Professional Documents
Culture Documents
Equity
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18
18-2
Learning Objectives
18-3
Net Assets
(Residual Interest)
18-4
Amounts invested
by shareholders
Shareholders Equity
Paid-in Capital
Retained Earnings
Accumulated Other
Comprehensive Income
Amounts earned
by corporation
Other
gains and
losses not
included in
net income
18-5
Advantages:
Disadvantages:
Double taxation.
Government regulation.
18-6
Types of Corporations
18-7
Hybrid Organizations
S Corporation
Limited liability protection of a corporation.
Maximum number of owners.
Double
taxation
avoided.
18-8
Formation of a Corporation
Composition of initial
board of directors.
18-9
Formation of a Corporation
Articles of incorporation
are filed with the state.
State issues a
corporate charter.
Shares of
stock issued.
Board of directors
appoint officers.
Board of directors
elected by
shareholders.
18-10
Right
to vote.
Right to share
in profits when
dividends are
declared.
Preemptive
right to maintain
percentage
ownership.
Right to share
in distribution of
assets if company
is liquidated.
Authorized
Shares
The maximum number
of shares of capital
stock that can be sold
to the public is called
the authorized number
of shares.
18-11
Authorized
Shares
Issued
shares are
authorized
shares of
stock that
have been
sold.
Unissued
shares are
authorized
shares of
stock that
have never
been sold.
18-12
Authorized
Shares
Issued
Shares
18-13
Outstanding
Shares
Treasury
Shares
Unissued
Shares
Treasury shares are
issued shares that have
been reacquired by the
corporation.
18-14
Authorized
Shares
Outstanding
Shares
Retired
Shares
Unissued
Shares
Retired shares assume
the same status as
authorized but unissued
shares.
18-15
Capital Stock
No-par stock
Dollar amount per
share not designated
in corporate charter.
Corporations can
assign a stated value
per share (treated as
if par value).
18-16
Capital Stock
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.
18-17
Common
Preferred
18-18
Common Stock
18-19
Preferred Stock
Usually has a
par or stated value.
Dividend and
liquidation
preference over
common stock.
May be convertible,
callable, and/or
redeemable.
18-20
18-21
18-22
Learning Objectives
18-23
Comprehensive Income
Comprehensive income includes four types
of gains and losses that traditionally have
been excluded from net income.
Net holding
gains (losses)
on investments.
Net
unrecognized
loss on
pensions.
Deferred gains
(losses) from
derivatives.
Gains (losses)
from foreign
currency
translations.
18-24
Comprehensive Income
Components of comprehensive income created during the reporting period:
($ in millions)
Net income
Other comprehensive income:
Net unrealized holding gains (losses) on investments (net of tax) $ x
Net unrecognized loss on pensions (net of tax)
(x)
Deferred gains (losses) from derivatives (net of tax)
Gains (losses) from foreign currency translation (net of tax)*
x
Comprehensive income
$xxx
xx
$xxx
18-25
Comprehensive Income
Comprehensive income is reported periodically as it is
created and also is reported as a cumulative amount.
As an additional
section of the
income
statement.
As part of the
statement of
shareholders
equity.
As a separate
statement in
a disclosure
note.
18-26
Learning Objectives
18-27
Description
Cash
Common Stock, par value
Paid-in Capital in Excess
of Par, Common Stock
PR
Debit
Credit
100,000
10,000
90,000
18-28
Description
Cash
Common Stock
PR
Debit
Credit
100,000
100,000
18-29
Description
Cash
PR
Debit
Credit
100,000
10,000
90,000
18-30
18-31
18-32
Common Stock
Preferred Stock
Total
Market*
$275,000
225,000
$500,000
18-33
%
Allocation** Par^
Excess^^
55% $ 247,500 $ 50,000 $ 197,500
45% 202,500
15,000
187,500
100% $ 450,000 $ 65,000 $ 385,000
* Market Value:
Common: $55 5,000 shares
Preferred: $75 3,000 shares
^ Par Value:
Common: $10 5,000 shares
Preferred: $5 3,000 shares
**Allocation:
Common: $450,000 55%
Preferred: $450,000 45%
^^Excess:
Common: $247,500 - $50,000 par
Preferred: $202,500 - $15,000 par
18-34
GENERAL JOURNAL
Page 1
Date
Description
Cash
Common Stock, par $10
Preferred Stock, par $5
Additional paid-in capital,
Common Stock
Additional paid-in capital
Preferred Stock
To record issue of stock for cash
PR
Debit
Credit
450,000
50,000
15,000
197,500
187,500
18-35
18-36
18-37
PR
Debit
Cash
400,000
600,000
Credit
Common stock
100,000
900,000
18-38
18-39
Share Buybacks
18-40
Share Buybacks
18-41
Learning Objectives
18-42
18-43
Description
Common Stock
Paid-in Capital in Excess of Par
Paid-in Capital - Share Repurchase
Cash
PR
Debit
Credit
10,000
90,000
15,000
85,000
18-44
Description
Common Stock
Paid-in Capital in Excess of Par
Paid-in Capital - Share Repurchase
Cash
PR
Debit
Credit
10,000
90,000
25,000
125,000
18-45
Learning Objectives
18-46
Treasury Stock
Usually does not have:
Voting rights.
Dividend rights.
Preemptive rights.
Liquidation rights.
18-47
18-48
18-49
18-50
GENERAL JOURNAL
Date
May 1, 2005
Dec. 3, 2006
Description
PR
Debit
Treasury Stock
Cash
To record purchase of treasury stock.
165,000
Cash
Treasury Stock
Paid-in Capital-Share Repurchase
To record sale of treasury stock.
75,000
Page 1
Credit
165,000
55,000
20,000
18-51
Unallocated reduction
of total Shareholders
Equity.
18-52
Learning Objectives
18-53
Retained Earnings
Represents the undistributed earnings of the
company since its inception.
Balance January 1, 2006
Net income
Cash dividends
Balance December 31, 2006
$ 500,000
25,000
(10,000)
$ 515,000
18-54
Retained Earnings
The
18-55
$ 200,000
40,000
300,000
10,000
550,000
121,500
$ 671,500
18-56
Learning Objectives
18-57
Cash Dividends
Dividends must be
declared by the board
of directors before
they can be paid.
A corporation is not
legally required to
pay dividends.
Cash dividends
require sufficient cash
and retained earnings
to cover the dividend.
When a dividend is
declared, a liability
is created.
18-58
Dividend Dates
Declaration date
Board of directors declares
the dividend.
Record a liability.
GENERAL JOURNAL
Date
Description
Retained Earnings
Dividends Payable
Post.
Ref.
Page 12
Debit
Credit
XXX
XXX
18-59
Dividend Dates
Ex-dividend date
The first day the shares trade without the
right to receive the declared dividend.
(No entry)
July
18-60
Dividend Dates
Date of record
Stockholders holding shares on this date
will receive the dividend. (No entry)
July
18-61
Dividend Dates
Date of payment
Record the payment of the
dividend to stockholders.
GENERAL JOURNAL
Date
Description
Dividends Payable
Cash
Post.
Ref.
Page 12
Debit
Credit
XXX
XXX
18-62
Property 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.
18-63
Learning Objectives
18-64
Stock Dividends
Distribution of additional shares of stock to
shareholders.
No change in total
shareholders equity.
All shareholders
receive the same
percentage increase
in shares.
18-65
Stock Dividends
18-66
Stock Dividends
Small
Large
Record at current
market value
of stock.
Record at par or
stated value
of stock.
18-67
Stock Dividends
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.
GENERAL JOURNAL
Date
Description
Post.
Ref.
Page 21
Debit
Credit
18-68
Stock Dividends
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.
GENERAL JOURNAL
Date
Description
Retained Earnings
Common Stock
Post.
Ref.
Page 21
Debit
Credit
20,000,000
1,000,000
Paid-in Capital in
Excess of Par
19,000,000
18-69
Stock Splits
Decrease
par value of
stock.
Increase number of
outstanding shares.
No change in total
stockholders equity.
Does not require a
journal entry.
Banana Splits
On Sale Now
18-70
5,000
$ 1.00
$ 5,000
After
Split
18-71
5,000
$ 1.00
$ 5,000
After
Split
10,000
Increase
$ 0.50 Decrease
$ 5,000
No
Change
18-72
Description
Paid-in Capital in Excess of Par
Common Stock
Post.
Ref.
Page 21
Debit
Credit
1,000,000
1,000,000
18-73
Description
Retained Earnings
Common Stock
Post.
Ref.
Page 21
Debit
Credit
1,000,000
1,000,000
18-74
Quasi
Reorganizations
Appendix 18
18-75
Quasi Reorganizations
Purpose
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.
18-76
Quasi Reorganizations
Procedures
18-77
Quasi Reorganizations
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 :
18-78
Quasi Reorganizations
Cash
Receivables
Inventory
Property, plant, and equipment (net)
Total assets
Liabilities
Common stock (800 million shares @$1)
Additional paid-in capital
Retained earnings (deficit)
Total liabilities and equity
(millions)
$
75
200
375
400
$
1,050
$
400
800
150
(300)
1,050
18-79
Quasi Reorganizations
To revalue assets.
GENERAL JOURNAL
Date
Description
Retained Earnings
Inventory
Property, plant, & equipment
Page 43
Post.
Ref.
Debit
Credit
250
75
175
18-80
Quasi Reorganizations
To eliminate the deficit in retained earnings
GENERAL JOURNAL
Date
Description
Page 43
Post.
Ref.
Debit
150
Common stock
400
Retained earnings
Credit
550
$300 + $250
Now, lets prepare the balance sheet
immediately after restatement.
18-81
Quasi Reorganizations
Cash
Receivables
Inventory
Property, plant, and equipment (net)
Total assets
Liabilities
Common stock (800 million shares @$.50)
Additional paid-in capital
Retained earnings
Total liabilities and equity
75
200
300
225
800
400
400
0
0
800
18-82
End of Chapter 18