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Chapter 8
Accounting for and Presentation of
Stockholders’ 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 © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
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LO 1
Stockholders’ Equity
Section of Balance Sheet
Stockholders’ Equity
Paid-in capital
Common stock $2 par, 244,800 shares
issued and 243,800 outstanding
Additional paid-in capital
Preferred stock, 5,000 shares outstanding
Total paid-in capital
Retained earnings
Total paid-in capital and retained earnings
Less: cost of treasury stock (1,000 shares)
Accum. Other comprehensive income
Total stockholders’ equity
McGraw-Hill/Irwin
$
$
489,600
3,322,400
500,000
4,312,000
2,828,000
7,140,000
(12,000)
50,000
7,178,000
8-2
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-3
Equity
◼ Stockholders’ Equity = claim of entity’s
owners (stockholders) on net assets
◼ Assets – Liabilities = Equity
◼ Two types of equity:
◼ Retained earnings – entity’s cumulative net
income over life of entity, less dividends
◼ Earned capital
◼ Paid-in Capital – amount invested by s/h’s
◼ Contributed capital
McGraw-Hill/Irwin
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Equity Terminology
◼ Stockholders’ Equity
◼ Shareholders’ Equity
◼ Owners’ Equity
◼ Equity
◼ Net Assets
◼ Fund Balance
◼ John Doe’s capital (sole proprietorship)
◼ Partners’ capital (partnership)
◼ All mean the same thing
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Nature of Stockholders’
Equity
Less
Total Stockholders’ Equity
Treasury
Stock
Paid-in Capital
Preferred
Stock
Par or
Stated
Value
McGraw-Hill/Irwin
Additional
Paid-In
Capital
Retained
Earnings
Common
Stock
Par or
Stated
Value
Additional
Paid-In
Capital
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Stockholders’ Equity
◼ 1) Retained Earnings (earned capital)
◼ 2) Paid-In Capital (contributed capital)
◼ Common Stock
◼ Par Value
◼ Additional Paid-In Capital
◼ Preferred Stock
◼ Par Value
◼ Additional Paid-In Capital
◼ 3) Treasury Stock (contra-equity)
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-7
LO 1
Stockholders’ Equity
Section
Stockholders’ Equity
Paid-in capital
Common stock $1 par, 100,000 shares
issued and 95,000 outstanding
Additional paid-in capital
Total paid-in capital
Retained earnings
Total paid-in capital and retained earnings
Less: cost of treasury stock (5,000 shares)
Total stockholders’ equity
McGraw-Hill/Irwin
$
100,000
2,800,000
2,900,000
1,400,000
4,300,000
(150,000)
$ 4,150,000
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Disclosure for Stock
Authorized – maximum # allowed by charter;
changes require s/h approval
◼ Issued – # issued by corp to stockholders
◼ Treasury stock – firm’s own stock that has been
bought back by stockholders (contra-equity,
reduces issued stock)
◼ Outstanding – # issued less any treasury stock
bought back by corp
◼ Example: 5,000 shares authorized, but only
4,000 shares issued less 1,000 shares treasury
stock = 3,000 shares outstanding
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◼
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Disclosure for Stock
LO 1
Issued shares
that have been
reacquired.
Treasury
Issued shares
include
outstanding
Issued
and treasury
Shares
shares.
Unissued
Outstanding
Authorized
Shares
McGraw-Hill/Irwin
Issued shares that
are owned by
stockholders.
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Common Stock
◼ Have claim to all assets that remain after
liabilities & preferred stock claims have
been satisfied
◼ No entitlement to receive dividends
◼ Right & obligation to elect board members
◼ Approve changes to corp. charter, &
approve mergers & acquisitions
◼ May have a preemptive right to buy more
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Common Stock
◼ Par Value (stated value) – nominal
amount, usually $1-$2, or less
◼ Balance sheet presentation:
◼ Common stock, $1 par value, 40,000 shs
issued = $40,000 (amount on Bal Sheet)
◼ Common stock, $2 par value, 30,000 shs
issued = $60,000 (amount on Bal Sheet)
◼ Common stock, $0.0375 par value, 323M shs
issued= $12,112,500 (amt on Bal Sheet)
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Preferred Stock
◼ No voting privileges, but less risky than
com. stock; required dividend is a stated
% of par (6% of $100 par = $6 div/yr/sh)
◼ Redemption (liquidation) value must be
met before common s/h receive anything
◼ Cumulative dividend – if any dividend
pmts are not made to preferred s/h,
dividends in arrears must be met before
common s/h can get paid any dividends
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Preferred Stock (cont’d)
◼ Participating dividend – after common s/h
have received a dividend, further
dividends are shared by preferred and
common s/h in a specified ratio
◼ Callable – redeemable w/ premium over
par
◼ Convertible – may be exchanged for
common stock at a conversion rate
McGraw-Hill/Irwin
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Preferred Stock Dividends
◼ Ex #1:
◼ 6% $100 par cumulative preferred stock,
50,000 shs authorized, issued, &
outstanding. Dividend payable
semiannually, no dividends in arrears.
◼ Semiannual dividend payout:
◼ 6% x $100 x 50,000 shs outstanding x ½ yr
= $150,000
McGraw-Hill/Irwin
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Preferred Stock Dividends
◼ Ex #2:
◼ $4.50, $75 par cumulative preferred stock,
50,000 shs authorized, issued, & 40,000
shs outstanding (10,000 shs treasury
stock). Dividend payable quarterly, no
dividends in arrears.
◼ Quarterly dividend payout:
◼ $4.50 x 40,000 shs outstanding x 1/4 yr =
$45,000
McGraw-Hill/Irwin
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Preferred Stock Dividends
◼ Ex #3:
◼ 8%, $50 par cumulative preferred stock,
100,000 shs authorized, 60,000 shs
issued, & 54,000 shs outstanding (6,000
shs treasury stock). Dividend payable
annually, & dividends were not paid in
prior two years.
◼ Current year dividend payout:
◼ 8% x $50 x 54,000 shs outstanding x 3 yrs =
$648,000
McGraw-Hill/Irwin
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LO 2
Common Stock vs
Preferred Stock
◼ Voting rights – common yes, preferred no
◼ Risk – common higher, preferred lower
◼ Dividend preference – preferred stock is
required (arrears), common is optional
◼ Liquidity preference – preferred stock gets
redemption value, common gets leftover
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-18
LO 2
Preferred Stock Versus
Bonds
Comparison of Preferred Stock and Bonds Payable
Similarities
Preferred Stock
Bonds Payable
Dividend is usually fixed
Interest is fixed claim to
claim to income
income
Redemption value is fixed
Maturity value is a fixed claim
claim to assets
to assets
Is usually callable and may be
Is usually callable and may be
convertible
convertible
Differences
Dividend may be skipped,
Interest must be paid or firm
even if it must be caught up
faces bankruptcy
before payments to common
Principal must be paid at
No maturity date
maturity
Dividends are not an
Interest is a tax deductible
expense and are not tax
expense
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McGraw-Hill/Irwin
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deductible
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Cash Dividends
LO 3
Dividends must be
declared by the board
of directors before
they can be legally paid.
The company must have
sufficient cash and
retained earnings
to pay the dividend.
The company is not legally required to
pay dividends, but once declared, a
legal liability (Dividends Payable) is created.
Dividends are not an Expense! They are a
reduction of Retained Earnings on the BS.
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-20
Stock Dividends
LO 4
Distribution of additional shares of stock to
existing stockholders (proportionately).
No change in par value
of stock or in total
stockholders’ equity.
Stockholders retain
percentage ownership in the
company (preemptive right)
Reason for stock dividends:
Maintain loyalty of stockholders when corp does
not have enough cash to pay a cash dividend.
McGraw-Hill/Irwin
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Stock Dividends
◼ Ex:
◼ 5% stock dividend → issuance of 5%
more of previously owned shares
◼ If stockholder owned 100 shares already,
then the 5% stock dividend would give
him an additional 5 shares, for 105 total
◼ (100 x .05 = 5 shares additional)
McGraw-Hill/Irwin
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1-22
Stock Split
LO 4
Distribution of additional shares of stock to
existing stockholders while reducing the par
value proportionately
Par value decreases
# of shares outstanding
increases
Reason for stock split:
➢ Lower market price of common stock
to appeal to more buyers
➢ Thwart a hostile takeover
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Stock Split
◼ Ex #1:
◼ 10,000 shares of $6 par stock = $60,000
value of stock on balance sheet
◼ Stock split 2:1
◼ 20,000 shares of $3 par stock = $60,000
new value of stock on balance sheet
◼ Total stock value does not change, but the
par value decreased by 1/2 and the # of
shares doubled (x 2)
McGraw-Hill/Irwin
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Stock Split
◼ Ex #2:
◼ 25,000 shares of $6 par stock = $150,000
value of stock on balance sheet
◼ Stock split 3:1
◼ 75,000 shares of $2 par stock = $150,000
new value of stock on balance sheet
◼ Total stock value does not change, but the
par value decreased by 1/3 and the # of
shares tripled (x 3)
McGraw-Hill/Irwin
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1-25
LO 2
Retained Earnings
Represents the cumulative earnings of a
corporation less the cumulative dividends paid
since the business started operations.
Retained earnings are NOT cash!
Beg RE + net inc (loss) – dividends = End RE
Beg Ret Earnings $100,000
+ Net Income $50,000
– Dividends Paid ($25,000)
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-26
LO 2
Retained Earnings
Beginning Retained Earnings $2,600,000
+ Net Income $390,000
– Cash Dividends – Preferred Stock ($30,000)
– Cash Dividends – Common Stock ($60,000)
– 2% stock dividend on Common stock ($72,000)
= Ending Retained Earnings $2,828,000
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-27
LO 2
Additional Paid-in Capital
• Represents the excess of the amount
received from the sale of preferred or
common stock over par (or stated)
value.
• Cash Paid less Par Value =
Additional Paid-in Capital
• May also be called Capital in Excess of
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-28
LO 2
Additional Paid-in Capital
• Ex #1:
• 5,000 shs issued at $1 par value were
sold for $6,000 cash
• Balance Sheet presentation:
• Common stock, $1 par value, 5,000
shs issued = $5,000 (on Bal Sheet)
• Additional Paid-in-Capital = $1,000
($6,000 cash paid – $5,000 par)
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-29
LO 2
Additional Paid-in Capital
• Ex #2:
• 3,000 shs issued at $2 par value were
sold for $8,000 cash
• Balance Sheet presentation:
• Common stock, $2 par value, 3,000
shs issued = $6,000 (on Bal Sheet)
• Additional Paid-in-Capital = $2,000
($8,000 cash paid – $6,000 par)
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Accumulated Other
Comprehensive Income
LO 5
A new category in stockholders’ equity called
accumulated other comprehensive income (loss)
includes the following unrealized changes to
stockholders’ equity:
1. Cumulative foreign currency translation adjustments;
2. Unrealized gains or losses on available-for-sale
investments;
3. Changes during the period in certain pension or other
postretirement benefit items; and
4. Gains or losses on certain derivative instruments.
McGraw-Hill/Irwin
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Treasury Stock
◼ Shares of a firm’s previously issued stock
that have been reacquired by the firm
◼ Contra-equity account (negative balance)
◼ Reasons to purchase treasury stock:
◼ Low market price, & company wants to shrink
the supply of its own stock in the market
◼ Thwart a hostile takeover by another corp.
◼ Reduces # of shares of stock issued
◼ Issued – treasury stock = outstanding
McGraw-Hill/Irwin
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1-32
Nature of Stockholders’
Equity
Less
Total Stockholders’ Equity
Treasury
Stock
Paid-in Capital
Preferred
Stock
Par or
Stated
Value
McGraw-Hill/Irwin
Additional
Paid-In
Capital
Retained
Earnings
Common
Stock
Par or
Stated
Value
Additional
Paid-In
Capital
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-33
LO 1
Stockholders’ Equity
Section of Balance Sheet
Stockholders’ Equity
Paid-in capital
Common stock $2 par, 244,800 shares
issued and 243,800 outstanding
Additional paid-in capital
Preferred stock, 5,000 shares outstanding
Total paid-in capital
Retained earnings
Total paid-in capital and retained earnings
Less: cost of treasury stock (1,000 shares)
Accum. Other comprehensive income
Total stockholders’ equity
McGraw-Hill/Irwin
$
$
489,600
3,322,400
500,000
4,312,000
2,828,000
7,140,000
(12,000)
50,000
7,178,000
8-33
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-34
LO 7
McGraw-Hill/Irwin
Statement of Changes in
Stockholders’ Equity
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Not-for-Profit and
Governmental Organizations
◼ No owners in these organizations
◼ Owners’ equity is called Fund Balance
◼ Operating (current) Fund
◼ Restricted Fund
◼ Endowment Fund
◼ Loan Fund
◼ Plant Fund
◼ Debt Retirement Fund
◼ Same concept as equity
McGraw-Hill/Irwin
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Proprietorships and
Partnerships
LO 8
Proprietorships (single owner) and partnerships
(two or more owners) do not issue stock.
Proprietorship
Owner’s equity:
John Jones, Capital
John Jones, Drawing
Owners equity:
Partnership
$ 562,500
(41,200)
$ 521,300
Drawing accounts are
distributions to owners
similar to dividends.
Owners’ equity
John Jones, Capital
John Jones, Drawing
Ralph Smith, Capital
Ralph Smith, Drawing
Mary West, Capital
Mary West, Drawings
Owners’ equity:
$ 125,000
(12,000)
125,000
(12,000)
250,000
(20,000)
$ 456,000
Net income and drawing accounts are transferred to
capital accounts at the end of the period.
McGraw-Hill/Irwin
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End of Chapter 8
McGraw-Hill/Irwin
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© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Name _________________________________________________________
ACCT 223
Homework – Ch 8 – Part 2
1. Ellie Inc. had 6.5%, $100 par value cumulative preferred stock.
Dividends are paid quarterly, and there are 95,000 shares authorized,
65,000 shares issued, and 50,000 shares outstanding.
a.
b.
c.
d.
Calculate the dividend payout for the full year.
Calculate the dividend payout for each quarter.
If dividends were not paid out for the previous 2 years,
calculate the total dividend payout for this year (including the current year).
Calculate the total par amount that would be reported on the balance sheet.
2. Retained earnings as of 1/1/2023 were $69,000,000. Net income for the year
ending 12/31/2023 was $2,000,000. Equipment was purchased totaling $1,000,000,
bond payments during the year totaled $500,000, and interest expense totaled
$725,000 for the year. Dividends of $100,000 were declared and paid on common
stock, and dividends of $75,000 were declared and paid on preferred stock in 2023.
a.
Calculate the ending retained earnings balance as of 12/31/2023.
3. Retained earnings as of 12/31/2023 were $15,000,000. Net income for the year
ending 12/31/2023 was $600,000. Bonds were issued for $2,000,000, Dividends of
$50,000 were paid, and Treasury Stock was issued for $80,000 during 2023.
a.
Calculate the beginning retained earnings balance as of 1/1/2023.
4. Common stock, $2 par value, 1,000,000 shares issued, 500,000 shares
outstanding, 3,000,000 shares authorized.
a.
b.
c.
Calculate the total par amount that would be reported on the balance sheet.
Calculate the total amount of a cash dividend of $0.50 per share.
Calculate the number of shares of treasury stock.
5. Evan Scott owns 800 shares of $4 par value common stock of a company that
just made a 2-for-1 stock split.
a.
b.
c.
How many shares of common stock would he own after the stock split?
What will be the new par value per share of stock?
What is the total par value before and after the stock split?
6. Sophia Christine own 500 shares of $15 par value common stock of a company that
just made a 3-for-1 stock split.
a.
b.
c.
How many shares of common stock would you own after the stock split?
What will be the new par value per share of stock?
What is the total par value before and after the stock split?
7. Dax owned 5,000 shares of common stock. The company issued a 2% stock
dividend in lieu of a cash dividend.
a.
How many shares of common stock would he own after the issuance?
8. Sawyer Co. issued (sold) 10,000 shares of $6 common stock for a market price of $8
cash per share on 12/31/23.
a.
b.
c.
How much total cash was received by the sale of stock?
What was the total par value of the stock issuance?
What was the amount of the additional paid-in capital?
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