Chapter 10 Powerpoint

Learning Objective
1. Explain the features of a corporation
10-1
Copyright 2015 Pearson Education Inc. All rights reserved.
FEATURES OF A CORPORATION
Advantages
1. Can raise more capital
than a proprietorship or
partnership can
1. Separation of
ownership and
management
2. Continuous life
2. Double taxation of
distributed profits
3. Ease of transferring
ownership
4. Limited liability of
stockholders
10-2
Disadvantages
3. Government regulation
Exhibit 10-1 | Advantages
and Disadvantages of a
Corporation
LO 1
Organizing a Corporation
Corporate organizers (incorporators) obtain a charter

from the state
10-3
Charter includes authorization to issue shares of

stock
Incorporators:
Pay fees
Sign the charter
File documents with the state
Agree to set of bylaws
LO 1
Exhibit 10-2 |
Authority
Structure of a
Corporation
10-4
Stockholders Rights
Right to voting on matters that come
before the stockholders
Vote
Dividends
Right to receive a proportionate part of

any dividend
Liquidation
Right to receive a proportionate share of

any assets remaining after corporation
pays its liabilities in liquidation
Preemption
Right to maintain ones proportionate

ownership in the corporation
LO 1
Stockholders Equity
Paid-in Capital
Also called contributed

capital
Amount of equity
stockholders have
contributed
10-6
Retained Earnings
Increased by earnings
through profitable
operations
Reduced by dividends
declared
Includes stock accounts

and any additional paidin capital
LO 1
Stockholders Equity
10-7
Exhibit 10-3 | The Home

Depot, Inc. Stock Certificate
LO 1
Classes of Stock
Common
Basic form of stock
Has four basic rights
Receive dividends first
Shareholders benefit
most if corporation
succeeds
Receive assets first in

liquidation
10-8
Preferred
Advantages
Shareholders earn a
fixed dividend
Few corporations issue
Take more risk
LO 1
Exhibit 10-4 |
Percentage of
Corporations Issuing
Preferred Stock
Classes
of Stock
Exhibit 10-5 | Comparison of

Common Stock, Preferred
Stock, and Long-Term Debt
10-9
LO 1
Par Value and No-Par
Arbitrary amount assigned to share of stock
Usually set low to avoid legal issues
No-par stock
10-10
Most states do not allow companies to issue stock

below par
May have a stated value
LO 1
Learning Objective
2. Account for the issuance of stock
10-11
ACCOUNT FOR THE ISSUANCE OF STOCK

Common Stock
Illustration: Home Depot needs to raise $100 million through
issuance of stock. Suppose Home Depots common stock had
carried a par value equal to its issuance price of $10 per share. The
entry for issuance of 10 million shares of stock at par would be
Account
Jan 8
Cash (10,000,000 x $10)
Debit
Credit
100,000,000
Common Stock
100,000,000
To issue common stock
10-12
LO 2
Common Stock Above Par

Illustration: Home Depot needs to raise $100 million through
issuance of stock. Suppose Home Depots common stock had a
par value of $0.05. The entry for issuance of 10 million shares of
stock at $10 per share would be:
Account
Jan 8
Cash (10,000,000 x $10)
Debit
Credit
100,000,000
Common Stock
Paid-in Capital
500,000
99,500,000
Common stock = 10,000,000 $0.05 = $500,000

10-13
LO 2
Common Stock Above Par

Illustration: Stockholders Equity section of The Home Depot,
Inc.s Balance Sheet might appear as follows (figures assumed):
Stockholders Equity
Common stock, $.05 par, 10 billion shares
authorized, 10 million shares issued and outstanding
500,000
99,500,000
Paid-in Capital
Total paid-in capital
Retained earnings
Total stockholders equity
10-14
100,000,000
500,000,000
$600,000,000
LO 2
No-Par Common Stock

Illustration: Apple, Inc., issues 939 million shares of no-par
common stock for $16,422 million. Apples stock issuance entry is
(in millions):
Account
Aug 14 Cash
Debit
Credit
16,422
Common Stock
16,422
To issue no-par common stock
10-15
LO 2
No-Par Common Stock

Illustration: Apple, Inc., reports stockholders equity on its balance
sheet as follows (in millions):
Stockholders Equity
(in millions)
Common stock, no par, 1,800 shares
authorized, 939 shares issued and outstanding
Retained earnings
Accumulated other comprehensive income
10-16
$ 16,422
101,289
499
$ 118,210
LO 2
Common Stock Issued for Assets Other

Than Cash
Illustration: On November 12, Kahn Corporation issued 15,000
shares of its $1 par common stock for equipment with a market
value of $4,000 and a building with a market value of $120,000.
Account
Nov 12 Equipment
Building
Common Stock (15,000 x $1)
Paid-in Capital in Excess of Par-Common
Debit
Credit
4,000
120,000
15,000
109,000
($124,000 - $15,000)
10-17

LO 2
Common Stock Issued for Services

Illustration: Kahn Corporation engages an attorney. The attorney
bills the corporation $25,000 for services and agrees to accept
2,500 shares of $1 par common stock, rather than cash, in
settlement of the fee. The fair market value of the stock is $10 per
share. The journal entry to record the transaction is
Account
Legal Expense
Common Stock (2,500 x $1)
Debit
Credit
25,000
2,500
22,500
($25,000 - $2,500)
10-18
LO 2
Preferred Stock
Follows same pattern as accounting for common

stock
May have separate accounts for paid-in capital in

excess of par for preferred and common
Can be issued with conversion feature
10-19
Allows preferred shareholders to exchange preferred

shares for common
LO 2
Preferred Stock
Illustration: Convertible preferred stock $1 par, 50,000 shares
issued at par value
Account
2014
Cash
Debit
Credit
50,000
Convertible Preferred Stock
50,000
Issue convertible preferred stock
10-20
LO 2
Preferred Stock
Illustration: Converted preferred stock to common stock at the
rate of 6.25 to 1 (8,000 shares of $1 par-value common stock
issued in exchange for 50,000 shares of preferred stock).
Account
2014
Convertible Preferred Stock

Common Stock
Debit
Credit
50,000
8,000
42,000
Convert convertible preferred stock into

common stock
10-21
LO 2
Authorized, Issued, and Outstanding Stock

Authorized
Maximum number of shares the

company can issue under its charter
Issued
Number of shares the company has

issued to its stockholders
Outstanding
10-22
Number of shares that stockholders

own (number of shares in the hands of
stockholders)
LO 2
Learning Objective
3. Show how treasury stock affects a company
10-23
SHOW HOW TREASURY STOCK AFFECTS A

COMPANY
10-24
Issued shares reacquired by the company
Reasons:
Make shares available for employee stock purchase

plans
Plan to buy low and sell high
Avoid takeover
Increase earnings per share
Use in share repurchase program
LO 3
How Is Treasury Stock Recorded?
Recorded at cost
Not par value
Classified as a contra-stockholders equity account
Debit balance
Illustration: The following entry records the repurchase of 74

million shares for $4 billion.
Account
2012
Treasury Stock
Debit
4,000,000,000
Cash
10-25
Credit
4,000,000,000
LO 3
How Is Treasury Stock Recorded?

The Home Depot, Inc.
Stockholders Equity
January 29, 2012
(in millions)
Common stock
87
Paid-in Capital
6,966
Retained earnings
Treasury stock (196,000,000 shares)
10-26
17,246
293
(6,694)
$ 17,898
LO 3
Retirement of Treasury Stock
10-27
Cancel stock certificates
Stock cannot be reissued
Once shares are repurchased, neither total assets

nor total liabilities are affected
Memorandum entry made decreasing number of

shares issued in stockholders equity
LO 3
Resale of Treasury Stock
10-28
Increases assets and equity
No gain or loss on transactions involving treasury

stock
Amounts received on resale in excess of amounts

originally paid for treasury stock are recorded as
Paid-in Capital from Treasury Stock Transaction
Amounts received from resale of treasury stock less

than amounts originally paid are debited to Paid-in
Capital from Treasury Stock Transactions to extent of
that balance, and after that, to Retained Earnings
LO 3
Resale of Treasury Stock

Illustration: On July 22, 2014, Home Depot resold a million shares
of treasury stock for $55 per share. Assuming that the average cost
of treasury shares is $54.05, the journal entry to record the resale
of treasury shares would have been as follows:
2014
Account
Jul 22 Cash
Debit
Credit
55,000,000
Treasury Stock
Paid-in Capital from Treasury Stock
Transactions
54,050,000
950,000
Sold treasury stock
Cost of shares sold = 1,000,000 shares $54.05 = $54,050,000

10-29
LO 3
Illustration
Illustration: At December 31, 2014, Hartnett Corporation reported the
stockholders equity as follows (in millions):
Common stock $1.50 par value per share,
2,400 million shares issued
$ 3,600
Paid-in capital in excess of par value--Common
7,200
Retained earnings
1,490
Treasury stock, at cost

(85)
$12,205
Hartnetts 2015 transactions included

a. Issuance of 16 million shares of common stock for $10.00 per share
b. Purchase of 6 million shares of treasury stock for $100 million
c. Sold 3 million of the treasury shares purchased in part b for $70
million
10-30
LO 3
Illustration
Illustration: Journalize the transaction to record the issuance of 16
million shares of common stock for $10.00 per share.
Account
Cash (16 million x $10)
10-31
Debit
Credit
160,000,000
Common stock (16 million x $1.50)
24,000,000
Paid-in Capital in Excess of Par

Common
136,000,000
Advance slide in presentation mode to reveal answers

LO 3
Illustration
Illustration: Journalize the transactions to record the purchase of 6
million shares of treasury stock for $100 million and the sale of 3 million
of the treasury shares purchased in part b for $70 million.
Account
Treasury stock
Debit
Credit
100,000,000
Cash
100,000,000
Cash
70,000,000
Treasury stock (3 million x $16.67)
50,000,000
Paid-in Capital from Treasury Stock
20,000,000
Treasury stock cost per share = $100 million 6 million shares = $16.67
10-32

LO 3
Issuing Stock for Employee Compensation

Illustration: Home Depot issued 21 million new (not treasury)
shares in conjunction with an employee stock compensation plan.
The entry the company made was
Account
Compensation Expense
Common Stock
Paid-in Capital
Debit
Credit
679,000,000
1,000,000
678,000,000
Record stock-based compensation
10-33
LO 3
Stockholders Equity on Balance Sheet

The Home Depot, Inc.
Stockholders Equity
February 3, 2013
(in millions)
Common stock
88
Paid-in Capital
7,948
Retained earnings
Treasury stock (at cost) 270 million shares
10-34
20,038
397
(10,694)
$ 17,777
LO 3
Learning Objective
4. Account for retained earnings, dividends, and
splits
10-35
ACCOUNT FOR RETAINED EARNINGS,

DIVIDENDS, AND SPLITS
Retained Earnings
10-36
Net income
Less net losses
Less declared dividends
Accumulated over
corporations lifetime
Credit
balance
Lifetime
earnings
Debit
balance
Lifetime
earnings
>
Lifetime losses
& dividends
<
Lifetime losses
& dividends
LO 4
Should the Company Declare and Pay

Cash Dividends?
Dividends
10-37
Distribution by a corporation to its stockholders
Usually based on earnings
Usually take one of three forms:
Cash
Stock
Noncash assets
LO 4
Cash Dividends
10-38
Company must have both:
Enough Retained Earnings to declare the dividend
Enough Cash to pay the dividend
Board of directors has authority to declare a dividend
Company not obligated to pay dividend until declared
Three relevant dates:
Declaration date
Date of record (no entry)
Payment date
LO 4
Cash Dividends
Declaration Date
Illustration: On June 19, the board of directors declares a $50,000

cash dividend. The company records the dividend as follows:
Account
Jun 19 Retained Earnings
Dividends Payable
Debit
Credit
50,000
50,000
Declared a cash dividend
10-39
LO 4
Cash Dividends
Payment Date
Illustration: On July 10, the company paid the dividend declared

on June 19. The entry to record the payment is as follows:
Account
Jul 10
Dividends Payable
Cash
Debit
Credit
50,000
50,000
Paid cash dividend
10-40
LO 4
Analyzing the Stockholders Equity

Accounts
Retained Earnings
Dividends
1,743
17,246
Beg balance
4,535
Net income
20,038
10-41
End. balance
LO 4
Illustration
Illustration: Hartnett Corporation reported stockholders equity as
follows (in millions):
Common stock $1.50 par value per share,
2,416 million shares issued
$ 3,624
Paid-in capital in excess of par value--Common
7,336
Retained earnings
1,490
Treasury stock, at cost

Paid-in capital from treasury stock
(135)
80
$12,315
Journalize the transactions to record the declaration and payment of

cash dividends of $32 million.
10-42
LO 4
Illustration
Illustration: Journalize the transactions to record the declaration and
payment of cash dividends of $32 million.
Account
Retained Earnings
Debit
32,000,000
Dividends Payable
Dividends Payable
32,000,000
32,000,000
Cash
10-43
Credit
32,000,000

LO 4
Dividends on Preferred Stock
Paid dividends before common stockholders
Stated as a percent of par value or a dollar amount per

share
May be cumulative
Passed dividends are owed to preferred shareholders
10-44
In arrears
Almost debt
LO 4
Dividends on Preferred Stock

Illustration: Assume that the preferred stock of Avant Garde, Inc., is
cumulative. Avant Garde passed the preferred dividend of $150,000 in
2013. Before paying dividends to common in 2014, Avant Garde must
first pay preferred dividends of $150,000 for both 2013 and 2014a
total of $300,000. On September 6, 2014, Avant Garde declares a
$500,000 dividend. The entry to record the declaration is as follows:
Account
Sep 6
Retained Earnings
Debit
Credit
500,000
Dividends Payable, Preferred
300,000
Dividends Payable, Common
200,000
* $150,000 x 2 = $300,000
10-45
LO 4
Illustration
Illustration: Arizona Manufacturing, Inc., reported the following at
December 31, 2014 and December 31, 2015:
Stockholders Equity
Preferred stock, cumulative, $1.00 par, 6%, 90,000 shares
issued
Common stock, $0.30 par, 9,130,000 shares issued
$ 90,000
1,490
Arizona Manufacturing has paid all preferred dividends through 2011.

Requirements
1. Compute the total amounts of dividends to both preferred and
common for 2014 and 2015 if total dividends are $90,000 in 2014
and $270,000 in 2015.
10-46
LO 4
Illustration
Illustration: Total dividends are $90,000 in 2014 and $270,000 in 2015.
Preferred dividend = $1.00 x 6% x 90,000 shares = $5,400
Preferred
Common
2014 Dividends = $90,000

Dividends in arrears (2 years x $5,400)
Current year
$10,800
5,400
16,200
Remainder to common
$73,800
2015 Dividends = $270,000

Current year
10-47
5,400
Advance
slide in presentation mode to reveal answers 264,600
Remainder
to common
LO 4
Stock Dividends
Proportional distribution of stock to shareholders
Increase stock account and decrease Retained

Earnings
10-48
Total equity is unchanged
Reasons stock dividends are distributed
Continue dividends, but conserve cash
Reduce market price of shares
Size of stock dividend
25% or less, recorded at market value
Greater than 25%, recorded at par value

LO 4
Stock Splits
10-49
Increase in shares with a proportionate reduction in par

value
Decreases market price of shares
No accounts affected
LO 4
Summary of the Effects of Stock

Transactions on Assets, Liabilities, and
Stockholders Equity
Exhibit 10-7 | Effects of Stock Transactions
10-50
LO 4
Learning Objective
5. Use stock values in decision making
10-51
USE STOCK VALUES IN DECISION MAKING
Market, Redemption, Liquidation, and

Book Value
Stocks market value, or market capitalization
10-52
Market price multiplied by number of shares

outstanding
Overall market assessment of the worth of a share of

common stock is reflected in the price-earnings ratio
LO 5
Market, Redemption, Liquidation, and

Book Value
10-53
Redeemable preferred stock requires company to

redeem stock at a set price
Liquidation value is amount that a company must pay

a preferred stockholder in the event the company goes
out of business
Book value per share is amount of common

stockholders equity on companys books for each share
of its stock
LO 5
ROE: Relating Profitability to

Stockholder Investment
DuPont Analysis provides a way to analyze various elements
of profitability, as shown in the following diagram:
* minus preferred dividends
10-54
LO 5
Learning Objective
6. Report stockholders equity transactions in the
financial statements
10-55
REPORT STOCKHOLDERS EQUITY

TRANSACTIONS
Statement of Cash Flows

Financing transactions that affect both cash and equity fall
into three main categories:
Issuance of stock
Treasury stock
Dividends
10-56
LO 6
Exhibit
10-9
10-57
A Detailed Stockholders Equity Section

Real-World Format
Stockholders Equity
Preferred stock, 8%, $10 par, 30,000 shares authorized,
issued, and outstanding
$ 330,000
Common stock, $1 par, 100,000 shares authorized,

60,000 shares issued, 58,600 shares outstanding
Additional paid-in capital
2,150,000
Retained earnings
1,500,000
Less treasury stock, common (1,400 shares at cost)
(40,000)
200,000
10-58
60,000
$4,200,000
LO 6
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Learning Objective

1. Explain the features of a corporation

Copyright 2015 Pearson Education Inc. All rights reserved.

Copyright 2015 Pearson Education Inc. All rights reserved.

Corporate organizers (incorporators) obtain a charter

Charter includes authorization to issue shares of

Sign the charter

File documents with the state

Agree to set of bylaws

Copyright 2015 Pearson Education Inc. All rights reserved.

Right to receive a proportionate part of

Right to receive a proportionate share of

Right to maintain ones proportionate

Copyright 2015 Pearson Education Inc. All rights reserved.

Also called contributed

Includes stock accounts

Copyright 2015 Pearson Education Inc. All rights reserved.

Copyright 2015 Pearson Education Inc. All rights reserved.

Exhibit 10-3 | The Home

Basic form of stock

Has four basic rights

Receive dividends first

Receive assets first in

Few corporations issue

Take more risk

Copyright 2015 Pearson Education Inc. All rights reserved.

Exhibit 10-5 | Comparison of

Copyright 2015 Pearson Education Inc. All rights reserved.

Par Value and No-Par

Arbitrary amount assigned to share of stock

Usually set low to avoid legal issues

Most states do not allow companies to issue stock

May have a stated value

Copyright 2015 Pearson Education Inc. All rights reserved.

Copyright 2015 Pearson Education Inc. All rights reserved.

ACCOUNT FOR THE ISSUANCE OF STOCK

Cash (10,000,000 x $10)

To issue common stock

Copyright 2015 Pearson Education Inc. All rights reserved.

Common Stock Above Par

Cash (10,000,000 x $10)

To issue common stock

Common stock = 10,000,000 $0.05 = $500,000

Copyright 2015 Pearson Education Inc. All rights reserved.

Common Stock Above Par

Copyright 2015 Pearson Education Inc. All rights reserved.

No-Par Common Stock

To issue no-par common stock

Copyright 2015 Pearson Education Inc. All rights reserved.

No-Par Common Stock

Common Stock Issued for Assets Other

To issue common stock

Common Stock Issued for Services

Copyright 2015 Pearson Education Inc. All rights reserved.

Follows same pattern as accounting for common

May have separate accounts for paid-in capital in

Can be issued with conversion feature

Allows preferred shareholders to exchange preferred

Copyright 2015 Pearson Education Inc. All rights reserved.

Convertible Preferred Stock

Issue convertible preferred stock

Copyright 2015 Pearson Education Inc. All rights reserved.

Convertible Preferred Stock

Convert convertible preferred stock into