Chapter 11 Part 1 Corporations Organization Stock Transactions

Chapter 11 – Part 1 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings Use Table of Contents to switch between slides

CHAPTER 11 - Part 1 Major Characteristics of a corporation Forming a corporation Stockholders’ Rights

Learning Objectives 1. Identify the major characteristics of a corporation. 2. Record the issuance of common stock. 3. Explain the accounting for treasury stock. 4. Differentiate preferred stock from common stock. 5. Prepare the entries for cash dividends and stock dividends. 6. Identify the items that are reported in a retained earnings statement. 7. Prepare and analyze a comprehensive stockholders’ equity section.

The Corporate Form of Organization An entity separate and distinct from its owners. Classified by Purpose and Classified by Ownership Not-for-Profit Publicly held For Profit Privately held Ø Hopelink Ø Susan B Komen Ø Bill & Melinda Gates Foundation Ø Ø Wendy’s Ford Motor Company Coke Amazon Ø Mars (the Snickers Co.

The Corporate Form of Organization Characteristics that distinguish corporations from proprietorships and partnerships. Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Advantages Continuous Life Corporate Management Government Regulations Additional Taxes Disadvantages

Separate Legal Existence - Adv Stockholders are separate from the company. The word _______________________ “corporation” comes from the The Stockholders root work “corpus” or body. A corporation is a separate legal entity.

Limited Liability of Stockholders - Adv The Corporation Stockholder are at risk ONLY to the extent of their investment. In other words, a stockholder can either make money on his/her _______________________ stock (if the price The Stockholders –$$$$$$$$$$ rises) or…. worst case scenario, LOSE IT ALL. But no more. BUT: The stockholders’ personal assets are NOT at risk.

Transferable Ownership Rights - Adv Easy to buy/sell stock – the transactions are public, not personal, and do not require the consensus of other owners. Stockholder are can sell their stock without consent of other owners. And…changing owners does NOT affect the company’s dayto day operations.

Ability to Acquire Capital - Adv It is easy to obtain capital through the stock market and investors can be BIG or small…. Investors can buy stock… a lot or a little with ease.

Continuous Life–ADV A corporation’s life is not limited by the lifetime of its owners The corporate charter (read ahead forming a corporation and writing a charter) can limit its life, but most corporations live on indefinitely, not limited by its owner’s lives.

Corporate Management - Adv Having professional managers is an advantage. Having professional managers who are not owners…. might be a disadvantage. Stockholders elect the Board of Directors, who elect the CEO, who hires the managers. Question: Should the managers own stock? Would owning stock make them more invested in the company?

Characteristics of a Corporation Illustration 11 -1 Corporation organization chart Stockholders Chairman and Board of Directors President and Chief Executive Officer General Counsel and Secretary Vice President Marketing Treasurer Vice President Finance/Chief Financial Officer Vice President Operations Controller Vice President Human Resources

Government Regulations – DIS ADV Many requirements: reports, federal laws, state laws, SEC rules, stock exchange requirements (NYSE, NASDAC, ASE…)

Additional Taxes– DIS ADV Double Taxation. The stockholders are taxed on their dividend earnings AND the corporation is taxed on its earnings. AND, the corporation CANNOT deduct dividend payments!

Forming a Corporation Initial Steps: File application with the Secretary of State grants charter. Corporation develops by-laws. Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey). Corporations expense organization costs as incurred.

Stockholders’ Rights Stockholders have the right to: Illustration 11 -3 1. Vote in election of board of directors and on actions that require stockholder approval. 2. Share the corporate earnings through receipt of dividends. SO 1 Identify the major characteristics of a corporation.

Stockholders’ Rights Stockholders have the right to: 3. Keep the same percentage ownership when new shares of stock are issued (preemptive right*). * A number of companies have eliminated the preemptive right.

Ownership Rights of Stockholders have the right to: 4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim. First: Lenders paid Next: Stockholders paid (if there is $)

Ownership Rights of Stockholders Prenumbered Illustration 11 -4 Class A COMMON STOCK PAR VALUE $1 PER SHARE Name of corporation Stockholder’s name Stock Certificate Signature of corporate official Shares

Practice: Do Self Study Questions: 1, 2, 3 See solution at the end of the chapter

End of Part 1 Go on to Parts 2 and 3

Chapter 11 – Part 2 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings Use Table of Contents to switch between slides

Learning Objectives 1. Identify the major characteristics of a corporation. 2. Record the issuance of common stock. 3. Differentiate preferred stock from common stock. 4. Prepare the entries for cash dividends and stock dividends. 5. Explain the accounting for treasury stock. 6. Identify the items that are reported in a retained earnings statement. 7. Prepare and analyze a comprehensive stockholders’ equity section.

Stock Issue Considerations Authorized Stock Charter indicates the amount of stock that a corporation is authorized to sell. Number of authorized shares is often reported in the stockholders’ equity section. Note: the number of authorized shares does NOT mean there are the SAME number of investors in the company. These are just the number of shares the company would EVER be authorized to sell.

Stock Issue Considerations Issuance of Stock Corporation can issue common stock directly to investors or indirectly through an investment banking firm. How does a company set the price for a new issue of stock? Note: 1. the company’s anticipated future earnings 2. its expected dividend rate per share 3. its current financial position 4. the current state of the economy 5. the current state of the securities market Ultimately, it is the market demand that will set the current selling price.

Stock Issue Considerations Market Value of Stock of publicly held companies is traded on organized exchanges. Interaction between buyers and sellers determines the prices per share. Prices set by the marketplace tend to follow the trend of a company’s earnings and dividends. Factors beyond a company’s control, may cause day-to-day fluctuations in market prices. After the Company has sold a share of stock, any subsequent sale (at profit or loss), does NOT impact the company.

Stock Issue Considerations For example… The Chocolate Company sells 1 share of stock at $30 to Joseph Blow. One year later, Joseph sells it for $40. There is a $10 profit. Who receives it? The company or Joseph? Chocolate! First, answer this on YOUR OWN and then go to next slide

Stock Issue Considerations For example… Joseph earns the $10 profit. However… The Chocolate Company gets the prestige of its rising prices.

Stock Issue Considerations Par and No-Par Value Stock Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors. Today many states do not require a par value. No-par value stock is quite common today. In many states the board of directors assigns a stated value to no-par shares.

Capital Remember the Accounting Equation? Assets = Liabilities + Stockholders’ Equity Assets = The Company’s Resources Liabilities & Stockholders’ Equity = How the Company financed these resources. The Choices are: DEBT EQUITY (owners)

Capital (EQUITY) HAS TWO SOURCES: PAID IN CAPITAL Common Stock Preferred Stock PIC, in Excess of Par Value, Common Stock “APIC, CS” PIC, in Excess of Par Value, Preferred Stock “APIC, PS” EARNED CAPITAL Retained Earnings Paid in Capital is the total amount of cash and other assets paid into the corporation by stockholders in exchange for capital stock. Retained Earnings – the net income (less dividends paid out) that a corporation retains for future use.

Accounting for Common Stock Issues Primary objectives: 1) Identify the specific sources of paid-in capital. 2) Maintain the distinction between paid-in capital and retained earnings. Other than consideration received, the issuance of common stock affects only paid -in capital accounts.

Accounting for Common Stock Issues Issuing Par Value Common Stock for Cash Illustration: Assume that Mc. Clane, Inc. issues 2, 000 shares of $1 par value common stock. Prepare Mc. Clane’s journal entry if (a) Jan 10 th: 1, 000 share issued for $1 per share, and (b) October 17 th: 1, 000 shares are issued for $5 per share. a. b. Stop: Try these Journal Entries in your Course Pack

Accounting for Common Stock Issues Issuing Par Value Common Stock for Cash Illustration: Assume that Mc. Clane, Inc. issues 2, 000 shares of $1 par value common stock. Prepare Mc. Clane’s journal entry if (a) 1, 000 share issued for $1 per share, and (b) 1, 000 shares are issued for $5 per share. Note these Journal Entries in your Course Pack a. Cash 1, 000 Common stock (1, 000 x $1) b. Cash 1, 000 5, 000 Common stock (1, 000 x $1) 1, 000 Paid-in capital in excess of par value * 4, 000 *Note: also called Additional Paid in Capital, abbreviated to APIC

Accounting for Common Stock Issues Issuing Common Stock for Services or Noncash Assets Corporations also may issue stock for: Services (attorneys or consultants). Noncash assets (land, buildings, and equipment). Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable.

Accounting for Common Stock Issues Illustration: Assume that attorneys have helped Bruce Company incorporate. They have billed the company $25, 000 for their services. They agree to accept 24, 000 shares of $1 par value common stock in payment. Bruce Company is not a publicly traded company, so there is no available market price for the stock. Required: Prepare the journal entry for this transaction. Stop: Try these Journal Entries in your Course Pack

Accounting for Common Stock Issues Illustration: Assume that attorneys have helped Bruce Company incorporate. They have billed the company $25, 000 for their services. They agree to accept 24, 000 shares of $1 par value common stock in payment. Bruce Company is not a publicly traded company, so there is no available market price for the stock. Required: Prepare the journal entry for this transaction. Organizational expense 25, 000 Common stock (4, 000 x $1) 24, 000 Paid-in capital in excess of par 1, 000

Accounting for Common Stock Issues Illustration: Assume that Athletic Research Inc. is an existing publicly held corporation. Its $1 par value stock is actively traded at $6 per share. The company issues 10, 000 shares of stock to acquire land recently advertised for sale at $80, 000. Prepare the journal entry for this transaction. Stop: Try these Journal Entries in your Course Pack

Accounting for Common Stock Issues Illustration: Assume that Athletic Research Inc. is an existing publicly held corporation. Its $1 par value stock is actively traded at $6 per share. The company issues 10, 000 shares of stock to acquire land recently advertised for sale at $80, 000. Prepare the journal entry for this transaction. Land (10, 000 x $6) 60, 000 Common stock (10, 000 x $1) 10, 000 Paid-in capital in excess of par 50, 000

Preferred Stock Features often associated with preferred stock. 1. Preference as to dividends. 2. Preference as to assets in liquidation. 3. Nonvoting. Accounting for preferred stock at issuance is similar to that for common stock.

Preferred Stock Illustration: Morland Corporation issues 9, 000 shares of $10 par value preferred stock for $12 cash per share. Journalize the issuance of the preferred stock. Note this Journal Cash Entries in your Course Pack 108, 000 Preferred stock (9, 000 x $10) 90, 000 Paid-in capital in excess of par – Preferred stock 18, 000 Preferred stock may have a par value or no-par value.

Chapter 11 - Part 3 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings – part 3 Use Table of Contents to switch between slides

CHAPTER 11 - Part 3 Cash Dividends Stock Splits Retained Earnings

Learning Objectives 1. Identify the major characteristics of a corporation. 2. Record the issuance of common stock. 3. Differentiate preferred stock from common stock. 4. Prepare the entries for cash dividends and stock dividends. 5. Explain the accounting for treasury stock. 6. Identify the items that are reported in a retained earnings statement. 7. Prepare and analyze a comprehensive stockholders’ equity section.

Preferred Stock Dividend Preferences Preferred Shareholders receive dividends before common stockholders. Preferred dividends are calculated as a percentage of the preferred stock’s par value (or as a specified amount), unless common stock. Cumulative dividend – If the preferred stock is cumulative, its’ dividends must be paid their annual dividend (as calculated above) plus any dividends in arrears before common stockholders receive ANY dividends. Preferred Stock can also be non-cumulative

Preferred Stock Dividends - example o Preferred Stock Dividends are usually expressed as a % of par, for example: o 10%, $100 par value Preferred Stock o = $10. 00 Preferred Dividend per share

Dividends A distribution of cash or stock to stockholders on a pro rata (proportional) basis. Types of Dividends: 1. Cash dividends. 2. Property dividends. 3. Scrip (note) 4. Stock dividends. Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share.

Accounting for Dividends Declaration Date - The Board of directors announces a dividend Liability Recorded Record Date -The date ownership is determined. No journal entry made Payment Date The date the dividend is paid to the Liability paid Current stockholder on this date receives the dividend stockholder of record on the Record Date.

Cash Dividends For a corporation to pay a cash dividend, it must have: 1. Retained earnings - Payment of cash dividends from retained earnings is legal in all states. 2. Cash. $$$$$$$$$ 3. A declaration of dividends by the Board of Directors.

Cash Dividends Illustration: On Dec. 15, the directors of Paccar, Inc. declare a 30¢ per share cash dividend on 100, 000 shares of $1 par value common stock. The dividend is payable on Jan. 20 to shareholders of record on Dec. 29 th. December 15 (Declaration Date) Note these Journal Entries in your Course Pack Cash Dividends 30, 000 Dividends payable 30, 000 December 29 (Date of Record) January 20 (Payment Date) Dividends payable Cash 30, 000 No entry

Cash Dividends – how to allocate to Pfd and Common? Reminder: Holders of cumulative preferred stock must be paid any unpaid prior-year dividends before common stockholders receive dividends.

Cash Dividends - Allocations Illustration: On December 31, 2011, Rosales, Inc. has 1, 000 shares of 9%, $100 par value cumulative preferred stock. It also has 50, 000 shares of $10 par value common stock outstanding. At December 31, 2011, the directors declare a $6, 000 cash dividend. Prepare the entry to record the declaration of the dividend. Even though the Preferred Shareholders have an 9% dividend feature, Rosales can only pay them $6, 000 Stop: Try these Journal Entries in your Course Pack

Cash Dividends – Watch the Dates Illustration: On December 31, 2011, Rosales, Inc. has 1, 000 shares of 9%, $100 par value cumulative preferred stock. It also has 50, 000 shares of $10 par value common stock outstanding. At December 31, 2011, the directors declare a $6, 000 cash dividend. Prepare the entry to record the declaration of the dividend. Note these Journal Entries in your Course Pack Cash Dividends 6, 000 Dividends payable 6, 000 Pfd Dividends: 1, 000 shares x $100 par x 9% = $9, 000

Cash Dividends Illustration: At December 31, 2012, Rosales declares a $60, 000 cash dividend. Show the allocation of dividends to each class of stock. $ 60, 000 3, 000 9, 000 $ 48, 000 ** * * 1, 000 shares x $100 par x 9% = $9, 000 ** 2011 Pfd. dividends $9, 000 – declared $6, 000 = $3, 000

Stock Dividends Pro rated distribution of the corporation’s own stock. The total number of shares increases, but the ownership % stays the same. 120 40 160 Before: 25% ownership: 40 shares out of 160 1 1 2 2 480 After : 25% ownership: 120 shares out of 480 Impact: decreases retained earnings, increases in paid-in capital. But no change in total Stockholders’ Equity

Stock Dividends Reasons why corporations issue stock dividends: 1. To satisfy stockholders’ dividend expectations without spending cash. 2. To increase the marketability of the corporation’s stock. 3. To emphasize that a portion of stockholders’ equity has been permanently reinvested in the business.

Stock Dividends Size of Stock Dividends Small stock dividend (less than 20– 25% of the corporation’s issued stock, recorded at fair market value) Large stock dividend (greater than 20– 25% of issued stock, recorded at par value) * This accounting is based on the assumption that a small stock dividend will have little effect on the market price of the outstanding shares; larger dividends will affect market pricing.

Stock Dividends Illustration: Voth Corp. has 60, 000 shares issued and outstanding. The par value is $10 per share and market value is $15 per share. 10% stock dividend is declared Stock Dividends* (60, 000 x 10% x $15) Common stock dividends distributable Paid-in capital in excess of par value Stock issued Common stock dividends distributable Common stock 90, 000 60, 000 30, 000 60, 000 *Stock Dividends will be closed to Retained Earnings and reduce it.

Stock Dividends Stockholders’ Equity with Dividends Distributable Voth, Inc. Balance Sheet (partial) February 1, 2011 Stockholders' equity: Paid in Capital: Common Stock dividends distributable Paid-in capital in excess or par value Total paid in Capital $ $ 200, 000 Retained earnings Total stockholders' equity 600, 000 60, 000 30, 000 690, 000 $ 890, 000 Note: Common Stock dividends distributable is an account.

Stock Dividends – Before & After picture Voth, Inc. BEFORE DIVIDEND AFTER DIVIDEND Balance Sheet (partial) February 1, 2011 Stockholders' equity: Paid in Capital: Common Stock Paid-in capital in excess or par value Total paid in Capital $ 600, 000 290, 000 Retained earnings Total stockholders' equity Outstanding Shares $ $ 890, 000 660, 000 30, 000 690, 000 200, 000 $ 890, 000 66, 000 Note: total Stockholders’ Equity is the same

Stock Splits Stock Split Reduces the market value of shares. No JOURNAL entry recorded for a stock split (HOORAY!) Decrease par value and increase number of shares.

Stock Splits Illustration: Assume Voth Corporation splits 60, 000 shares of common stock on a 2 -for-1 basis. Voth, Inc. BEFORE SPLIT Balance Sheet (partial) February 1, 2011 Stockholders' equity: Paid in Capital: Common Stock (60, 000 shares @ $10 par value) $ 600, 000 Paid-in capital in excess or par value Total paid in Capital 290, 000 Retained earnings Total stockholders' equity Outstanding Shares $ 890, 000 60, 000 Results in a reduction of the par or stated value per share.

Stock Splits Illustration: Assume Voth Corporation splits 60, 000 shares of common stock on a 2 -for-1 basis. Common Stock (120, 000 shares outstanding, $5 par value) Paid in capital in excess of par value Total Paid in Capital AFTER Split: $600, 000 0 $500, 000 Retained Earnings $300, 000 Total Stockholders’ Equity $800, 000 Outstanding Shares 120, 000 Results in a reduction of the par or stated value per share.

Stock Splits So what is the value in a stock split? ? ? When stock is split, the market responds. Let’s say the Voth stock was trading at $80 in the market. After the split, the market will adjust its price to match the split and move to $40. (This will not affect the stockholder, who know owns 2 shares of stock with a total value of $80) Often, lowering the price of a share of stock, can stimulate trades. More trades mean more demand, which often drives the stock price UP.

Stock Splits – other types Stock splits can be structure any way…. For example, they can be 3 shares issued for every 2 shares owned: Before: Outstanding Shares of 10, 000 at a $6 par value $60, 000 After: Outstanding Shares of 15, 000 at a $4 par value $60, 000

Retained Earnings Retained earnings is net income that a company retains for use in the business. Net income increases Retained Earnings and a net loss decreases Retained Earnings. Retained earnings is part of the stockholders’ claim on the total assets of the corporation. A debit balance in Retained Earnings is identified as a deficit. Retained earnings is NOT CASH!

Retained Earnings Restrictions can result from: 1. Legal restrictions. 2. Contractual restrictions. 3. Voluntary restrictions. Illustration 11 -22

Prior Period Adjustments - Corrections Reason for Corrections: Ø mathematical errors Ø errors in application of accounting principles Ø oversight or misuse of facts Corrections treated as prior period adjustments Adjustment made to the beginning balance of Retained Earnings

Prior Period Adjustments Butters, Inc. Statement of Retained Earnings December 31, 2011 $ 1, 100, 000 400, 000 $ (275, 000) 1, 225, 000 Balance - January 1 Net Income Dividends Balance - December 31 Before issuing the report for the year ended December 31, 2011, you discover a $50, 000 error (net of tax) that caused the 2010 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2010. Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2011?

Prior Period Adjustments Butters, Inc. Statement of Retained Earnings December 31, 2011 Balance - January 1 Prior Period adjustment - error correction Balance - January 1 - as restated Net Income $ Dividends Balance - December 31 $ 1, 100, 000 (50, 000) 1, 050, 000 400, 000 (275, 000) 1, 175, 000

Retained Earnings Statement The company prepares the statement from the Retained Earnings account. Retained Earnings 1. 2. 3. 4. Net Loss Prior period adjustments for overstatements of net income Dividends (stock or cash) Sales of Treas. Stock (if nec) 1. 2. Net Income Prior period adjustments for understatements of net income

TREASURY STOCK PAID IN CAPITAL Common Stock Preferred Stock PIC, in Excess of Par Value, Common Stock Paid in Capital is the total amount of cash and other assets paid into the corporation by stockholders in exchange for capital stock. PIC, in Excess of Par Value, Preferred Stock EARNED CAPITAL Retained Earnings LESS: Treasury Stock Retained Earnings – the net income (less dividends paid out) that a corporation retains for future use.

Accounting for Treasury Stock Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired. Corporations purchase their outstanding stock: 1. To reissue the shares to officers and employees under bonus and stock compensation plans. 2. To enhance the stock’s market value. 3. To have additional shares available for use in the acquisition of other companies. 4. To increase earnings per share. 5. To rid the company of disgruntled investors, perhaps to avoid a takeover.

Accounting for Treasury Stock Purchase of Treasury Stock Debit Treasury Stock for the price paid to reacquire the shares. * Treasury stock is a contra stockholders’ equity account, not an asset. Purchase of treasury stock reduces stockholders’ equity. * Debit T-Stock at Cost (note-there alternative ways to record T-Stock, but not learned until more advanced courses)

Accounting for Treasury Stock Gio, Inc. Balance Sheet (partial) February 1, 2011 Stockholders' equity: Paid in Capital: Common Stock, $4 par value, 100, 000 shares issued and outstanding. $ Retained earnings 400, 000 200, 000 Total stockholders' equity $ 600, 000 Illustration: On February 1, 2011, Gio, Inc. acquires 4, 000 shares of its stock at $7 per share. Treasury stock (4, 000 x $7) 28, 000 Cash 28, 000

Accounting for Treasury Stockholders’ Equity with Treasury stock Gio, Inc. Balance Sheet (partial) February 1, 2011 Stockholders' equity: Paid in Capital: Common Stock, $4 par value, 100, 000 shares issued and 96, 000 outstanding. $ Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (4, 000 shares) Total stockholders' equity 400, 000 200, 000 600, 000 28, 000 $ 572, 000 Both the number of shares issued (100, 000), outstanding (96, 000), and the number of shares held as treasury (4, 000) are disclosed.

What is the relationship between… Authorized Issued Outstanding Treasury Stock Assume: 1, 000 shares are authorized. 400, 000 shared issued and 15, 000 shares in treasury stock. How many are outstanding?

What is the relationship between… Authorized = 1, 000 Issued = 400, 000 Outstanding = 385, 000 Treasury Stock = 15, 000 --Total Issued Shares = 400, 000 -- 15, 000 385, 000 -------Total Authorized Shares = 1, 000 ------ Assume: 1, 000 shares are authorized. 400, 000 shared issued and 15, 000 shares in treasury stock. How many are outstanding?

What about the unissued shares? Authorized = 1, 000 Issued = 400, 000 Outstanding = 385, 000 Treasury Stock = 15, 000 --Total Issued Shares = 400, 000 -- 385, 000 Unissued Shares = ? ? -------Total Authorized Shares = 1, 000 ------ Unissued shares have no value. They are just the maximum number of additional shares that the company can issue (without revising the corporate charter).

What about the unissued shares? Authorized = 1, 000 Issued = 400, 000 Outstanding = 385, 000 Treasury Stock = 15, 000 Unissued = 600, 000 --Total Issued Shares = 400, 000 -- 15, 000 385, 000 Unissued Shares = 600, 000 -------Total Authorized Shares = 1, 000 ------ Unissued shares have no value. They are just the maximum number of additional shares that the company can issue (without revising the corporate charter).

Accounting for Treasury Stock Disposal of Treasury Stock Above Cost Below Cost Both increase total assets (Cash) and stockholders’ equity, thus reducing/eliminating the contra account (T-Stock).

Accounting for Treasury Stock – ABOVE COST Illustration: Per the earlier illustration: On February 1, 2011, Gio acquired 4, 000 shares of its stock at $7 per share. On July 1, Gio sells for $10 per share 1, 000 shares of its treasury stock, previously acquired at $7 per share. July 1 Cash 10, 000 Treasury stock (1, 000 x $7) 7, 000 Paid-in capital treasury stock 3, 000 A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders.

Accounting for Treasury Stock – BELOW Cost Illustration: Per the earlier illustrations: On February 1, 2011, Gio acquired 4, 000 shares of its stock at $7 per share and has previously sold 1, 000 shares above cost. On Oct. 1, Gio sells an additional 800 shares of treasury Note this Journal stock at $6 per share. Oct. 1 Cash Entries in your Course Pack 4, 800 Paid-in capital treasury stock Treasury stock (800 x $7) 800 5, 600 Gio uses Paid-in Capital from Treasury Stock, if available, for the difference between cost and resale price of the shares.

Accounting for Treasury Stock – Final sale Illustration: Per the earlier illustrations: On February 1, 2011, Gio acquired 4, 000 shares of its stock at $7 per share and has previously sold 1, 000 shares above cost and 800 shares below cost. On Dec. 1, assume that Gio, Inc. sells its remaining 2, 200 shares at $5. 75 per share. Dec. 1 Cash (2, 200 x $5. 75) 12, 650 Paid-in capital treasury stock Retained earnings 2, 200 550 Treasury stock (2, 200 x $7) 15, 400 Note this Journal Entries in your Course Pack Limited to balance on hand

Accounting for Treasury Stock Practice: Do Problem 11 -2 B See solution at the end of the Powerpoint slides – part 3

Statement Analysis and Presentation Analysis Return on Common Stockholders’ Equity = Net Income Available to Common Stockholders* Average Common Stockholders’ Equity This ratio shows how many dollars of net income the company earned for each dollar invested by the stockholders. * Net Income – Preferred Dividends

End of Chapter 11 Good Bye and Good Luck! Solutions to problems next

Prob 11 -1 B Mar. 1 Paid-in Capital in Excess of Stated Value—Common Stock (80, 000 X $1) Cash (5, 000 X $105) 525, 000 Preferred Stock (5, 000 X $100) 80, 000 500, 000 Apr. 1 Land Paid-in Capital in Excess of Par Value—Preferred Stock (5, 000 X $5) 85, 000 Common Stock (24, 000 X $3) 25, 000 72, 000 Paid-in Capital in Excess of Stated Value—Common Stock ($85, 000 – $72, 000) 13, 000 May 1 Cash (80, 000 X $4. 50) 360, 000 Common Stock (80, 000 X $3) 240, 000 Paid-in Capital in Excess of Stated Value—Common Stock (80, 000 X $1. 50) 120, 000 Aug. 1 Organization Expense Common Stock (10, 000 X $3) 30, 000 Paid-in Capital in Excess of Stated Value—Common Stock ($40, 000 – $30, 000) 10, 000 Sept. 1 Cash (10, 000 X $5) 50, 000 Common Stock (10, 000 X $3) 40, 000

Prob 11 -1 B PROBLEM 11 -1 B (Continued) (c) KEELER CORPORATION Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, 10, 000 shares authorized, 6, 000 shares issued $ 600, 000 Common stock, no par, $3 stated value, 500, 000 shares authorized, 204, 000 shares issued 612, 000 Total capital stock Additional paid-in capital In excess of par value— preferred stock $ 34, 000 In excess of stated value— common stock 243, 000 Total additional paid-in capital Total paid-in capital 1, 212, 0 277, 000 $1, 489, 0

Prob 11 -2 B (a) Mar. 1 June 1 Sept. Dec. 1 1 31 Treasury Stock (5, 000 X $8) Cash (1, 000 X $12) 12, 000 Treasury Stock (1, 000 X $8) Paid-in Capital from Treasury Stock (1, 000 X $4) Cash (2, 000 X $10) 20, 000 Treasury Stock (2, 000 X $8) Paid-in Capital from Treasury Stock (2, 000 X $2) Cash (1, 000 X $6) 6, 000 Paid-in Capital from Treasury Stock (1, 000 X $2) 2, 000 Treasury Stock (1, 000 X $8) Income Summary 40, 000 Retained Earnings 40, 000 8, 00 4, 000 16, 00 4, 000 8, 00 40, 000

Prob 11 -2 B (c) GOLDBERG CORPORATION Stockholders’ equity Paid-in capital Capital stock Common stock, $5 par, 100, 000 shares issued and 99, 000 outstanding $500, 000 Additional paid-in capital In excess of par value $200, 000 From treasury stock 6, 000 Total additional paid-in capital 206, 000 Total paid-in capital Retained earnings 140, 000 Total paid-in capital and retained earnings Less: Treasury stock (1, 000 common shares, at cost) (8, 000) Total stockholders’ equity $838, 000 706 846

Prob 11 -3 B (a) Feb. Apr. Sept. 1 14 3 Nov. 10 Dec. 31 Cash 100, 000 Common Stock (25, 000 X $1) Paid-in Capital in Excess of Stated Value—Common Stock ($100, 000 – $25, 000) Cash 33, 000 Treasury Stock—Common (6, 000 X $4) Paid-in Capital from Treasury Stock-Common ($33, 000 – $24, 000) Patent 30, 000 Common Stock (5, 000 X $1) Paid-in Capital in Excess of Stated Value—Common Stock ($30, 000 – $5, 000) Treasury Stock—Common Cash Income Summary 452, 000 Retained Earnings 25 75 24, 000 9, 000 5 25 6, 000 452, 000

Prob 11 -3 B (c) PORT CORPORATION Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $50 par value, cumulative, 10, 000 shares authorized, 8, 000 shares issued and outstanding $ 400, 000 Common stock, no par, $1 stated value, 2, 000 shares authorized, 1, 030, 000 shares issued and 1, 025, 000 shares outstanding Total capital stock Additional paid-in capital In excess of par value— preferred stock 1, 030, 000 1, 430, 000 $ 100, 000 In excess of stated value— common stock 1, 550, 000 From common treasury stock Total additional paid-in capital Total paid-in capital Retained earnings (see Note X) Total paid-in capital and retained earnings 9, 000 1, 659, 000 3, 08 2, 268, 000 5, 3 Less: Treasury stock (5, 000 common shares) Total stockholders’ equity Note X: Dividends on preferred stock totaling $32, 000 [8, 000 X (8% X $50)] are in arrears. (22 $5, 33

Accounting for Common Stock Issues Mc. Clane, Inc. Balance Sheet (partial) January 1, 2011 Stockholders' equity: Paid in Capital: Common Stock $ Paid-in capital in excess or par value* Total paid-in capital 4, 000 $ Retained earnings Total stockholders' equity 2, 000 6, 000 27, 000 $ 33, 000

Accounting for Common Stock Issues Issuing No-Par Common Stock for Cash Illustration: Assume that Mc. Clane, Inc. issues 5, 000 shares of $5 stated value no-par common stock for $8 per share. The entry is: Stop: Try these Journal Entries in your Course Pack Prepare the entry assuming there is no stated value?

Accounting for Common Stock Issues Issuing No-Par Common Stock for Cash Illustration: Assume that Mc. Clane, Inc. issues 5, 000 shares of $5 stated value no-par common stock for $8 per share. Note these Journal Entries in The entry is: your Course Pack Cash 40, 000 Common stock (5, 000 x $5) 25, 000 Paid-in capital in excess of stated value 15, 000 Prepare the entry assuming there is no stated value? Cash 40, 000 Common stock 40, 000

Accounting for Common Stock Issues Issuing Common Stock for Services or Noncash Assets Corporations also may issue stock for: Services (attorneys or consultants). Noncash assets (land, buildings, and equipment). Cost is either the fair market value of the consideration given up, or the fair market value of the consideration received, whichever is more clearly determinable.

Accounting for Common Stock Issues Practice: Do Problem 11 -1 B See solution at the end of the Powerpoint slides, part 3

End of Part 2 Go on to Part 3