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Chapter Outline
Notes
B. Reissuing Treasury Stock
1. Sale at cost—Treasury stock is reduced (credited) for the cost
of the reissued shares and Cash is debited for the amount
received.
2. Sale above cost—the amount received in excess of cost is
credited to Paid-in Capital, Treasury Stock.
3. Sale below cost—entry depends on whether the Paid-in
Capital, Treasury Stock account has a balance. If it has no
balance, the excess of cost over sales price is debited to
Retained Earnings. However, if the Paid-in Capital, Treasury
Stock account exists, then it is debited for the excess of the
cost over the sales price, not to exceed the balance in the
account. The paid-in Capital, Treasury Stock account can
have a credit or zero balance but never a debit balance.
4. A company ever reports a loss or gain from the sale of
treasury stock.
C. Retiring Stock—results in a reduction in assets and equity equal to
the amount paid for the retired stock. Reduces the number of
issued shares.
1. When stock is purchased for retirement, all capital amounts
(from original issuance) that relate to the retired shares are
removed from the accounts.
2. Any excess of original issuance price over cost from the
transaction should be credited to Paid-in Capital from
Retirement of Stock.
3. Any excess of cost over original issuance price from the
transaction should be debited to Retained Earnings.
VI. Reporting of Equity
A. Statement of Retained Earnings—Retained Earnings is total
cumulative amount of reported net income less any net losses and
dividends declared since the company’s inception. It is part of
stockholders' equity (claim to the assets) and is not implying that
any certain amount of cash or other assets actually exists.
1. Restrictions and Appropriations
a. Restricted retained earnings refers to both statutory and
contractual restrictions.
b. Appropriated retained earnings refers to a voluntary
transfer of amounts from the Retained Earnings account.
Chapter Outline
Notes
2. Prior Period Adjustments
a. Corrections of material errors made in prior periods.
b. Include arithmetic mistakes, unacceptable accounting, and
missed facts.
c. Reported in statement of retained earnings as corrections
(net of income tax effects) to the beginning retained
earnings balance.
d. Changes in Accounting Estimates do not result in prior
period adjustments, but are accounted for in current and
future periods.
2. Closing Process
a. Close credit balances in revenue accounts to Income
Summary
b. Close debit balances in expense accounts to Income
Summary.
c. Close Income Summary to Retained Earnings
d. Close Dividends account to Retained Earnings (if
dividends were recorded in a Dividends account).
B. Statement of Stockholders’ Equity
1. Provided by most companies rather than a separate statement
of retained earnings; the statement of stockholders’ equity
includes changes in retained earnings.
2. Lists the beginning and ending balances of each equity
account and describes the changes that occurred during the
period.
C. Reporting Stock Options
1. Stock options are rights to purchase common stock at a fixed
price over a specified period of time. As stock prices rise
above the fixed price, the option value increases.
2. Stock options are said to motivate employees and managers..
VII. Global View—Compares U.S. GAAP to IFRS
A. Accounting for Common Stock—both systems have similar
procedures for issuing common. Rights and responsibilities and
terminology, may differ due to legal and cultural differences.
B. Accounting for Dividends—consistent under both systems for
cash and stock dividends, and stock splits.
C. Accounting for Preferred Stock—similar under both systems, but
redeemable preferred stock is reported between liabilities and
equity in U.S. GAAP balance sheets but as a liability in IFRS.
Differences also exist in reporting convertible preferred stock.
D. Accounting for Treasury Stock—Both systems are consistent as
applied to treasury stock purchases, reissuances, and retirements.
Chapter Outline
Notes
VIII. Decision Analysis
A. Earnings per Share (EPS)
1. Amount of income earned by each share of outstanding
common stock; reported on the income statement.
2. Basic earnings per share is computed by dividing the net
income less preferred dividends by the weighted average
number of shares outstanding.
B. Price-Earnings Ratio (PE ratio)
1. Used to gain understanding of the market's expected receipts
for the stockholders.
2. Calculated as market value per share divided by earnings per
share.
3. Can be based on current or expected EPS.
C. Dividend Yield
1. Used to determine whether a company's stock is an income
stock (pays large and regular dividends) or a growth stock
(pays little or no cash dividends).
2. Calculated as annual cash dividends per share divided by
market value per share.
D. Book Value per Share—stockholders' claim to the assets on a per
share basis.
1. Book value per common share
a. If only one class outstanding, equals total stockholders’
equity divided by the number of common shares
outstanding.
b. If two classes of stock outstanding, equals the recorded
amount of stockholders’ equity applicable to common
shares (total stockholders’ equity less equity applicable to
preferred stock—see section below) divided by the
number of common shares outstanding.
2. Book value per preferred share
a. The stockholders' equity applicable to preferred shares
equals the preferred share’s call price (or par value if the
preferred is not callable) plus any cumulative dividends in
arrears. The remaining stockholders’ equity is the portion
applicable to common shares.
b. Book value per preferred share equals equity applicable to
preferred shares divided by number of preferred shares
outstanding.
ALTERNATE DEMONSTRATION PROBLEM
Chapter 11
Uzi Company received a charter granting the right to issue 200,000 shares
of $1 par value common stock and 10,000 shares of 8% cumulative and
nonparticipating, $50 par value preferred stock that is callable at $80 per
share. Selected transactions are presented below.
2015
Feb.
19
Issued 45,000 shares of common stock at par for cash.
22
Gave the corporation’s promoters 30,000 shares of common
stock for their services in getting the corporation organized.
The directors valued the services at $50,000.
Mar
30
Exchanged 100,000 shares of common stock for the
following assets at fair market values: land, $25,000;
building, $100,000; and machinery, $125,000.
Dec.
31
Closed the Income Summary account. A $25,000 loss was
incurred.
2016
Jan.
12
Issued 1,000 shares of preferred stock at $75 per share.
Dec.
15
The board of directors declared an 8% dividend on preferred
shares and $0.10 per share on outstanding common shares,
payable on January 31 to the January 17 stockholders of
record.
31
Closed the Income Summary account. A $69,000 net income
was earned.
2017
Jan.
31
Paid the previously declared dividends.
Required:
1. Prepare general journal entries to record the selected transactions.
2. Prepare a stockholders’ equity section as of the close of business on
December 31, 2016.
3. Determine the book value per preferred share and per common stock
as of December 31, 2016.
Solution: Alternate Demonstration Problem
Chapter 11
Part 1
2015
Feb.
19
Cash .............................................................
45,000
Common Stock ......................................
45,000
22
Organizational Expense .............................
50,000
Common Stock ......................................
30,000
Paid-In Capital in Excess of Par
Value, Common Stock ......................
20,000
Mar.
30
Land ............................................................
25,000
Buildings ......................................................
100,000
Machinery ....................................................
125,000
Common Stock
100,000
Paid-In Capital in Excess of Par
Value, Common Stock ......................
150,000
Dec.
31
Retained Earnings .......................................
25,000
Income Summary ..................................
25,000
2016
Jan.
12
Cash .............................................................
75,000
Preferred Stock .....................................
50,000
Paid-In Capital in Excess of Par
Value, Preferred Stock ......................
25,000
Dec.
15
Retained Earnings .......................................
21,500
Common Dividend Payable ..................
17,500
Preferred Dividend Payable .................
4,000
31
Income Summary ........................................
69,000
Retained Earnings .................................
69,000
2017
Jan.
31
Preferred Dividend Payable .......................
4,000
Common Dividend Payable ........................
17,500
Cash .......................................................
21,500
Part 2
Stockholders’ Equity
Preferred stock, $50 par value, 8% cumulative and
nonparticipating, 10,000 shares authorized, 1,000
shares issued ...............................................................
$ 50,000
Paid-in capital in excess of par, preferred stock ............
25,000
75,000
Common stock, $1 par value, 200,000 shares
authorized, 175,000 issued ..........................................
$175,000
Paid-in capital in excess of par, common stock .............
170,000
345,000
Total Paid-in capital ...........................................................
420,000
Retained earnings ..............................................................
22,500
Total stockholders’ equity .................................................
$422,500
Part 3
Book value per preferred share = call value (or par value if stock does not
have a call value) plus any dividends in arrears if cumulative stock. There
are no arrears.
Book value per preferred share = $80.
Book value per common share = (Total equity less equity applicable to
preferred stock) divided by number of shares of common stock
outstanding.
Book value per common share = ($422,500 - $80,000) / 175,000 = $1.96*
*ROUNDED
Another Alternate Demonstration Problem
Chapter 11
At the beginning of 2015, Austin Corporation’s stockholders’ equity
consisted of the following:
Common stock, $25 par value, 30,000 shares authorized,
24,000 shares issued ..............................................................
$600,000
Paid-In capital in excess of par value common stock ...............
90,000
Retained earnings .........................................................................
230,000
Total stockholders’ equity ......................................................
$920,000
During the year, the company completed these transactions:
June
6
Purchased 1,000 shares of treasury stock at $40 per share.
23
The directors voted a $0.50 per share cash dividend payable
on July 25 to the July 20 stockholders of record.
July
25
Paid the dividend declared on June 23.
Aug.
10
Sold 500 of the treasury shares at $45 per share.
Oct.
20
Sold 500 of the treasury shares at $38 per share.
Dec.
15
The directors voted a $0.50 per share cash dividend payable
on January 20 to the January 15 stockholders of record, and
they voted a 2% stock dividend distributable on January 30 to
the January 20 stockholders of record. The market value of
the stock was $40 per share.
31
Closed the Income Summary account and carried the
company’s $60,000 net income to Retained Earnings.
Required:
1. Prepare general journal entries to record the transactions.
2. Prepare a retained earnings statement for the year and the
stockholders’ equity section of the company’s year-end balance sheet.
Solution: Another Alternate Demonstration Problem
Chapter 11
Part 1
June
6
Treasury Stock, Common ...........................
40,000
Cash ........................................................
40,000
23
Retained Earnings .......................................
11,500
Common Dividend Payable ..................
11,500
July
25
Common Dividend Payable ........................
11,500
Cash ........................................................
11,500
Aug.
10
Cash ..............................................................
22,500
Treasury Stock, Common
20,000
Paid-In Capital, Treasury Stock
Transactions ......................................
2,500
Oct.
20
Cash ..............................................................
19,000
Paid-In Capital, Treasury Stock
Transactions ......................................
1,000
Treasury Stock, Common .....................
20,000
Dec.
15
Retained Earnings .......................................
31,200
Common Dividend Payable ..................
12,000
Common Stock Dividend Distributable.
12,000
Paid-In Capital in Excess of Value, .....
Common Stock ......................................
7,200
31
Income Summary ........................................
60,000
Retained Earnings .................................
60,000
Part 2
AUSTIN CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2015
Retained earnings, January 1, 2015 ........................
$230,000
Additions:
Net income for year .............................................
60,000
Total ..................................................................
290,000
Deductions:
Cash dividends declared ....................................
$23,500
Stock dividends declared ...................................
19,200
42,700
Retained earnings, December 31, 2015 ...................
$247,300
Stockholders’ Equity
Common stock, $25 par value, 30,000 shares authorized,
24,000 shares issued ..........................................................
$600,000
Common stock dividend distributable, 480 shares ...................
12,000
Total common stock issued and to be issued .....................
612,000
Paid-in capital in excess of par value, common stock ..............
97,200
Total capital paid-in by common stockholders ............
709,200
Other Paid-in capital: ....................................................................
Paid-in capital, treasury stock ...............................................
1,500
Total Paid-in capital ........................................................
710,700
Retained earnings .........................................................................
247,300
Total stockholders’ equity ..............................................
$958,000
