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Financial Accounting Chapter 13 Notes

by: bauer47 Notetaker

Financial Accounting Chapter 13 Notes ACC-142

Marketplace > Iowa Central Community College > Accounting > ACC-142 > Financial Accounting Chapter 13 Notes
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These notes cover stock holder's equity and how to account for it.
Financial Accounting
DawnA. Humburg
Class Notes
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This 5 page Class Notes was uploaded by bauer47 Notetaker on Wednesday March 2, 2016. The Class Notes belongs to ACC-142 at Iowa Central Community College taught by DawnA. Humburg in Fall 2015. Since its upload, it has received 19 views. For similar materials see Financial Accounting in Accounting at Iowa Central Community College.


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Date Created: 03/02/16
Chapter 13 Outline Please make a good faith effort to complete this for Thursday’s class (12/3/15). THIS ASSIGNMENT  IS WORTH 30 POINTS.  PLEASE HAVE THIS PRINTED FOR 12/3/15. SHE (stockholders’ equity) 1) What is a corporation? Legally recognized by each state as a separate legal entity; most  businesses in the U.S. are legally organized as sole proprietorships; corporations generate  approximately 90% of the revenues in the U.S.; what is a multinational business? Business  located in many countries; headquarters in one country and produce in another a. Characteristics: (SNNLITC); list and define i. S > separate legal entity ii. N > number of owners is infinite iii. N > no personal liability for owners iv. L > lack of mutual agency; stockholders cannot act on behalf of the business v. I > indefinite life vi. T > taxation; separate taxable entity vii. C > capital accumulation; able to raise more cash than sole proprietorship b. Advantages: (RCTNL); list i. R > raise more money ii. C > continuous life iii. T > transfer of ownership is easy iv. N > no mutual agency v. L > stockholders have limited liability c. SHE basics: i. Ownership of a corporation is evidenced by shares of stock 1. Stock terms (define): (page 748) a. Capital > ownership in a corporation; can be common or preferred  stock b. Authorized > (blue ring) maximum number of shares that a  corporation may sell according to its state charter; 10,000  authorized shares c. Issued > (orange ring) number of shares that have been sold; 4,000 shares have been sold out of 10,000 authorized shares d. Outstanding > (red ring) number of shares that stockholders own;  3,000 shares; we only pay dividends to OS shares e. Treasury > (difference between orange and red rings) our own  stock that we have repurchased after it was initially sold by us;  calculated as issued shares – outstanding shares; 4,000 – 3,000 =  1,000 shares are treasury stock; why does a corporation  repurchase its own stock? Entice investors, may drive up the  market price, you may need some stock for stock dividends, may  do this so you don’t have to pay dividends on this stock ii. The two main components of SHE are (PICRE); list and explain 1. PIC > paid­in capital a. Accounts under PIC > common stock, preferred stock, PIC in  Excess of Par­Common, PIC in Excess of Par­Preferred, PIC in  Excess of Cost­Treasury; all of these accounts have a normal credit balance 2. RE > retained earnings a. Accounts under RE > retained earnings (CR), dividends (DR) 2) Accounting for stock transactions a. Two main types of stock are: common and preferred (equity) i. XYZ Corporation had its initial stock offering (also known as a(n) IPO) on  January 1, 2016. Sold 10,000 shares of $1 par common stock for $2 per share. Journal entry: Cash (10,000X$2) $20,000 */**Common Stock (10,000X$1) 10,000 ** PIC in Excess of Par­Common (10,000X$1) 10,000 *always credited for par ** both of these accounted are part of overall PIC ii. On April 30, the BOD declared cash dividends of $.25 per share to common  stockholders of record on May 31, 2015.  Journal entry:  Retained Earnings (­SHE) (10,000 o/s X.25)* 2,500 Dividends Payable (+CL)  2,500 iii. May 31, 2015, date of record. (recorded in a stock ledger) Journal entry: No entry iv. June 30, 2015, payment date. Journal entry: Dividends Payable (­CL) 2,500 Cash (­CA) 2,500 Stock sold/purchased between May 31 and June 30, 2015 will not receive dividends;  these stocks are purchased ex­dividend. v. On July 31, 2015, issued an additional 5,000 shares of $1 par common stock at  $3 per share Journal entry: Cash (5,000 shares X $3/share) 15,000 Com Stk (5,000 x $1) 5,000 PIC Excess over Par­Com (5,000 X $2) 10,000 How many shares are now outstanding? 15,000; so we don’t oversell our  authorized stock; we will pay dividends on the 15,000 shares o/s vi. On August 31, 2015, we purchased 500 shares of our own stock at $3.00 per  share. Journal entry: Treasury Stock (+, ­SHE) (500 x $3) 1,500 Cash 1,500 How many shares are now outstanding? 15,000 – 500 = 14,500 o/s What is the significance of the number of shares outstanding?  b. Preferred stock > this is called preferred because? Higher market price, get paid first for dividends and in a liquidation before common; par value is also higher than common Sept. 30 > Sold 5,000 shares of preferred $10 par stock for $15 per share. Journal entry: Cash (5,000 x $15) 75,000 Pref. Stock (5,000 x $10) 50,000 PIC Excess over Par (5,000 x $5) 25,000 Oct. 31, 2015 > the BOD declared a 5% dividend on preferred shares. Journal entry: Retained Earnings (­, ­SHE) (5,000 x .05 x $10) 2,500 Dividends Payable 2,500 Every share gets (2,500 / 5,000) = $.50 per share What happens if the BOD declares dividends for both preferred and common shares of  stock? Preferred gets paid first, then common; it is possible that common will be SOL c. Cumulative preferred stock > dividends not declared by the BOD accumulate if not paid  in a certain year; called dividends in arrears (behind); cumm. Pref. stock is first, then  pref. stock, then common stock d. Stock dividends > giving stock instead of cash to our stockholders. Nov. 30, 2015 > the BOD declared a 10% stock dividend on common stock (how many  common shares are outstanding from above? 14,500 found in vi above); market value  was $5, par value is $1 Journal entry: Retained Earnings (14,500 x .1 x $5) 7,250 Dividends Distributable* (14,500 x .1 x $1) 1,450 PIC Excess over Par (plug) 5,800 *temporary SHE account, normal balance is CR; it will only have a CR balance if the  BOD has declared stock dividends but they haven’t been issued yet; similar to  Dividends Payable; it is always credited at par value Dec. 31, 2015 > issued the stock dividends Journal entry: Divs. Distributable 1,450 Common Stock 1,450 e. Stock splits > why would a corporation do this? Sell more stock (more authorized stock), may be more attractive to investors, if the market price is really high The corporation had 10,000 shares issued and outstanding, $40 par value. Split the  stock 4 for 1; we will call in 1 share and in exchange we will give 4 shares. How many shares are now outstanding? 10,000 x 4 = 40,000 shares o/s What is the par value of these shares? $40/4 = $10 par value PIC before stock split > 10,000 x $40 par value = $400,000 equity PIC after stock split > 40,000 x $10 par value = $400,000 equity After a stock split the equity (# of shares o/s X new par value) = equity before the split How is this recorded? Memorandum entry in the journal; there is no financial impact  because the equity is the same before and after 3) Treasury stock > stock that the corporation has issued and has been repurchased on the open market Purchased 100 shares of our own common stock at $10 per share. Journal entry: Treasury Stock (100 x $10) 1,000 Cash 1,000 Sold 50 shares of Treasury at $15 per share (above cost). Journal entry: Cash (50 x $15) 750 Treasury Stock* (50 x $10) 500 PIC­Excess of Par* (50 x $5) 250 *the two CR both increase SHE Sold 25 shares of Treasury at $5 per share (below cost). Cash (25 x $5) 125 PIC­ Excess of Par (25 x $5) 125 Treasury Stock (25 x $10) 250 4) Reporting equity a. Statement of RE format > beg. RE + net income – dividends = end RE b. Statement of SHE format > page 771; shows changes in all SHE accounts c. Define an appropriation of RE: setting aside a part of RE for a purpose (restricting) d. Define a prior period adjustment: a correcting entry to RE for an error in a prior period 5) EPS (very important!!!)  a. This is reported on the face of the Income Statement; indicates to prospective investors  and current investors how much net income was earned per share of o/s common  stock; equity per common share o/s b. Calculation is: (net income – pref. divs) / average # of common shares o/s c. P/E ratio  formula: market price per share of common/EPS i. What does this tell us? Ability to have a return on investment d. Return on common stock formula: (net income – pref. divs) / average common SHE i. What does this tell us? Relationship between the three accounts; our return or  percentage return on common


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