6

REPORTING
AND ANALYZING
STOCKHOLDERS’
EQUITY

11-1
 Learning
Learning Objectives
Objectives
After studying this chapter, you should be able to:

1. Record the issuance of common stock.

2. Explain the accounting for the purchase of treasury stock.

3. Differentiate preferred stock from common stock.

4. Prepare the entries for cash dividends

5. Prepare a comprehensive stockholders’ equity section.
6. Prepare the statement of changes in stockholder’s equity

11-2
 Stockholders Rights

1. Vote in election of board of

directors and on actions that
require stockholder approval.

2. Share the corporate earnings

through receipt of dividends.

11-3
 Stockholders Rights

3. Keep the same percentage ownership when new shares

of stock are issued (preemptive right).

11-4
 Stockholders Rights

4. Share in assets upon liquidation in proportion to their

holdings. This is called a residual claim.

11-5
 Stock
Stock Issue
Issue Considerations
Considerations
Prenumbered Shares

Name of corporation

Stockholder’s
name

Signature of
corporate official

11-6
 Stock
Stock Issue
Issue Considerations
Considerations

Stocks’ Par Value

 Par value determines the legal capital per share that a
company must retain in the business for the protection of
corporate creditors.

11-7
 Owners' equity is the residual interest in assets that
remains after subtracting an entity's liabilities.

Owners' equity includes mainly contributed capital,

preferred stock, treasury stock, retained earnings.

Contributed capital (also known as issued capital or

common stock) is the amount contributed by the
common shareholders.

The par value of common stock is a stated or legal value.

Par value has no relationship to fair value. Some
common shares are even issued without a par value.
When par value exists, it is reported separately in
stockholders' equity.
11-8
  Also disclosed is the number of common shares
that are authorized, issued, and outstanding.
Authorized shares are the number of shares that
may be sold under the firm's articles of
incorporation.

 Issued shares are the number of shares that have

actually been sold to shareholders. The number of
outstanding shares is equal to the issued shares
less shares that have been reacquired by the firm
(i.e., treasury stock).
11-9
  Preferred stock has certain rights and
privileges not conferred by common stock.
For example, preferred shareholders are paid
dividends at a specified rate, usually
expressed as a percentage of par value, and
have priority over the claims of the common
shareholders in the event of liquidation.

11-10
  Preferred stock can be classified as debt or
equity, depending on the terms. For example,
perpetual preferred stock that is non-
redeemable is considered equity. However,
preferred stock that calls for mandatory
redemption in fixed amounts is considered a
financial liability.

11-11
  Retained earnings are the undistributed
earnings (net income) of the firm since
inception, the cumulative earnings that have
not been paid out to shareholders as
dividends.

11-12
 Stock
Stock Issue
Issue Considerations
Considerations
Accounting for Issues of Common Stock
Illustration: Assume that during 2015 (1st year of activity) Hydro-
Slide, Inc. issued 17,000 shares of $1 par value common stock.
Prepare Hydro-Slide’s journal entry if (a) 15,000 shares are issued
for $1 per share just before starting operations, and (b) 2,000
shares are issued later for $1.5 per share.

a) Cash 15,000
Common stock (15,000 x $1) 15,000

b) Cash 3,000
Common stock (2,000 x $1) 2,000
Additional paid in capital- Common stock 1,000
11-13
  Prepare the statement of changes in shareholders’ equity for 2015
assuming that : net income = 3000 ; dividend = 500
Paid in capital Retained Treasury Total
earnings stocks
Common Preferred Addtional Addtional Addtional
stock stock paid in paid in paid in
capital capital capital
CS PS TS

Beginning Balance 0 0 0 0 0 0 0 0
Common stock 17000 17000
Preferred stock
Additional paid in capital- 1000 1000
Common stock
Additional paid in capital-
Preferred stock
Treasury stocks/Loss on
TS
Additional paid in capital-
Treasury stocks
Net income 3000 3000
Preferred dividend
Common Dividend (500) (500)
11-14
Ending balance 17000 0 1000 0 0 2500 0 20500
 Stock
Stock Issue
Issue Considerations
Considerations

Prepare Stockholders’ equity section of the balance-sheet.

Stockholders’ equity
Paid in capital:
Common stock 17,000
Additional Paid in capital – common stock 1,000
Total paid in capital 18,000
Retained earnings 2,500
Total stockholders’ equity 20,500
Additional Paid in capital – common stock

11-15
 Stock
Stock Issue
Issue Considerations
Considerations

Review Question
ABC Corp. issues 1,000 shares of $10 par value common stock
at $12 per share. When the transaction is recorded, credits are
made to:
a. Common Stock $10,000 and Paid-in Capital in Excess of
Stated Value $2,000.
b. Common Stock $12,000.
c. Common Stock $10,000 and Additional Paid-in Capital –
Common stock (in Excess of Par Value) $2,000.
d. Common Stock $10,000 and Retained Earnings $2,000.

11-16
 Accounting
Accounting for
for Stock
Stock repurchase
repurchase

NB: Corporations purchase their outstanding stock:

1. To reissue shares to officers and employees under bonus
and stock compensation plans.
2. To increase trading of the company’s stock in the securities
market.
3. To have additional shares available for use in acquiring
other companies.
4. To increase earnings per share.

Another infrequent reason is to eliminate hostile shareholders.

11-17
 Accounting
Accounting for
for Stock
Stock repurchase
repurchase

Accounting process:

 Debit Treasury Stock for the price paid and credit cash.

 Treasury stock is a contra stockholders’ equity account,

not an asset.

 Treasury Stock decreases by the same amount when the

company later sells the shares.

11-18
 Accounting
Accounting for
for Stock
Stock repurchase
repurchase

Assume now that before december 31, 2015, Hydro-Slide,

Inc. repurchased 1500 shares of its stock at $2.5 per share.
(the issue price of these shares was $1.5)

Treasury stock (1,500 x $2.5) 3,750

Cash 3,750
11-19
 Reprepare the statement of changes in shareholders’ equity for 2015

Paid in capital Retained Treasury Total

earnings stocks
Common Preferre Addtiona Addtiona Addtiona
stock d stock l paid in l paid in l paid in
capital capital capital
CS PS TS

Beginning Balance 0 0 0 0 0 0 0 0
Common stock 17000 17000
Preferred stock
Additional paid in capital- 1000 1000
Common stock
Additional paid in capital-
Preferred stock
Treasury stocks/Loss on (3750) (3750)
TS
Additional paid in capital-
Treasury stocks
Net income 3000 3000
Preferred dividend
Common Dividend (500) (500)
11-20
Ending balance 17000 0 1000 0 0 2500 (3750) 16750
 Reprepare Stockholders’ equity section of the balance-sheet.

Stockholders’ equity
Paid in capital
Common stock 17,000
Additional Paid in capital – common stock 1,000
Total paid in capital 18,000
Retained earnings 2,500
Total paid in capital and retained earnings 20,500
Additional Paid in capital – common stock
Less: Treasury stocks (3750)
Total stockholders’ equity 16750

11-21
 Treasury stock is stock that has been reacquired by
the issuing firm but not yet retired. Treasury stock
reduces stockholders' equity. It does not represent
an investment in the firm.

Treasury stock has no voting rights and does not

receive dividends.

11-22
 Disposal of Treasury Shares

Disposal of Treasury Shares

1. Sale of Treasury Shares
 Above Cost
 Below Cost

Both increase total assets and equity.

2. Retirement of Treasury Shares

Alternatively, the board may elect to retire the shares. When a corporation
retires treasury stock, it should book a loss or gain to shareholder’s equity
based on the purchase price and par value. Unlike the other transactions, the
retirement entry will depend on the original issue price.
11-23
 1. Sale of Treasury Shares Above
Cost

Illustration: Assume now that, before the end of 2015, Hydro-

Slide, Inc. sells for $4 per share 500 shares of its treasury shares,
previously acquired at $2.5 per share.

July 1 Cash 2,000

Treasury shares (500 x $2.5) 1250
Additional paid in capital-treasury stock 750

11-24
 Reprepare the statement of changes in shareholders’ equity for 2015

Paid in capital Retained Treasury Total

earnings stocks
Common Preferre Addtiona Addtiona Addtiona
stock d stock l paid in l paid in l paid in
capital capital capital
CS PS TS

Beginning Balance 0 0 0 0 0 0 0 0
Common stock 17000 17000
Preferred stock
Additional paid in capital- 1000 1000
Common stock
Additional paid in capital-
Preferred stock
Treasury stocks/Loss on (2500) (2500)
TS
Additional paid in capital- 750 750
Treasury stocks
Net income 3000 3000
Preferred dividend
Common Dividend (500) (500)
11-25
Ending balance 17000 0 1000 0 750 2500 (2500) 18750
 Reprepare Stockholders’ equity section of the balance-sheet for
2015

Stockholders’ equity
Paid in capital
Common stock 17,000
Additional Paid in capital – common stock 1,000
Additional Paid in capital – Treasury stock 750
Total paid in capital 18,750
Retained earnings Additional Paid in capital – common stock 2,500
Total paid in capital and retained earnings 21,250
Less: Treasury stocks (2,500)
Total stockholders’ equity 18,750

11-26
 1. Sale of Treasury Shares Below
Cost

Illustration: Assume now that, before the end of 2015, Hydro-Slide,

Inc. sells additional 300 treasury shares at $1.5 per share.

Cash 450
Additional paid in capital-treasury stock 300
Treasury shares (300 x $2.5) 750

Treasury shares Additional paid in capital – Treasury stock

3750 1250 300 750

750 Balance: 450
Balance: 1750

11-27
 Reprepare the statement of changes in shareholders’ equity for 2015

Paid in capital Retained Treasury Total

earnings stocks
Common Preferre Addtiona Addtiona Addtiona
stock d stock l paid in l paid in l paid in
capital capital capital
CS PS TS

Beginning Balance 0 0 0 0 0 0 0 0
Common stock 17000 17000
Preferred stock
Additional paid in capital- 1000 1000
Common stock
Additional paid in capital-
Preferred stock
Treasury stocks/Loss on (1750) (1750)
TS
Additional paid in capital- 450 450
Treasury stocks
Net income 3000 3000
Preferred Dividend
Common Dividend (500) (500)
11-28
Ending balance 17000 0 1000 0 450 2500 (1750) 19200
 Reprepare Stockholders’ equity section of the balance-sheet for
2015

Stockholders’ equity
Paid in capital
Common stock 17,000
Additional Paid in capital – common stock 1,000
Additional Paid in capital – Treasury stock 450
Total paid in capital 18,450
Retained earnings Additional Paid in capital – common stock 2,500
Total paid in capital and retained earnings 20,950
Less: Treasury stocks (1,750)
Total stockholders’ equity 19,200

11-29
 1. Sale of Treasury Shares Below
Cost

Illustration: Assume now that, before the end of 2015, Hydro-

Slide, Inc. sells the remaining 700 treasury shares at $1.2 per
share.
Cash 840 Limited
to
Additional paid-in capital-treasury stock 450 balance
on hand
Retained earnings 460
Treasury shares 1750

11-30
 Reprepare the statement of changes in shareholders’ equity for 2015

Paid in capital Retained Treasury Total

earnings stocks
Common Preferre Addtiona Addtiona Addtiona
stock d stock l paid in l paid in l paid in
capital capital capital
CS PS TS

Beginning Balance 0 0 0 0 0 0 0 0
Common stock 17000 17000
Preferred stock
Additional paid in capital- 1000 1000
Common stock
Additional paid in capital-
Preferred stock
Treasury stocks/Loss on (460) (460)
TS
Additional paid in capital-
Treasury stocks
Net income 3000 3000
Preferred Dividend
Common Dividend (500) (500)
11-31
Ending balance 17000 0 1000 0 0 2040 0 2040
 Reprepare Stockholders’ equity section of the balance-sheet for
2015

Stockholders’ equity
Paid in capital
Common stock 17,000
Additional Paid in capital – common stock 1,000
Total paid in capital 18,000
Retained earnings 2,040
Total stockholders’ equityAdditional Paid in capital – common stock 20,040

11-32
 2. Retirement Treasury Shares
Alternatively, the board may elect to retire the shares. When a corporation
retires treasury stock, it should book a loss or gain to shareholder’s equity
based on the purchase price and par value. Unlike the other transactions, the
retirement entry will depend on the original issue price. In our previous
example, if before the end of 2015, the board decided to retire the 700
remaining shares, the entry would be:
=1050 =
700*1.5(this
is the issue
price of the
700 shares)

Common stock, $1 par value 700 Limited

Additional paid-in capital – Common stock 350 to
balance
Additional paid-in capital – Treasury stock 450 on hand
Retained earnings 250

Treasury shares 1750

11-33 This is the repurchase price of the 700
Total difference = 1050-1750= -700 shares)
 Reprepare the statement of changes in shareholders’ equity for 2015

Paid in capital Retained Treasury Total

earnings stocks
Common Preferre Addtiona Addtiona Addtiona
stock d stock l paid in l paid in l paid in
capital capital capital
CS PS TS

Beginning Balance 0 0 0 0 0 0 0 0
Common stock 17000 17000
Preferred stock
Additional paid in capital- 650 650
Common stock
Additional paid in capital-
Preferred stock
Treasury stocks/Loss on (700) (250) (950)
TS
Additional paid in capital-
Treasury stocks
Net income 3000 3000
Preferred Dividend
Common Dividend (500) (500)
11-34
Ending balance 16300 0 650 0 0 2250 0 19200
Reprepare Stockholders’ equity section of the balance-sheet for 2015

Stockholders’ equity
Paid in capital
Common stock 16,300
Additional Paid in capital – common stock 650

Total paid in capital 16,950

Retained earnings Additional Paid in capital – common stock 2,250
Total stockholders’ equity 19,200

11-35
 Exercise
1. Assume that during 2014 (1st year of activity) AMG, Inc. issues
25,000 shares of $10 par value common stock:

Feb. 1st, 15,000 shares are issued for $10 per share just before
starting operations,

March 15, additional 10,000 shares are issued for $12 per share.

2. June 1st, AMG, Inc. repurchased 6000 shares of its stock at $15
per share. (the issue price of these shares was $12)

11-36
 3. July 1st, AMG, Inc. sells for $17 (per share) 2000 of its treasury shares previously acquired
at $15 per share.

4. August 16, AMG Inc. sells additional 3000 treasury shares at $12 per share.

Instructions:
A. Prepare Jounal entries
B. Post equity accounts to the Ledger
C. Prepare the statement of changes in stockholders’ equity for 2014
D. Prepare the equity section of the balance sheet for 2014
E. Assuming that during 2015, AMG. Inc, retired the remaining treasury shares:
- Prepare the related journal entry
- Prepare the statement of changes in stockholders’ equity for 2015
- Prepare the equity section of the balance sheet for 2015
NB: for 2014: Net income: 35,000, dividend: 7000
for 2015: Net income: 40,000, dividend: 10,000

11-37
 Solution:

1.
Cash 150,000
Common stock (15,000 x $10) 150,000

Cash 20,000
Common stock (10,000 x $10) 100,000
Additional paid in capital- Common stock 20,000
11-38
 2.
Treasury shares (6000 x $15) 90,000
Cash 90,000

11-39
 3.

July 1 Cash 34,000

Treasury shares (2000 x $15) 30,000
Additional paid in capital-treasury stock 4,000

11-40
 4.

Cash 36000
Additional paid in capital-treasury stock 4000
Retained earnings 5000

Treasury shares (3000 x $15) 45000

11-41
 Common stock Add Paid-in CS Net income

150,00 20,000 35,000

0
100,00
0
CB: 250,000 CB: 20,000 CB: 35,000

Dividend Treasury shares Add paid-in TS

7000 90,000 30,000 4,000 4,000

45,000

DB: 7,000 DB: 15,000 0

11-42
 the statement of changes in shareholders’ equity for 2014

Paid in capital Retained Treasur Total

earnings y stocks
Common Preferred Addtional Addtional Addtional
stock stock paid in paid in paid in
capital CS capital PS capital TS

Beginning Balance 0 0 0 0 0 0 0 0
Common stock 250,000 250,000
Preferred stock
Additional paid in capital- 20,000 20,000
Common stock
Additional paid in capital-
Preferred stock
Treasury stocks/Loss on (5000) (15,000) (20,000)
TS
Additional paid in capital-
Treasury stocks
Net income 35,000 35,000
Preferred Dividend
Common Dividend (7000) (7000)
11-43
Ending balance 250,000 0 20,000 0 0 23,000 (15,000) 278,000
 Stockholders’ equity section of the balance-sheet for 2014.

Stockholders’ equity
Paid in capital
Common stock 250,000
Additional Paid in capital – common stock 20,000
Total paid in capital 270,000
Retained earnings 23,000
Total paid in and retained capital Paid in capital – common stock
Additional 293,000
Less:Treasury stock (15,000)
Total stockholders’ equity 278,000

11-44
 E. Retirement of Treasury Shares

Common stock, $10 par value 10,000

Additional paid-in capital – Common stock 2000
Retained earnings 3000

Treasury shares 15,000

11-45
 Common stock Add Paid-in CS Net income

10,000 150,00 2,000 20,000 40,000

0
100,00
0
CB: 240,000 CB: 18,000 CB: 40,000

Dividend Treasury shares

10,000 90,000 30,000

45,000

DB: 10,000 15,000

0

11-46
 the statement of changes in shareholders’ equity for 2015

Paid in capital Retained Treasur Total

earnings y stocks
Common Preferred Addtional Addtional Addtional
stock stock paid in paid in paid in
capital CS capital PS capital TS

Beginning Balance 250,000 0 20,000 0 0 23,000 (15,000) 278,000

Common stock (10000) (10,000)

Preferred stock
Additional paid in capital- (2000) (2000)
Common stock
Additional paid in capital-
Preferred stock
Treasury stocks/Loss on (3000) 15000 12,000
TS
Additional paid in capital-
Treasury stocks
Net income 40,000 40,000
Preferred Dividend
Common Dividend (10,000) (10,000)
11-47
Ending balance 240,000 0 18,000 0 0 50,000 0 308,000
 Stockholders’ equity section of the balance-sheet for 2015.

Stockholders’ equity
Paid in capital
Common stock 240,000
Additional Paid in capital – common stock 18,000
Total paid in capital 258,000
Retained earnings 50,000
Total stockholders’ equityAdditional Paid in capital – common stock 308,000

11-48
 Preferred
Preferred Stock
Stock

Typically, preferred stockholders have a priority in relation to

1. dividends and

2. assets in the event of liquidation.

However, they sometimes do not have voting rights.

Each paid-in capital account title should identify the stock to

which it relates:
 Additional Paid-in Capital (in Excess of Par Value)—Common
Stock
 Additional Paid-in Capital (in Excess of Par Value)— Preferred
11-49
Stock
 Accounting
Accounting for
for Treasury
Treasury Stock
Stock

Additional paid in capital ( in

Common
CommonStock
Stock Additional paid in capital ( in
Excess of Par) – Common
Excess of Par) – Common
Account
Account stock
stock
Account
Paid-in
Paid-inCapital
Capital
Account
Additional
Additionalpaid
paid inincapital
capital(in
in
( in
Excess
ExcessofofPar)
Par)––Preferred
Preferred
PreferredStock
Stock stock
stock
Preferred

Account Account
Account Account

Two Primary
Sources of Retained
RetainedEarnings
Earnings
Account
Account
Equity

Less:
Less:
Treasury
TreasuryStock
Stock
Account
Account

11-50
 Preferred
Preferred Stock
Stock

Illustration: Stine Corporation issues 10,000 shares of

$10 par value preferred stock for $12 cash per share. Journalize
the issuance of the preferred stock.

Cash 120,000
Preferred stock (10,000 x $10) 100,000
Additional Paid-in capital–Preferred stock 20,000

11-51
 Preferred
Preferred Stock
Stock

Dividend Preferences
 Right to receive dividends before common stockholders.
 Per share dividend amount is stated as a percentage of
the preferred stock’s par value or as a specified amount.
 Cumulative dividend – holders of preferred stock must be
paid their annual dividend plus any dividends in arrears
before common stockholders receive dividends.

11-52
 Preferred
Preferred Stock
Stock

Cumulative Dividend
Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par
value, cumulative preferred stock outstanding. Each $100 share
pays a $7 dividend (.07 x $100). The annual dividend is $35,000
(5,000 x $7 per share). If dividends are two years in arrears,
preferred stockholders are entitled to receive the following
dividends in the current year.

11-53
 Preferred
Preferred Stock
Stock

Liquidation Preference
 Preference on corporate assets if the corporation fails.
 Preference may be
► for the par value of the shares or
► for a specified liquidating value.

11-54
 Preferred
Preferred Stock
Stock

Review Question
M-Bot Corporation has 10,000 shares of 8%, $100 par
value, cumulative preferred stock outstanding at December
31, 2014. No dividends were declared in 2012 or 2013. If M-
Bot wants to pay $375,000 of dividends in 2014, common
stockholders will receive:
a. $0.
b. $295,000.
c. $215,000.
d. $135,000.
11-55
 Dividends
Dividends
Illustration: On Jan. 20, Media General paid a $1.5 cash
preferred dividend on 5000 preferred stocks and $1 per share
cash dividend on 100,000 ordinary shares.

January 20 (Preferred dividend)

Preferred dividend 7,500
Cash 7,500

January 20 (Common divided)

Dividend 100,000
Cash 100,000
11-56