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Chapter 13

Conceptual Learning Objectives. C1: Identify characteristics of corporations and their organizationC2: Describe the components of stockholders' equityC3: Explain characteristics of common and preferred stockC4: Explain the items reported in retained earnings. A1: Compute earnings per s

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Chapter 13

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    1. Chapter 13 Accounting for Corporations In this chapter we will learn about various aspects of a corporation. On the income statement, we will learn how to report discontinued operations, extraordinary items, and changes in accounting principles. On the balance sheet, we will learn about accounting issues related to common stock, preferred stock, retained earnings, restrictions, and appropriations. In this chapter we will learn about various aspects of a corporation. On the income statement, we will learn how to report discontinued operations, extraordinary items, and changes in accounting principles. On the balance sheet, we will learn about accounting issues related to common stock, preferred stock, retained earnings, restrictions, and appropriations.

    2. Conceptual Learning Objectives C1: Identify characteristics of corporations and their organization C2: Describe the components of stockholders’ equity C3: Explain characteristics of common and preferred stock C4: Explain the items reported in retained earnings In this chapter, you will learn the following conceptual objectives: C1: Identify characteristics of corporations and their organization C2: Describe the components of stockholders’ equity C3: Explain characteristics of common and preferred stock C4: Explain the items reported in retained earnings In this chapter, you will learn the following conceptual objectives: C1: Identify characteristics of corporations and their organization C2: Describe the components of stockholders’ equity C3: Explain characteristics of common and preferred stock C4: Explain the items reported in retained earnings

    3. A1: Compute earnings per share and describe its use A2: Compute price-earnings ratio and describe its use in analysis A3: Compute dividend yield and explain its use in analysis A4: Compute book value and explain its use in analysis Analytical Learning Objectives In this chapter, you will learn the following analytical objectives: A1: Compute earnings per share and describe its use A2: Compute price-earnings ratio and describe its use in analysis A3: Compute dividend yield and explain its use in analysis A4: Compute book value and explain its use in analysisIn this chapter, you will learn the following analytical objectives: A1: Compute earnings per share and describe its use A2: Compute price-earnings ratio and describe its use in analysis A3: Compute dividend yield and explain its use in analysis A4: Compute book value and explain its use in analysis

    4. P1: Record the issuance of corporate stock P2: Record transactions involving cash dividends P3: Account for stock dividends and stock splits P4: Distribute dividends between common stock and preferred stock P5: Record purchases and sales of treasury stock and the retirement of stock Procedural Learning Objectives In this chapter, you will learn the following procedural objectives: P1: Record the issuance of corporate stock P2: Record transactions involving cash dividends P3: Account for stock dividends and stock splits P4: Distribute dividends between common stock and preferred stock P5: Record purchases and sales of treasury stock and the retirement of stock In this chapter, you will learn the following procedural objectives: P1: Record the issuance of corporate stock P2: Record transactions involving cash dividends P3: Account for stock dividends and stock splits P4: Distribute dividends between common stock and preferred stock P5: Record purchases and sales of treasury stock and the retirement of stock

    5. Corporate Form of Organization Corporations are entities created by law that exist separately from their owners and that have rights and privileges. Corporations may be privately or publicly owned. Publicly owned corporations have additional reporting responsibilities beyond those of a privately held corporation. Corporations are entities created by law that exist separately from their owners and that have rights and privileges. Corporations may be privately or publicly owned. Publicly owned corporations have additional reporting responsibilities beyond those of a privately held corporation.

    6. Advantages Separate legal entity Limited liability of stockholders Transferable ownership rights Continuous life Lack of mutual agency for stockholders Ease of capital accumulation Disadvantages Governmental regulation Corporate taxation Characteristics of Corporations The corporate form of organization has several advantages. It is a separate legal entity that can enter into contracts and sue and be sued. Stockholders’ losses are limited to the amount invested in the corporation. Ownership rights are transferable. The corporation continues in existence even when ownership changes. Stockholders are not agents of the corporation and can not enter into contracts on the corporation’s behalf. Capital needs can be met by selling more ownership in the corporation. Two disadvantages include extra governmental regulations imposed on corporations and corporate taxation of earnings. Corporations pay taxes on their earnings and then if they distribute a dividend to stockholders, the stockholders pay taxes on the dividends received. This is sometimes referred to as double taxation. The corporate form of organization has several advantages. It is a separate legal entity that can enter into contracts and sue and be sued. Stockholders’ losses are limited to the amount invested in the corporation. Ownership rights are transferable. The corporation continues in existence even when ownership changes. Stockholders are not agents of the corporation and can not enter into contracts on the corporation’s behalf. Capital needs can be met by selling more ownership in the corporation. Two disadvantages include extra governmental regulations imposed on corporations and corporate taxation of earnings. Corporations pay taxes on their earnings and then if they distribute a dividend to stockholders, the stockholders pay taxes on the dividends received. This is sometimes referred to as double taxation.

    7. Organizing and Managing a Corporation Ultimate control of a corporation rests with the stockholders who elect the Board of Directors. In turn, the members of the board of directors hire the executive officers of the corporation. Finally, officers of the corporation empower others to hire needed employees. Employees, officers, and members of the board of directors may also be owners of the corporation. Ultimate control of a corporation rests with the stockholders who elect the Board of Directors. In turn, the members of the board of directors hire the executive officers of the corporation. Finally, officers of the corporation empower others to hire needed employees. Employees, officers, and members of the board of directors may also be owners of the corporation.

    8. Organizing and Managing a Corporation At their annual meeting, stockholders elect the Board of Directors and vote on important management issues facing the company. The Board of Directors has the ultimate responsibility for managing the company. The executive management team manages the day-to-day decisions for the corporation. At their annual meeting, stockholders elect the Board of Directors and vote on important management issues facing the company. The Board of Directors has the ultimate responsibility for managing the company. The executive management team manages the day-to-day decisions for the corporation.

    9. Vote at stockholders’ meetings Sell stock Purchase additional shares of stock Receive dividends, if any Share equally in any assets remaining after creditors are paid in a liquidation Rights of Stockholders In addition to voting on important issues at annual meetings, stockholders have the right to buy and sells shares of stock, to receive dividends when declared by the board of directors, and in the event of liquidation, they share equally in any remaining assets after creditors are paid. In addition to voting on important issues at annual meetings, stockholders have the right to buy and sells shares of stock, to receive dividends when declared by the board of directors, and in the event of liquidation, they share equally in any remaining assets after creditors are paid.

    10. Stock Certificates and Transfer Part I On the right side of your screen is a copy of a stock certificate for AT&T. The share certificate is proof of ownership in AT&T. Part II When stock is sold, the seller signs a transfer endorsement on the back of the stock certificate.Part I On the right side of your screen is a copy of a stock certificate for AT&T. The share certificate is proof of ownership in AT&T. Part II When stock is sold, the seller signs a transfer endorsement on the back of the stock certificate.

    11. Basics of Capital Stock Corporations must disclose information related to their stock, such as par value and number of shares authorized and issued. The corporate charter determines the number of shares of stock the corporation is authorized to sell. Corporations must disclose information related to their stock, such as par value and number of shares authorized and issued. The corporate charter determines the number of shares of stock the corporation is authorized to sell.

    12. Basics of Capital Stock We can also find the number of shares actually issued by the company. In our example, the company had issued a total of ninety two million, five hundred fifty-six thousand, two hundred ninety-five shares by the end of 2008. Notice that this common stock has a par value of one cent. Low par values are normal in business. Let’s look at the meaning of par value. We can also find the number of shares actually issued by the company. In our example, the company had issued a total of ninety two million, five hundred fifty-six thousand, two hundred ninety-five shares by the end of 2008. Notice that this common stock has a par value of one cent. Low par values are normal in business. Let’s look at the meaning of par value.

    13. Selling (Issuing) Stock Par value is an arbitrary amount assigned to each share of stock in the corporate charter. Par value is typically a nominal amount, and is not related in any manner to market value which is the selling price of a share of stock. Par value is an arbitrary amount assigned to each share of stock in the corporate charter. Par value is typically a nominal amount, and is not related in any manner to market value which is the selling price of a share of stock.

    14. Classes of Stock In addition to par value stock, some states permit no-par, stated value common stock, or no par value common stock. Let’s see how these 3 classes of stock work. In addition to par value stock, some states permit no-par, stated value common stock, or no par value common stock. Let’s see how these 3 classes of stock work.

    15. Issuing Par Value Stock When par value stock is sold for cash, the Common Stock account is credited for the par value of the stock sold. Remember that par value and market value are not related. The difference between the par value of the stock and the market value of the stock is credited to Contributed Capital in Excess of Par. If you added together the amount of par value in the Common Stock account and the amount in the Paid-In Capital in Excess of Par, Common Stock, you would have the market value of the sale of the stock. When par value stock is sold for cash, the Common Stock account is credited for the par value of the stock sold. Remember that par value and market value are not related. The difference between the par value of the stock and the market value of the stock is credited to Contributed Capital in Excess of Par. If you added together the amount of par value in the Common Stock account and the amount in the Paid-In Capital in Excess of Par, Common Stock, you would have the market value of the sale of the stock.

    16. Issuing Par Value Stock Part I Let’s record the entry for Matrix Incorporated for the issue of one hundred thousand shares of two dollar par value stock for twenty five dollars in cash. Part II Matrix would debit Cash for the market value of the stock sold: one hundred thousand shares times twenty-five dollars per share. Matrix would credit Common Stock for the par value of the share sold: one hundred thousand shares times two dollars per share. And, they would credit Paid-In Capital in Excess of Par Value, Common Stock, for the excess of market over par: one hundred thousand shares times twenty-three dollars per share. Part I Let’s record the entry for Matrix Incorporated for the issue of one hundred thousand shares of two dollar par value stock for twenty five dollars in cash.

    17. Issuing Par Value Stock This is the way Matrix would report the common stock on its balance sheet. The two hundred thousand dollars is the par value of the stock sold and the two million, three hundred thousand dollars is the excess over par value Matrix received for the stock. These two amounts added together total two million, five hundred thousand dollars, the amount of cash received for the sale of the stock. This is the way Matrix would report the common stock on its balance sheet. The two hundred thousand dollars is the par value of the stock sold and the two million, three hundred thousand dollars is the excess over par value Matrix received for the stock. These two amounts added together total two million, five hundred thousand dollars, the amount of cash received for the sale of the stock.

    18. Issuing Stock for Noncash Assets A similar situation occurs when par value stock is exchanged for noncash assets. The Common Stock account is credited for the par value of the stock sold. The difference between the par value of the stock and the market value of the assets received is credited to Contributed Capital in Excess of Par. If you added together the amount of par value in the Common Stock account and the amount in the Paid-In Capital in Excess of Par, Common Stock, you would have the market value of the assets received. A similar situation occurs when par value stock is exchanged for noncash assets. The Common Stock account is credited for the par value of the stock sold. The difference between the par value of the stock and the market value of the assets received is credited to Contributed Capital in Excess of Par. If you added together the amount of par value in the Common Stock account and the amount in the Paid-In Capital in Excess of Par, Common Stock, you would have the market value of the assets received.

    19. Issuing Stock for Noncash Assets Part I Let’s record the entry for Matrix Incorporated for the issue of one hundred thousand shares of two dollar par value stock for land valued at two million, five hundred thousand dollars. Part II Matrix would debit Land for its market value. Matrix would credit Common Stock for the par value of the share sold: one hundred thousand shares times two dollars a share. And, they would credit Paid-In Capital in Excess of Par Value, Common Stock, for the excess of land’s market value in excess of the par value. Part I Let’s record the entry for Matrix Incorporated for the issue of one hundred thousand shares of two dollar par value stock for land valued at two million, five hundred thousand dollars. Part II Matrix would debit Land for its market value. Matrix would credit Common Stock for the par value of the share sold: one hundred thousand shares times two dollars a share. And, they would credit Paid-In Capital in Excess of Par Value, Common Stock, for the excess of land’s market value in excess of the par value.

    20. To pay a cash dividend the corporation must have: A sufficient balance in retained earnings and The cash necessary to pay the dividend. Cash Dividends To pay a cash dividend, a corporation must have two things: ? Sufficient retained earnings to absorb the dividend without creating a deficit and ? Enough cash to pay the dividend. To pay a cash dividend, a corporation must have two things: ? Sufficient retained earnings to absorb the dividend without creating a deficit and ? Enough cash to pay the dividend.

    21. A separate class of stock, typically having priority over common shares in . . . Dividend distributions Distribution of assets in case of liquidation Preferred Stock Preferred stock is a separate class of stock that typically has priority over common stock in dividend distributions and distribution of assets in a liquidation. Preferred stock usually has a stated dividend that is expressed as a percentage of its par value. It normally does not have voting rights. Preferred stock is a separate class of stock that typically has priority over common stock in dividend distributions and distribution of assets in a liquidation. Preferred stock usually has a stated dividend that is expressed as a percentage of its par value. It normally does not have voting rights.

    22. Cumulative or Noncumulative Dividend Cumulative preferred stockholders have the right to be paid both the current and all prior periods’ unpaid dividends before any dividends are paid to common stockholders. When the preferred stock is cumulative and the directors do not declare a dividend to preferred stockholders, the unpaid dividend is called a dividend in arrears and must be disclosed in the financial statements. Noncumulative preferred stock has no rights to prior periods’ dividends if they were not declared in those prior periods. Let’s look at an example. Cumulative preferred stockholders have the right to be paid both the current and all prior periods’ unpaid dividends before any dividends are paid to common stockholders. When the preferred stock is cumulative and the directors do not declare a dividend to preferred stockholders, the unpaid dividend is called a dividend in arrears and must be disclosed in the financial statements. Noncumulative preferred stock has no rights to prior periods’ dividends if they were not declared in those prior periods. Let’s look at an example.

    23. Cumulative or Noncumulative Dividend This company has both common stock and preferred stock. The directors did not declare a dividend in 2007. In 2008, the directors declare and pay cash dividends of forty-two thousand dollars. Let’s see how this dividend is distributed if the preferred stock is cumulative and if it is noncumulative. This company has both common stock and preferred stock. The directors did not declare a dividend in 2007. In 2008, the directors declare and pay cash dividends of forty-two thousand dollars. Let’s see how this dividend is distributed if the preferred stock is cumulative and if it is noncumulative.

    24. Cumulative or Noncumulative Dividend If the preferred stock is noncumulative, these stockholders have no rights to the missed dividends of the year 2007. However, they get first distribution of the dividends declared in 2008. The dividend for the preferred stock in 2008 is calculated as follows: one hundred dollar par value times nine percent times one thousand shares. Since forty two thousand dollars in dividends were declared, preferred would first get their nine thousand dollars, and the remaining thirty three thousand dollars would be divided evenly among the common stockholders. If the preferred stock is cumulative, these stockholders have rights to the missed dividends of 2007 in addition to the dividend in 2008. The preferred stockholders first get a distribution of nine thousand dollars for the missed dividends of 2007. Then they get another nine thousand dollars for the dividend in 2008. Since forty two thousand dollars in dividends were declared, preferred would first get their eighteen thousand dollars and the remaining twenty four thousand dollars would be divided evenly among the common stockholders. If the preferred stock is noncumulative, these stockholders have no rights to the missed dividends of the year 2007. However, they get first distribution of the dividends declared in 2008. The dividend for the preferred stock in 2008 is calculated as follows: one hundred dollar par value times nine percent times one thousand shares. Since forty two thousand dollars in dividends were declared, preferred would first get their nine thousand dollars, and the remaining thirty three thousand dollars would be divided evenly among the common stockholders. If the preferred stock is cumulative, these stockholders have rights to the missed dividends of 2007 in addition to the dividend in 2008. The preferred stockholders first get a distribution of nine thousand dollars for the missed dividends of 2007. Then they get another nine thousand dollars for the dividend in 2008. Since forty two thousand dollars in dividends were declared, preferred would first get their eighteen thousand dollars and the remaining twenty four thousand dollars would be divided evenly among the common stockholders.

    25. Participating or Nonparticipating Dividend An additional preference for preferred stock is participation in dividends if they are declared above certain limits. This participation feature does not apply until common stockholders receive dividends equal to the preferred stock’s dividend percent. This is not a common preference seen in practice. An additional preference for preferred stock is participation in dividends if they are declared above certain limits. This participation feature does not apply until common stockholders receive dividends equal to the preferred stock’s dividend percent. This is not a common preference seen in practice.

    26. Reasons for Issuing Preferred Stock To raise capital without sacrificing control To boost the return earned by common stockholders through financial leverage To appeal to investors who may believe the common stock is too risky or that the expected return on common stock is too low Corporations may issue preferred stock to be able to raise needed capital without sacrificing control since preferred stock has no voting rights. Issuing preferred stock is a way to boost return to common stockholders. It is also a way to increase ownership in the company if the common stock is perceived as too risky or has a lower than expected return. Corporations may issue preferred stock to be able to raise needed capital without sacrificing control since preferred stock has no voting rights. Issuing preferred stock is a way to boost return to common stockholders. It is also a way to increase ownership in the company if the common stock is perceived as too risky or has a lower than expected return.

    27. Regular cash dividends provide a return to investors and almost always affect the stock’s market value. Cash Dividends Stockholders receive a return on their investment in two ways: one is through increases in the market value of the stock and one is through cash dividends. Stockholders receive a return on their investment in two ways: one is through increases in the market value of the stock and one is through cash dividends.

    28. Three important dates Entries for Cash Dividends There are three important dates to remember when discussing dividends: ? The date of declaration is the date the directors declare the dividend. At this time, a liability is created and must be recorded. ? The date of record is important because you must own the stock on this date to receive the dividend. No entry is required in the accounting records. ? The date of payment is the date the corporation pays the dividend to the stockholders who owned the stock on the record date. Let’s look at an example. There are three important dates to remember when discussing dividends: ? The date of declaration is the date the directors declare the dividend. At this time, a liability is created and must be recorded. ? The date of record is important because you must own the stock on this date to receive the dividend. No entry is required in the accounting records. ? The date of payment is the date the corporation pays the dividend to the stockholders who owned the stock on the record date. Let’s look at an example.

    29. On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on March 19 to stockholders of record on February 19. Entries for Cash Dividends Dana Incorporated declared a one dollar per share dividend on January 19th on its ten thousand common shares outstanding. The entry on January 19th includes a debit to Retained Earnings and a credit to Common Dividend Payable of ten thousand dollars. Dana Incorporated declared a one dollar per share dividend on January 19th on its ten thousand common shares outstanding. The entry on January 19th includes a debit to Retained Earnings and a credit to Common Dividend Payable of ten thousand dollars.

    30. Entries for Cash Dividends On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on March 19 to stockholders of record on February 19. On February 19th, the record date, we need to know who owns the stock, but an accounting entry is not needed. On February 19th, the record date, we need to know who owns the stock, but an accounting entry is not needed.

    31. Entries for Cash Dividends On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. The dividend will be paid on March 19 to stockholders of record on February 19. On March 19th, the payment date, Dana Incorporated would debit Common Dividend Payable and credit Cash for the ten thousand dollar dividend. On March 19th, the payment date, Dana Incorporated would debit Common Dividend Payable and credit Cash for the ten thousand dollar dividend.

    32. Created when a company incurs cumulative losses or pays dividends greater than total profits earned in other years. Deficits and Cash Dividends A deficit in Retained Earnings occurs when a company incurs cumulative losses and or pays dividends greater than cumulative profits earned in other years. Most states have laws that prohibit corporations with a deficit from declaring dividends. When there is a deficit in Retained Earnings, the account has a debit balance and is subtracted in the equity section of the balance sheet. A deficit in Retained Earnings occurs when a company incurs cumulative losses and or pays dividends greater than cumulative profits earned in other years. Most states have laws that prohibit corporations with a deficit from declaring dividends. When there is a deficit in Retained Earnings, the account has a debit balance and is subtracted in the equity section of the balance sheet.

    33. The corporation distributes additional shares of its own stock to its stockholders without receiving any payment in return. Stock Dividends Sometimes corporations will distribute additional shares of stock as a dividend. Reasons for doing this include keeping the market price affordable by increasing the number of shares outstanding and providing evidence of management’s confidence in the company. Sometimes corporations will distribute additional shares of stock as a dividend. Reasons for doing this include keeping the market price affordable by increasing the number of shares outstanding and providing evidence of management’s confidence in the company.

    34. Small Stock Dividend Distribution is Ł 25% of the previously outstanding shares. Capitalize retained earnings for the market value of the shares to be distributed. Stock Dividends A stock dividend can be classified as small or large. A small stock dividend is a distribution of stock that is less than or equal to twenty five percent of the outstanding shares. A large stock dividend is a distribution of stock that is greater than twenty five percent of the outstanding shares. Let’s look at the entries to record a small and large stock dividend. A stock dividend can be classified as small or large. A small stock dividend is a distribution of stock that is less than or equal to twenty five percent of the outstanding shares. A large stock dividend is a distribution of stock that is greater than twenty five percent of the outstanding shares. Let’s look at the entries to record a small and large stock dividend.

    35. Here is the stockholders’ equity section of Quest’s balance sheet prior to the declaration of a small stock dividend. Recording a Small Stock Dividend Here is the equity section for Quest Incorporated prior to a small stock dividend. Here is the equity section for Quest Incorporated prior to a small stock dividend.

    36. On December 31, 2008, Quest declared a 2% stock dividend, when the stock was selling for $10 per share. The stock will be distributed to stockholders on January 20, 2009. Let’s make the December 31 entry. Recording a Small Stock Dividend Quest declares a two percent stock dividend. The stock was selling for ten dollars a share. On the declaration date, Quest would debit Retained Earnings for the number of shares declared times the market value of the stock. In this example, that amount is twenty thousand dollars. The account Common Stock Dividend Distributable is credited for the par value of the shares declared. In this example, that amount is two thousand dollars. The excess is credited to Contributed Capital in Excess of Par Value. In this example, that amount is eighteen thousand dollars.Quest declares a two percent stock dividend. The stock was selling for ten dollars a share. On the declaration date, Quest would debit Retained Earnings for the number of shares declared times the market value of the stock. In this example, that amount is twenty thousand dollars. The account Common Stock Dividend Distributable is credited for the par value of the shares declared. In this example, that amount is two thousand dollars. The excess is credited to Contributed Capital in Excess of Par Value. In this example, that amount is eighteen thousand dollars.

    37. Comparing Quest’s equity section before and after the stock dividend shows that the Common Stock dividend Distributable account is reported with the common stock and the Contributed Capital in Excess of Par Value is reported as additional paid in capital. Retained Earnings also decreased based on the previous entry. Comparing Quest’s equity section before and after the stock dividend shows that the Common Stock dividend Distributable account is reported with the common stock and the Contributed Capital in Excess of Par Value is reported as additional paid in capital. Retained Earnings also decreased based on the previous entry.

    38. Router, Inc. shows the following stockholders’ equity section just prior to issuing a large stock dividend. Recording a Large Stock Dividend Here is the equity section for Router Incorporated prior to a large stock dividend. Here is the equity section for Router Incorporated prior to a large stock dividend.

    39. On December 31, 2008, Router declared a 40% stock dividend, when the stock was selling for $8 per share. State law requires that large stock dividends be capitalized at par value per share. Recording a Large Stock Dividend Router declares a forty percent stock dividend. On the declaration date, Router would debit Retained Earnings for the number of shares declared times the par value of the stock. In this example, that amount is twenty thousand dollars. The account Common Stock Dividend Distributable is credited for the par value of the shares declared. In this example, that amount is twenty thousand dollars. Router declares a forty percent stock dividend. On the declaration date, Router would debit Retained Earnings for the number of shares declared times the par value of the stock. In this example, that amount is twenty thousand dollars. The account Common Stock Dividend Distributable is credited for the par value of the shares declared. In this example, that amount is twenty thousand dollars.

    40. A distribution of additional shares of stock to stockholders according to their percent ownership. Stock Splits A stock split is the distribution of additional shares of stock to stockholders according to their percent ownership. When a stock split occurs, the corporation calls in the outstanding shares and issues new shares of stock. In the process of a stock split, the par value of the stock changes. Let’s look at an example. A stock split is the distribution of additional shares of stock to stockholders according to their percent ownership. When a stock split occurs, the corporation calls in the outstanding shares and issues new shares of stock. In the process of a stock split, the par value of the stock changes. Let’s look at an example.

    41. After the 2-for-1 split the stockholders’ equity section of the balance sheet looks like this . Stock Splits After the split, the number of shares doubled and the par value was cut in half. Notice that an accounting entry is not required, and that Retained Earnings is not reduced. In many respects a one hundred percent stock dividend and a two-for-one stock split result in similar impacts in the stock market. The stock split usually requires more administrative tasks to call in and reissue stock certificates. However, sometimes corporations do not reissue certificates in a stock split, saving some of the administrative costs. After the split, the number of shares doubled and the par value was cut in half. Notice that an accounting entry is not required, and that Retained Earnings is not reduced. In many respects a one hundred percent stock dividend and a two-for-one stock split result in similar impacts in the stock market. The stock split usually requires more administrative tasks to call in and reissue stock certificates. However, sometimes corporations do not reissue certificates in a stock split, saving some of the administrative costs.

    42. Treasury Stock As this graph indicates, the majority of corporations have some treasury stock. Let’s see how to account for treasury stock. As this graph indicates, the majority of corporations have some treasury stock. Let’s see how to account for treasury stock.

    43. On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for $8,000. Purchasing Treasury Stock On May 8th, Whitt Incorporated purchased two thousand of its own shares in the market for eight thousand dollars. The entry on May 8th includes a debit to Treasury Stock and a credit to Cash for eight thousand dollars, which is the amount of the purchase. The Treasury Stock would be reported on the balance sheet in the equity section as a reduction from total equity. On May 8th, Whitt Incorporated purchased two thousand of its own shares in the market for eight thousand dollars. The entry on May 8th includes a debit to Treasury Stock and a credit to Cash for eight thousand dollars, which is the amount of the purchase. The Treasury Stock would be reported on the balance sheet in the equity section as a reduction from total equity.

    44. On June 30, Whitt sold 100 shares of its treasury stock for $4 per share. Selling Treasury Stock at Cost On June 30th, Whitt sold one hundred shares of the treasury stock for four dollars per share. This entry would include a debit to Cash and a credit to Treasury Stock for four hundred dollars. This was a nice clean entry because we sold the treasury stock for its original cost of four dollars per share. Let’s see what happens when the selling price of the treasury stock is different than the cost. On June 30th, Whitt sold one hundred shares of the treasury stock for four dollars per share. This entry would include a debit to Cash and a credit to Treasury Stock for four hundred dollars. This was a nice clean entry because we sold the treasury stock for its original cost of four dollars per share. Let’s see what happens when the selling price of the treasury stock is different than the cost.

    45. On July 19, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per share. Selling Treasury Stock Above Cost On July 19th, Whitt sold five hundred shares of the treasury stock for eight dollars per share. Remember that the original cost of the treasury stock was four dollars per share. This entry would include a debit to Cash for four thousand dollars. The credit Treasury Stock is for two thousand dollars. This is the original cost of four dollars per share times the five hundred shares sold. The difference between the selling price and the cost of the treasury stock is credited to Contributed Capital. In this example, that amount is two thousand dollars. Now, let’s see what happens if we sell treasury stock for less than its original cost. On July 19th, Whitt sold five hundred shares of the treasury stock for eight dollars per share. Remember that the original cost of the treasury stock was four dollars per share. This entry would include a debit to Cash for four thousand dollars. The credit Treasury Stock is for two thousand dollars. This is the original cost of four dollars per share times the five hundred shares sold. The difference between the selling price and the cost of the treasury stock is credited to Contributed Capital. In this example, that amount is two thousand dollars. Now, let’s see what happens if we sell treasury stock for less than its original cost.

    46. On August 27, Whitt sold an additional 400 shares of its treasury stock for $1.50 per share. Selling Treasury Stock Below Cost On August 27th, Whitt sold four hundred shares of the treasury stock for one dollar and fifty cents per share. Remember that the original cost of the treasury stock was four dollars per share. This entry would include a debit to Cash for six hundred dollars. The credit to Treasury Stock is for one thousand, six hundred dollars. This is the original cost of four dollars per share times the four hundred shares sold. The difference between the selling price and the cost of the treasury stock is debited to Contributed Capital. In this example, that amount is one thousand dollars. On August 27th, Whitt sold four hundred shares of the treasury stock for one dollar and fifty cents per share. Remember that the original cost of the treasury stock was four dollars per share. This entry would include a debit to Cash for six hundred dollars. The credit to Treasury Stock is for one thousand, six hundred dollars. This is the original cost of four dollars per share times the four hundred shares sold. The difference between the selling price and the cost of the treasury stock is debited to Contributed Capital. In this example, that amount is one thousand dollars.

    47. The right to purchase common stock at a fixed price over a specified period of time. As the stock’s price rises above the fixed option price, the value of the option increases. Stock Options Stock options give the owner the right to purchase common stock at a fixed price over a specified period of time. As the stock’s price rises above the fixed option price, the value of the option increases. Stock options give the owner the right to purchase common stock at a fixed price over a specified period of time. As the stock’s price rises above the fixed option price, the value of the option increases.

    48. Options are given to key employees to motivate them to: focus on company performance, take a long-run perspective, and remain with the company. Stock Options Corporations give stock options to motivate employees to focus on the company’s stock performance, to take a long-run perspective, and to remain with the company.Corporations give stock options to motivate employees to focus on the company’s stock performance, to take a long-run perspective, and to remain with the company.

    49. Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating. Statement of Retained Earnings The Statement of Retained Earnings is a summary of the activity that occurred in Retained Earnings during the period. It begins with the balance at the beginning of the period. If a company has net income, it is added to the beginning retained earnings balance. If a company has a net loss, then that would be subtracted. Any dividends declared are subtracted to arrive at the ending Retained Earnings balance. The Statement of Retained Earnings is a summary of the activity that occurred in Retained Earnings during the period. It begins with the balance at the beginning of the period. If a company has net income, it is added to the beginning retained earnings balance. If a company has a net loss, then that would be subtracted. Any dividends declared are subtracted to arrive at the ending Retained Earnings balance.

    50. Restricted Retained Earnings Retained earnings can have legal or contractual restrictions. In most states, the corporate charters will not allow companies to purchase treasury stock in excess of the balance in retained earnings. Some loan agreements place restrictions on how much dividends can be based on the balance in retained earnings. Restrictions on retained earnings are generally disclosed in the notes to the financial statements. Retained earnings can have legal or contractual restrictions. In most states, the corporate charters will not allow companies to purchase treasury stock in excess of the balance in retained earnings. Some loan agreements place restrictions on how much dividends can be based on the balance in retained earnings. Restrictions on retained earnings are generally disclosed in the notes to the financial statements.

    51. A corporation’s directors can voluntarily limit dividends because of a special need for cash such as the purchase of new facilities. Appropriated Retained Earnings Directors can voluntarily limit the use of retained earnings. This is called an appropriation. When there is an appropriation of retained earnings, it is separately reported in the financial statements and disclosed to inform users of special activities that require funds. Directors can voluntarily limit the use of retained earnings. This is called an appropriation. When there is an appropriation of retained earnings, it is separately reported in the financial statements and disclosed to inform users of special activities that require funds.

    52. Correction of material errors in past years’ financial statements. If an amount is incorrectly expensed, add amount to Retained Earnings. Prior Period Adjustments Prior period adjustments are corrections of errors that occurred in prior periods’ financial statements. Prior period adjustments are reported net of tax effects on the statement of retained earnings. Prior period adjustments are corrections of errors that occurred in prior periods’ financial statements. Prior period adjustments are reported net of tax effects on the statement of retained earnings.

    53. Statement of Stockholders’ Equity Many companies issue a Statement of Stockholders’ Equity rather than a simple Statement of Retained Earnings. The Statement of Stockholders’ Equity is more inclusive and discloses changes in all equity accounts, not just Retained Earnings. Many companies issue a Statement of Stockholders’ Equity rather than a simple Statement of Retained Earnings. The Statement of Stockholders’ Equity is more inclusive and discloses changes in all equity accounts, not just Retained Earnings.

    54. Earnings per share is one of the most widely cited items of accounting information. Earnings Per Share Earnings per share is one of the most widely used ratios. It is calculated as net income minus preferred dividends divided by weighted average common shares outstanding. Earnings per share is one of the most widely used ratios. It is calculated as net income minus preferred dividends divided by weighted average common shares outstanding.

    55. Price Earnings The Price Earnings Ratio reveals information about the stock market’s expectation for a company’s future growth in earnings, dividends, and opportunities. It is calculated as market value per share divided by earnings per share. The Price Earnings Ratio reveals information about the stock market’s expectation for a company’s future growth in earnings, dividends, and opportunities. It is calculated as market value per share divided by earnings per share.

    56. Tells us the annual amount of cash dividends distributed to common stockholders relative to the stock’s market price. Dividend Yield The Dividend Yield ratio provides the annual amount of cash dividends distributed to common stockholders relative to the stock’s market price. It is calculated as the annual cash dividend per share divided by the market value per share. The Dividend Yield ratio provides the annual amount of cash dividends distributed to common stockholders relative to the stock’s market price. It is calculated as the annual cash dividend per share divided by the market value per share.

    57. Records amount of stockholders’ equity applicable to common shares on a per share basis. Book Value per Share—Common The Book Value per Common Share ratio records the amount of stockholders’ equity applicable to common shares on a per share basis. It is calculated as stockholders’ equity applicable to common shares divided by the number of common shares outstanding. The Book Value per Common Share ratio records the amount of stockholders’ equity applicable to common shares on a per share basis. It is calculated as stockholders’ equity applicable to common shares divided by the number of common shares outstanding.

    58. Records amount of stockholders’ equity applicable to preferred shares on a per share basis. Book Value per Share—Preferred The Book Value per Preferred Share ratio records the amount of stockholders’ equity applicable to preferred shares on a per share basis. It is calculated as stockholders’ equity applicable to preferred shares divided by the number of preferred shares outstanding. The Book Value per Preferred Share ratio records the amount of stockholders’ equity applicable to preferred shares on a per share basis. It is calculated as stockholders’ equity applicable to preferred shares divided by the number of preferred shares outstanding.

    59. End of Chapter 13 In this chapter we learned about various aspects of a corporation. We learned about accounting issues related to common stock and different types of preferred stock. We also learned about the statement of retained earnings and how to account for restrictions and appropriations. In this chapter we learned about various aspects of a corporation. We learned about accounting issues related to common stock and different types of preferred stock. We also learned about the statement of retained earnings and how to account for restrictions and appropriations.

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