Chapter 19

Shareholders’ Equity

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The Nature of Shareholders’

19-2

Equity
Assets – Liabilities = Shareholders’ Equity

Net Assets
(Residual Interest)

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-3

Sources of Shareholders’ Equity

Amounts invested Amounts earned

by shareholders by corporation

Stockholders’ Equity
Paid-in Capital
Retained Earnings
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19-4

The Corporate Organization

Advantages:
 Limited liability.
 Ease of raising capital.
 Ease of ownership transfer.
 Lack of mutual agency.

Disadvantages:
 Doubletaxation.
 Government regulation.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-5

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.
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.
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19-6

Hybrid Organizations
Double
S Corporation taxation
 Limited liability protection of a corporation.
 Maximum number of owners. avoided.
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
 Owners are liable for their own actions but not
entirely liable for actions of other partners.
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.
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19-7

Formation of a Corporation

Nature and location

of business activities.

Number and classes

of shares authorized.

Composition of initial
board of directors.
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19-8

Formation of a Corporation

Articles of incorporation
are filed with the state.

Board of directors
State issues a appoint officers.
corporate charter.
Board of directors
elected by
Shares of shareholders.
stock issued.
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19-9

Fundamental Share Rights

Right Preemptive
to vote. right to maintain
percentage
ownership.

Right to share Right to share

in profits when in distribution of
dividends are assets if company
declared. is liquidated.
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19-10

Concepts and Definitions

Classification of capital stock

 Authorized
 Issued
 Unissued
 Treasury stock
 Outstanding
 Subscribed

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19-11

Authorized, Issued, and

Outstanding Capital Stock
Authorized
Shares
The maximum number
of shares of capital
stock that can be sold
to the public is called
the authorized number
of shares.

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19-12

Authorized, Issued, and

Outstanding Capital Stock
Authorized
Shares
Issued Unissued
shares are shares are
authorized authorized
shares of shares of
stock that stock that
have been have never
sold. been sold.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-13

Authorized, Issued, and

Outstanding Capital Stock
Outstanding shares are
Authorized issued shares that are
Shares owned by stockholders.

Outstanding
Unissued
Issued Shares
Shares
Shares
Treasury shares are
Treasury issued shares that have
Shares been reacquired by the
corporation.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-14

Capital Stock

Par value stock No-par stock

 Designated dollar  Dollar amount per
amount per share share not designated in
stated in the corporate corporate charter.
charter.  Corporations can
 Par value has no assign a stated value
relationship to market per share (treated as if
value. par value).

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-15

Capital Stock
Legal capital is . . .
 The portion of stockholders’ 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.

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19-16

Types of Capital Stock

Common Preferred

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19-17

Common Stock

The basic voting stock of the corporation.

Ranks after preferred stock for dividend and

liquidation distribution.

Dividends determined by the board of

directors.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-18

Preferred Stock

Generally does not Usually has a

have voting rights. par or stated value.

Dividend and
May be convertible,
liquidation
callable, and/or
preference over
redeemable.
common stock.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-19

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.

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19-20

Preferred Stock Dividends

Cumulative
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.

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19-21

Issuing Stock for Cash

10,000 shares of $1 par value stock is issued for

$100,000 cash.
GENERAL JOURNAL
Page 1

Date Description PR Debit Credit

Cash 100,000
Common Stock, par value 10,000
Paid-in Capital in Excess
of Par, Common Stock 90,000

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19-22

Issuing Stock for Cash

10,000 shares of no-par stock is issued for

$100,000 cash.
GENERAL JOURNAL
Page 1

Date Description PR Debit Credit

Cash 100,000
Common Stock 100,000

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19-23

Issuing Stock for Cash

10,000 shares of no-par stock, with a stated value

of $1 is issued for $100,000 cash.
GENERAL JOURNAL
Page 1

Date Description PR Debit Credit

Cash 100,000
Common Stock, stated value 10,000
Paid-in Capital in Excess of
Stated Value, Common Stock 90,000

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-24

Issuing Stock for Noncash Assets

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.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-25
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.

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19-26
More Than One Security Issued
for a Single Price
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 paid-in capital in excess of par for each
class of stock.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-27
More Than One Security Issued
for a Single Price
Market* % Allocation** Par^ Excess^^
Common Stock $275,000 55% $ 247,500 $ 50,000 $ 197,500
Preferred Stock 225,000 45% 202,500 15,000 187,500
Total $500,000 100% $ 450,000 $ 65,000 $ 385,000

* Market Value: ^ Par Value:

Common: $55 × 5,000 shares Common: $10 × 5,000 shares
Preferred: $75 × 3,000 shares Preferred: $5 × 3,000 shares

**Allocation: ^^Excess:
Common: $450,000 × 55% Common: $247,500 - $50,000 par
Preferred: $450,000 × 45% Preferred: $202,500 - $15,000 par

Record the journal entry for issuing the stock.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.
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19-28
More Than One Security Issued
for a Single Price
GENERAL JOURNAL
Page 1

Date Description PR Debit Credit

Cash 450,000
Common Stock, par $10 50,000
Preferred Stock, par $5 15,000
Paid-in Capital in Excess
of Par, Common Stock 197,500
Paid-in Capital in Excess
of Par, Preferred Stock 187,500

To record issue of stock for cash

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19-29

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 Paid-in Capital in Excess of Par.

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19-30

Let’s turn our

attention to
reacquiring
shares.

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19-31

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.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-32

Share Buybacks

I can account for

the reacquired shares
by retiring them or by
holding them as
treasury shares.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-33

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 Paid-in
Capital in Excess of Par.

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19-34

Accounting for Retired Shares

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.
GENERAL JOURNAL
Page 1

Date Description PR Debit Credit

Common Stock 10,000
Paid-in Capital in Excess of Par 90,000
Paid-in Capital - Share Repurchase 15,000
Cash 85,000

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-35

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.
Reduce Retained Earnings if the
GENERAL JOURNAL
Paid-in Capital – Share RepurchasePage 1
account balance is insufficient.
Date Description PR Debit Credit
Common Stock 10,000
Paid-in Capital in Excess of Par 90,000
Paid-in Capital - Share Repurchase 25,000
Cash 125,000

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-36

Treasury Stock

Usually does not have:

 Voting rights.
 Dividend rights.
 Preemptive rights.
 Liquidation rights.
Reduces both assets and
stockholders’ equity.

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19-37

Accounting for Treasury Stock

(one-transaction concept)

(rarely used, not covered

in this chapter)

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19-38

Accounting for Treasury Stock

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.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-39

Accounting for Treasury Stock

On 5/1/03, Photos-in-a-Second reacquired 3,000 shares
of its common stock at $55 per share. On 12/3/04,
Photos-in-a-Second reissued 1,000 shares of the stock
at $75 per share. Which of the following would be
included in the 12/3 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.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-40

Accounting for Treasury Stock

On 5/1/03, Photos-in-a-Second reacquired 3,000 shares
of its common stock at $55 per share. On 12/3/04,
Photos-in-a-Second reissued 1,000 shares of the stock
at $75 per share. Which of the following would be
included in the 12/3 entry?

a. Credit Cash for $165,000.

b. Debit Treasury Stock for $75,000.
c. Credit Treasury Stock for $55,000. Solution
d. Credit Cash for $75,000.

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19-41

Accounting for Treasury Stock

GENERAL JOURNAL
Page 1

Date Description PR Debit Credit

May 1, 2003 Treasury Stock 165,000
Cash 165,000
To record purchase of treasury stock.

Dec. 3, 2004 Cash 75,000

Treasury Stock 55,000
Paid-in Capital-Share Repurchase 20,000
To record sale of treasury stock.

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19-42

Reporting Treasury Stock

 Reported in Shareholders’ Equity.

 Unallocated reduction
of total Shareholders’
Equity.

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19-43

Retained Earnings

Represents the undistributed earnings of the

company since its inception.

Balance January 1, 2003 $ 500,000

Net income 25,000
Cash dividends (10,000)
Balance December 31, 2003 $ 515,000

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19-44

Retained Earnings

 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.

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19-45

Let’s change the

subject to dividends.

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19-46

Cash Dividends

Dividends must be Cash dividends

declared by the board require sufficient cash
of directors before and retained earnings
they can be paid. to cover the dividend.

A corporation is not When a dividend is

legally required to declared, a liability
pay dividends. is created.
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19-47

Dividend Dates
Declaration date
 Board of directors declares
the dividend.
 Record a liability.

GENERAL JOURNAL Page 12

Post.
Date Description Ref. Debit Credit
Retained Earnings XXX
Dividends Payable XXX

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-48

Dividend Dates

Ex-dividend date
 The latest date for stock purchase that entitles
the stockholder to receive the declared
dividend. (No entry)
July

X
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19-49

Dividend Dates

Date of record
 Stockholders holding shares on this date will
receive the dividend. (No entry)

July

X
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19-50

Dividend Dates

Date of payment
 Record the payment of the
dividend to stockholders.

GENERAL JOURNAL Page 12

Post.
Date Description Ref. Debit Credit
Dividends Payable XXX
Cash XXX

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19-51

Property Dividends

 Distributions of non-
cash assets.
 Record at fair value of
non-cash asset.
 Recognize gain or loss
for difference between
book value and fair
value.
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19-52

Stock Dividends

Distribution of additional shares of stock to

stockholders.

No change in total No change in par

stockholders’ equity. values.

All stockholders
receive the same
percentage increase
in shares.
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19-53

Stock Dividends

Reasons for stock dividends:

To preserve cash.
To decrease market price
of stock.
To reduce existing balance
in Retained Earnings.

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19-54

Stock Dividends
Small Large
Stock dividend < 25% Stock dividend > 25%

Record at current Record at par or stated

market value value
of stock. of stock.

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19-55

Stock Dividends

CarCo declares and distributes a 20% stock dividend on 5

million common shares. Par value is $1 and market value
is $20. Prepare the required journal entry.

GENERAL JOURNAL Page 21

Post.
Date Description Ref. Debit Credit

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19-56

Stock Dividends

CarCo declares and distributes a 20% stock dividend on 5

million common shares. Par value is $1 and market value
is $20. Prepare the required journal entry.

GENERAL JOURNAL Page 21

Post.
Date Description Ref. Debit Credit
Retained Earnings 20,000,000
Common Stock 1,000,000
Paid-in Capital in
Excess of Par 19,000,000

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19-57

Stock Splits
 Decrease par value of stock.
 Increase number of outstanding
shares.
 No change in total stockholders’
equity.
 Does not require a journal entry. Ice Cream Parlor

Banana Splits
On Sale Now

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19-58

Accounting for Stock Splits

A corporation had 5,000 shares of $1 par value common

stock outstanding before a 2–for–1 stock split.

Before After
Split Split
Common Stock Shares 5,000

Par Value per Share $ 1.00

Total Par Value $ 5,000

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc.

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19-59

Accounting for Stock Splits

A corporation had 5,000 shares of $1 par value common

stock outstanding before a 2–for–1 stock split.

Before After
Split Split
Common Stock Shares 5,000 10,000 Increase

Par Value per Share $ 1.00 $ 0.50 Decrease

No
Total Par Value $ 5,000 $ 5,000 Change

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End of Chapter 19
Chester, would you
like to buy some stock
in my internet.com
company?

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