CHAPTER
8
Accounting for and Presentation
of Stockholders’ Equity
CHAPTER OUTLINE:
I. Paid–in Capital
A. Common Stock
2. Par value/no par value
1. Differences from common stock
3. Differences from bonds
C. Additional paid-in capital
II. Retained Earnings
A. Items that cause retained earnings to change
B. Cash dividends
1. Recording transactions
1. Reasons for stock dividends and stock splits
2. No impact on total market value of company’s stock
III. Accumulated Other Comprehensive Income (Loss)
A. Why included in stockholders’ equity
B. Cumulative Foreign Currency Translation Adjustment
IV. Noncontrolling (Minority) Interest
V. Reporting Changes in Stockholders’ Equity Accounts
Chapter 8 Accounting for and Presentation of Stockholders’ Equity
TEACHING/LEARNING OBJECTIVES:
Principal:
2. To reinforce the student’s understanding of retained earnings, and the transactions that affect
this account.
3. To have the student understand the nature and characteristics of cash dividends, stock
dividends, and stock splits.
Supporting:
5. To have the student understand the rights and obligations of common and preferred
stockholders.
7. To expand the student’s understanding of cash dividends.
9. To have the student understand that treasury stock transactions affect only stockholders’
equity accounts.
10. To have the student be able to understand the statement of changes in stockholders’ equity in
TEACHING OBSERVATIONS:
2. The discussion of preferred stock can be used to clarify the characteristics of both common
stock and bonds.
3. If the instructor is so inclined, a brief discussion of the determinants of a firm’s dividend
policy can help students get a better grasp of dividends (e.g., why many firms continue to pay
5. Real-world examples of the statement of changes in stockholders’ equity should be presented
to illustrate the topics discussed in this chapter.
ASSIGNMENT OVERVIEW:
NO.
DIFFICULTY &
TIME ESTIMATE
OTHER
COMMENTS
M8.1.
Easy, 3-5 min.
Basic calculations and entries.
M8.2.
Easy, 3-5 min.
Basic preferred dividends calculations.
M8.3.
Easy, 3-5 min.
Basic stock split calculations.
M8.4.
Easy, 3-5 min.
Basic treasury stock transactions.
E8.5.
Easy, 3-5 min.
Straight-forward review question.
E8.6.
Easy, 3-5 min.
Good in-class demonstration exercise.
E8.7.
Easy, 3-5 min.
Review the Statement of Retained Earnings.
E8.8.
Easy, 3-5 min.
See E8.7.
E8.9.
Easy, 3-5 min.
Use to clarify terminology: authorized, issued, outstanding.
E8.10.
Easy, 3-5 min.
Good homework assignment.
E8.11.
Easy, 5-8 min.
Straight-forward dividend calculations.
Easy, 5-8 min.
See E8.11. Good in-class demonstration exercise.
E8.13.
Easy, 3-5 min.
See E8.11.
E8.14.
Easy, 3-5 min.
See E8.11.
E8.15.
3
Easy, 3-5 min.
See Business in Practice—Dividend Dates.
E8.16.
Med., 10-15 min.
Group learning problem—an opportunity to have students
E8.17.
Easy, 3-5 min.
Good discussion starter for “dividend policy” issues.
E8.18.
Med., 7-10 min.
See E8.17.
E8.19.
Easy, 5-8 min.
See E8.17. Emphasize that stock dividend transactions do not
E8.21.
Easy, 3-5 min.
Straight-forward.
P8.23.
Med., 7-10 min.
Straight-forward dividend calculations and entries.
P8.24.
Med., 7-10 min.
Good homework assignment.
P8.25.
Med., 7-10 min.
Straight-forward treasury stock problem.
P8.26.
Med., 10-12 min.
See P8.25.
P8.27.
Med., 10-12 min.
Potpourri—straight-forward journal entries problem.
P8.28.
Med., 10-12 min.
See P8.27. Good homework assignment.
P8.29.
Med., 10-12 min.
Excellent problem for self-study / review.
P8.30.
Med., 10-12 min.
See P8.29. Good homework assignment.
P8.31.
Hard, 25-35 min.
Emphasize terminology and the structure of the stockholders’
equity section of the balance sheet.
P8.32.
Hard, 25-35 min.
C8.33.
Easy, 5-10 min.
Focus company—basic review of note disclosures.
C8.34.
Hard, 15-20 min.
Excellent problem for self-study / review.
Chapter 8 Accounting for and Presentation of Stockholders’ Equity
NO.
LEARNING
OBJECTIVES
DIFFICULTY &
TIME ESTIMATE
OTHER
COMMENTS
C8.36.
Med-Hard, 30 min. or
more.
Capstone analytical review, Chapters 7-8. Capital lease,
preferred stock and bonds payable issues.
SOLUTIONS:
M8.1.
a.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
January 1, 2016 to record stock issuance:
Cash Dividends
– 280,000 Payable
– 280,000
a.
January 1, 2016:
Dr. Cash (140,000 shares @ $12) …. ……….. ……….. ……….. ……….. 1,680,000
M8.2.
Preferred dividends for 2015, 2016, and 2017 would have to be paid before a dividend on
M8.3.
a.
A 4-for-1 split means that for every share now owned, the stockholder will own 4 shares.
Thus, I will own 3,600 shares * 4 = 14,400 shares.
Because there are now 4 times as many shares of stock outstanding, and the financial
does not happen automatically—any changes in par value per share require action by the
M8.4.
a.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
April 10, 2016 to record the purchase of 800 shares of treasury stock @ $27 per share:
Cash Treasury Stock
– 21,600 – 21,600
b.
Paid-in Capital
September 28, 2016 to record the sale of 500 shares of treasury stock @ $31 per share:
Cash Treasury Stock
+ 15,500 + 13,500
b.
September 28, 2016:
Dr. Cash (500 shares @ $31) ……….. ……….. ……….. ……….. ……….. 15,500
Cr. Treasury Stock (500 shares @ $27) . ……….. ……….. ……….. 13,500
E8.5.
A = L + PIC + RE
Beginning……..$ (4) $ (3) (1) (2) $260,000 SE
Changes……….+130,000 +11,000 +20,000 + (7) Net income
–28,000 Dividends
Ending………… (5) = $116,000 + $90,000 + (6) .
3. $116,000 – $11,000 = $105,000
6. $495,000 – $116,000 – $90,000 = $289,000
E8.6.
A = L + PIC + RE
Beginning …… $ (5) $876,000 (4) (6)
Changes……… +308,000 –144,000 +40,000 + (7) Net income
–248,000 Dividends
Ending………. (3) = (2) + $760,000 + (1) $1,516,000 SE
4. $760,000 – $40,000 = $720,000 Net income = $660,000
6. $1,940,000 – $876,000 – $720,000 = $344,000
E8.7.
Retained earnings, December 31, 2016 ……… ……….. ……….. ……….. ……….. $692,800
E8.8.
Prepare the retained earnings portion of a statement of changes in stockholders’ equity for
the year ended December 31, 2016:
Retained earnings, December 31, 2016 ……… ……….. ……….. ……….. $ ?
E8.9.
a.
Cash dividends are paid on shares outstanding.
2,500,000 shares * $0.30 = $750,000
c.
Treasury stock of 300,000 shares accounts for the difference between shares issued and
Balance sheet amount equals number of shares issued * par value.
E8.10.
a.
Average price at which shares issued = Balance sheet amount / Number of shares issued
= $8,700,000 / 600,000 = $14.50 per share
Common stock at stated value of $1 per share;
Additional paid-in capital …… ……….. ……….. ……….. ……….. ……….. 8,100,000
Treasury stock of 60,000 shares accounts for the difference between shares issued and
E8.11.
a.
Dividend requirement per share ……… ……….. ……….. ……….. ……….. * $4.75
Total annual dividends required to be paid …. ……….. ……….. ……….. $1,350,900
Number of shares issued ……. ……….. ……….. ……….. ……….. ……….. 325,000
E8.11.
(continued)
b.
Dividend per share (7.4% * $100 stated value) ……… ……….. ……….. $7.40
Dividend per share (5% * $50 par value) …… ……….. ……….. ……….. $2.50
E8.12.
a.
Annual dividend = Dividend rate * par value * number of shares outstanding
= 9% * $50 * 30,000 = $135,000
= 6.5% * $100 * 168,000 = $1,092,000
Quarterly dividend = annual dividend / 4 = $1,092,000 /4 = $273,000
E8.13.
Preferred dividends for 2015, 2016, and 2017 would have to be paid before a dividend on
E8.14.
a.
Annual dividend per share = Dividend rate * par value = 8.5% * $50 = $4.25
b.
Preferred dividends for 2015 and 2016 must be paid first because the preferred stock is
E8.15.
a.
February 21 is the declaration date. Because this is a regular dividend of the same
amount as prior dividends, the stock price would not be significantly affected.
E8.16.
E8.17.
E8.18.
$1.075 per share in 2010 to $1.248 in 2014, although there was no increase in dividends
per share during 2013.
$1.248 in 2014 was 53% of 2014 Basic EPS. This rather narrow range of results suggests
that Campbell’s board of directors has been targeting a 50% (+/– 3%) dividend payout
ratio in recent years.
E8.18.
(continued)
c.
2010 2011 2012 2013 2014
E8.19.
If the company can reinvest retained earnings at a higher ROI than I could earn on the
E8.20.
a.
6,000 shares * 5% dividend = 300 dividend shares
b.
c.
Total dividend $15,876 / 6,000 shares = $2.646 per share
This dividend policy would result in greater total cash dividends every year without
$2.52 / 1.05 = $2.40
E8.21.
a.
A 2-for-1 split means that for every share now owned, the stockholder will own 2 shares.
Thus, I will own 800 shares.
what it was, or $30 per share. The total market value of my investment will not have
not happen automatically—any changes in par value per share require action by the board