Download Chap 18 - CSUN.edu

18
Shareholders’ Equity
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
The Nature of Shareholders’ Equity
Assets – Liabilities = Shareholders’ Equity
Net Assets
Sources of
Shareholders’
Equity
Amounts earned
Amounts invested
by shareholders
Shareholders’ Equity
Paid-in Capital
Retained Earnings
Accumulated Other
Comprehensive Income
18 - 2
by corporation
Other
gains and
losses not
included in
net income
Financial Reporting Overview
Shareholders' Equity
Paid-in-capital:
Captial stock:
Preferred stock - $100 par value; 1,000 shares
authorized; 400 shares issued and
outstanding
$ 40,000
Common stock - $10 par value; 60,000 shares
authorized; 20,000 shares issued and
outstanding
200,000
Additional paid-in capital in excess of par value
From issuance of preferred stock
10,000
From issuance of common stock
300,000
Total paid-in capital
$ 550,000
Retained earnings
121,500
Accumulated other comprehensive income:
Net unrealized holding gains (losses) on investments
(35,000)
Gains (losses) from foreign currency translation
22,000
(13,000)
Treasury stock (at cost)
(10,000)
Total shareholders' equity
$ 648,500
18 - 3
Accumulated Other
Comprehensive Income
Accumulated other comprehensive income
includes four types of gains and losses that
traditionally have been excluded from net income.
Net holding
gains (losses)
on investments.
Gains (losses)
from and
amendments to
post retirement
benefit plans.
18 - 4
Deferred gains
(losses) from
derivatives.
Gains (losses)
from foreign
currency
translations.
Accumulated Other
Comprehensive Income
Comprehensive income is reported periodically as it is
created and also is reported as a cumulative amount.
There are 3 options for
reporting comprehensive
income created during the
reporting period.
As an additional
section of the
income
statement.
18 - 5
The accumulated amount
of comprehensive income
is reported as a separate
item of shareholders’
equity in the balance sheet.
As part of the
statement of
shareholders’
equity.
As a separate
statement.
U.S. GAAP vs. IFRS
Comprehensive Income
• Single statement of
comprehensive income.
• Two statements: a separate
income statement and
statement of comprehensive
income.
• In the statement of
shareholders’ equity.
18 - 6
• Same
• Same
• Not permitted
U.S. GAAP vs. IFRS
Use of the Term Reserves and
Other Terminology Differences
• Capital stock:
 Common stock.
 Preferred stock.
 Paid‐in capital—excess of
par, common.
 Paid‐in capital—excess of
par, preferred .
18 - 7
• Share capital:
 Ordinary shares.
 Preference shares.
 Share premium, ordinary
shares.
 Share premium, preference
shares.
U.S. GAAP vs. IFRS
Use of the Term Reserves and
Other Terminology Differences
• Accumulated other
comprehensive income:
 Net gains (losses) on
investments—AOCI.
 Net gains (losses) foreign
currency translation —AOCI.
 Fair value adjustments not
permitted.
• Retained earnings.
• Total shareholders’ equity.
• Presented after liabilities
18 - 8
• Reserves:
 Investment revaluation
reserve.
 Translation reserve.
 Revaluation reserve.
 Retained Earnings.
• Total equity.
• Often presented before liabilities.
The Corporate Organization
Advantages of a corporation
Continuous
Existence
Easy
ownership
transfer
Easy to
raise capital
Limited
liability
Disadvantages of a corporation
Double
taxation
18 - 9
Government
regulation
Types of Corporations
Not-for-profit corporations include
hospitals, charities, and government
agencies such as FDIC.
Publicly-held corporations
whose shares are widely
owned by the general public.
Privately-held corporations
whose shares are owned by
only a few individuals.
18 - 10
Hybrid Organizations
S Corporation
•
•
Double
taxation
avoided.
Limited liability protection of a corporation.
Maximum number of owners.
Limited liability company
• Limited liability protection of a corporation.
• All owners may be involved in management
•
without losing limited liability protection.
No limit on number of owners.
Limited liability partnership
•
18 - 11
Owners are liable for their own actions but not
entirely liable for actions of other partners.
The Model Business Corporation Act
• Nature and location of business activities.
• Number and classes of shares authorized.
• Number and classes of shares authorized.
Articles of incorporation
are filed with the state.
State issues a
corporate charter.
Shares of
stock issued.
18 - 12
Board of directors
appoint officers.
Board of directors
elected by
shareholders.
Fundamental Share Rights
Right
to vote.
Right to share
in profits when
dividends are
declared.
18 - 13
Preemptive
right to maintain
percentage
ownership.
Right to share
in distribution of
assets if company
is liquidated.
Authorized, Issued, and
Outstanding Shares
Authorized shares are the maximum
number of shares of capital stock that
can be sold to the public.
Issued
shares are
authorized
shares of
stock that
have been
sold.
18 - 14
Unissued
shares are
authorized
shares of
stock that
never have
been sold.
Authorized, Issued, and
Outstanding Shares
Outstanding shares are
issued shares that are
owned by stockholders.
Authorized
Shares
Issued
Shares
Retired shares
have the same
status as
authorized but
unissued
shares.
18 - 15
Outstanding
Shares
Treasury
Shares
Retired
Shares
Unissued
Shares
Treasury shares are
issued shares that
have been reacquired
by the corporation.
Capital Stock
Par value stock
• Dollar amount per share
is stated in the corporate
charter.
• Par value has no
relationship to market
value.
No-par stock
• Dollar amount per share
is not designated in
corporate charter.
• Corporations can assign
a stated value per share
(treated as if par value).
Legal capital is . . .
 The portion of shareholders’ equity that must be
contributed to the firm when stock is issued.
 The amount of capital, required by state law, that must
remain invested in the business.
 Refers to par value, stated value, or full amount paid for
no-par stock.
18 - 16
Capital Stock
Common stock is the basic voting stock of the
corporation. It ranks after preferred stock for dividend
and liquidation distribution. Dividends are determined
by the board of directors.
Usually has a
par or stated value.
Generally does not
have voting rights.
Preferred
Stock
Dividend and liquidation
preference over
common stock.
18 - 17
May be convertible,
callable, and/or
redeemable.
Preferred Stock Dividends
•
•
•
Are usually stated as a percentage of the par
or stated value.
May be cumulative or noncumulative.
May be partially participating, fully participating,
or nonparticipating.
Unpaid dividends must be paid in full before
any distributions to common stock.
Dividends in arrears are not liabilities, but the per
share and aggregate amounts must be disclosed.
18 - 18
Shares Issued for Cash
10,000 shares of stock are issued for $100,000 cash.
$1 Par
Value
Cash .......................................................
Common stock, par value ..............
Paid-in capital – excess of par ……
100,000
10,000
90,000
To record issue of common stock.
No Par
Value
No Par,
$1 Stated
Value
18 - 19
Cash .......................................................
Common stock .............................
100,000
100,000
To record issue of common stock.
Cash ................................................................... 100,000
Common stock, stated value .....................
10,000
Paid-in capital – excess of stated value ….
90,000
To record issue of common stock.
Shares Issued for
Noncash Consideration
Apply the general valuation principle by using
fair value of stock given up or fair value of
asset received, whichever is more clearly
evident.
If market values cannot be determined, use
appraised values.
18 - 20
More Than One Security
Issued for a Single Price
• Allocate the lump-sum received based on the relative fair
values of the two securities.
• If only one fair value is known, allocate a portion of the
lump-sum received based on that fair value and allocate
the remainder to the other security.
Toys, Inc. issued 5,000 shares of common stock, $10 par
value and 3,000 shares of preferred stock, $5 par value
for $450,000. The market values of the common stock
and preferred stock were $55 and $75, respectively.
Calculate the additional paid-in
capital for each class of stock.
18 - 21
More Than One Security
Issued for a Single Price
Common Stock
Preferred Stock
Total
Market*
$275,000
225,000
$500,000
%
Allocation** Par^
Excess^^
55% $ 247,500 $ 50,000 $ 197,500
45%
202,500
15,000
187,500
100% $ 450,000 $ 65,000 $ 385,000
* Market Value:
Common: $55 × 5,000 shares
Preferred: $75 × 3,000 shares
^ Par Value:
Common: $10 × 5,000 shares
Preferred: $5 × 3,000 shares
**Allocation:
Common: $450,000 × 55%
Preferred: $450,000 × 45%
^^Excess:
Common: $247,500 - $50,000 par
Preferred: $202,500 - $15,000 par
Cash ............................................................................
Common stock, $10 par .....................................
Paid-in capital – excess of par common ………..
Preferred stock, $5 par
Paid-in capital – excess of par preferred ……….
To record issue of common and preferred stock.
18 - 22
450,000
50,000
197,500
15,000
187,500
Share Issue Costs
• Registration fees
• Underwriter commissions
• Printing and clerical costs
• Legal and accounting fees
• Promotional costs
Share issue costs reduce net proceeds
from selling shares, resulting in a lower
amount of additional paid-in capital.
18 - 23
Share Buybacks
A corporation might reacquire shares of its stock to . . .
• support the market price.
• increase earnings per share.
• distribute in stock option plans.
• issue as a stock dividend.
• use in mergers and acquisitions.
• thwart takeover attempts.
I can account for the reacquired
shares by retiring them or by holding
them as treasury shares.
18 - 24
Accounting for Retired Shares
When shares are formally retired, we reduce the same capital
accounts that were increased when the shares were issued –
common or preferred stock, and additional paid-in capital.
Price paid is less than issue price.
5,000 shares of $2 par value stock that were issued
for $20 per share are reacquired for $17 per share.
Common stock ............................................................
Paid-in capital – excess of par common ……………....
Paid-in capital – share repurchase ……………..
Cash ………………………………………………..
To record repurchase and retirement of common stock.
18 - 25
10,000
90,000
15,000
85,000
Accounting for Retired Shares
Price paid is more than issue price.
5,000 shares of $2 par value stock that were issued
for $20 per share are reacquired for $25 per share.
Common stock ............................................................
Paid-in capital – excess of par common ……………….
Paid-in capital – share repurchase ……………………..
Cash ………………………………………………..
10,000
90,000
25,000
125,000
To record repurchase and retirement of common stock.
Reduce Retained Earnings if the Paid-in capital – share
repurchase account balance is insufficient.
18 - 26
Accounting for Treasury Stock
Treasury stock usually does not have:
•Voting rights.
•Dividend rights.
•Preemptive rights.
•Liquidation rights.
Treasury stock is reported as an unallocated reduction
of total Shareholders’ Equity.
Acquisition of Treasury Stock
•Recorded at cost to acquire.
Resale of Treasury Stock
•Treasury Stock credited for cost.
•Difference between cost and issuance price is (generally)
recorded in paid-in capital – share repurchase.
18 - 27
Accounting for Treasury Stock
On 5/1/10, Photos-in-a-Second reacquired 3,000 shares of its
common stock at $55 per share. On 12/3/11, Photos-in-aSecond reissued 1,000 shares of the stock at $75 per share.
Which of the following would be included in the 12/3/11 entry?
a. Credit Cash for $165,000.
b. Debit Treasury Stock for $75,000.
c. Credit Treasury Stock for $55,000.
d. Credit Cash for $75,000.
May 1, 2010:
Treasury stock ..............................................
Cash ...................................................
165,000
165,000
To record purchase of treasury stock.
December 3, 2011:
Cash .............................................................
Treasury stock ....................................
Paid-in capital – share repurchase ….
18 - 28
To record reissue of treasury stock.
75,000
55,000
20,000
Retained Earnings
Represents the undistributed earnings of
the company since its inception.
Balance January 1, 2009
Net income
Cash dividends
Balance December 31, 2009


18 - 29
$ 106,500
25,000
(10,000)
$ 121,500
The statement of retained earnings may also contain the
correction of an accounting error that occurred in the
financial statements of a prior period, called a prior
period adjustment.
Any restrictions on retained earnings must be disclosed
in the notes to the financial statements.
Accounting for Cash Dividends
Declared by board of
directors.
Not legally
required.
Creates liability at
declaration.
Requires sufficient
Retained Earnings and
Cash.
Declaration date
•
•
Board of directors declares a $10,000 cash dividend.
Record a liability.
Declaration Date:
Retained earnings ........................................
Dividends payable ..............................
To record declaration of cash dividend.
18 - 30
10,000
10,000
Dividend Dates
Ex-dividend date
The first day the shares trade without the right to
receive the declared dividend. (No entry)
Date of Record
Stockholders holding shares on this date will receive
the dividend. (No entry)
Date of Payment
Record the dividend payment to stockholders.
Date of Payment:
Dividends payable ........................................
Cash ………………..............................
To record payment of cash dividend.
18 - 31
10,000
10,000
Property Dividends
 Distributions of noncash assets.
 Record at fair value of
non-cash asset.
 Recognize gain or
loss for difference
between book value
and fair value.
18 - 32
Accounting for Stock Dividends
Distribution of additional shares of stock to owners.
No change in total
stockholders’ equity.
No change in
par values.
All stockholders retain same
percentage ownership.
Small
18 - 33
Large
Stock dividend < 25%
Stock dividend > 25%
Record at current fair
value of stock.
Record at par
value of stock.
Accounting for Stock Dividends
CarCo declares and distributes a 20%
stock dividend on 5 million common shares.
Par value is $1 and market value is $20.
The required journal entry would be:
Retained earnings .....................................................
Common stock ………………………………….
Paid-in capital – excess of par common ……..
20,000,000
1,000,000
19,000,000
To record declaration and distribution of small stock dividend.
5,000,000 shares × 20 % = 1,000,000 shares issued × $20 = $20,000,000
18 - 34
Stock Splits
Stock splits change the par value per share and the
number of shares outstanding, but the total par value is
unchanged, and no journal entry is required.
Assume that a corporation had 3,000shares of
$2 par value common stock outstanding
before a 2–for–1 stock split.
Before
Split
Common Stock Shares
18 - 35
After
Split
3,000
Par Value per Share
$
2.00
Total Par Value
$ 6,000
6,000
$
1.00
$ 6,000
Increase
Decrease
No
Change
Stock Splits Effected in the
Form of Large Stock Dividends
Matrix, Inc. declares and distributes a 2-for-1 stock
split effected in the form of a 100% stock dividend.
The company has 1,000,000, $1 par value common
stock outstanding. The stock is trading in the open
market for $14 per share. The per share par value of
the shares is not to be changed.
Paid-in capital – excess of par common ….................
Common stock ……………..…………………….
To record declaration and distribution of 2-for-1 stock
split effected in the form of a 100% stock dividend.
18 - 36
1,000,000
1,000,000
Appendix 18 ─ Quasi Reorganizations
Purpose
To allow a company undergoing financial difficulty, but with
favorable future prospects, to get a fresh start by writing down
inflated assets and eliminating an accumulated balance in
retained earnings.
•
•
•
18 - 37
Procedures
Assets and liabilities are revalued to reflect market values,
with corresponding debits and credits to retained earnings.
The debit balance in retained earnings is eliminated first
against additional paid in capital, and then, if necessary,
against common stock.
Retained earnings is dated to indicate when the new
accumulation of earnings began.
Quasi Reorganizations
Emerson-Walsch Corporation has incurred losses for
several years. The board of directors voted to implement a
quasi reorganization, subject to shareholder approval.
The balance sheet prior to restatement, in millions, follows :
Cash
Receivables
Inventory
Property, plant, and equipment (net)
Total assets
Liabilities
Common stock (800 million shares @$1)
Additional paid-in capital
Retained earnings (deficit)
Total liabilities and equity
(millions)
$
75
200
375
400
$
1,050
$
$
400
800
150
(300)
1,050
Fair values:
Inventory =
$300,000,000
and Property,
plant, and
equipment =
$225,000,000.
Let’s prepare the journal entries necessary for the quasi reorganization.
18 - 38
Quasi Reorganizations
To revalue assets
Retained earnings …………………………..................
Inventory ………………………………………….
Property, plant, & equipment ……………………
250,000,000
75,000,000
175,000,000
To record reduction to fair value of assets.
To eliminate the deficit in retained earnings
Paid-in capital – excess of par common ……..............
Common stock ………….……………………………….
Retained earnings ………………..………………
150,000,000
400,000,000
550,000,000
To eliminate the deficit in retained earnings.
$300,000,000 + $250,000,000
18 - 39
Quasi Reorganizations
Balance sheet immediately after restatement.
Cash
Receivables
Inventory
Property, plant, and equipment (net)
Total assets
Liabilities
Common stock (800 million shares @$.50)
Additional paid-in capital
Retained earnings
Total liabilities and equity
18 - 40
(millions)
$
75
200
300
225
$
800
$
$
400
400
0
0
800
End of Chapter 18