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Chapter 11. Stockholders’ Equity. PowerPoint Authors: Brandy Mackintosh Lindsay Heiser. Learning Objective 11-1. Explain the role of stock in financing a corporation. Corporate Ownership.

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chapter 11

Chapter 11

Stockholders’ Equity

PowerPoint Authors:

Brandy Mackintosh

Lindsay Heiser

learning objective 11 1
Learning Objective 11-1

Explain the role of stock in financing a corporation

corporate ownership
Corporate Ownership

The major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ownership.

Easy to transfer ownership

Provides limited liability

Simple to become an owner

  • Because a corporation is a separate legal entity, it can
  • Own assets.
  • Incur liabilities.
  • Sue and be sued.
  • Enter into contracts.
corporate ownership1

StockholderBenefits

Corporate Ownership
  • Voting rights.
  • Dividends.
  • Residual claims.
  • Preemptive rights.
equity versus debt financing
Equity Versus Debt Financing

Advantages of equity and debt financing.

Advantages of equity

  • Equity does not have to be repaid.
  • Dividends are optional.

Advantages of debt

  • Interest on debt is tax deductible.
  • Debt does not change stockholder control.
learning objective 11 2
Learning Objective 11-2

Explain and analyze common stock transactions.

authorization issuance and repurchase of stock

Outstanding sharesare issued shares that are owned by stockholders.

Authorized

Shares

Issued

Shares

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

Authorization, Issuance, and Repurchase of Stock

Issued shares are authorized shares of stock that have been distributed to stockholders.

Unissued shares of stock are shares that have never been distributed to stockholders.

Outstanding

Shares

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

Unissued

Shares

Treasury

Shares

stock authorization
Stock Authorization

Par value is typically a very nominal amount such a $0.01 per share.

Par valueis an arbitrary amount assigned to each share of stock when it is authorized.

Market priceis the amount that each share of stock will sell for in the market.

stock authorization1

No-par Stock

Some states do notrequire a par value to be stated in the charter.

Stock Authorization
stock issuance

Initial public offering (IPO)

Seasoned new issue

The first time a corporation issues stock to the public.

Subsequent issues of new stock to the public.

National Beverage

issues stock.

Stock Issuance
stock issuance1

Stockholders’ Equity

+

Cash +1,000,000

Common Stock +1,000

Additional Paid-In

Capital +999,000

Stock Issuance

Most issues of stock to the public are cash transactions.

National Beverage issued 100,000 shares of$0.01 par value common stock for $10 per share.

1,000,000

1,000

999,000

dr Cash (+A) (100,000 x $10)

cr Common Stock (+SE) (100,000 x $0.01)

cr Additional Paid-In Capital (+SE)

(1,000,000 – 1,000)

Analyze

Record

Liabilities

Assets

=

1

2

stock exchanged between investors
Transactions between two investors do not affectthe corporation’s accounting records.

I’d like to sell 100 shares of National Beverage stock.

I’d like to buy 100 shares of National Beverage stock.

Stock Exchanged between Investors
stock used to compensate employees
Stock Used to Compensate Employees

Employees pay packages can include stock options

Gives the employees the option to acquire company stock at a predetermined price

If the employees work hard and meet the corporation’s goals the stock price will increase.

Employees can then exercise their option to acquire stock at the lower predetermined price and sell it at the higher price for a profit.

repurchase of stock
Repurchase of Stock
  • A corporation repurchases its stock to:
  • Distribute excess cash to stockholders.
  • Send a signal that the company believesits stock is worth acquiring.
  • Obtain shares to reissue for the purchaseof other companies.
  • Obtain shares to reissue to employees as part of stock option plans.
repurchase of stock1

National Beverage repurchases its own stock

(Treasury stock)

Stockholders

Employee compensation package includes salary plus stock options.

Employee

Repurchase of Stock

Stock optionsallow employees to purchase stock from the corporation at a fraction of the stock’s market price.

repurchase of stock2

Treasury

stock is notan asset.

Repurchase of Stock

No voting or dividend rights

Contra equity account

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

repurchase of stock3

Stockholders’ Equity

+

Cash -1,250,000

Treasury

Stock (+xSE) -1,250,000

Repurchase of Stock

National Beverage reacquired 50,000 sharesof its common stock at $25 per share.

1,250,000

1,250,000

dr Treasury Stock (+xSE, -SE)

cr Cash (-A)

Analyze

Record

Liabilities

Assets

=

1

2

reissuance of treasury stock

Stockholders’ Equity

+

Cash +140,000

Treasury Stock (-xSE) +125,000

Additional Paid-In

Capital +15,000

Reissuance of Treasury Stock

National Beverage reissued 5,000 sharesof the Treasury Stock at $28 per share.

140,000

125,000

15,000

dr Cash (+A) (5,000 x $28)

cr Treasury Stock (-xSE, +SE) (5,000 x $25)

cr Additional Paid-In Capital (+SE)

[5,000 x ($28 - $25)]

Analyze

Record

Liabilities

Assets

=

1

2

No profit or loss is recognized on treasury stock transactions.

learning objective 11 3
Learning Objective 11-3

Explain and analyze cash dividends, stock dividends, and stock split transactions.

dividends on common stock
Dividends on Common Stock

Declared by board of directors.

Not legally

required.

Creates liability at declaration.

Requires sufficient Retained Earnings and Cash.

dividends dates

Stockholders’ Equity

+

Dividends

Declared (+D) -106,260,000

Dividends

Payable +106,260,000

Dividends Dates

National Beverage declares an $2.30 dividend on each share of its 46,200,000 shares of common stock outstanding.

106,260,000

106,260,000

dr Dividends Declared (+D, -SE)

cr Dividends Payable (+L)

Analyze

Record

Liabilities

Assets

=

1

2

dividends dates1

Stockholders’ Equity

+

Cash -106,260,000

Dividends

Payable -106,260,000

Dividends Dates

National Beverage paid the previously declared $2.30dividend on its shares of common stock outstanding.

106,260,000

106,260,000

dr Dividends Payable (-L)

cr Cash (-A)

Analyze

Record

Liabilities

Assets

=

1

2

stock dividends

No change in total stockholders’ equity.

No change inpar values.

All stockholders retain same percentage ownership.

Stock Dividends

Distribution of additional sharesof stock to stockholders.

  • Corporations issue stock dividends to:
  • Remind stockholders of the accumulating wealth in the company.
  • Reduce the market price per share of stock.
  • Signal that the company expects strong financial performance in the future.
stock dividends1

Record at currentmarket valueof stock.

Record atpar valueof stock.

Stock Dividends

Small

Large

Stock dividend < 20 – 25%

Stock dividend > 20 – 25%

The journal entry moves an amount fromRetained Earnings to other equity accounts.

stock dividends2

Stockholders’ Equity

+

Retained Earnings -76,000

Common Stock +76,000

Stock Dividends

National Beverage issued a 20 percent stock dividend on 38,000,000 outstanding shares of its $0.01 par value common stock and accounted for it as a large stock dividend.

76,000

76,000

dr Retained Earnings (-SE)

cr Common Stock (+SE)

Analyze

Record

Liabilities

Assets

=

1

2

stock splits
Stock Splits

An increase in the number of shares and a corresponding decreasein par value per share. Retained earnings is not affected.

A stock split creates more pieces of the same pie.

Assume that a corporation had 1,000,000 shares of $0.01 par value common stock outstanding before a 2–for–1 stock split.

learning objective 11 4
Learning Objective 11-4

Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.

preferred stock issuance

Stockholders’ Equity

+

Cash +50,000

Preferred Stock +10,000

Additional Paid-In

Capital Preferred +40,000

Preferred Stock Issuance

Priority over common stock

Preferred Stock

Usually has a fixed dividend rate

Usually has no voting rights

National Beverage issued 10,000 shares of its$1 par value preferred stock for $5 per share.

10,000

40,000

50,000

dr Cash (+A) (10,000 x $5)

cr Preferred Stock (+SE) (10,000 x $1)

cr Additional Paid-In Capital – Preferred (+SE)

Analyze

Record

Liabilities

Assets

=

1

2

preferred stock dividends
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.

Preferred Stock Dividends

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

preferred stock dividends1
Preferred Stock Dividends

Assume the preferred stock of Flavoria carries only a current dividend preference and that the company declares dividends totaling $8,000 in 2012 and $10,000 in 2013. How much would the preferred and common stockholders receive in 2012 and 2013?

preferred stock dividends3
Preferred Stock Dividends

Assume that Flavoria Company has the same amount of stock outstanding. However assume that dividends are in arrears for 2010 and 2011. How much would the preferred and common stockholders receive in 2012 and 2013?

retained earnings
Retained Earnings

Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating.

Baker Company

Comparative Balance Sheets (Partial)

For Year Ended December 31

Stockholders’ Equity

Common Stock

Additional Paid-in Capital

Retained Earnings (Deficit)

Total Stockholders’ Equity

2014

$ 100,000

750,000

50,000

900,000

2013

$ 100,000

750,000

(70,000)

780,000

Baker Company incurred a loss of $120,000 in 2013 thatresulted in an Accumulated Deficit in Retained Earnings.

learning objective 11 5
Learning Objective 11-5

Analyze the earnings per share (EPS), return on equity (ROE), and price/earnings (P/E) ratios.

earnings per share eps

Net Income

Average Number of Common Shares Outstanding

EPS =

$40,800,000

46,200,000 Shares

= $0.88 per share

EPS =

Earnings Per Share (EPS)

Earnings per share is probably the single most widely watched financial ratio.

National Beverage’s income for 2011 was $40,800,000 and the average number of shares outstanding during the year was 46,200,000.

return on equity roe

$40,800,000

$110,950,000

ROE =

= 36.8 percent

Return on Equity (ROE)

Return on equity is the amount earned for each dollar invested by stockholders.

Net Income

Average Stockholders’ Equity

ROE =

National Beverage’s income for 2011 was $40,800,000 and the average Stockholders’ Equity was $110,950,000.

price earnings p e ratio

Current Stock Price (per share)

Earnings Per Share (annual)

P/E =

Price/Earnings (P/E) Ratio

The P/E ratio is a measure of the value that investors place on a company’s common stock.

$ 15.10

$ 0.88

P/E =

= 17.2

National Beverage’s stock price was $15.10 whenthe company reported its 2011 EPS of $0.88.

supplement 11a

Supplement 11A

Owners’ Equity for Other Forms of Business

owner s equity for a sole proprietorship
Owner’s Equity for a Sole Proprietorship

Only two owner’sequity accounts.

A Capital account to recordthe owner’s investmentsand the periodic incomeor loss.

A Withdrawal accountto record the owner’s

withdrawals of assets.

No separate retainedearnings account.

Closed to the capital accountat the end of each period.

accounting for owner s equity for a sole proprietorship
Accounting for Owner’s Equityfor a Sole Proprietorship

To record a $150,000 investment by H. Simpson, the owner.

To record H. Simpson’s $1,000 monthly withdrawal.

accounting for owner s equity for a sole proprietorship1
Accounting for Owner’s Equityfor a Sole Proprietorship

To close revenue and expense accounts to capital.

To close the $1,000 monthly drawings to capital.

accounting for partnership equity
Accounting for Partnership Equity

Accounting for assets, liabilities, revenues and expenses follows the same accounting principles as any other form of business.

Accounting for partners’ equity follows the same pattern as for a sole proprietorship.

Separate Capital and Drawings accounts are maintained for each partner.

accounting for partnership equity1
Accounting for Partnership Equity

To record investments by partners Able and Bakerwho will divide net income as follows: Able, 60percent and Baker 40 percent.

To record the partners’ monthly withdrawal.

accounting for partnership equity2
Accounting for Partnership Equity

To close revenue and expense accounts to partners’ capital.

To close the monthly drawings to partners’ capital.

other business forms

Limited Liability Partnership(LLP)

Limited Liability Company(LLC)

  • Protects innocent partners from malpractice or negligence claims.
  • Most states hold all partners personally liable for partnership debts.
  • Owners have same limited liability feature as owners of a corporation.
  • A limited liability company typically has a limited life.
Other Business Forms
chapter 11 solved exercises

Chapter 11Solved Exercises

M11-4, M11-8, E11-3, E11-6, E11-8, E11-11, E11-19

slide54

Stockholders’ Equity

+

Cash +50,000

Common Stock +1,000

Additional Paid-In

Capital +49,000

M11-4Analyzing and Recording the Issuance of Common Stock

To expand operations, Aragon Consulting issued 1,000 shares of previously unissued common stock with a par value of $1. The price for the stock was $50 per share. Analyze the accounting equation effects and record the journal entry for the stock issuance.

1,000

49,000

50,000

dr Cash (+A)

cr Common Stock (+SE)

cr Additional Paid-In Capital (+SE)

Analyze

Record

Liabilities

Assets

=

1

2

slide55

Stockholders’ Equity

+

Cash +50,000

Common Stock +2,000

Additional Paid-In

Capital +48,000

M11-4Analyzing and Recording the Issuance of Common Stock

Would your answer be different if the par value were $2 per share? If, so, analyze the accounting equation effects and record the journal entry for the stock issuance with a par value of $2.

The effects on total assets and total stockholders’ equity would not differ, but the amounts within the individual stockholders’ equity accounts would differ.

2,000

48,000

50,000

dr Cash (+A)

cr Common Stock (+SE)

cr Additional Paid-In Capital (+SE)

Analyze

Record

Liabilities

Assets

=

1

2

slide56

M11-8Determining the Amount of a Dividend

Netpass Company has 300,000 shares of common stock authorized, 270,000 shares issued, and 100,000 shares of treasury stock. The company’s board of directors declares a dividend of $1 per share of common stock. What is the total amount of the dividend that will be paid?

Dividends are paid on shares that are issued and outstanding.Dividends are not paid on treasury stock.

Shares issued

Less treasury stock

Shares outstanding

Dividend per share

Total dividends paid

270,000

100,000

170,000

x $ 1.00

$170,000

slide57

E11-3 Preparing the Stockholders’ Equity Section of the Balance Sheet

North Wind Aviation received its charter during January 2013. The charter authorized the following capital stock:

During 2013, the following transactions occurred in the order given:

a. Issued a total of 40,000 shares of the common stock for $15 per share.

b. Issued 10,000 shares of the preferred stock at $16 per share.

c. Issued 3,000 shares of the common stock at $20 per share and 1,000 shares of the preferred stock at $16.

d. Net income for the first year was $48,000.

Required:

Prepare the stockholders’ equity section of the balance sheet at December 31, 2013.

slide58

E11-3 Preparing the Stockholders’ Equity Section of the Balance Sheet

North Wind Aviation

Stockholders’ Equity

December 31, 2013

North Wind Aviation

Stockholders’ Equity

December 31, 2013

North Wind Aviation

Stockholders’ Equity

December 31, 2013

North Wind Aviation

Stockholders’ Equity

December 31, 2013

$ 430,000

$ 430,000

66,000

$ 430,000

66,000

43,000

617,000

$ 110,000

66,000

43,000

617,000

836,000

48,000

$ 884,000

Contributed Capital:

Preferred Stock, 8%, $10 par, 20,000 shares authorized,

43,000 shares issued and outstanding

Contributed Capital:

Preferred Stock, 8%, $10 par, 20,000 shares authorized,

43,000 shares issued and outstanding

Additional Paid-in Capital, Preferred

Contributed Capital:

Preferred Stock, 8%, $10 par, 20,000 shares authorized,

43,000 shares issued and outstanding

Additional Paid-in Capital, Preferred

Common Stock, $1 par, 50,000 shares authorized,

43,000 shares issued and outstanding

Additional Paid-in Capital, Common

Contributed Capital:

Preferred Stock, 8%, $10 par, 20,000 shares authorized,

11,000 shares issued and outstanding

Additional Paid-in Capital, Preferred

Common Stock, $1 par, 50,000 shares authorized,

43,000 shares issued and outstanding

Additional Paid-in Capital, Common

Total Contributed Capital

Retained Earnings

Total Stockholders’ Equity

10,000 shares × ($16 – $10) + 1,000 shares × ($16 – $10)

40,000 shares × ($15 – $1) + 3,000 shares × ($20 – $1)

slide59

E11-6Recording and Reporting Stockholders’ Equity Transactions

AvA School of Learning obtained a charter at the start of 2013 that authorized 50,000 shares of no-par common stock and 20,000 shares of preferred stock, par value $10. During 2013, the following selected transactions occurred:

a. Collected $40 cash per share from four individuals and issued 5,000 shares of common stock to each.

b. Issued 6,000 shares of common stock to an outside investor at $40 cash per share.

c. Issued 8,000 shares of preferred stock at $20 cash per share.

Required:

1. Give the journal entries indicated for each of these transactions.

2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2013. At the end of 2013, the accounts reflected net income of $36,000. No dividends were declared.

slide60

E11-6Recording and Reporting Stockholders’ Equity Transactions

Required:

1. Give the journal entries indicated for each of these transactions.

(a) Collected $40 cash per share from four individuals and issued 5,000 shares of common stock to each.

800,000

240,000

800,000

240,000

dr Cash (+A) (5,000 x $40 x 4)

cr Common Stock (+SE)

dr Cash (+A) (6,000 x $40)

cr Common Stock (+SE)

(b) Issued 6,000 shares of common stock to an outside investor at $40 cash per share.

slide61

E11-6Recording and Reporting Stockholders’ Equity Transactions

Required:

1. Give the journal entries indicated for each of these transactions.

(c) Issued 8,000 shares of preferred stock at $20 cash per share.

80,000

80,000

160,000

dr Cash (+A) (8,000 x $20)

cr Preferred Stock (+SE)

cr Additional Paid-in Capital, Preferred (+SE)

slide62

E11-6Recording and Reporting Stockholders’ Equity Transactions

Required:

2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2013. At the end of 2013, the accounts reflected net income of $36,000. No dividends were declared.

AvA School of Learning

Stockholders’ Equity

December 31, 2013

AvA School of Learning

Stockholders’ Equity

December 31, 2013

AvA School of Learning

Stockholders’ Equity

December 31, 2013

AvA School of Learning

Stockholders’ Equity

December 31, 2013

$ 80,000

$ 80,000

80,000

$ 80,000

80,000

1,040,000

$ 80,000

80,000

1,040,000

1,200,000

36,000

$1,236,000

Contributed Capital:

Preferred Stock, $10 par, 20,000 shares authorized,

8,000 shares issued and outstanding

Contributed Capital:

Preferred Stock, $10 par, 20,000 shares authorized,

8,000 shares issued and outstanding

Additional Paid-in Capital, Preferred

Contributed Capital:

Preferred Stock, $10 par, 20,000 shares authorized,

8,000 shares issued and outstanding

Additional Paid-in Capital, Preferred

Common Stock, no par, 50,000 shares authorized,

26,000 shares issued and outstanding

Contributed Capital:

Preferred Stock, $10 par, 20,000 shares authorized,

8,000 shares issued and outstanding

Additional Paid-in Capital, Preferred

Common Stock, no par, 50,000 shares authorized,

26,000 shares issued and outstanding

Total Contributed Capital

Retained Earnings

Total Stockholders’ Equity

8,000 shares x ($20 - $10)

(20,000 shares × $40) + (6,000 shares × ($40)

slide63

E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact

During 2013, the following selected transactions affecting stockholders’ equity occurred for Corner Corporation:

Feb. 1 Purchased 400 shares of the company’s own common stock at $20 cash per share.

Jul. 15 Issued 100 of the shares purchased on February 1, for $30 cash per share.

Sept. 1 Issued 60 more of the shares purchased on February 1, for $15 cash per share.

Required:

1. Show the effects of each transaction on the accounting equation.

2. Give the indicated journal entries for each of the transactions.

3. What impact does the purchase of treasury stock have on dividends paid?

4. What impact does the issuance of treasury stock for an amount higher than the purchase price have on net income?

slide64

Stockholders’ Equity

Stockholders’ Equity

Stockholders’ Equity

+

+

+

Cash - 8,000

Cash + 3,000

Cash + 900

Cash - 8,000

Cash - 8,000

Cash + 3,000

Treasury Stock (+xSE) - 8,000

Treasury Stock (-xSE) + 2,000

Additional Paid-in

Capital – treasury + 1,000

Treasury Stock (-xSE) + 1,200

Additional Paid-in

Capital – treasury - 300

Treasury Stock (+xSE) - 8,000

Treasury Stock (-xSE) + 2,000

Additional Paid-in

Capital – treasury + 1,000

Treasury Stock (+xSE) - 8,000

E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact

Required:

1. Show the effects of each transaction on the accounting equation.

Analyze

Analyze

Analyze

Date

Date

Date

Assets

Assets

Assets

=

=

=

1

1

1

Liabilities

Liabilities

Liabilities

Feb. 1

Feb. 1

Jul. 15

Feb. 1

Jul. 15

Sept. 1

slide65

E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact

Required:

2. Give the indicated journal entries for each of the transactions.

8,000

2,000

1,000

1,200

8,000

3,000

900

300

dr Treasury Stock (+xSE)

cr Cash (-A) (400 x $20)

dr Cash (+A) (100 x $30)

cr Treasury Stock (-xSE, +SE)

cr Additional Paid-In Capital – Treasury (+SE)

dr Cash (+A) (60 x $15)

dr Additional Paid-in Capital - Treasury (-SE)

cr Treasury Stock (-xSE, +SE) (60 x $20)

Record Feb. 1

Record July 15

Record Sept. 1

2

2

2

slide66

E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact

Required:

3. What impact does the purchase of treasury stock have on dividends paid?

4. What impact does the issuance of treasury stock for an amount higher than the purchase price have on net income?

Dividends are not paid on treasury stock. Therefore, the total amount of cash dividends paid is reduced when treasury stock is purchased.

The sale of treasury stock for more or less than its original purchase price does not have an impact on net income. The transaction affects only balance sheet accounts.

slide67

E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings

The 2012 annual report for Sneer Corporation disclosed that the company declared and paid preferred dividends in the amount of $100,000 in 2012. It also declared and paid dividends on common stock in the amount of $2 per share. During 2012, Sneer had 1,000,000 common shares authorized; 300,000 shares had been issued; 100,000 shares were in treasury stock. The balance in Retained Earnings was $800,000 on December 31, 2011, and 2012 Net Income was $300,000.

Required:

1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.

2. Using the information given above, prepare a Statement of Retained Earnings for the year ended December 31, 2013.

slide68

E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings

1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.

a. Preferred Stock

100,000

100,000

100,000

100,000

dr Dividends Declared (-SE)

cr Dividends Payable (+L)

dr Dividends Payable (-L)

cr Cash (-A)

Declaration

Payment

slide69

E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings

1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.

b. Common Stock

Dividends are paid on shares that are issued and outstanding.Dividends are not paid on treasury stock.

Shares issued

Less treasury stock

Shares outstanding

Dividend per share

Total dividends paid

300,000

100,000

200,000

x $ 2.00

$400,000

slide70

E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings

1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.

b. Common Stock

400,000

400,000

400,000

400,000

dr Dividends Declared (-SE)

cr Dividends Payable (+L)

dr Dividends Payable (-L)

cr Cash (-A)

Declaration

Payment

slide71

E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings

2. Using the information given above, prepare a Statement of Retained Earnings for the year ended December 31, 2013.

Sneer Corporation

Statement of Retained Earnings

For Year Ended December 31, 2013

$ 800,000

300,000

(100,000)

(400,000)

$ 600,000

Retained Earnings, January 1, 2013

Plus: Net Income

Less: Dividends declared on Preferred Stock

Dividends declared on Common Stock

Retained Earnings, December 31, 2013

slide72

Net Income

Average Number of Common Shares Outstanding

EPS =

$5,000

50,000 Shares

= $0.10 per share

EPS =

E11-19Determining the Effect of a Stock Repurchase on EPS and ROE

Swimtech Pools Inc. (SPI) reported the following in its financial statements for the quarter ended March 31, 2013.

During the quarter ended March 31, 2013, SPI reported Net Income of $5,000 and declared and paid cash dividends totaling $5,000.

Required:

1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31, 2013.

slide73

$5,000

$100,000

ROE =

= 5.0 percent

E11-19Determining the Effect of a Stock Repurchase on EPS and ROE

Required:

1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31, 2013.

Net Income

Average Stockholders’ Equity

ROE =

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$5,000

40,000 Shares

= $0.125 per share

EPS =

E11-19Determining the Effect of a Stock Repurchase on EPS and ROE

Required:

2. Assume SPI repurchases 10,000 of its common stock at a price of $2 per share on April 1, 2013. Also assume that during the quarter ended June 30, 2013, SPI reported Net Income of $5,000, and declared and paid cash dividends totaling $5,000. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2013.

If 10,000 shares are repurchased on April 1, 2013, only 40,000shares would be outstanding from April 1 – June 30, 2013.

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$5,000

$80,000

ROE =

= 6.25 percent

E11-19Determining the Effect of a Stock Repurchase on EPS and ROE

Required:

2. Assume SPI repurchases 10,000 of its common stock at a price of $2 per share on April 1, 2013. Also assume that during the quarter ended June 30, 2013, SPI reported Net Income of $5,000, and declared and paid cash dividends totaling $5,000. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2013.

10,000 shares are repurchased for $20,000 on April 1, 2013, resulting in a Stockholders’ Equity balance of $80,000 fromApril 1 – June 30, 2013.

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E11-19Determining the Effect of a Stock Repurchase on EPS and ROE

Swimtech Pools Inc. (SPI) reported the following in its financial statements for the quarter ended March 31, 2013.

Required:

3. Based on your calculations in requirements 1 and 2, what can you conclude about the impact of a stock repurchase on EPS and ROE?

By repurchasing stock, a company can increase both its EPS and ROE.