Reporting and Analyzing Equity
Reporting and Analyzing Equity 201
Popular in Financial Accounting
Popular in Accounting
This 0 page Class Notes was uploaded by Ebony Notetaker on Wednesday December 9, 2015. The Class Notes belongs to 201 at Ball State University taught by Jason Owens in Fall 2015. Since its upload, it has received 14 views. For similar materials see Financial Accounting in Accounting at Ball State University.
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Date Created: 12/09/15
Chapter 11 Notes 0 Corporate Form of Organization 0 A corporation is an entity created by law that is separate from its owners It has most of the rights and privileges granted to individuals Owners of corporations are called stockholders or shareholders Corporations can be separated into two types A privately held or closely held corporation does not offer its stock for public sale and usually has a few stockholders A publicly held corporation offers its stock for public sale and can have thousands of stockholders Public sale usually refers to issuance and trading on an organized stock market Stockholders of Corporations 0 Rights of Stockholders State laws vary but common stockholders usually have the general right to 0 Vote at stockholders39 meetings or register proxy votes electronically Sell or otherwise dispose of their stock 0 Purchase their proportional share of any common stock later issued by the corporation This preemptive right protects stockholders39 proportionate interest in the corporation For example a stockholder who owns 25 of a corporation39s common stock has the rst opportunity to buy 25 of any new common stock issued 0 Receive the same dividend if any on each common share of the corporation 0 Share in any assets remaining after creditors and preferred stockholders are paid when and if the corporation is liquidated Each common share receives the same amount Stockholders also have the right to receive timely nancial reports 0 Basics of Capital Stock 0 Market Value of Stock Market value per share is the price at which a stock is bought and sold Expected future earnings dividends growth and other company and economic factors in uence market value 0 Classes of Stock When all authorized shared have the same rights and characteristics the stock is called common stock A corporation is sometimes authorized to issue more than one class of stock including preferred stock and different classes of common stock Par Value Stock Par value stock is stock that is assigned a par value which is an amount assigned per share by the corporation in its charter NoPar Value Stock Nopar value stock or simply nopar stock is stock not assigned a value per share by the corporate charter lts advantage is that it can be issued at any price without the possibility of a minimum legal capital de ciency Stated Value Stock Stated value stock is nopar stock to which the directors assign a quotstatedquot value per share Stated value per share becomes the minimum legal capital per share in this case Stockholders Equity A corporation s equity is known as stockholders equity also called shareholders equity or corporate capital Stockholders equity consists of Paidin or contributed capital Retained earnings Issuing Par Value Stock June 5 Cash 300000 Common Stock 10 Par Value 300000 Issued 30000 shares of 10 par value common stock at pan lssuing Par Value Stock at a Premium 0 O A premium on stock occurs when a corporation sells its stock for more than par or stated value To illustrate if Dillon Snowboards issues its 10 par value common stock at 12 per share its stock is sold at a 2 per share premium The premium known as paidin capital in excess of par value is reported as part of equity it is not revenue and is not listed on the income statement The entry to record Dillon Snowboards issuance of 30000 shares of 10 par value stock for 12 per share on June 52013 June 5 Cash 360000 Common Stock 10 Par Value 300000 PaidIn Capital in Excess of Par Value 60000 Common Stock Sold and issued 30 000 shares of 10 par value common stock at 12pershare Issuing NoPar Value Stock Oct 20 Cash 40000 Common Stock NoPar Value 40000 Issued 1000 shares of nopar value common stock at 40 per share Issuing Stated Value Stock Oct 20 Cash 50000 Common Stock 40 Stated Value 40000 PaidIn Capital in Excess of Stated Value 10000 Common Stock Issued 1 000 shares of 40 per share stated value stock at 50 pershare Issuing Stock for Noncash Assets June 10 Land 105000 Common Stock 20 Par Value 80000 PaidIn Capital in Excess of Par Value 25000 Common Stock Exchanged 4000 shares of 20 par value common stock for land Cash Dividends o The decision to pay cash dividends rests with the board of directors and involves more than evaluating the amounts of retained earnings and cash The directors for instance may decide to keep the cash to invest in the corporation39s growth to meet emergencies to take advantage of unexpected opportunities or to pay off debt Alternatively many corporations pay cash dividends to their stockholders at regular dates These cash ows provide a return to investors and almost always affect the stock39s market value 0 Accounting for Cash Dividends Dividend payment involves three important dates declaration record and payment Date of declaration is the date the directors vote to declare and pay a dividend Date of record is the future date speci ed by the directors for identifying those stockholders listed in the corporation39s records to receive dividends The date of record usually follows the date of declaration by at least two weeks Persons who own stock on the date of record receive dividends Date of payment is the date when the corporation makes payment it follows the date of record by enough time to allow the corporation to arrange checks money transfers or other means to pay dividends Jan9 Retained Earnings 5000 Common Dividend Payable 5000 Declared 1 per common share cash dividend o No formal journal entry is needed on the date of record Feb 1 Common Dividend Payable 5000 Cash 5000 Paid 1 per common share cash dividend Stock Dividends o A stock dividend declared by a corporation39s directors is a distribution of additional shares of the corporation39s own stock to its stockholders without the receipt of any payment in return Stock dividends and cash dividends are different A stock dividend does not reduce assets and equity but instead transfers a portion of equity from retained earnings to contributed capital 0 Accounting for Stock Dividends A small stock dividend is a distribution of 25 or less of previously outstanding shares It is recorded by capitalizing retained earnings for an amount equal to the market value of the shares to be distributed A large stock dividend is a distribution of more than 25 of previously outstanding shares A large stock dividend is recorded by capitalizing retained earnings for the minimum amount required by state law governing the corporation Dec 31 Retained Earnings 15000 Common Stock Dividend Distributable 10000 PaidIn Capital in Excess of Par Value 5000 Common Stock Declared a 1000share 10 stock dividend Preferred Stock 0 A corporation can issue two basic kinds of stock common and preferred Preferred stock has special rights that give it priority or senior status over common stock in one or more areas Special rights typically include a preference for receiving dividends and for the distribution of assets if the corporation is liquidated Preferred stock carries all rights of common stock unless the corporate charter nulli es them Issuance of Preferred Stock July 1 Cash 6000 Preferred Stock 100 Par Value 5000 Paidln Capital Excess of Par Value Preferred 1000 Stock Issued preferred stock for cash Cumulative or Noncumulative Dividend 0 Most preferred stocks carry a cumulative dividend right Cumulative preferred stock has a right to be paid both the current and all prior periods39 unpaid dividends before any dividend is paid to common stockholders When preferred stock is cumulative and the directors either do not declare a dividend to preferred stockholders or declare one that does not cover the total amount of cumulative dividend the unpaid dividend amount is called dividend in arrears Accumulation of dividends in arrears on cumulative preferred stock does not guarantee they will be paid Treasury Stock 0 A corporation39s reacquired shares are called treasury stock which is similar to unissued stock in several ways Neither treasury stock nor unissued stock is an asset Neither receives cash dividends or stock dividends Neither allows the exercise of voting rights 0 However treasure stock does differ from unissued stock in one major way the corporation can resell treasury stock at less than par without having the buyers incur a liability provided it was originally issued at par value or higher Treasury stock purchases also require management to exercise ethical sensitivity because funds are being paid to speci c stockholders instead of all stockholders Managers must be sure the purchase is in the best interest of all stockholders These concerns cause companies to fully disclose treasury stock transactions Statement of Retained Earnings o Retained earnings generally consist of a company39s cumulative net income less any net losses and dividends declared since its inception Retained earnings are part of stockholders39 claims on the company39s net assets but this does not imply that a certain amount of cash or other assets is available to pay stockholders