Chapter 11 Reporting and Interpreting Owners Equity Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limited liability separate legal entity o Own assets o Incur liabilities o Sue and be sued o Enter into contracts Authorized Issued and Outstanding Shares Authorized shares maximum number of shares a company can see Issued shares that are sold for the public Outstanding shares are issued shares that are owned by stockholders Treasury shares are issued shares that have been reacquired by the corporation Authorized shares issued shares unissued shares Issues shares Outstanding Treasury Stock EPS Net Income preferred stock Average Number of Shares Outstanding for the Period a measure of the company s ability to produce income for each common share outstanding Common stock par value Nominal Value Capital in excess of par Legal Capital Par Value Market Value Stockholder s Equity Contributed Capital Retained Earnings Stock Issued for Employee Compensation Stock options allow employees to purchase stock from the corporation at a predetermined fixed price Initial Sale of Stock Kroger issued 100 000 shares of 1 par value common stock for 20 per share Repurchase of Stock Treasury Stock A corporation records treasury stock at cost Treasury stock has no voting or dividend rights Treasury stock is not an asset It is a contra equity account Kroger reacquired 100 000 shares of its common stock at 20 per share Reissuance of Treasury Stock Kroger reissued 10 000 shares of the treasury stock at 30 per share Dividends on Common Stock Declared by board of directors Creates liability at declaration Not legally required Requires sufficient Retained Earnings and Cash Declaration date Board of directors declares the dividend Record a liability Date GENERAL JOURNAL Description Debit Credit Retained earnings SE XXX Dividends payable L XXX 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 GENERAL JOURNAL Description Debit Credit Dividends payable L XXX Cash A XXX Dividend Dividends Per Share Yield Ratio Market Price Per Share This ratio is often used to compare the dividend paying performance of different investment alternatives Stock Dividends SMALL Stock dividend 20 25 Record at current market value of stock LARGE Stock dividend 20 25 Record at par value of stock Assume The Kroger Co issued a large stock dividend The company issued 400 000 000 shares of its 1 par value stock The journal entry to record the stock dividend is The stock dividend did not change total stockholders equity It changed only the balances of two accounts within stockholders equity Stock Splits change the par value per share but the total par value is unchanged Assume that a corporation had 3 000 shares of 2 par value common stock outstanding before a 2 for 1 stock split Total dividend declared Preferred stock cumulative Dividends in arrears 100 par 3 5 000 shares 100 par 3 5 000 shares Current Year 15 000 15 000 Preferred Stock Preference over common stock Usually has no voting rights Usually has a fixed dividend rate Remainder Preferred stock noncumulative Current Year Remainder Common stock Current Year 11 000 Remainder 50 par 6 3 000 shares Remainder Dividends on Preferred Stock Current Dividend Preference The current preferred dividends must be paid before paying any dividends to common stock stockholders Cumulative Dividend Preference Any unpaid dividends from previous years dividends in arrears must be paid before common dividends are paid If the preferred stock is noncumulative any dividends not declared in previous years are lost permanently 50 000 30 000 20 000 9 000 11 000 11 000 0
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