Chapter 11
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Chapter 11. Reporting and Interpreting Owners’ Equity. Advantages of a corporation. Simple to become an owner. Easy to transfer ownership. Provides limited liability. Business Background. Incur liabilities. Own assets. Sue and be sued. Enter into contracts. Business Background.

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Chapter 11

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Chapter 11

Chapter 11

Reporting and Interpreting Owners’ Equity


Business background

Advantages of a corporation

Simple to become an owner

Easy to transfer ownership

Provides limited liability

Business Background


Business background1

Incur liabilities.

Own assets.

Sue and be sued.

Enter into contracts.

Business Background

Because a corporation is a separate legal entity, it can . . .


Ownership of a corporation

  • Voting (in person or by proxy).

  • Proportionate distributions of profits.

Rights

  • Proportionate distributions of assets in a liquidation.

Stockholders

Ownership of a Corporation


Ownership of a corporation1

Elected byshareholders

Appointedby directors

Ownership of a Corporation


Authorized issued and outstanding capital stock

Authorized

Shares

Authorized, Issued, and Outstanding Capital Stock

The maximum number of shares of capital stock that can be sold to the public.


Authorized issued and outstanding capital stock1

Authorized, Issued, and Outstanding Capital Stock

Authorized

Shares

Issued sharesare authorized shares of stock that have been sold.

Unissued shares are authorized shares of stock that never have been sold.


Authorized issued and outstanding capital stock2

Outstanding sharesare issued shares that are owned by stockholders.

Issued

Shares

Treasury sharesare issued shares that have been reacquired by the corporation.

Authorized, Issued, and Outstanding Capital Stock

Authorized

Shares

Outstanding

Shares

Unissued

Shares

Treasury

Shares


Types of capital stock

Common Stock

Preferred Stock

Types of Capital Stock


Common stock

Basic voting stock

Ranks after preferred stock

Dividend set by board of directors

Common Stock


Par value and no par value stock

Nominal value

Legal capital

Par Value and No-par Value Stock

Par Value

Legal capitalis the amount of capital, required by the state, that must remain invested in the business.


Par value

I get it!

Par Value

Par Value

Market Value


Preferred stock

Preference over common stock

Usually hasno voting rights

Usually has a fixed dividend rate

Preferred Stock


Special features of preferred stock

Special Features of Preferred Stock

Convertible preferred stock may be exchanged for common stock.

Callablepreferred stock may be repurchased by the corporation at a predetermined price.


Accounting for capital stock

Contributed capital

Retained earnings

Parvalue

Additional paid-in capital

Accounting for Capital Stock

Two primary sources of stockholders’ equity


Sale and issuance of capital stock

Wal-Mart

Wal-Mart

issues new stock.

Sale and Issuance of Capital Stock

Initial public offering (IPO)

Seasoned new issue

The first time a corporation sells stock to the public.

Subsequent sales of new stock to the public.


Secondary markets

Secondary Markets

Transactions between two investors that do not affect the corporation’s accounting records.(Like when you buy and sell stock)

I’d like to sell some of myWal-Mart stock.

I’d like to buy some of yourWal-Mart stock.


Sale and issuance of capital stock1

Sale and Issuance of Capital Stock

On July 6, Wal-Mart issued 100,000 shares of $0.10 par value common stock for $22 per share.

Prepare the journal entry to record this transaction.


Sale and issuance of capital stock2

Sale and Issuance of Capital Stock

On July 6, Wal-Mart issued 100,000 shares of $0.10 par value common stock for $22 per share.

100,000 shares × $0.10 par value = $10,000

100,000 shares × $22 per share = $2,200,000


Treasury stock

Stockholders

Wal-Mart

Treasury Stock

Wal-Mart buysits own stock in

the secondary market.(Treasury stock)

Management compensation package includes salary and stock options.

Stock optionsallow management to purchase stock from the corporation at a fraction of the stock’s value in the secondary market.

Management


Treasury stock1

No voting or dividend rights

Contra equity account

Treasury Stock

When stock is reacquired, the corporation records the treasury stock at cost.


Treasury stock2

Treasury Stock

On May 1, Wal-Mart reacquired 100,000 shares of its common stock at $22 per share.

The journal entry for May 1 is . . . .


Treasury stock3

Treasury Stock

On December 3, Wal-Mart reissued 10,000 shares of the treasury stock at $30 per share.

The journal entry for December 3 is . . .

10,000 shares × $22 cost = $220,000

10,000 shares × $30 = $300,000


Accounting for cash dividends

Declared by board of directors.

Not legally

required.

Requires sufficient Retained Earnings and Cash.

Creates liability at declaration.

Accounting for Cash Dividends


Dividend dates

Dividend Dates

Declaration date

  • Board of directors declares the dividend.

  • Record a liability.


Dividend dates1

Dividend Dates

Date of Record

  • Stockholders holding shares on this date will receive the dividend.(No entry)

X


Dividend dates2

Dividend Dates

Date of Payment

  • Record the payment of the dividend to stockholders.


Dividends on preferred stock

Dividends on Preferred Stock

  • Current Dividend Preference:The current preferred dividends must be paid before paying any dividends to common stock.

  • Cumulative Dividend Preference:Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.


Dividends on preferred stock1

Dividends on Preferred Stock

If the preferred stock isnoncumulative, any dividends not declared in previous years are lostpermanently.


Dividends on preferred stock2

Dividends on Preferred Stock

Kites, Inc. has the following stock outstanding:

Common stock: $1 par, 100,000 shares

Preferred stock: 3%, $100 par, cumulative, 5,000 shares

Preferred stock: 6%, $50 par, noncumulative, 3,000 shares

Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000.

How much will each class of stock receive?


Dividends on preferred stock3

Dividends on Preferred Stock


Dividends on preferred stock4

Dividends on Preferred Stock


Dividends on preferred stock5

Dividends on Preferred Stock


Focus on cash flows

Wal-Mart

Focus on Cash Flows


Accounting for stock dividends saving cash

No change in total stockholders’ equity.

No change in par values.

All stockholders retain same percentage ownership.

Accounting for Stock Dividends (Saving cash)

Distribution of additional sharesof stock to stockholders(less than 25%).


Stock splits

Stock Splits

Distributions of 25% or more of stock to stockholders.

Ice Cream Parlor

Banana Splits On Sale Now


Stock splits1

Stock Splits

Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.


Stock splits2

Stock Splits

Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.

Increase

Decrease

No Change


Restrictions on retained earnings

Why would youwant to do that?

If I loan you $150,000, I will want you to restrict your retained earnings.

Restrictions on Retained Earnings


Restrictions on retained earnings1

Because I want to restrict the amount you can pay out in dividends.

Restrictions on Retained Earnings


End of chapter 11

C’mon Chester! With your smarts and my savvy, we could make a great partnership!!

End of Chapter 11


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