Chapter 11 – Corporate Reporting and Analysis
Chapter Outline
Notes
B. Reissuing Treasury Stock
1. Selling treasury stock at cost: debit Cash, credit Treasury
Stock, Common.
2. Selling treasury stock above cost: debit Cash, credit Treasury
Stock, Common, credit Paid-in Capital, Treasury Stock (for
the amount received in excess of cost).
3. Selling treasury stock below cost: entry depends on whether
the Paid-in Capital, Treasury Stock account has a balance.
i. If the Paid-in Capital, Treasury Stock account has no
balance, the excess of cost over sales price is debited to
Retained Earnings.
ii. If the Paid-in Capital, Treasury Stock account has a
balance, then it is debited for the excess of the cost over
the sales price, not to exceed the balance in the account.
C. Retiring Stock—Retiring stock reduces the number of shares
issued and results in a reduction in assets and equity equal to the
amount paid for the retired stock.
1. When stock is purchased for retirement, all paid-in capital
amounts 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 – generally consist of a
company’s cumulative net income less any net losses and
dividends declared since its inception.
1. Restricted and Appropriations
a. Restricted retained earnings—Amount of retained
earnings that are not available for dividends and refers to
both statutory and contractual restrictions.
b. Appropriated retained earnings—amount that the
corporation voluntarily restricts from retained earnings
which are available for dividends.
2. Prior Period Adjustments – corrections of material errors
made in prior periods.
a. Include arithmetic mistakes, using unacceptable
accounting principles, and ignoring relevant facts.
Chapter 11 – Corporate Reporting and Analysis
Chapter Outline
Notes
3. The Closing Process – explained earlier in the text, as (1)
Close credit balances in revenue accounts to Income
Summary; (2) Close debit balances in expense accounts to
Income Summary; and (3) Close Income Summary to
Retained Earnings. If Dividends are recorded in a Dividends
account, a fourth step is necessary to close Dividends to
Retained Earnings.
4. Changes in Accounting Estimates – Adjustments to
previously made assumptions.
a. No adjustment is made for prior periods.
b. Revised estimate is applied in calculating the appropriate
revenue or expense of the current and future periods.
B. Statement of Stockholders’ Equity – lists the beginning and ending
balances of each equity account and describes the changes that
occurred during the period.
1. Provided by most companies rather than a separate statement
of retained earnings.
2. Statement of changes in stockholders’ equity includes changes
in retained earnings.
C. Reporting Stock Options
1. Stock options are rights to purchase common stock at a fixed
price over a specified period of time.
2. Stock options are said to motivate managers and employees to
focus on company performance, take a long-run perspective,
and remain with the company.
VII. Global View
1. Accounting and Reporting for Common Stock – accounting for
common stock is similar under both GAAP and IFRS. There are
legal and cultural differences that can impact common
shareholders.
2. Accounting and Reporting for Dividends – GAAP and IFRS
account for dividends in a similar manner.
3. Accounting and Reporting for Preferred Stock – preferred stock
accounting is similar under GAAP and IFRS. Preferred stock
that is redeemable at the option of the preferred stockholders is
none to the conversion feature. IFRS, however, requires that a
portion of the issue price be allocated to the conversion feature
when it exists.
4. Accounting and Reporting for Treasury Stock – Both GAAP and
IFRS account for treasury stock as explained in this chapter.
Chapter 11 – Corporate Reporting and Analysis
Chapter Outline
Notes
VIII. Decision Analysis—Earnings per Share, Price-Earnings Ratio,
Dividend Yield, and Book Value per Share
A. Earnings per Share (EPS)—reported in final section of income
statement. Earnings per share is the amount of income earned by
each share of outstanding common stock (one of the most widely
cited items of accounting information).
1. Basic earnings per share is calculated as net income –
preferred dividends (the numerator) divided by the weighted-
average common shares outstanding.
a. If preferred stock is noncumulative, the income available
to common stockholders (the numerator) is the current
period net income less any preferred dividends declared in
that same period.
b. If preferred stock is cumulative, the income available
(numerator) is the current period net income less the
preferred dividends, whether declared or not.
B. Price-Earnings Ratio (PE ratio)
1. The price earnings ratio is used to gain understanding of the
market’s expected earnings for the stockholders.
2. It is calculated as market value per share divided by earnings
per share.
3. It can be based on current or expected EPS.
C. Dividend Yield
1. The dividend yield shows the annual amount of cash
dividends distributed to common shares relative to their
market value.
2. It is 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).
3. It is calculated as annual cash dividends per share divided by
market value per share.
D. Book Value per Share
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 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.
Chapter 11 – Corporate Reporting and Analysis
Chapter Outline
Notes
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.
Chapter 11 – Corporate Reporting and Analysis
website, in whole or part. 11–15
Chapter 11 – Alternate Demonstration Problem #1
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.
2013
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.
2014
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. A $69,000 net income was
earned.
2015
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, 2014
3. Determine the book value per preferred share and per common
stock as of December 31, 2014, assuming no dividends are in
arrears on preferred stock.
Chapter 11 – Corporate Reporting and Analysis
website, in whole or part. 11–16
Solution: Chapter 11 – Alternate Demonstration Problem #1
1.
2013
Feb.
19
45,000
45,000
22
50,000
30,000
20,000
Mar.
30
25,000
100,000
125,000
100,000
150,000
Dec.
31
25,000
25,000
2014
Jan.
12
75,000
50,000
25,000
Dec.
15
21,500
17,500
4,000
31
69,000
69,000
20015
Jan.
31
4,000
17,500
21,500
Chapter 11 – Corporate Reporting and Analysis
website, in whole or part. 11–17
Solution: Chapter 11 – Alternate Demonstration Problem #1, continued
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 ………………………………………….
$442,500
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 dividends in arrears.
Chapter 11 – Corporate Reporting and Analysis
website, in whole or part. 11–18
Chapter 11 – Alternate Demonstration Problem #2
At the beginning of 2013, 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 ended Dec. 31,
2014.
3. Prepare the stockholders’ equity section of the company’s year–end
balance sheet, December 31, 2014.
Chapter 11 – Corporate Reporting and Analysis
website, in whole or part. 11–19
Solution: Chapter 11 – Alternate Demonstration Problem #2
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
Chapter 11 – Corporate Reporting and Analysis
website, in whole or part. 11–20
Solution: Chapter 11 – Alternate Demonstration Problem #2, continued
2.
AUSTIN CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2014
Retained earnings, January 1, 2013 ……………………
$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, 2014 ……………….
$247,300
3.
AUSTIN CORPORATION
Stockholders’ Equity Section of Balance Sheet
December 31, 2014
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 contributed 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