Chapter 11 Stockholders’ Equity Stockholders’ Equity  Stockholders:  Owners of a corporation  Have a residual interest in assets after liabilities are satisfied  Stockholders’ equity: Two major components  Contributed capital  Retained earnings LO Stockholders’ Equity  Contributed Capital:  Amount a corporation receives from the sale of stock (common or preferred) to the stockholders  Additional Paid-In Capital : amount received at issuance that exceeds the par value of the stock  Retained earnings:  Amount of net income, over the life of the company not paid out as dividends  An important link between the income statement and the balance sheet EXHIBIT 11.1—Advantages and Disadvantages of Stock versus Debt Financing Stockholders’ Equity on the Balance Sheet  The basic accounting equation: Assets = Liabilities + Stockholders’ Equity  Two major components or subcategories: Components of the Stockholders’ Equity Section of the Balance Sheet  Number of Shares  Par Value  Additional Paid-In Capital  Retained Earnings Contributed Capital  Common stock  Carries voting rights  The common stockholders elect the corporation’s officers • Establish its bylaws and governing rules  Preferred stock  Flexible and tailored to a company’s needs  Preference in dividends Number of Shares  Authorized shares: the maximum number of shares a corporation may issue as indicated in the corporate charter  Issued shares: the number of shares sold or distributed to stockholders  Outstanding shares: the number of shares issued less the number of shares held as treasury stock Par Value  An arbitrary amount that represents the legal capital of the firm  Stated on the face of the stock certificate  Also called “stated value”  Amount presented in the stock account Additional Paid-In Capital & Retained Earnings  Additional paid-in capital: the amount received for the issuance of stock in excess of the par value of the stock  Retained earnings: net income that has been made by the corporation but not paid out as dividends  Not necessarily available to stockholders  May be used for purchase of assets, the retirement of debt, or other financial needs Example 11.10—Recording Investments in a Sole Proprietorship  Assume that on January 1, 2014, Peter Tom began a new business by investing $10,000 cash Example 11.10—Recording Investments in a Sole Proprietorship (continued)  Assume that on July 1, 2014, Peter Tom took an auto valued at $6,000 from the business to use as his personal auto Example 11.10—Recording Investments in a Sole Proprietorship (continued)  The Peter Tom, Drawing account is a contra-equity account An increase in the account reduces the owner’s equity At the end of the fiscal year, the drawing account should be closed to the capital account and the effect is as follows: Example 11.10—Recording Investments in a Sole Proprietorship (continued)  Assume that all revenue and expense accounts of Peter Tom Company have been closed to the Income Summary account, resulting in a balance of $4,000, the net income for the year Example 11.10—Recording Investments in a Sole Proprietorship (continued)  The Owner’s Equity section of the balance sheet Partnerships  More than one owner  Separate capital account is maintained for each partner, as well as separate drawing accounts  Partnership agreement governs how income (losses) will be distributed  Unlimited liability  Limited life  Not taxed as a separate entity  Income is taxed on each owner’s tax return Partnership Agreement  Specifies how much the owners will invest, what their salaries will be, and how profits will be shared Example 11.11—Recording Investments in a Partnership  Assume that on January 1, 2014, Paige Thoms and Amy Rebec begin a partnership named AP Company Paige contributes $10,000 cash, and Amy contributes equipment valued at $5,000 Example 11.11—Recording Investments in a Partnership (continued)  Assume that on April 1, 2014, each owner withdraws $2,000 of cash from AP Company Distribution of Income  Assume that AP Company has $30,000 of net income for the period and has established an agreement that income should be allocated evenly between the two partners, Paige and Amy Each capital account would be increased by $15,000 Distribution of Income (continued)  Paige and Amy may specify that all income of AP Company should be allocated in a 2-to-1 ratio, with Paige receiving the larger portion Distribution of Income (continued)  Assume that the partnership agreement of AP Company specifies that Paige and Amy be allowed a salary of $6,000 and $4,000, respectively; that each partner receive 10% on her capital balance; and that any remaining income be allocated equally Assume that AP Company has been in operation for several years and that the capital balances of the owners at the end of 2014, before the income distribution, are as follows: Paige Thoms, Capital $40,000 Amy Rebec, Capital 50,000 Distribution of Income (continued)  If AP Company calculated that its 2014 net income (before partner salaries) was $30,000, income would be allocated between the partners as follows: Distribution of Income (continued)  Paige Thoms, Capital would be increased by $15,500, and Amy Rebec, Capital, by $14,500 The effect of closing the Income Summary account to the capital accounts is as follows:  This indicates that the amounts of $15,500 and $14,500 were allocated to Paige and Amy, respectively It does not indicate the amount actually paid to (or withdrawn by) the partners End of Chapter 11 [...]... The creation of additional shares of stock with a reduction of the par value of the stock LO 7 Example 11. 9—Reporting a Stock Split  Refer to the Shah Company in Examples 11- 7 and 11- 8 Assume that on January 2, 2014,Shah issued a 2-for-1 stock split instead of a stock dividend The split results in an additional 5,000 shares of stock outstanding but is not recorded in a formal accounting transaction... to be distributed on April 1, 2014 The stock dividend results in 5,000 additional shares being issued and certainly meets the definition of a large stock dividend Example 11. 8—Recording the Declaration of a Large Stock Dividend (continued)  The effect when the stock is actually distributed is as follows:  The Stockholders’ Equity category of Shah’s balance sheet as of April 1 after the stock dividend... common stockholders to be distributed on April 1, 2014 Small stock dividends (usually those of 20% to 25%) normally are recorded at the market value of the stock as of the date of declaration Assume that Shah’s common stock is selling at $40 per share on that date Stockholders’ Equity Section Example 11. 8—Recording the Declaration of a Large Stock Dividend  Assume that instead of a 10% dividend, on. .. at the fair market value of the stock or the assets received, whichever is most readily determined LO 3 Example 11. 1—Recording Stock Issued for Cash  Assume that on July 1, a firm issued 1,000 shares of $10 par common stock for $15 per share Example 11. 2—Recording Stock for Noncash Consideration  Assume that on July 1, a firm issued 500 shares of $10 par preferred stock to acquire a building The. .. Stock  If the terms of the stock agreement in Example 11. 5 indicate that the preferred stock is cumulative, the preferred stockholders have a right to dividends in arrears before the current year’s dividend is distributed Stock Dividends  The issuance of additional shares of stock to existing stockholders  Firms use stock dividends for several reasons  Do not require the use of cash  Reduce the market...Exhibit 11. 2—Retained Earnings Connects the Income Statement and the Balance Sheet IFRS and Stockholders’ Equity  Items that have characteristics of both debt and equity   International accounting rules   Example: Convertible bond is similar to debt but because it will become stock if converted, it also has the characteristics of equity An item having both debt and equity component should... must be the corporation’s own stock  It must have been issued to the stockholders at some point  It must have been repurchased from the stockholders  It must not be retired, but must be held for some purpose LO 4 Example 11. 3—Recording the Purchase of Treasury Stock  Assume that the Stockholders’ Equity section of Rezin Company’s balance sheet on December 31, 2014, appears as follows: Example 11. 3—Recording... follows: Example 11. 3—Recording the Purchase of Treasury Stock (continued)  Assume that on February 1, 2015, Rezin buys 100 of its shares as treasury stock at $25 per share Stockholders’ Equity Section  The Stockholders’ Equity section of Rezin’s balance sheet on February 1, 2015, after the purchase of the treasury stock Retirement of Stock  Repurchase of stock with no intention of reissuing  To eliminate... stockholders  The general principle for retirement of stock is the same as for treasury stock transactions  No income statement accounts are affected  Effect is reflected in the Cash account and the Stockholders’ Equity accounts Cash Dividends  Declared only if a company has sufficient cash available and adequate retained earnings  Not an expense on the income statement  Date of declaration: cash dividends... Date of record: dividend is paid to the stockholders who own the stock as of this date LO 5 Dividend Payout Ratio  The annual dividend amount divided by the annual net income  RatioDividend for many firms is 50%Ratio or 60%= and seldom exceeds 70% Payout Annual Dividend Annual Net Income Example 11. 4—Recording the Declaration of a Dividend  Assume that on July 1, the board of directors of Grant Company ... Equity on the Balance Sheet  The basic accounting equation: Assets = Liabilities + Stockholders’ Equity  Two major components or subcategories: Components of the Stockholders’ Equity Section of the. .. Amount a corporation receives from the sale of stock (common or preferred) to the stockholders  Additional Paid-In Capital : amount received at issuance that exceeds the par value of the stock  Retained... Shares  Par Value  Additional Paid-In Capital  Retained Earnings Contributed Capital  Common stock  Carries voting rights  The common stockholders elect the corporation’s officers • Establish