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Chapter 11

Chapter 11. Reporting and Interpreting Owners’ Equity. Advantages of a corporation. Simple to become an owner. Easy to transfer ownership. Provides limited liability. Business Background. Incur liabilities. Own assets. Sue and be sued. Enter into contracts. Business Background.

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Chapter 11

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  1. Chapter 11 Reporting and Interpreting Owners’ Equity

  2. Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limited liability Business Background

  3. Incur liabilities. Own assets. Sue and be sued. Enter into contracts. Business Background Because a corporation is a separate legal entity, it can . . .

  4. Voting (in person or by proxy). • Proportionate distributions of profits. Rights • Proportionate distributions of assets in a liquidation. Stockholders Ownership of a Corporation

  5. Elected byshareholders Appointedby directors Ownership of a Corporation

  6. Authorized Shares Authorized, Issued, and Outstanding Capital Stock The maximum number of shares of capital stock that can be sold to the public.

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

  8. Outstanding sharesare issued shares that are owned by stockholders. Issued Shares Treasury sharesare issued shares that have been reacquired by the corporation. Authorized, Issued, and Outstanding Capital Stock Authorized Shares Outstanding Shares Unissued Shares Treasury Shares

  9. Common Stock Preferred Stock Types of Capital Stock

  10. Basic voting stock Ranks after preferred stock Dividend set by board of directors Common Stock

  11. Nominal value Legal capital Par Value and No-par Value Stock Par Value Legal capitalis the amount of capital, required by the state, that must remain invested in the business.

  12. I get it! Par Value  Par Value Market Value

  13. Preference over common stock Usually hasno voting rights Usually has a fixed dividend rate Preferred Stock

  14. Special Features of Preferred Stock Convertible preferred stock may be exchanged for common stock. Callablepreferred stock may be repurchased by the corporation at a predetermined price.

  15. Contributed capital Retained earnings Parvalue Additional paid-in capital Accounting for Capital Stock Two primary sources of stockholders’ equity

  16. Wal-Mart Wal-Mart issues new stock. Sale and Issuance of Capital Stock Initial public offering (IPO) Seasoned new issue The first time a corporation sells stock to the public. Subsequent sales of new stock to the public.

  17. Secondary Markets Transactions between two investors that do not affect the corporation’s accounting records.(Like when you buy and sell stock) I’d like to sell some of myWal-Mart stock. I’d like to buy some of yourWal-Mart stock.

  18. Sale and Issuance of Capital Stock On July 6, Wal-Mart issued 100,000 shares of $0.10 par value common stock for $22 per share. Prepare the journal entry to record this transaction.

  19. Sale and Issuance of Capital Stock On July 6, Wal-Mart issued 100,000 shares of $0.10 par value common stock for $22 per share. 100,000 shares × $0.10 par value = $10,000 100,000 shares × $22 per share = $2,200,000

  20. Stockholders Wal-Mart Treasury Stock Wal-Mart buysits own stock in the secondary market.(Treasury stock) Management compensation package includes salary and stock options. Stock optionsallow management to purchase stock from the corporation at a fraction of the stock’s value in the secondary market. Management

  21. No voting or dividend rights Contra equity account Treasury Stock When stock is reacquired, the corporation records the treasury stock at cost.

  22. Treasury Stock On May 1, Wal-Mart reacquired 100,000 shares of its common stock at $22 per share. The journal entry for May 1 is . . . .

  23. Treasury Stock On December 3, Wal-Mart reissued 10,000 shares of the treasury stock at $30 per share. The journal entry for December 3 is . . . 10,000 shares × $22 cost = $220,000 10,000 shares × $30 = $300,000

  24. Declared by board of directors. Not legally required. Requires sufficient Retained Earnings and Cash. Creates liability at declaration. Accounting for Cash Dividends

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

  26. Dividend Dates Date of Record • Stockholders holding shares on this date will receive the dividend.(No entry) X

  27. Dividend Dates Date of Payment • Record the payment of the dividend to stockholders.

  28. Dividends on Preferred Stock • Current Dividend Preference:The current preferred dividends must be paid before paying any dividends to common stock. • Cumulative Dividend Preference:Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

  29. Dividends on Preferred Stock If the preferred stock isnoncumulative, any dividends not declared in previous years are lostpermanently.

  30. Dividends on Preferred Stock Kites, Inc. has the following stock outstanding: Common stock: $1 par, 100,000 shares Preferred stock: 3%, $100 par, cumulative, 5,000 shares Preferred stock: 6%, $50 par, noncumulative, 3,000 shares Dividends were not paid last year. In the current year, the board of directors declared dividends of $50,000. How much will each class of stock receive?

  31. Dividends on Preferred Stock

  32. Dividends on Preferred Stock

  33. Dividends on Preferred Stock

  34. Wal-Mart Focus on Cash Flows

  35. No change in total stockholders’ equity. No change in par values. All stockholders retain same percentage ownership. Accounting for Stock Dividends (Saving cash) Distribution of additional sharesof stock to stockholders(less than 25%).

  36. Stock Splits Distributions of 25% or more of stock to stockholders. Ice Cream Parlor Banana Splits On Sale Now

  37. Stock Splits Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.

  38. Stock Splits Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split. Increase Decrease No Change

  39. Why would youwant to do that? If I loan you $150,000, I will want you to restrict your retained earnings. Restrictions on Retained Earnings

  40. Because I want to restrict the amount you can pay out in dividends. Restrictions on Retained Earnings

  41. C’mon Chester! With your smarts and my savvy, we could make a great partnership!! End of Chapter 11

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