Equity
Chapter Stockholders 11
Stockholders Equity
Corporate form of organization
Benefits of Corporations
Access to large amounts of capital
Limited liability
Liquidity
Risk sharing
Sources of stockholders equity
Contributed capital
Retained earnings
Stockholders Equity Accounts
Common stock, at par
Preferred stock
Additional Paid-in Capital (APIC)
Retained Earnings
Other stockholders equity
Treasury stock (A contra-equity account)
Contributed Capital
Authorized shares
Issued shares
Treasury stock
Outstanding shares
Voting rights, dividend rights
Market Capitalization
Shares outstanding x share price
Earnings per share
Net income / Average common shares
outstanding
Issuing common shares
Par value
Initial Public Offering (IPO)
Cash
25,000,000
Common stock
100,000
Capital in excess of par
24,900,000
Issue of 1,000,000 shares, $0.10 par value, at
$25 per share.
Exercise 11-3: Stock Issuances
Horace Company had the following transactions during 2008, its first
year of business:
a. Issued 5,000 shares of $5 par common stock for cash at $15 per
share.
b. Issued 7,000 shares of common stock on May 1 to acquire a factory
building from Barkley Company. Barkley had acquired the building
in 2004 at a price of $150,000. Horace estimated that the building
was worth $175,000 on May 1, 2008.
c. Issued 2,000 shares of stock on June 1 to acquire a patent. The
accountant has been unable to estimate the value of the patent but
has determined that Horaces common stock was selling at $25 per
share on June 1.
Required
1. Record an entry for each of the transactions.
2. Determine the balance sheet amounts for common stock and
additional paid-in capital.
Treasury Stock Transactions
Repurchase of shares:
Treasury shares, at cost 800,000
Cash
800,000
Repurchase of 20,000 shares at $40 per share.
Reissue of treasury shares:
Cash
50,000
Capital in excess of par
10,000
Treasury shares, at cost
40,000
Reissue of 1,000 shares at $50 per share.
Exercise 11-5: Treasury Stock
The Stockholders Equity category of Bradford Companys balance
sheet on January 1, 2008, appeared as follows:
Common stock, $10 par, 10,000 shares
issued and outstanding
$100,000
Additional paid-in capital
50,000
Retained earnings
80,000
Total stockholders equity
$230,000
The following transactions occurred during 2008:
a. Reacquired 2,000 shares of common stock at $20 per share on
July 1.
b. Reacquired 400 shares of common stock at $18 per share on
August 1.
Exercise 11-5: Treasury Stock
Required
1. Record the entries in journal form.
2. Assume the company resold the shares treasury stock at $28 per
share on October 1. Did the company benefit from the treasury
stock transaction? If so, where is the gain presented on the
balance sheet?
Cash Dividends
Declaration date
Retained earnings
15,000
Dividends payable
15,000
Declare dividend of $0.30 on 50,000 shares
Record date (Ex-date)
Payment date
Dividends payable
Cash
15,000
15,000
Cash Dividends Preferred Stock
Preferred stock typically has a preference
over common stock as to dividend.
Cumulative preferred stock
Non-cumulative preferred stock
Participative preferred
Dividend amount:
Percentage of par value
Per-share amount
Mandatorily redeemable, convertible,
cumulative preferred stock.
Exercise 11-8: Cash Dividends
The Stockholders Equity category of Jackson Companys balance
sheet on January 1, 2008, appeared as follows:
Preferred stock, $100 par, 8%,
2,000 shares issued and outstanding
$200,000
Common stock, $10 par, 5,000 shares
issued and outstanding
50,000
Additional paid-in capital
300,000
Retained earnings
400,000
Total stockholders equity
$950,000
The notes that accompany the financial statements indicate that
Jackson has not paid dividends for the two years prior to 2008. On July
1, 2008, Jackson declares a dividend $100,000 of to be paid to
preferred and common stockholders on August 1.
Exercise 11-8: Cash Dividends
Required
1. Determine the amounts of the dividends to be allocated to
preferred and common stockholders assuming that the preferred
stock is noncumulative, nonparticipating stock.
2. Record the appropriate journal entries on July 1 and August 1,
2008.
3. Determine the amounts of the dividends to be allocated to
preferred and common stockholders assuming instead that the
preferred stock is cumulative, nonparticipating stock.
Stock Dividends & Stock Splits
Both increase shares outstanding, have no impact on total
stockholders equity (and thus no impact on assets and liabilities),
and lower share price
Stock dividends are classified as small (less than 20-25%, and
accounted for using market values) or large (greater than 20-25%,
and accounted for at par value). They result in an increase in
contributed capital and a decrease in retained earnings a
capitalization of earnings.
Stock splits impact shares outstanding and par value such that
common stock at par is unchanged no journal entry required.
Typical stock splits at 2-for-1, or 3-for-2. A reverse stock split, 1for-10, would increase share price.
Problem 11-5: Dividends and Stock Splits
On January 1, 2008, Fredericksen Inc.s Stockholders Equity category
appeared as follows:
Preferred stock, $80 par value, 7%
3,000 shares issued and outstanding
Common stock, $10 par value,
15,000 shares issued and outstanding
Additional paid-in capital-Preferred
Additional paid-in capital-Common
Total contributed capital
Retained earnings
Total stockholders equity
$ 240,000
150,000
60,000
225,000
$ 675,000
2,100,000
$2,775,000
The preferred stock is noncumulative and nonparticipating. During
2008, the following transactions occurred:
a. On March 1, declared a cash dividend of $16,800 on preferred
stock. Paid the dividend on April 1.
b. On June 1, declared a 5% stock dividend on common stock. The
current market price of the common stock was $18. The stock was
issued on July 1.
Problem 11-5: Dividends and Stock Splits
c. On September 1, declared a cash dividend of $0.50 per share on the
common stock; paid the dividend on October 1.
d. On December 1, issued a 2-for-1 stock split of common stock, when
the stock was selling for $50 per share.
Required
1. Explain each transactions effect on the Stockholders Equity
accounts and the total stockholders equity.
2. Develop the Stockholders Equity category of the December 31,
2008, balance sheet. Assume the net income for the year was
$650,000.
3. Write a paragraph that explains the difference between a stock
dividend and a stock split.
Microsoft splits
Split
Payable Date Type of split* Closing Price before/after
First
Second
Third
Fourth
Fifth
Sixth
Seventh
Eighth
Ninth
Sept. 18, 1987
April 12, 1990
June 26, 1991
June 12, 1992
May 20, 1994
Dec. 6, 1996
Feb. 20, 1998
March 26, 1999
Feb. 14, 2003
2 for 1
2 for 1
3 for 2
3 for 2
2 for 1
2 for 1
2 for 1
2 for 1
2 for 1
Sept. 18- $114.50/Sept. 21-$53.50
April 12-$120.75/April 16-$60.75
June 26-$100.75/June 27-$68.00
June 12-$112.50/June 15-$75.75
May 20-$97.75/May 23-$50.63
Dec. 6-$152.875/Dec. 9-$81.75
Feb. 20-$155.13/Feb. 23-$81.63
March 26-$178.13/March 29-$92.38
Feb. 14 - $48.30/Feb. 18 - $24.96
Each share outstanding prior to Sept. 18, 1987 has split into 288 shares
outstanding today
Ratio Analysis
1.
2.
2.
2.
2.
2.
Return on equity (ROE)
= net income / average stockholders equity
Earnings per Share (EPS)
= net income / average common shares outstanding
Book value per share
= Stockholders equity / common shares outstanding
Dividend yield
= Dividends per share / Market price per share
Dividend payout ratio
= dividends per share / earnings per share
Price/Earnings ratio (PE Ratio)
= Market price per share / Earnings per share