Intermediate Accounting (New Mexico State Universi

Chapter15:Stockholders’EquityIntermediateAccounting,11thed.Kieso,Weygandt,andWarfieldPreparedbyJepRobertsonandRenaeClarkNewMexicoStateUniversity1.Discussthecharacteristicsofthecorporateformoforganization.2.Explainthekeycomponentsofstockholders’equity.3.Explaintheaccountingproceduresforissuingsharesofstock.4.Explaintheaccountingfortreasurystock.Afterstudyingthischapter,youshouldbeableto:Chapter15:Stockholders’Equity5.Explaintheaccountingforandreportingofpreferredstock.6.Describethepoliciesusedindistributingdividends.7.Identifythevariousformsofdividenddistributions.8.Explaintheaccountingforsmallandlargestockdividends,andforstocksplits.9.Indicatehowstockholders’equityispresentedandanalyzed.Chapter15:Stockholders’EquityThestockholdershavetherightto:•shareproportionatelyinprofitsandlosses•shareproportionatelyinmanagement•shareproportionatelyincorporateassetsuponliquidation•shareproportionatelyinanynewissuesofstockofthesameclass(preemptiveright)TheRightsofStockholdersNormallythreecategories:1.Capitalstock2.Additional-paidincapital3.RetainedearningsThefirsttworepresentcontributedcapital,whereasretainedearningsisearnedcapital.ComponentsofStockholders’EquityEQUITYEarnedcapital(Ret.Earn).ContributedcapitalLess:T.StockatCOSTLess:T.stockatPARRestrictUnrestritctPaid-incapitalAdditionalPaid-incommonpreferredcommonpreferredComponentsofEquityAccountsmustbemaintainedfor:Parvaluestockpreferredstockorcommonstockpaid-incapitalinexcessofpardiscountonstock(ifpresent)Noparstockpreferredstockorcommonstockpaid-incapitalinexcessofparAccountingforShareIssuesParvaluehasnoeconomicsignificance.•Whenparvaluestockisissuedforcash:Cash(proceeds)CommonStock(#ofSh.XParvalue)PaidinCapitalinExcessofPar(balance)Manystatespermitno-parstock.•Whenno-parstockisissuedforcash:Cash(proceeds)CommonStock(proceeds)StockIssuanceBothCOMMONandPREFERREDstocksareissuedforcashinasingletransaction.Thetwomethodsofallocationavailableare:•ProportionalMethod[relativefairmarketvalues]•IncrementalMethodWhenstockisissuedforservicesorpropertyotherthancash,thepropertyorservicesarerecordedat•eitherthefairmarketvalueofassetsreceivedor•thefairvalueofthenon-cashconsiderationreceived,whicheverismoreclearlydeterminableStockIssuedinLump-SumSalesOutstandingstock,purchasedbythecorporation,isknownastreasurystock.Thereasonsastowhycorporationsbuybacktheiroutstandingstockmayinclude:1.toincreaseearningspershareandreturnonequity2.toprovidetaxefficientdistributionsofexcesscashtoshareholders3.toprovidestockforemployeestockcompensationcontracts4.tothwarttakeoverattempts5.tocreateorimprovethemarketforthestockTreasuryStockCOSTMETHOD:•TreasurystockisrecordedatpurchaseCOST•Treasurystockisacontra-stockholders’account.PARVALUEMETHOD:•TreasurystockisrecordedatPARvalue•ItispresentedasadeductionfromcapitalstockRecordingTreasuryStock:Methods•Debittreasurystockforpurchasecost,andcredittreasurystockatcostifsharesreissued.•Theinitialissuepriceofstockdoesnotaffectsubsequenttreasurystocktransactions.•Nogainorlosscanberecognizedwhentreasurysharesarere-issued.TreasuryStock:CostMethodGiven:•Issued:1,000commonshares;Par,$100;issuedat$110.•Reacquired:100sharesat$112each.•10shareswerereissuedat112(atcost).•10shareswerereissuedat130(abovecost).•10shareswerereissuedat$98(belowcost).•10sharesreissuedat$105(belowcost).Showjournalentriesforthesetransactions.CostMethod:ExampleIssued:(par,$100);1,000sh.at$110.Cash110,000Commonstock100,000AdditionalPIC:Commonstock10,[e-mail]1,120Treasurystock1,1203Reacquired:100at$112.Treasurystock11,200Cash11,2002CostMethod:Example10sharesreissuedat130.Cash1,300Treasurystock1,120AdditionalPIC:Treasurystock180410sharesreissuedat$98.Cash980AdditionalPIC:(T/stock)140Treasurystock1,1205CostMethod:ExampleCash1,050AddlPIC(T/stock)40Retainedearnings30Treasurystock1120Reissued10treasurysharesat$105(cost=$112)6UseAdditionalPIC(Treasurystock)firsttoabsorbanyshortfall.Then,useretainedearnings.CostMethod:Example•Treasurystockisrecordedatparwhenboughtorreissued.•Anyshortfallsbetweentheparvalueandthereissuepriceoftreasurystockisborne:firstbyPaid-InandthenbyRetainedEarningsParValueMethod:MainPoints•RepurchaseofstockdoesNOTmeanretirement•Retiredstockbecomesauthorized/unissuedstock•ActiveretirementiseffectedbyapplicationtotheState•ConstructiveretirementiseffectedbyBoardResolutionRetirementofTreasuryStockPreferredstockhascertainpreferencesorfeaturesnotpossessedbycommonstock.Thesefeaturesare:•preferenceastodividends•preferenceastoassetsintheeventofliquidation•maybeconvertibilityintocommonstockattheoptionofthestockholders•maybecallableattheoptionoftheissuer•absenceofvotingrightsPreferredStock•Cumulativepreferredstock•Participatingpreferredstock:•FullyParticipating•PartiallyParticipating•Convertiblepreferredstock•Callablepreferredstock•RedeemablepreferredstockPreferredStock:Features•Dividendscomefrompresentandpastearningsinmajorityofstates.•Dividendscomealsofromappreciationofassetsinsomestates.•Dividendsrestrictionsarebasedonliquidityandsolvencytests.LegalityofDividends1.Cashdividen