Corporations: Stock Values, Dividends, Treasury Stock, and Retained Earnings

1. Corporations:Stock Values, Dividends,Treasury Stock, andRetained Earnings Chapter 20

2. Calculating the book value of preferred and common stock. Learning Objective 1

3. Learning Unit 20-1 • Corporations often reserve the right to retire or redeem preferred stock at a specific price. This price is called redemption value. • Market value is the market value per share in the stock market.

4. Learning Unit 20-1 Book value per share = Total stockholders’ equity ÷ Total shares outstanding Book value preferred = Redemption value + Dividendsin arrears ÷ Number of shares outstanding Book value common = Stockholders’ equity – Amount assigned to preferred ÷ Number of shares outstanding

5. Learning Unit 20-1 Stockholders’ Equity Paid-in Capital: Common Stock, $25 par value, 10,000 shares authorized, issued, and outstanding $ 250,000 Paid-in Capital in Excess of Par–Common 110,000 Total Paid-in Capital $ 360,000 Retained Earnings 894,000 Total Stockholders’ Equity $1,254,000 Book value per share: $1,254,000 ÷ 10,000 = $125.40

6. Learning Unit 20-1 Stockholders’ Equity Paid-in Capital: Preferred 7% stock, $100 par value, authorized 3,000 shares cumulative and nonparticipating, 2,000 shares issued and outstanding $200,000 Paid-in Capital in Excess of Par–Preferred 10,000 Total Paid-in Capital, Preferred Stockholders $210,000 Redemption value = $206,000 Dividends in arrears = $ 14,000

7. Learning Unit 20-1 Book value per share preferred: $206,000 + $14,000 ÷ 2,000 = $110 Book value per share common: $894,000 – 220,000 ÷ 10,000 = $67.40

8. Journalizing entries to record issuance of a cash dividend and a stock dividend. Learning Objective 2

9. Learning Unit 20-2 There are three important dates associated with the dividend process. Date of declaration Date of record Date of payment

10. Learning Unit 20-2 On March 8, 200x, the board declares a $2 cash dividend per share on the 5,000 shares issued and outstanding. Accounts Affected Category Rules Retained Earnings SE Dr. 10,000 Dividends Payable Liability Cr. 10,000

11. Learning Unit 20-2 • A stock dividend is a distribution of the corporation’s own stock to shareholders. • It is a transfer of retained earnings to contributed capital. • It does not affect total stockholders’ equity.

12. Learning Unit 20-2 Jesse Company, with 10,000 shares of $20 par value common stock outstanding, declares a 10% stock dividend when the shares are trading at $30. How many shares are issued in the dividend? • 10,000 × 10% = 1,000 shares

13. Retained Earnings 30,000 Common Stock – Dividend Distributable 20,000 Paid-In Capital in Excess 10,000 Declaration of a 10% common stock dividend Learning Unit 20-2

14. Learning Unit 20-2 • Results of a stock split: • increases the number of shares outstanding • reduces the par or stated value in proportion • increases stock prices in the market • dividends per share increased

15. Journalizing the purchase and sale of treasury stock. Learning Objective 3

16. Learning Unit 20-3 • Treasury stock is the corporation’s own shares of issued stock. • Treasury stock has a debit balance. • It is not an asset. • The corporation buys the shares on the stock market, or directly from shareholders.

17. Learning Unit 20-3 • The stock is held in the treasury and used for issuance in stock options plans, etc. • Dividends are not paid on the treasury stock. • It is not outstanding.

18. Learning Unit 20-3 On June 1, 200x, Ashley Corporation purchased 1,000 shares of its own $10 par value common stock at $12 per share (5,000 shares are outstanding). What is the journal entry? • Treasury Stock—Common 12,000 Cash 12,000 Purchase of previously issued stock

19. Learning Unit 20-3 • Stockholders’ equity (before purchase of treasury stock): • Paid-in capital: common stock, $10 par, 5,000 issued $ 50,000 • Paid-in capital in excess of par 30,000 • Total paid-in capital $ 80,000 • Retained earnings 60,000 • Total stockholders’ equity $140,000

20. Learning Unit 20-3 • After purchase of treasury stock: • Common stock, $10 par, 5,000 issued, 4,000 outstanding $ 50,000 • Paid-in capital in excess of par 30,000 • Retained earnings 60,000 • Subtotal $140,000 • Treasury stock, 1,000 shares at cost 12,000 • Total stockholders’ equity $128,000

21. Learning Unit 20-3 • Treasury stock can be reissued at a price above or below the cost of reacquiring the stock. • Excess of sales price over cost is credited to Paid-in Capital from Treasury Stock. • Assume that on July 8, Ashley Corporation sells 100 shares of treasury stock at $15.

22. Cash 1,500 Treasury Stock 1,200 Paid-In Capital from Treasury Stock 300 Sold 100 shares of treasury stock Learning Unit 20-3

23. Preparing a statement of retained earnings. Learning Objective 4

24. Learning Unit 20-4 • Retained earnings appropriation is the amount of retained earnings that is not available for dividends. • No actual cash “set asides” are involved in the appropriation of retained earnings.

25. Learning Unit 20-4 • It can be noted in a memo entry or an actual journal entry that debits Retained Earnings and credits Appropriation (for a purpose). • The restriction can be contractual or voluntary.

26. Learning Unit 20-4 Statement of Retained Earnings Beginning Retained Earnings Less: Prior Period Adjustments Error corrections Net loss Add: Net Income Error corrections Deduct: Dividends Equals: Ending Retained Earnings

27. Learning Unit 20-4 Raymond Company Statement of Retained Earnings Year Ended December 31, 20x3 Retained Earnings, Jan. 1, 20x3 $350,000 Less: Prior Period Adjustments: Correction of 20x1 error 12,000 Retained Earnings, Jan, 20x3, corrected $338,000 Add: Net Income for 20x3 40,000 Total $378,000 Deduct: Dividends declared in 20x3 25,000 Retained Earnings, Dec. 31, 20x3 $353,000

28. End of Chapter 20