University:
California State University, Northridge
Course:
ACCT 352 | Intermediate Financial Accounting III
Academic year:

2024
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157

Pages:

42
Author:

vykolsinaigr

Shareholders’ Equity Chapter 18 18-2 The Nature of Shareholders’ Equity Assets – Liabilities = Shareholders’ Equity Net Assets Sources of Shareholders’ Equity Amounts earned Amounts invested by corporation by shareholders Shareholders’ Equity Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Other gains and losses not included in net income 18-3 Financial Reporting Overview Shareholders' Equity Paid-in capital: Captial stock: Preferred stock - $100 par value; 1,000 shares authorized; 400 shares issued and $ 40,000 outstanding Common stock - $10 par value; 60,000 shares authorized; 20,000 shares issued and outstanding 200,000 Additional paid-in capital in excess of par value From issuance of preferred stock 10,000 From issuance of common stock 300,000 Total paid-in capital $ 550,000 Retained earnings 121,500 Accumulated other comprehensive income: Net unrealized holding gains (losses) on investments (35,000) Gains (losses) from foreign currency translation 22,000 (13,000) Treasury stock (at cost) (10,000) Total shareholders' equity $ 648,500 Accumulated Other Comprehensive Income 18-4 Accumulated other comprehensive income includes four types of gains and losses not included in net income. Net holding gains (losses) on investments. Gains (losses) from and amendments to postretirement benefit plans. Deferred gains (losses) from derivatives. Gains (losses) from foreign currency translations. Accumulated Other Comprehensive Income Comprehensive income is reported periodically as it is created and also is reported as a cumulative amount. There are 2 options for reporting comprehensive income created during the reporting period. As an additional section of the income statement. The accumulated amount of comprehensive income is reported as a separate item of shareholders’ equity in the balance sheet. As a separate statement immediately following the income statement 18-5 18-6 U.S. GAAP vs. IFRS Terminology Differences Capital stock:  Common stock.  Preferred stock.  Paid‐in capital—excess of par, common.  Paid‐in capital—excess of par, preferred. Share capital:  Ordinary shares.  Preference shares.  Share premium, ordinary shares.  Share premium, preference shares. 18-7 U.S. GAAP vs. IFRS Terminology Differences  Accumulated other comprehensive income:        Net gains (losses) on investment ― AOCI. Net gains (losses) foreign currency translation —AOCI. Fair value adjustments not permitted. Retained earnings. Total shareholders’ equity. Presented after liabilities Reserves:  Investment revaluation reserve. Translation reserve.  Revaluation reserve.  Retained earnings.    Total equity. Often presented before liabilities. 18-8 The Corporate Organization Advantages of a corporation Continuous existence Easy ownership transfer Easy to raise capital Limited liability Disadvantages of a corporation Double taxation Government regulation 18-9 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. 18-10 Hybrid Organizations S Corporation   Limited liability protection of a corporation. Maximum number of owners. 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. Double taxation avoided. 18-11 The Model Business Corporation Act Nature and location of business activities.  Number and classes of shares authorized.  Articles of incorporation are filed with the state. State issues a corporate charter. Shares of stock issued. Board of directors appoint officers. Board of directors elected by shareholders. 18-12 Fundamental Share Rights Right to vote. Preemptive right to maintain percentage ownership. Right to share in profits when dividends are declared. Right to share in distribution of assets if company is liquidated. Authorized, Issued, and Outstanding Shares Authorized shares are the maximum number of shares of capital stock that can be sold to the public. Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold. 18-13 Authorized, Issued, and Outstanding Shares Outstanding shares are issued shares that are owned by stockholders. Authorized Shares Issued Shares Retired shares have the same status as authorized but unissued shares. 18-14 Outstanding Shares Treasury Shares Retired Shares Unissued Shares Treasury shares are issued shares that have been reacquired by the corporation. 18-15 Capital Stock   Par value stock Dollar amount per share is stated in the corporate charter. Par value has no relationship to market value.   No-par stock Dollar amount per share is not designated in corporate charter. Corporations can assign a stated value per share (treated as if par value). Legal capital is . . .  The portion of shareholders’ 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 nopar stock. 18-16 Capital Stock Common stock is the basic voting stock of the corporation. It ranks after preferred stock for dividend and liquidation distribution. Dividends are determined by the board of directors. Usually has a par or stated value. Generally does not have voting rights. Preferred Stock Dividend and liquidation preference over common stock. May be convertible, callable, and/or redeemable. 18-17 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. 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. 18-18 U.S. GAAP vs. IFRS Distinction between Debt and Equity for Preferred Stock  Preferred stock normally is reported as equity, but is reported as debt with the dividends reported in the income statement as interest expense if it is “mandatorily redeemable” preferred stock.  Most non-mandatorily redeemable preferred stock (preference shares) also is reported as debt as well as some preference shares that aren’t redeemable. Under IFRS (IAS No. 32), the critical feature that distinguishes a liability is if the issuer is or can be required to deliver cash (or another financial instrument) to the holder. 18-19 Shares Issued for Cash 10,000 shares of stock are issued for $100,000 cash. $1 Par Value Cash ....................................................... Common stock, par value .............. Paid-in capital – excess of par …… 100,000 No Par Value Cash ....................................................... Common stock ............................. 100,000 100,000 No Par, $1 Stated Value To record issue of common stock. To record issue of common stock. 10,000 90,000 Cash ................................................................... 100,000 Common stock, stated value ..................... 10,000 Paid-in capital – excess of stated value …. 90,000 To record issue of common stock. Shares Issued for Noncash Consideration 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. 18-20 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 lumpsum received based on that fair value and allocate the remainder to the other security. 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 additional paid-in capital for each class of stock. 18-21 18-22 More Than One Security Issued for a Single Price Common Stock Preferred Stock Market* $ 275,000 225,000 % Allocation** Par^ 55% $ 247,500 $ 50,000 45% 202,500 15,000 Excess^^ $ 197,500 187,500 Total $ 500,000 100% $ 450,000 $ 385,000 $ 65,000 * Market Value: Common: $55 × 5,000 shares Preferred: $75 × 3,000 shares ^ Par Value: Common: $10 × 5,000 shares Preferred: $5 × 3,000 shares **Allocation: Common: $450,000 × 55% Preferred: $450,000 × 45% ^^Excess: Common: $247,500 - $50,000 par Preferred: $202,500 - $15,000 par Cash ............................................................................ Common stock, $10 par ..................................... Paid-in capital – excess of par common ……….. Preferred stock, $5 par Paid-in capital – excess of par preferred ………. To record issue of common and preferred stock. 450,000 50,000 197,500 15,000 187,500 18-23 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 additional paid-in capital. 18-24 Share Buybacks A corporation might reacquire shares of its stock to . . .  support the market price. Companies can account  increase earnings per share. for the reacquired  distribute in stock option plans. shares by retiring them  issue as a stock dividend. or by holding them as treasury shares.  use in mergers and acquisitions.  thwart takeover attempts. 18-25 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 additional paid-in capital. 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. Common stock ............................................................ Paid-in capital – excess of par common …………….... Paid-in capital – share repurchase …………….. Cash ……………………………………………….. To record repurchase and retirement of common stock. 10,000 90,000 15,000 85,000 18-26 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. Common stock ............................................................ Paid-in capital – excess of par common ………………. Paid-in capital – share repurchase …………………….. Cash ……………………………………………….. To record repurchase and retirement of common stock. 10,000 90,000 25,000 125,000 Reduce Retained Earnings if the Paid-in capital—share repurchase account balance is insufficient. 18-27 Accounting for Treasury Stock Treasury stock usually does not have: Voting rights. Dividend rights. Preemptive rights. Liquidation rights. Treasury stock is reported as an unallocated reduction of total Shareholders’ Equity. 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. 18-28 Accounting for Treasury Stock On 5/1/12, Photos-in-a-Second reacquired 3,000 shares of its common stock at $55 per share. On 12/3/13, Photos-in-a-Second reissued 1,000 shares of the stock at $75 per share. Which of the following would be included in the 12/3/13 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. May 1, 2012: Treasury stock .............................................. Cash ................................................... 165,000 To record purchase of treasury stock. December 3, 2013: Cash ............................................................. Treasury stock .................................... Paid-in capital – share repurchase …. To record reissue of treasury stock. 75,000 165,000 55,000 20,000 18-29 Where We’re Headed The FASB and IASB are working to establish a common standard for presenting information in the financial statements, An important part of the proposal involves the organization of elements of the balance sheet, statement of comprehensive income, and statement of cash flows into a common set of classifications. A key feature of the new format is that each of the financial statements will include classifications by operating, investing, and financing activities (similar to the current statement of cash flows). Operating and investing activities will be included within a new category, “business” activities. Each statement also will include three additional groupings: discontinued operations, income taxes, and multicategory transactions (if needed). 18-30 Retained Earnings Represents the undistributed earnings of the company since its inception. Balance January 1, 2013 Net income Cash dividends Balance December 31, 2013   $ 106,500 25,000 (10,000) $ 121,500 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. 18-31 Accounting for Cash Dividends Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash. Declaration date   Board of directors declares a $10,000 cash dividend. Record a liability. Declaration Date: Retained earnings ........................................ Dividends payable .............................. To record declaration of cash dividend. 10,000 10,000 18-32 Dividend Dates Ex-dividend date The first day the shares trade without the right to receive the declared dividend. (No entry) Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) Date of Payment Record the dividend payment to stockholders. Date of Payment: Dividends payable ........................................ Cash ……………….............................. To record payment of cash dividend. 10,000 10,000 18-33 Property Dividends Distributions of noncash assets.  Record at fair value of noncash asset.  Recognize gain or loss for difference between book value and fair value.  18-34 Accounting for Stock Dividends Distribution of additional shares of stock to owners. No change in total stockholders’ equity. No change in par values. All stockholders retain same percentage ownership. Small Large Stock dividend < 25% Stock dividend > 25% Record at current fair value of stock. Record at par value of stock. 18-35 Accounting for Stock Dividends CarCo declares and distributes a 20% stock dividend on 5 million common shares. Par value is $1 and market value is $20. The required journal entry would be: Retained earnings ..................................................... Common stock …………………………………. Paid-in capital – excess of par common …….. To record declaration and distribution of small stock dividend. 20,000,000 1,000,000 19,000,000 5,000,000 shares × 20 % = 1,000,000 shares issued × $20 = $20,000,000 18-36 Stock Splits Stock splits change the par value per share and the number of shares outstanding, but the total par value is unchanged, and no journal entry is required. Assume that a corporation had 3,000 shares of $2 par value common stock outstanding before a 2–for–1 stock split. Before Split Common Stock Shares After Split 3,000 Par Value per Share $ 2.00 Total Par Value $ 6,000 6,000 $ 1.00 $ 6,000 Increase Decrease No Change 18-37 Stock Splits Effected in the Form of Large Stock Dividends Matrix Inc. declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend. The company has 1,000,000, $1 par value common stock outstanding. The stock is trading in the open market for $14 per share. The per share par value of the shares is not to be changed. Paid-in capital – excess of par common …................. Common stock ……………..……………………. To record declaration and distribution of 2-for-1 stock split effected in the form of a 100% stock dividend. 1,000,000 1,000,000 18-38 Appendix 18 ─ Quasi Reorganizations Purpose To allow a company undergoing financial difficulty, but with favorable future prospects, to get a fresh start by writing down inflated assets and eliminating an accumulated balance in retained earnings.    Procedures Assets and liabilities are revalued to reflect market values, with corresponding debits and credits to retained earnings. The debit balance in retained earnings is eliminated first against additional paid-in capital, and then, if necessary, against common stock. Retained earnings is dated to indicate when the new accumulation of earnings began. 18-39 Quasi Reorganizations Emerson-Walsch Corporation has incurred losses for several years. The board of directors voted to implement a quasi reorganization, subject to shareholder approval. The balance sheet prior to restatement, in millions, follows : Cash Receivables Inventory Property, plant, and equipment (net) Total assets Liabilities Common stock (800 million shares @$1) Additional paid-in capital Retained earnings (deficit) Total liabilities and equity (millions) $ 75 200 375 400 $ 1,050 $ $ 400 800 150 (300) 1,050 Fair values: Inventory = $300,000,000 and Property, plant, and equipment = $225,000,000. Let’s prepare the journal entries necessary for the quasi reorganization. 18-40 Quasi Reorganizations To revalue assets Retained earnings ………………………….................. Inventory …………………………………………. Property, plant, & equipment …………………… 250,000,000 To record reduction to fair value of assets. 75,000,000 175,000,000 To eliminate the deficit in retained earnings Paid-in capital – excess of par common …….............. Common stock ………….………………………………. Retained earnings ………………..……………… To eliminate the deficit in retained earnings. 150,000,000 400,000,000 550,000,000 $300,000,000 + $250,000,000 18-41 Quasi Reorganizations Balance sheet immediately after restatement. Cash Receivables Inventory Property, plant, and equipment (net) Total assets Liabilities Common stock (800 million shares @$.50) Additional paid-in capital Retained earnings Total liabilities and equity (millions) $ 75 200 300 225 $ 800 $ $ 400 400 0 0 800 18-42 End of Chapter 18

Shareholders’ Equity

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