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Chapter 15
Stockholders Equity
Intermediate Accounting
Kieso Weygant and Warfield

Stockholders Rights
The right to share in the profits when a dividend is declared The right to elect directors and to establish corporate policies The right (called a preemptive right) to maintain a proportionate interest in the ownership of the corporation by purchasing a proportionate (pro rata) share of additional capital stock, if more stock is issued The right to share in the distribution of the assets of the corporation if it is liquidated

Changes in Equity
Changes in Equity Affecting Assets or Liabilities

Changes in Equity
Changes in Equity Not Affecting Assets or Liabilities

Comprehensive Income

Transfers Between Entity and Owners

Net Income

Other Comprehensive Income

Investments by Owners

Distributions to Owners

Stock Dividends and Splits

Conversions of Preferred Stock to Common Stock

Revenues and Expenses

Gains and Losses

Basic Terminology
Authorized capital stock The number of shares of capital stock that a corporation may issue as stated in its corporate charter. Outstanding capital stock Issued capital The number of stockThe shares of capital number of shares stock that a of capital stock corporation has that a issued to corporation has stockholders issued to its and that are still stockholders as of being held by a specific date. them as of a specific date.

Basic Terminology
Treasury stockThe number of shares of capital stock that a corporation has issued to stockholders and has reacquired but not retired. Subscribed capital stock The number of shares of capital stock that a corporation will issue upon the completion of an installment purchase contract with an investor.

Basic Terminology
Issued Capital Stock
Outstanding capital stock Treasury stock

Stockholders Equity Section of a Corporate Balance Sheet

Contributed Capital (Paid-in Capital) Preferred stock Common stock Additional paid-in-capital Retained earnings Accumulated other comprehensive income Less: Treasury stock (at cost) Total stockholders equity

Authorized Capital Stock

Unissued Capital Stock

Subscribed capital stock

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Issuance of Capital Stock

When only one class of capital stock is issued, it is referred to as common stock.

Issuance of Capital Stock

A corporation issues 500 shares of its no-par common stock with a stated value of $10 for $18 per share.
Cash Common Stock, $10 stated value Additional Paid-in Capital on Common Stock 9,000 5,000 4,000

A corporation issues 500 shares of its $10 par common stock for $18 per share.
Cash Common Stock, $10 par Additional Paid-in Capital on Common Stock 9,000 5,000 4,000 $18 500 $10 500

A corporation issues 500 shares of its no-par, nostated value common stock for $18 per share.
Cash Common Stock, no-par (500 shares) 9,000 9,000

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Stock Subscriptions
A corporation enters into a subscription contract with several subscribers that calls for the purchase of 1,000 shares of $6 par common stock at a price of $13 per share. A $3 per share down payment is required, with the remaining $10 per share collectible at the end of one month. 1,000 $6
Cash 3,000 Subscriptions Receivable: Common Stock 10,000 Common Stock Subscribed Additional Paid-in Capital on Common Stock $3 1,000 $10 1,000 6,000 7,000

Stock Subscriptions
The $10 per share final payment was received from subscribers to 950 of the 1,000 shares.
Cash Subscriptions Receivable: Common Stock Common Stock Subscribed Common Stock, $6 par 9,500 9,500 5,700 950 $10 950 $6 5,700

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Stock Subscriptions
When a default occurs, the accounting is determined by the relevant contract provisions, such as: 1. Return to the subscriber the entire amount paid in 2. Return to the subscriber the amount paid in, less any costs incurred by the corporation to reissue the stock 3. Issue to the subscriber a lesser number of shares based on the total amount paid in 4. Require the forfeiture of all amounts paid in

Stock Subscriptions
The subscriber to the 50 remaining shares defaults on the contract. The contract requires forfeiture of the entire amount paid in.
Common Stock Subscribed Additional Paid-in Capital on Common Stock Subscriptions Receivable: Common Stock Additional Paid-in Capital from Subscription Default 300 350 500 50 $6 50 $7 150 50 $10

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Combined Sales of Stock

A corporation issues 100 packages of securities for $82.80 per package. Each package consists of two shares of $10 par common stock (market value: $16 per share) and one share of $50 par preferred stock (market value: $60 per share).
Common Stock: $16 2 Shares 100 Packages = $ 3,200 Preferred Stock: $60 1 Share 100 Packages = 6,000 Total Market Value $9,200

Combined Sales of Stock

A corporation issues 100 packages of securities for $82.80 per package. Each package consists of two shares of $10 par common stock (market value: $16 per share) and one share of $50 par preferred stock (market value: $60 per share).
Common Stock: $3,200 $8,280 = $2,880 $9,200 $6,000 $8,280 = 5,400 $9,200 $8,280

Preferred Stock:

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Combined Sales of Stock

A corporation issues 100 packages of securities for $82.80 per package. Each package consists of two shares of $10 par common stock (market value: $16 per share) and one share of $50 par preferred stock (market value: $60 per share).
Cash Common Stock, $10 par (200 shares) Additional Paid-in Capital on Common Stock Preferred Stock, $50 par (100 shares) Additional Paid-in Capital on Preferred Stock 8,280 2,000 880 5,000 400

Stock Splits

A stock split results in a decrease in the par value per share of stock accompanied by a proportional increase in the number of shares issued. A proportionate stock split ordinarily is recorded by a memorandum entry.

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Various Preferred Stock Characteristics

Preference as to dividends Accumulation of dividends Participation in excess dividends Convertibility into common stock Attachment of stock warrants (rights) Callability by the corporation Mandatory redemption at a future maturity date Preference as to assets upon liquidation of the corporation Lack of voting rights

Cumulative Preferred Stock

If a corporation fails to declare a dividend on cumulative preferred stock at the stated rate on the usual dividend date, the amount of passed dividends becomes dividends in arrears. These dividends accumulate from period to period and dividends cannot be paid to common shareholders until all preferred dividends in arrears are paid.

Dividends in arrears are not a liability because they have not been declared, but must be disclosed in the footnotes to the financial statements.

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Cumulative Preferred Stock

Richland Corporation has outstanding 1,000 shares of 10%, $100 par cumulative preferred stock. The dividends are two years in arrears when a $30,000 dividend is declared. Preferred stockholders would receive all of it.
1,000 shares $100 0.10 3 years = $30,000

Cumulative Preferred Stock

Assume total dividends of $5,000, $11,000, $30,000, and $30,000 on the 10% cumulative preferred stock with a par of $100,000.
Year 1 2 3 4 Total Dividends $5,000 $11,000 $30,000 $30,000 Preferred Dividends $5,000 $11,000 $14,000 $10,000 Common Dividends $16,000 $20,000 Arrears $5,000 $4,000

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Convertible Preferred Stock

Convertible preferred stock allows stockholders to convert preferred stock into another security, usually common stock. No value is assigned to the convertible feature. The book value method is used (and the market value is not allowed) because it does not result in a corporation recording a gain or loss on a transaction involving its own capital stock, which would violate the concept of income.

Convertible Preferred Stock

Ness Corporation originally issued 500 shares of $100 par convertible preferred stock at $120 per share. Each share of preferred stock may be converted into four shares of $20 par common stock.
4 500 $20 Preferred Stock, $100 par Additional Paid-in Capital on Preferred Stock Common Stock, $20 par Additional Paid-in Capital from Preferred Stock Conversion 50,000 10,000 40,000 20,000

Continued

$60,000 $40,000

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Convertible Preferred Stock

Alternatively, assume each preferred share may be converted into seven shares of common stock.
Preferred Stock, $100 par Additional Paid-in Capital on Preferred Stock Retained Earnings Common Stock, $20 par 50,000 7 500 $20 10,000 10,000 70,000 $70,000 $60,000

Preferred Stock with Stock Warrants (Rights)

A corporation may attach warrants to preferred stock to enhance their attractiveness. These warrants represent rights that allow the holder to purchase additional shares of common stock at a specified price in the future. The corporation is actually selling two different securities: preferred stock and warrants. Therefore, the proceeds must be allocated to the two securities based upon their fair values.

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Preferred Stock with Stock Warrants (Rights)

Preferred Stock with Stock Warrants (Rights)

Preferred Stock: $119,000 $119,000 + $6,000 $6,000 $119,000 + $6,000 $121,000 = $115,192

Ponce Corporation issues 1,000 shares of $100 par value preferred stock at a price of $121 per share. It attaches a warrant to each share of stock that allows the holder to purchase one share of $10 par common stock at $40 per share. Immediately after the issuance, the preferred stock begins selling ex rights for $119 per share. The warrants begin selling for $6 each.

Common Stock Warrants:

$121,000 =

5,808 $121,000

Recording of the issuance price:

Cash 121,000 Preferred Stock, $100 par Additional Paid-in-Capital on Preferred Stock Common Stock Warrants $121 1,000 100,000 15,192 5,808

Continued

Continued

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Preferred Stock with Stock Warrants (Rights)

Contributed Capital Section

Stockholders Equity Contributed Capital Preferred stock, $100 par (9%, cumulative, convertible, 10,000 shares authorized, 4,300 shares issued and outstanding) Common stock, $5 par (80,000 shares authorized, 32,800 shares issued and outstanding) Common stock subscribed, $5 par (3,600 shares at a subscription price of $34 per share) Common stock option warrants Additional paid-in capital on preferred stock Additional paid-in capital on common stock Additional paid-in capital from conversion of preferred stock into common stock Total Contributed Capital

To record the issuance of the 1,000 shares of common stock in exchange for the$40 1,000 and warrants $40 per share:
Cash Common Stock Warrants Common Stock, $10 par Additional Paid-in Capital on Common Stock 40,000 5,808 10,000 35,808

$ 430,000 164,000 18,000 23,000 107,500 590,400 10,100 $1,343,000

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IFRS vs. U.S. GAAP

Under IFRS, stockholders equity is classified as capital and reserves. This caption includes capital stock, additional paid-in-capital, reserves, and accumulated profits and losses. IFRS allow companies to revalue (upward or downward) property, plant, and equipment and intangible assets. Revaluation gains are reflected in a reserve account and losses reduce the reserve account until it is depleted, after which the loss appears on the income statement.

Treasury Stock
Treasury stock is a corporations own capital stock that Has been fully paid for by stockholders Has been legally issued Is reacquired by the corporation Is being held by the corporation for future reissuance

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Reasons Corporations Acquire Treasury Stock To use for stock option, bonus, and employee purchase plans To use in the conversion for convertible preferred stock or bonds To use excess cash To use in acquiring other companies To reduce the number of shares outstanding and thereby increase the earnings per share and help maintain or increase the market price of its stock To reduce the number of shares held by hostile stockholders and thereby reduce the likelihood of being acquired by another company To use for the issuance of a stock dividend

Conceptual Overview of Treasury Stock

1. Treasury stock is not an asset of a corporation. 2. Treasury stock does not vote, has no preemptive rights, ordinarily does not share in dividends, or participate in the companys liquidation assets, but does participate in stock splits. 3. Treasury stock transactions do not result in gains or losses.

Continued

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Conceptual Overview of Treasury Stock

4. Treasury stock transactions may reduce retained earnings but may never increase retained earnings. 5. A corporation ordinarily must restrict the amount of retained earnings available for dividends by the cost of treasury stock held so that the payment of dividends does not reduce contributed capital.

Treasury Stock
Cost Method Ball Corporation issues 6,000 shares of $10 par common stock for $12 per share:
Cash Common Stock $10 par Additional Paid-in Capital on Common Stock 72,000 60,000 12,000

Reacquisition of 1,000 shares of common stock at $13 per share:

Treasury Stock Cash 13,000 13,000

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Treasury Stock
Cost Method Reissuance of 600 shares of treasury stock at $15 per share:
Cash 9,000 Treasury Stock (600 shares at $13 per share) Additional Paid-in Capital from Treasury Stock 7,800 1,200

Treasury Stock
Cost Method Reissuance of another 100 shares of treasury stock at $10 per share:
Cash Additional Paid-in Capital from Treasury Stock Retained Earnings Treasury Stock (100 shares at $13 per share) 1,000 200 100 1,300

Reissuance of another 200 shares of treasury stock at $8 per share:

Cash Additional Paid-in Capital from Treasury Stock Treasury Stock (200 shares at $13 per share) 1,600 1,000 2,600

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Treasury Stock
Cost Method
Contributed Capital Common stock, $10 par (20,000 shares authorized, 6,000 shares issued , of which 100 are being held as treasury stock) Additional paid-in capital on common stock Total contributed capital Retained earnings Accumulated other comprehensive income Total contributed capital, retained earnings, and accumulated other comprehensive income Less: Treasury stock (100 shares at cost) Total Stockholders Equity

Chapter 16
Earnings per Share
$ 60,000 12,000 $ 72,000 39,900 10,000 $121,900 (1,300) $120,600

Intermediate Accounting
Kieso Weygant and Warfield

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Earnings and Earnings per Share

A corporation summarizes the components of its net income on its income statement, which are:
Income (loss) from continuing operations Results from discontinued operations Extraordinary gains or losses

Simple Capital Structure

For computing earnings per share, there are two types of corporate capital structures simple and complex. A simple capital structure is one that consists only of common stock outstanding. A corporation with a simple capital structure is required to report basic earnings per share.

A corporation also reports its earnings per share on its income statement.

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Basic Earnings per Share

Net Income Preferred Dividends Weighted Average Number of Common Shares Outstanding

Weighted Average Shares

Since a corporation earns its net income over the entire year, the earnings relate to the common shares outstanding during the year.

Lapan Corporation reports net income of $48,000, and declares and pays dividends of $8,000 on its preferred stock. It also declares and pays dividends of $12,000 on its 16,000 shares of common stock.
$48,000 $8,000 = $2.50 16,000

Disregard common stock dividends in calculating EPS.

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Weighted Average Shares

McTeal Corporation had 12,000 shares of common stock outstanding at the beginning of the year. On March 2, it issued 2,700 shares; on July 3, it issued another 3,300 shares, and on December 1, it reacquired 480 sharesnearest whole month is used. The as treasury stock.
Months Shares Are Outstanding JanuaryFebruary MarchJune JulyNovember December Shares Outstanding Fraction of Year Outstanding = Equivalent Whole Units = = = = 2,000 4,900 7,500 1,460 15,860

Weighted Average Shares

Wallers Corporation begins operations in January 2010 and issues 5,000 shares of common stock that are outstanding during all of 2010. On December 31, 2010, it issues a two-for-one stock split.
Months Shares Are Outstanding Shares Outstanding Fraction of Year Outstanding = Equivalent Whole Units 5,000 5,000 10,000

12,000 2/12 14,700 4/12 18,000 5/12 17,520 1/12 Total weighted average common shares

JanuaryFebruary 5,000 12/12 = The two-for-one split is retroactive to January 1. two-forTotal weighted average common shares

Continued

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Weighted Average Shares

On May 27, 2011, Wallers Corporation issues 5,000 shares of common stock; on August 3, 2011, it issues a 20% stock dividend; and on October 5, 2011, it issues 2,000 shares of stock. 2010 Data on 2011 Statement
Months Shares Are Outstanding JanuaryFebruary Shares Outstanding 5,000 Fraction of Year Outstanding = 12/12 Equivalent Whole Units = 5,000

Weighted Average Shares

2011 Data on 2011 Statement
Months Shares Are Outstanding Shares Outstanding Fraction of Year Outstanding = Equivalent Whole Units

JanuaryMay JuneJuly AugustSeptember

10,000 Issued 5,000 shares 15,000 Issued 20% stock dividend 18,000

5,000 200% 120% = 12,000 equivalent whole units

Continued

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Weighted Average Shares

2011 Data on 2011 Statement
Months Shares Are Outstanding Shares Outstanding Fraction of Year Outstanding = 10,000 Increases 20% Increases 20% 15,000 18,000 Equivalent Whole Units

Weighted Average Shares

2011 Data on 2011 Statement
Months Shares Are Outstanding JanuaryMay JuneJuly AugustSeptember OctoberDecember Shares Outstanding 12,000 18,000 18,000 20,000 Fraction of Year Outstanding = 5/12 2/12 2/12 3/12 Equivalent Whole Units = = = = 5,000 3,000 3,000 5,000 16,000

JanuaryMay 12,000 18,000 JuneJuly AugustSeptember

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Complex Capital Structure

Many corporations have a more complex capital structure that includes outstanding convertible securities or contingent shares that could have a dilutive effect on earnings per share. These securities are referred to as potential common shares.

Diluted Earnings per Share

A corporation with a complex capital structure is required to report two earnings per share amounts on the face of its income statement. The two amounts are basic earnings per share and diluted earnings per share. The amount for diluted earnings per share shows the earnings per share after including all potential common shares that would reduce earnings per share. To be included in the diluted earnings per share calculation, any potential common share must have a dilutive effect on earnings per share.

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Additional Disclosures
When a corporation reports its basic and diluted earnings per share on its income statement, it also is required to make additional disclosures in the notes to its financial statements.

Additional Disclosures
These include a schedule or note which includes information that: 1. Identifies the amount of preferred dividends deducted to determine the income available to common stockholders. 2. Describes the potential common shares that were not included in the diluted earnings per share computation because they were antidilutive. 3. Describe any material impact on the common shares outstanding of transactions after the close of the accounting period but before the issuance of the financial report.

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Types of Dividends
Cash Property Stock Liquidating Dividends consideration
Declared Not larger than unrestricted retained earnings Not paid on treasury stock Other restrictions

Cash Dividends
There are four significant dates for a cash dividend.

The date of declaration The ex-dividend date The date of record The date of payment

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Cash Dividend
Date Date of Declaration Increase Liabilities Date of Record Memorandum Entry Reduce Assets Date of Payment Reduce Liabilities Accounting Procedures Reduce Retained Earnings

Cash Dividends
On November 2, 2010, the board of directors of Bay Corporation declares preferred dividends totaling $10,000 and common dividends totaling $20,000. These dividends are payable on December 14, 2010, to stockholders of record on November 23, 2010.
November 2, 2010 Retained Earnings Dividends Payable: Preferred Stock Dividends Payable: Common Stock 30,000 10,000 20,000

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Cash Dividends
On November 2, 2010, the board of directors of Bay Corporation declares preferred dividends totaling $10,000 and common dividends totaling $20,000. These dividends are payable on December 14, 2010, to stockholders of record on November 23, 2010.
November 23, 2010 Memorandum entry: The company will pay dividends on December 14, 2010, to preferred and common stockholders of record as of today, the date of record.

Cash Dividends
On November 2, 2010, the board of directors of Bay Corporation declares preferred dividends totaling $10,000 and common dividends totaling $20,000. These dividends are payable on December 14, 2010, to stockholders of record on November 23, 2010.
December 14, 2010 Dividends Payable: Preferred Stock Dividends Payable: Common Stock Cash

10,000 20,000 30,000

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Fully Participating Preferred Stock Dividends

Everett Corporation has issued 10%, participating, cumulative preferred stock with a total par value of $20,000 and common stock with a total par value of $30,000. Everett Corporation declares a $9,000 dividend.
Preferred 10% dividend to Preferred (10% $20,000) $2,000 Common dividend (10% $30,000) Extra dividend proportionate to par values: Total to allocate $ 9,000 Allocated (5,000) Remainder [40% ($20,000 $50,000) to preferred, 60% ($30,000 $50,000 to common) $ 4,000 1,600 Dividends to each class of stock $3,600 Common $3,000

Partially Participating Preferred Stock Dividends (up to 12%)

Again, assume a $30,000 dividend.

Preferred 10% dividend to Preferred (10% $20,000) Common dividend (10% $30,000) 2% dividend on par of Preferred (2% $20,000) 2% dividend on par of Common (2% $30,000) Remainder to common ($9,000 $6,000 allocated) Dividends to each class of stock $3,600 $2,000 $3,000 400 600 3,000 $5,400 Common

2,400 $5,400

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Property Dividends
The corporation typically uses marketable securities of other companies that it owns for the property dividend. The corporation records a property dividend at the fair value of the asset transferred, and recognizes a gain or loss. Asel Corporation declares a property dividend payable in held-to-maturity bonds of Bard Company. The bonds are carried on Asel Corporations books at a book value of $40,000 but their current fair value is $48,000.

Property Dividends
$48,000 $40,000

Date of Declaration Investment in Bard Company Bonds Gain on Disposal of Investments Retained Earnings Property Dividends Payable

8,000 8,000 48,000 48,000

Date of Payment Property Dividends Payable 48,000 Investment in Bard Company Bonds

48,000

Continued

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Stock Dividends
1. They receive no corporate assets. 2. Their percentage ownership does not change. 3. Theoretically the total market value of their investment will remain the same. 4. Future cash dividends may be limited because retained earnings is decreased by the amount of the stock dividend.

Stock Dividends
What factors might enhance the perceived attractiveness of a stock dividend?

Stockholders often view stock dividends favorably even though:

Stock Dividend

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Stock Dividends
1. The stockholders may see the stock dividend as evidence of corporate growth. 2. The stockholders may see the stock dividend as evidence of sound financial policy. 3. Other investors may see the stock dividend in a similar light, and increased trading in the stock may cause the market price not to decrease proportionally. 4. The corporation may state that it will pay the same fixed cash dividend per share, in which case individual shareholders will receive higher total future cash dividends. 5. The stockholders may see the market price decreasing to a lower trading range, making the stock more attractive to additional investors so that the market price may eventually rise.

Stock Dividends
Small (<20% or 25%) Large

Fair Value

Par Value

Retained Earnings

+ Capital Stock

+ Additional Paid-In Capital

Retained Earnings

+ Capital Stock

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Stock Dividends
Stockholders equity prior to the stock dividend:
Common stock, $10 par (20,000 shares issued and outstanding) Additional paid-in capital Retained earnings Total Stockholders Equity $200,000 180,000 320,000 $700,000

Small Stock Dividend

Ringdahl Corporation declares and issues a 10% stock dividend. On the date of declaration, the stock sells for $23 per share. 0.10 $23 20,000 shares
Date of Declaration Retained Earnings 46,000 Common Stock To Be Distributed Additional Paid-in Capital From Stock Dividend

20,000 26,000

Par

Continued

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Small Stock Dividend

Ringdahl Corporation declares and issues a 10% stock dividend. On the date of declaration, the stock sells for $23 per share.
Date of Issuance Common Stock To Be Distributed Common Stock, $10 par 20,000 20,000
Par

Small Stock Dividend

Stockholders equity prior to the stock dividend:
Common stock, $10 par (22,000 shares issued and outstanding) Additional paid-in capital Retained earnings Total Stockholders Equity $220,000 206,000 274,000 $700,000

Note: Total remained the same

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Large Stock Dividend

Ringdahl Corporation declares and issues a 40% stock dividend. On the date of declaration, the stock sells for $23 per share. 0.40 $10 20,000 shares
Date of Declaration Retained Earnings Common Stock To Be Distributed Date of Issuance Common Stock To Be Distributed Common Stock, $10 par Continued 80,000 80,000 80,000 20,000

Small Stock Dividend

Stockholders equity prior to the stock dividend:
Common stock, $10 par (28,000 shares issued and outstanding) Additional paid-in capital Retained earnings Total Stockholders Equity $280,000 180,000 240,000 $700,000

Note: Total is the same as the small stock dividend

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Accumulated Other Comprehensive Income Other comprehensive income (loss) might include four items:
Unrealized increases (gains) or decreases (losses) in the fair value of investments in available-for-sale securities Translation adjustments from converting the financial statements of a companys foreign operation into U.S. dollars Certain gains and losses on derivative financial instruments Certain pension plan gains, losses, and prior service cost adjustments

Accumulated Other Comprehensive Income A corporation may report its comprehensive income (net of income taxes): On the face of its income statement In a separate statement of comprehensive income In its statement of changes in stockholders equity

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Stockholders Equity Section of a Corporate Balance Sheet

Statement of Changes in Stockholders Equity

Contributed Capital (Paid-in Capital)

Preferred stock Common stock Additional paid-in-capital

Retained earnings Accumulated other comprehensive income

Unrealized gains and losses on securities available for sale Change in additional liability related to pensions Certain gains and losses on derivative financial instruments Amount from foreign currency translation adjustments and gains and losses from certain forward exchange contracts

Less: Treasury stock (at cost) Total stockholders equity

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