerations (5 of 5)
Review Question
Which of these statements is false?
a. Ownership of common stock gives the owner a
voting right.
b. The stockholders’ equity section begins with paid-
in capital.
c. The authorization of capital stock does not result in
a formal accounting entry.
d. Legal capital is intended to protect stockholders.

LO1 Copyright ©2019 John Wiley & Sons, Inc. 18

Do It! 1a: Corporate Organization
Indicate whether each of the following statements is true or false.
1. Similar to partners in a partnership, stockholders of a False
corporation have unlimited liability.
2. It is relatively easy for a corporation to obtain capital
True
through the issuance of stock.
3. The separation of ownership and management is an
False
advantage of the corporate form of business.
4. The journal entry to record the authorization of capital
stock includes a credit to the appropriate capital stock False
account.
5. All states require a par value per share for capital stock. False

LO1 Copyright ©2019 John Wiley & Sons, Inc. 19

Corporate Capital (1 of 2)
Paid-in Capital in
Common Stock
Excess of Par-Common
Account
Account
Paid-in Capital
Paid-in Capital in
Preferred Stock
Excess of Par-Preferred
Account
Account

Two Primary Retained Earnings

Sources of Equity Account

Paid-in capital is the total amount of cash and other

assets paid in to the corporation by stockholders in
exchange for capital stock.
LO1 Copyright ©2019 John Wiley & Son, Inc. 20
Corporate Capital (2 of 2)
Paid-in Capital in
Common Stock
Excess of Par-Common
Account
Account
Paid-in Capital
Paid-in Capital in
Preferred Stock
Excess of Par-Preferred
Account
Account

Two Primary Retained Earnings

Sources of Equity Account

Retained earnings is net income that a corporation

retains for future use.

LO1 Copyright ©2019 John Wiley & Son, Inc. 21

Retained Earnings (1 of 2)
Illustration: Net income is recorded in Retained Earnings by a
closing entry that debits Income Summary and credits.
Retained Earnings. Assuming that net income for Delta
Robotics in its first year of operations is $130,000, the closing
entry is
       

Dec. 31 Income Summary 130,000  

  Retained Earnings   130,000
       

LO1 Copyright ©2019 John Wiley & Son, Inc. 22

Retained Earnings (2 of 2)
If Delta Robotics has a balance of $800,000 in common stock
and $130,000 in retained earnings at the end of its first year,
its stockholders’ equity section is as follows.

Delta Robotics
Balance Sheet (partial)
Stockholders’ equity
Paid-in capital
Common stock $800,000
Retained earnings 130,000
Total stockholders’ equity $930,000

LO1 Copyright ©2019 John Wiley & Son, Inc. 23

Capital Comparison
Comparison of accounts reported on the balance sheet as
owners’ equity and stockholders’ equity

LO1 Copyright ©2019 John Wiley & Son, Inc. 24

DO IT! 1b: Corporate Capital
Illustration: At the end of its first year of operation, Doral
Corporation has $750,000 of common stock and net income of
$122,000.
(a) Prepare the closing entry for net income.
       

Dec. 31 Income Summary 122,000  

  Retained Earnings   122,000
       

(b) Prepare the stockholders’ equity section at year-end .

Stockholders’ equity
Common Stock $750,000
Retained earnings 122,000
Total stockholders’ equity $872,000

LO1 Copyright ©2019 John Wiley & Son, Inc. 25

Learning Objective 2
Explain How to Account for the
Issuance of Common, Preferred, and
Treasury Stock

LO2 Copyright ©2019 John Wiley & Sons, Inc. 26

Accounting for Common Stock
Primary Objectives
a. Identify the specific sources of paid-in capital
b. Maintain the distinction between paid-in capital and
retained earnings
c. Other than consideration received, the issuance of
common stock affects only paid-in capital accounts.

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Issuing Par Value Common Stock for Cash
(1 of 2)

Illustration: Hydro-Slide, Inc. issues 1,000 shares of $1 par

value common stock. Prepare Hydro-Slide’s journal entry if
(a) 1,000 share are issued for $1 per share
       

  Cash 1,000  
  Common Stock (1,000 × $1)   1,000
       

(b) 1,000 shares are issued for $5 per share

       

  Cash 5,000  
  Common Stock (1,000 × $1)   1,000
  Paid-in Capital in Excess of Par Value   4,000
       

LO2 Copyright ©2019 John Wiley & Son, Inc. 28

Issuing Par Value Common Stock for Cash
(2 of 2)

Hydro-Slide, Inc.
Balance Sheet (partial)

Stockholders' equity
Paid-in capital
Common stock $ 2,000
Paid-in capital in excess of par value 4,000
Total paid-in capital 6,000
Retained earnings 27,000
Total stockholders' equity $33,000

LO2 Copyright ©2019 John Wiley & Son, Inc. 29

Issuing Stated Value Common Stock
Illustration: Hydro-Slide, Inc. issues $5 of no-par value stock
with a stated value of $1 and the company issues 5,000 shares
at $8 per share for cash.
       

  Cash 5,000  
  Common Stock (1,000 × $1)   1,000
Paid-in Capital in Excess of Stated
  Value   4,000
       

LO2 Copyright ©2019 John Wiley & Son, Inc. 30

Issuing No-Par Value Common Stock for
Cash
Illustration: Hydro-Slide, Inc. issues no-par stock that has no
stated value. The company issues 5,000 shares at $8 per share
for cash.
       

  Cash 40,000  
  Common Stock   40,000
       

LO2 Copyright ©2019 John Wiley & Son, Inc. 31

Accounting for Preferred Stock (1 of 2)
Typically, preferred stockholders have a priority as to
Distributions of earnings (dividends)
Assets in event of liquidation
Generally do not have voting rights
Accounting for preferred stock at issuance is similar to
that for common stock.

LO2 Copyright ©2019 John Wiley & Son, Inc. 32

Accounting for Preferred Stock (2 of 2)
Illustration: Stine Corporation issues 10,000 shares of $10 par
value preferred stock for $12 cash per share.
Journal entry to record the issuance
       
  Cash 120,000  
  Preferred Stock (10,000 × $1)   100,000
Paid-in Capital in Excess of Par Value-
 
   Preferred Stock    20,000
       

Preferred stock may have a par value or no-par value.

LO2 Copyright ©2019 John Wiley & Son, Inc. 33

DO IT! 2a: Issuance of Stock (1 of 2)
Illustration: Cayman Corporation begins operations on March
1 by issuing 100,000 shares of $1 par value common stock for
cash at $12 per share.
Journalize the issuance of the common shares.
       

  Cash 1,200,000  
  Common Stock (100,000 × $1)   100,000
  Paid-in Capital in Excess of Par    
  Value-Common Stock   1,100,000
       

LO2 Copyright ©2019 John Wiley & Son, Inc. 34

DO IT! 2a: Issuance of Stock (2 of 2)
Illustration: On March 28, Cayman issues 1,500 shares of $10
par value preferred stock for cash at $30 per share.
Journalize the issuance of preferred shares.
       

  Cash 45,000  
  Preferred Stock (1,500 × $10)   15,000
  Paid-in Capital in Excess of Par    
  Value-Preferred Stock   30,000
       

LO2 Copyright ©2019 John Wiley & Son, Inc. 35

Stockholders’ Equity with Treasury Stock
Paid-in Capital in
Common Stock
Excess of Par-Common
Account
Account
Paid-in Capital
Paid-in Capital in
Preferred Stock
Excess of Par-Preferred
Account
Account

Two Primary Retained Earnings

Sources of Equity Account

Less:
Treasury Stock
Account

LO2 Copyright ©2019 John Wiley & Son, Inc. 36

Treasury Stock
Treasury stock is a corporation’s own stock that it has
reacquired from shareholders but not retired.
Corporations acquire treasury stock for various reasons
a. To reissue the shares to officers and employees
under bonus and stock compensation plans
b. To enhance the stock’s market value.
c. To have additional shares available for use in the
acquisition of other companies
d. To increase earnings per share

LO2 Copyright ©2019 John Wiley & Son, Inc. 37

Accounting for Treasury Stock
Companies generally use cost method
Debit Treasury Stock for price paid to reacquire shares
Considered to be issued but not outstanding shares
a. Number of issued shares does not change
Reduces stockholders’ equity

LO2 Copyright ©2019 John Wiley & Son, Inc. 38

Purchase of Treasury Stock
Mead, Inc.
Balance Sheet (partial)
Stockholders’ equity
Paid-in capital
Common stock, $5 par value, 400,000 shares
authorized, 100,000 shares issued and outstanding $500,000
Retained earnings 200,000
Total stockholders’ equity $700,000

Illustration: On February 1, 2022, Mead acquires 4,000 shares of its

stock at $8 per share.
       
  Treasury Stock (4,000 × $8) 32,000  
  Cash   32,000
       

LO2 Copyright ©2019 John Wiley & Son, Inc. 39

Treasury Stock on the Balance Sheet
Mead, Inc.
Balance Sheet (partial)
Stockholders’ equity
Paid-in capital
Common stock, $5 par value, 400,000 shares
authorized, 100,000 shares issued, 96,000
outstanding $500,000
Retained earnings 200,000
Total paid-in capital and retained earnings 700,000
Less: Treasury stock (4,000 shares) 32,000
Total stockholders’ equity $668,000

Both the number of shares issued (100,000) and the number of

shares held as treasury (4,000) are disclosed.
LO2 Copyright ©2019 John Wiley & Son, Inc. 40
Treasury Stock (1 of 2)
Review Question
Treasury stock may be repurchased
a. to reissue the shares to officers and employees
under bonus and stock compensation plans.
b. to signal to the stock market that management
believes the stock is underpriced.
c. to have additional shares available for use in the
acquisition of other companies.
d. More than one of the above.

LO2 Copyright ©2019 John Wiley & Sons, Inc. 41

Treasury Stock (2 of 2)
Review Question
Treasury stock may be repurchased
a. to reissue the shares to officers and employees
under bonus and stock compensation plans.
b. to signal to the stock market that management
believes the stock is underpriced.
c. to have additional shares available for use in the
acquisition of other companies.
d. more than one of the above.

LO2 Copyright ©2019 John Wiley & Sons, Inc. 42

DO IT! 2b: Issuance of Stock
Santa Anita Inc. purchases 3,000 shares of its $50 par value
common stock for $180,000 cash on July 1. It expects to hold
the shares in the treasury until resold.
Journalize the treasury stock transaction.
       

July 1 Treasury Stock 180,000  

  Cash   180,000
       

LO2 Copyright ©2019 John Wiley & Son, Inc. 43

Learning Objective 3
Explain How to Account for Cash
Dividends, Stock Dividends, and Stock
Splits

LO3 Copyright ©2019 John Wiley & Sons, Inc. 44

Nature of Dividends
Dividends are a distribution of cash or stock to
stockholders on a pro rata (proportional to ownership)
basis.
Types of dividends
Cash
Property
Stock
Scrip (promissory note)

LO3 Copyright ©2019 John Wiley & Son, Inc. 45

Cash Dividend Requirements
For a corporation to pay a cash dividend, it must have
a. Sufficient retained earnings
Payment of cash dividends from retained earnings
is legal in all states
b. Adequate cash
c. A declaration of dividends by Board of Directors

LO3 Copyright ©2019 John Wiley & Son, Inc. 46

Cash Dividend Dates
Three dividend dates
a. Declaration date
b. Record date
c. Payment date
Companies make accounting entries on the declaration
date and the payment date.

LO3 Copyright ©2019 John Wiley & Son, Inc. 47

Recording Cash Dividends
Illustration: On December 1, 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 payable on
January 20 to shareholders of record on December 22.
       

Dec. 1 Cash Dividends 50,000  

  Dividends Payable   50,000
  (To record the declaration of cash dividends)    
       

22 No entry - Date of declaration    

       

Jan. 20 Dividends Payable 50,000  

  Cash   50,000
 
(To record the payment of cash dividends)  
 
   
   
LO3 Copyright ©2019 John Wiley & Son, Inc. 48
Cash Dividends (1 of 2)
Review Question
Entries for cash dividends are required on the:
a. declaration date and the record date.
b. record date and the payment date.
c. declaration date, record date, and payment date.
d. declaration date and the payment date.

LO3 Copyright ©2019 John Wiley & Sons, Inc. 49

Cash Dividends (2 of 2)
Review Question
Entries for cash dividends are required on the:
a. declaration date and the record date.
b. record date and the payment date.
c. declaration date, record date, and payment date.
d. declaration date and the payment date.

LO3 Copyright ©2019 John Wiley & Sons, Inc. 50

Dividend Preferences
Right to receive dividends before common stockholders
Per share dividend amount is stated as a percentage of
preferred stock’s par value or as a specified amount
Cumulative Dividend
 Preferred stockholders must be paid current-year
dividends and any unpaid prior-year dividends
before common stockholders receive dividends

LO3 Copyright ©2019 John Wiley & Son, Inc. 51

Cumulative Dividend Feature
Illustration: Scientific Leasing has 5,000 shares of 7%, $100
par value, cumulative preferred stock outstanding. Each $100
share pays a $7 dividend (.07 × $100). The annual dividend is
$35,000 (5,000 × $7 per share). If dividends are two years in
arrears, preferred stockholders are entitled to receive the
following dividends.
Dividends in arrears ($35,000 × 2) $ 70,000
Current-year dividends 35,000
Total preferred dividends $105,000

LO3 Copyright ©2019 John Wiley & Son, Inc. 52

Cumulative Dividend (1 of 2)
Review Question
U-Bet Corporation has 10,000 shares of 8%, $100 par
value, cumulative preferred stock outstanding at
December 31, 2022. No dividends were declared in 2020
or 2021. If U-Bet wants to pay $375,000 of dividends in
2022, common stockholders will receive
a. $0.
b. $295,000.
c. $215,000.
d. $135,000.
LO3 Copyright ©2019 John Wiley & Sons, Inc. 53
Cumulative Dividend (2 of 2)
Review Question
U-Bet Corporation has 10,000 shares of 8%, $100 par
value, cumulative preferred stock outstanding at
December 31, 2022. No dividends were declared in 2020
or 2021. If U-Bet wants to pay $375,000 of dividends in
2022, common stockholders will receive
a. $0.
b. $295,000.
c. $215,000.
d. $135,000.
LO3 Copyright ©2019 John Wiley & Sons, Inc. 54
DO IT! 3a: Preferred Stock Dividends (1 of 3)
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2022. At December
31, 2022, the company declared a $60,000 cash dividend.
Determine the dividend paid to preferred stockholders and
common stockholders if
Preferred stock is noncumulative, and the company has not missed
any dividends in previous years.
Preferred stockholders are paid only this year’s dividend
Preferred stockholders = $12,000 (2,000 x .06 x $100)
Common stockholders = $48,000 ($60,000 − $12,000)

LO3 Copyright ©2019 John Wiley & Son, Inc. 55

DO IT! 3a: Preferred Stock Dividends (2 of 3)
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2022. At December
31, 2022, the company declared a $60,000 cash dividend.
Determine the dividend paid to preferred stockholders and
common stockholders if
2. Preferred stock is noncumulative, and the company did not pay
a dividend in each of the two previous years.
Past unpaid dividends do not have to be paid
Preferred stockholders = $12,000 (2,000 x .06 x $100)
Common stockholders = $48,000 ($60,000 − $12,000)

LO3 Copyright ©2019 John Wiley & Son, Inc. 56

DO IT! 3a: Preferred Stock Dividends (3 of 3)
MasterMind Corporation has 2,000 shares of 6%, $100 par value
preferred stock outstanding at December 31, 2022. At December
31, 2022, the company declared a $60,000 cash dividend.
Determine the dividend paid to preferred stockholders and
common stockholders if
3. Preferred stock is cumulative, and the company did not pay a
dividend in each of the two previous years.
Past unpaid dividends do not have to be paid
Preferred stockholders = $36,000 (3 × 2,000 × .06 × $100)
Common stockholders = $24,000 ($60,000 − $36,000)

LO3 Copyright ©2019 John Wiley & Son, Inc. 57

Reasons for Stock Dividends
A pro rata (proportional to ownership) distribution of the
corporation’s own stock to stockholders
Reasons why corporations issue stock dividends
a. Satisfy stockholders’ dividend expectations without
spending cash
b. Increase marketability of corporation’s stock
c. Emphasize a portion of stockholders’ equity has
been permanently reinvested in business

LO3 Copyright ©2019 John Wiley & Son, Inc. 58

Small and Large Stock Dividends
a. Small stock dividend
Less than 20–25% of corporation’s issued stock
Recommendation is to record at the fair market value
of the stock
Based on assumption that a small stock dividend will
have little effect on market price of outstanding
shares
b. Large stock dividend
Greater than 20–25% of issued stock
Normally recorded at par value
LO3 Copyright ©2019 John Wiley & Son, Inc. 59
 Effects of Stock Dividends
Before After
Dividend Change Dividend
Stockholders’ equity
Paid-in capital
Common stock, $10 par $500,000 $ 50,000 $550,000
Paid-in capital in excess of par 25,000 25,000
Total paid-in capital 500,000 +75,000 575,000
Retained earnings 300,000 -75,000 225,000
Total stockholders’ equity $800,000 $ 0 $800,000
Outstanding shares 50,000 +5,000 55,000
Par value per share $ 10.00 $ 0 $ 10.00

LO3 Copyright ©2019 John Wiley & Son, Inc. 60

Stock Splits (1 of 2)
a. Issuance of additional shares to stockholders
according to their percentage ownership
b. Reduction in par or stated value per share
c. Increase in number of shares outstanding
d. Reduces market value of shares
e. No journal entry recorded, no affect on any balance in
stockholders’ equity

LO3 Copyright ©2019 John Wiley & Son, Inc. 61

Stock Splits (2 of 2)
Effect of 4-for-1 stock split for stockholders

LO3 Copyright ©2019 John Wiley & Son, Inc. 62

 Stock Split Effects Before
Stock Split
2 for 1 After
Change Stock Split
Stockholders’ equity
Paid-in capital
Common stock, $10 par
(before: 50,000 $10 par shares;
after: 100,000 $5 par shares) $500,000 $500,000
Paid-in capital in excess of par 0 0
Total paid-in capital 500,000 $ 0 500,000
Retained earnings 300,000 0 300,000
Total stockholders’ equity $800,000 $ 0 $800,000
Outstanding shares 50,000 +50,000 100,000
Par value per share $ 10.00 $ 5.00 $ 5.00

LO3 Copyright ©2019 John Wiley & Son, Inc. 63

Stock Dividend vs Stock Split Effects
Differences between the effects of stock dividends and
stock splits
Item Stock Dividend Stock Split
Total paid-in capital Increase No change
Total retained earnings Decrease No change
Total par value (common stock) Increase No change
Par value per share No change Decrease
Shares outstanding Increase Increase
Total stockholders' equity No change No change

LO3 Copyright ©2019 John Wiley & Sons, Inc. 64

Stock Dividends (1 of 2)
Review Question
Which of these statements about stock dividends is true?
a. Stock dividends reduce a company’s cash balance.
b. A stock dividend has no effect on total
stockholders’ equity.
c. A stock dividend decreases total stockholders’
equity.
d. A stock dividend ordinarily will increase total
stockholders’ equity.

LO3 Copyright ©2019 John Wiley & Sons, Inc. 65

Stock Dividends (2 of 2)
Review Question
Which of these statements about stock dividends is true?
a. Stock dividends reduce a company’s cash balance.
b. A stock dividend has no effect on total
stockholders’ equity.
c. A stock dividend decreases total stockholders’
equity.
d. A stock dividend ordinarily will increase total
stockholders’ equity.

LO3 Copyright ©2019 John Wiley & Sons, Inc. 66

DO IT! 3b: Stock Dividends and Splits (1 of 2)
Due to five years of record earnings at Sing CD Corporation, the
market price of its 500,000 shares of $2 par value common stock
tripled from $15 per share to $45. During this period, paid-in
capital remained the same at $2,000,000. Retained earnings
increased from $1,500,000 to $10,000,000. President Joan Elbert is
considering either a 10% stock dividend or a 2-for-1 stock split.
Show the before-and-after effects of each option on (a) retained
earnings, (b) total stockholders’ equity, and (c) par value per share.

LO3 Copyright ©2019 John Wiley & Son, Inc. 67

DO IT! 3b: Stock Dividends and Splits (2 of 2)
Sing CD Corporation has had five years of record earnings. Due to
this success, the market price of its 500,000 shares of $2 par value
common stock has tripled from $15 per share to $45. President
Joan Elbert is considering either a 10% stock dividend or a 2-for-1
stock split.
Run slide in presentation mode to reveal Original After After
solution. Balances Dividend Split
Paid-in capital $ 2,000,000 $ 4,250,000 $ 2,000,000
Retained earnings 10,000,000 7,750,000 10,000,000
Total stockholders’ equity $12,000,000 $12,000,000 $12,000,000
Outstanding shares 500,000 550,000 1,000,000
Par value per share $2.00 $2.00 $1.00

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Learning Objective 4
Discuss How Stockholders’ Equity is
Reported and Analyzed

LO4 Copyright ©2019 John Wiley & Sons, Inc. 69

Retained Earnings
a. Is net income that a company retains in the business
b. Net income increases Retained Earnings and a net
loss decreases Retained Earnings
c. Retained earnings is part of the stockholders’ claim
on the total assets of the corporation
d. Debit balance in Retained Earnings is identified as a
deficit

LO4 Copyright ©2019 John Wiley & Son, Inc. 70

Presentation of Accumulated Deficit
Groupon, Inc.
Balance Sheet (partial)
(in thousands)
Stockholders’ equity
Paid-in capital
Common stock $ 70
Paid-in capital in excess of par value 1,885,301
Total paid-in capital 1,885,371
Accumulated deficit (921,960)
Total paid-in capital and retained earnings 963,411
Less: Treasury stock 198,467
Total stockholders’ equity $ 764,944

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Retained Earnings Restrictions
Restrictions can result from
a. Legal restrictions
b. Contractual restrictions
c. Voluntary restrictions

Tektronix Inc.
Notes to the Financial Statements
Certain of the Company’s debt agreements require compliance with
debt covenants. Management believes that the Company is in
compliance with such requirements.

LO4 Copyright ©2019 John Wiley & Son, Inc. 72

Balance Sheet Presentation of
Stockholders’ Equity
Reported in the stockholders’ equity section of the balance
sheet
a. Paid-in capital, retained earnings, accumulated
other comprehensive income, and treasury stock
Paid-in capital components
b. Capital stock. Preferred stock appears before
common stock because of its preferential rights
c. Additional paid-in capital. Excess amounts paid in
over par or stated value and paid-in capital from
LO4 treasury stock Copyright ©2019 John Wiley & Son, Inc. 73
Stockholders’ Equity Presentation
Graber Inc.
Stockholders’ equity Balance Sheet (partial)
Paid-in capital
Capital stock
9% preferred stock, $100 par value, cumulative,
10,000 shares authorized, 6,000 shares issued
and outstanding $ 600,000
Common stock, no par, $5 stated value,
500,000 shares authorized, 400,000 shares
issued, and 390,000 outstanding 2,000,000
Total capital stock 2,600,000
Additional paid-in capital
Paid-in capital in excess of par value—preferred stock $ 30,000
Paid-in capital in excess of stated value—common stock 1,050,000
Total additional paid-in capital 1,080,000
Total paid-in capital 3,680,000
Retained earnings (Restricted for the cost of treasury stock) 1,050,000
Total paid-in capital and retained earnings 4,730,000
Accumulated other comprehensive income 110,000
Less: Treasury stock (10,000 common shares) 80,000
Total stockholders’ equity $4,760,000
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DO IT! 4a: Stockholders’ Equity Section
Jennifer Corporation has issued 300,000 shares of $3 par
value common stock. It is authorized to issue 600,000 shares.
The paid-in capital in excess of par value on the common
stock is $380,000. The corporation has reacquired 15,000
shares at a cost of $50,000 and is currently holding those
shares. It also had a cumulative other comprehensive loss of
$82,000. The corporation also has 4,000 shares issued and
outstanding of 8%, $100 par value preferred stock. It is
authorized to issue 10,000 shares. The paid-in capital in
excess of par value on the preferred stock is $97,000.
Retained earnings is $610,000.
Prepare the stockholders’ equity section of the balance sheet.

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DO IT! 4a: Stockholders’ Equity Section
Jennifer Corporation
Stockholders’ equity Balance Sheet (partial)
Paid-in capital
Capital stock
8% preferred stock, $100 par value, cumulative,
10,000 shares authorized, 4,000 shares issued
and outstanding $ 400,000
Common stock, $3 par value, 600,000 shares
authorized, 300,000 shares issued, and
285,000 shares outstanding 900,000
Total capital stock 1,300,000
Additional paid-in capital
Paid-in capital in excess of par value—preferred stock $ 97,000
Paid-in capital in excess of stated value—common stock 380,000
Total additional paid-in capital 477,000
Total paid-in capital 1,777,000
Retained earnings 610,000
Total paid-in capital and retained earnings 2,387,000
Accumulated other comprehensive loss 82,000
Less: Treasury stock (15,000 common shares) 50,000
Total stockholders’ equity $2,255,000
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Analysis of Stockholders’ Equity (1 of 2)
Dividend Record
Illustration: Payout ratio for Nike in 2016 and 2015.
Blank 2016 2015
Dividends (in millions) $1,133 $1,022
Nel income (in millions) 2,440 3,760

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Analysis of Stockholders’ Equity (2 of 2)
Earnings Performance
Illustration: Return on common stockholders’ equity ratio for
Nike in 2016 and 2015.
(in millions) 2016 2015 2014
Preferred dividends $ -0- $ -0- $ -0-
Common stockholders' equity 12,407 12,258 12,707

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Debt Versus Equity Decision
Bond Financing Advantages
1. Stockholder control is not affected.
Bondholders do not have voting rights, so current owners
(stockholders) retain full control of the company.

2. Tax savings result.

Bond interest is deductible for tax purposes; dividends on
stock are not.

3. Return on common stockholders' equity may be higher.

Although bond interest expense reduces net income, return
on common stockholders' equity often is higher under bond
financing because no additional shares of common stock are
issued.

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Return on Common Stockholders’ Equity

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Effects on Return on Common Stockholders’ Equity (1
of 2)

Illustration: Microsystems Inc. currently has 100,000 shares of

common stock outstanding issued at $25 per share and no debt. It
is considering two alternatives for raising an additional $5 million:
Plan A involves issuing 200,000 shares of common stock at the
current market price of $25 per share.
Plan B involves issuing $5 million of 12% bonds at face value.
Income before interest and taxes will be $1.5 million; income taxes
are expected to be 30%.
The alternative effects on the return on common stockholders’
equity are shown in the next Illustration.
LO4 Copyright ©2019 John Wiley & Sons, Inc. 81
Effects on Return on Common Stockholders’ Equity (2
of 2)

Plan A: Plan B:
Issue Stock Issue Bonds
Income before interest and taxes $1,500,000 $1,500,000
Interest (12% × $5,000,000) 0 600,000
Income before income taxes 1,500,000 900,000
Income tax expense (30%) 450,000 270,000
Net income $1,050,000 $630,000
Common stockholders’ equity $7,500,000 $2,500,000
Return on common stockholders’ equity 14% 25.2%

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Do It! 4b: Analyzing Stockholders’
Equity (1 of 2)
On January 1, 2022, Siena Corporation purchased 2,000 shares of
treasury stock. Other information is provided below.
2022 2021
Net income $110,000 $110,000
Dividends on preferred stock $10,000 $10,000
Dividends on common stock $1,600 $2,000
Common stockholders’ equity, beg. of year $400,000* $500,000
Common stockholders’ equity, end of year $400,000 $500,000
*Adjusted for purchase of treasury stock.
Compute the return on common stockholders’ equity for each year.

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Do It! 4b: Analyzing Stockholders’
Equity (2 of 2) 2022 2021
Net income $110,000 $110,000
Dividends on preferred stock $10,000 $10,000
Dividends on common stock $1,600 $2,000
Common stockholders’ equity, beg. of year $400,000* $500,000
Common stockholders’ equity, end of year $400,000 $500,000
*Adjusted for purchase of treasury stock.
Compute the return on common stockholders’ equity for each year.

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Learning Objective 5
Appendix 11A
Prepare Entries for Stock Dividends

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Entries for Stock Dividends
Illustration: Medland Corporation declares a 10% stock
dividend on its 50,000 shares of $10 par value common stock.
The current fair market value of its stock is $15 per share.
Record the entry on the declaration date
       
  Stock Dividends 75,000  
  Common Stock Dividends Distributable   50,000
  Paid-in Capital in Excess of Par Value   25,000
       

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Entries for Stock Dividends (5 of 5)
Medland Corporation
Balance Sheet (partial)
Paid-in capital
Common stock $500,000
Common stock dividends distributable 50,000
Paid-in capital in excess of par—common stock 25,000
Total paid-in capital $575,000

Record the journal entry for the issuance of the dividend shares.
       

  Common Stock Dividends Distributable 50,000  

  Common Stock   50,000
       

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Learning Objective 6
Compare the Accounting for
Stockholders’ Equity Under GAAP and
IFRS

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A Look at IFRS (1 of 5)
Similarities
Aside from the terminology used, the accounting transactions for
the issuance of shares and the purchase of treasury stock are
similar.
Like GAAP, IFRS does not allow a company to record gains or
losses on purchases of its own shares.
The accounting related to prior period adjustments is essentially
the same under IFRS and GAAP.
The computations related to earnings per share are essentially
the same under IFRS and GAAP.

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A Look at IFRS (2 of 5)
Similarities
The income statement using IFRS is called the statement of
comprehensive income.
The statement of comprehensive income is presented in a one- or two-
statement format.
a. The single-statement approach includes all items of income and
expense, as well as each component of other comprehensive
income or loss by its individual characteristic.
b. In the two-statement approach, a traditional income statement is
prepared. It is then followed by a statement of comprehensive
income, which starts with net income or loss and then adds
other comprehensive income or loss items.
Regardless of approach, reporting income tax expense is required.

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A Look at IFRS (3 of 5)
Differences
Under IFRS, the term reserves is used to describe all equity
accounts other than those arising from contributed (paid-in)
capital.
a. Includes reserves related to retained earnings, asset
revaluations, and fair value differences
Many countries have a different mix of investor groups than in the
United States.
b. In Germany, financial institutions like banks are not only major
creditors of corporations but often are the largest corporate
stockholders as well.
c. In the United States, Asia, and the United Kingdom, many
companies rely on substantial investment from private investors.
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A Look at IFRS (4 of 5)
Differences
There are often terminology differences for equity accounts.
GAAP IFRS
Common stock Share capital—ordinary
Stockholders Shareholders
Par value Nominal or face value
Authorized stock Authorized share capital
Preferred stock Share capital—preference
Paid-in capital Issued/allocated share capital
Paid-in capital in excess of par—common stock Share premium—ordinary
Paid-in capital in excess of par—preferred stock Share premium—preference
Retained earnings Retained earnings or Retained profits
Retained earnings deficit Accumulated losses
Accumulated other comprehensive income General reserve and other reserve
accounts

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A Look at IFRS (5 of 5)
Differences
A major difference between IFRS and GAAP relates to the account
Revaluation Surplus.
a. Arises under IFRS because companies are permitted to revalue their
property, plant, and equipment to fair value under certain
circumstances.
b. Part of general reserves under IFRS and is not considered contributed
capital
IFRS often uses terms such as retained profits or accumulated profit or
loss to describe retained earnings. The term retained earnings is also
often used.
Equity is given various descriptions under IFRS, such as shareholders’
equity, owners’ equity, capital and reserves, and shareholders’ funds.

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Copyright
Copyright © 2019 John Wiley & Sons, Inc.
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from the use of the information contained herein.

Copyright ©2019 John Wiley & Son, Inc. 94