Financial and Managerial Accounting, 8e
11-1
CHAPTER 11
CORPORATE REPORTING AND ANALYSIS
Student Learning Objectives
Questions
Quick Studies*
Exercises*
Problems*
AA and
BTN
C1. Identify characteristics of
corporations and their
organization.
preferred stock.
C3. Explain the items reported
in retained earnings.
11-19
11-13, 11-14,
11-15, 11-21
11-2, 11-4,
GL 11-1,
GL 11-2
AA 11-3, BTN 11-1,
BTN 11-3
1, 2, 3, 4
11-1
11-1, 11-2
SP
BTN 11-3
A1 Compute earnings per
share and describe its use.
13
11-20, 11-21
11-16, 11-17
AA 11-1, AA 11-2,
AA 11-3, BTN 11-2,
BTN 11-6
A2. Compute price-earnings
ratio and describe its use
in analysis.
11-22
11-18
AA 11-2, BTN 11-2,
BTN 11-6
A3. Compute dividend yield
and explain its use in
analysis.
A4. Compute book value and
explain its use in analysis.
14
11-24
11-20
11-1, 11-5
AA 11-1, AA 11-2
P1. Record the issuance of
corporate stock.
11-2, 11-3,
11-17
11-3, 11-4,
11-1, SP
stock dividends, and stock
11-8, 11-9,
11-10, 1-16
11-4, GL11-1,
GL11-2
11-23
11-19
AA 11-2, BTN 11-6
splits.
P3. Record purchases and
sales of treasury stock.
12
11-15, 11-16,
11-17
11-12, 11-13,
11-21
11-2, 11-4,
GL 11-1,
GL 11-2
BTN 11-4
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
BTN refers to Beyond the Numbers
GL refers to General Ledger Problems
Questions with Guided Example videos
Financial and Managerial Accounting, 8e
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available
in Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
o Connect also provides algorithmic versions for Quick Study, Exercises, and Problems.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated
PowerPoints without the video and audio functions for the Guided Examples are also available in the Connect
Instructor Library and Exercise Presentations. These are indicated in the Related Assignment Materials grid
on page 1 in blue bold font.
Need-to-Know Videos
C3
Statement of Retained Earnings
1:18
0:29
Compute earnings per share and describe its use.
Basic Earnings per Share
1:00
Compute price-earnings ratio and describe its use in analysis.
Need–to-Know
Title
Time
11-1
Recording Stock Issuance
2:21
Concept Overview Videos
LO
Title
Time
C1
Identify characteristics of corporations and their organization.
Organization of Corporations
0:56
Corporate Advantages and Disadvantages
2:39
Corporate Stockholders
3:10
C2
Explain characteristics of, and distribute dividends between, common and
preferred stock.
Issuance of Preferred Stock
2:03
Dividend Preference of Preferred Stock
3:48
Participating or Nonparticipating
1:17
Reasons for Issuing Preferred Stock
2:06
Financial and Managerial Accounting, 8e
11-3
Price-Earnings Ratio
0:48
Price-Earnings Ratio — Illustration
1:31
A3
Compute dividend yield and explain its use in analysis.
Dividend Yield
0:54
Dividend Yield — Illustration
1:20
A4
Compute book value and explain its use in analysis.
Book Value per Share
1:15
Book Value per Share — Illustration
2:24
P1
Record the issuance of corporate stock.
Issuing Par Value Stock
2:29
Issuing No-Par Value Stock
1:49
Issuing Stock for Noncash Assets
1:28
Issuing Stock for Organization Expenses
1:10
P2
Record transactions involving cash dividends, stock dividends, and stock splits.
Cash Dividends
2:12
Cash Dividends – Illustration
0:43
Small Stock Dividends
2:42
Large Stock Dividends
1:18
Stock Splits
1:07
P3
Record purchases and sales of treasury stock.
1:25
4:02
Synopsis of Chapter Revisions
NEW opener—Yelp and entrepreneurial assignment.
New Decision Insight on bots investing in stocks based on erroneous news.
New AT&T stock quote explanation.
New graphic visually depicting key cash dividend dates.
Continued 5-step process for stock dividends.
New table summarizing differences between small stock dividends, large stock dividends, and stock splits.
Updated Apple statement of equity in Exhibit 11.10.
Updated PE ratio and dividend yield using Amazon, Altria, Visa, and Mastercard.
Financial and Managerial Accounting, 8e
Chapter Outline
I. Corporate Form of Organization—An entity that is separate from its owners and has many of the
same rights and privileges as individuals. Owners are called stockholders. A publicly held corporation
offers its stock for public sale (organized stock market) whereas a privately held (closely held)
corporation does not.
A. Corporate Advantages
1. Separate legal entity—a corporation has many of the same rights, duties, and responsibilities as
a person. Takes actions through its agents, who are officers and managers.
2. Limited liability—stockholders are not liable for corporate actions or debt.
3. Transferable ownership rights—transfer of shares generally has no direct effect on operations
except when it causes a change in directors who oversee the corporation.
above, which helps corporations collect large sums of money.
B. Corporation Disadvantages
1. Governmental regulation—must follow a state’s incorporation laws.
2. Corporate taxation—corporate income is taxed; and when income is distributed to shareholders
as dividends, it is taxed a second time as personal income (double taxation).
C. Corporate Organization and Management
1. Incorporation—A corporation is created by getting a charter from a state government. A charter
application, signed by prospective stockholders (incorporators or promoters) must be filed with
the state and fees must be paid.
2. Organization Expenses (organization costs)—costs to start the corporation and include legal
3. Management of a Corporation
a. Stockholders control corporation by electing its board of directors. A stockholder usually
has one vote for each share of stock owned.
D. Corporate Stockholders
1. Rights of Stockholders—Specific rights are granted by the charter and general rights by state
laws. State laws vary but common stockholders general rights usually include right to:
a. Vote at stockholders’ meeting.
b. Sell or otherwise dispose of their stock.
c. Purchase their proportional shares of any common stock later issued; called preemptive
right.
11-5
2. Stock Certificates and Transfer
a. Stock certificate is sometimes received as proof of share ownership.
3. Registrar and Transfer Agents—if stock is traded on a stock exchange, the corporation has a
registrar and transfer agent (usually large banks or financial institutions).
a. Registrar—keeps a list of stockholders for stockholders’ meetings and dividend payments.
b. Transfer agent—assists with purchases and sales of shares.
E. Corporate Stock —shares issued to obtain capital (owner financing).
1. Authorized stock—the total amount of stock that the charter authorizes for sale. No journal
entry is required for stock authorization.
a. Outstanding stock is stock held by stockholders.
2. Selling (Issuing) stock—can be sold directly/indirectly to stockholders.
3. Market value of stock—the price at which a stock is bought and sold.
a. Influenced by expected future income, dividends, growth, and economic events.
b. Current market value of previously issued shares does not impact that corporation’s
stockholders’ equity accounts.
4. Classes of stock
a. Common—the name of stock when all classes have same rights and privileges.
b. Preferred stock—gives its owners a priority status over common stockholders in one or
more ways.
c. Additional classes—corporation may issue more than one class of common and/or preferred
stock.
a. Printed on the stock certificate.
8. Stockholders’ (Shareholders’) Equity—has two parts:
a. Paid-in capital (contributed capital)—the total amount of cash and other assets received by
the corporation from its stockholders in exchange for stock.
b. Retained earnings—the cumulative net income and losses not distributed as dividends to
stockholders.
II. Common Stock—Issuance of stock affects only paid-in capital accounts, not retained earnings
accounts.
A. Issuing Par Value Stock
11-6
1. Issuing Par Value Stock at Par—debit Cash for # shares issued × market price and credit
Common Stock for # shares issued × par value
2. Issuing Par Value Stock at a Premium—Premium on stock is an amount paid in excess of par by
premium)
3. Issuing Par Value Stock at a Discount— Discount occurs when stock is sold for less than its par
value (prohibited by most states).
a. Debit Cash (# shares issued × market price)
b. Credit Common Stock (# shares issued × par value)
c. Debit Discount on Common Stock, a contra to the common stock account (for the amount of
B. Issuing No-Par Value Stock
When no-par stock is issued, the entire amount received is credited to a no-par value stock account.
C. Issuing Stated Value Stock
The stated value is credited to the stock account. Any amount above the stated value, is credited to
Paid-In Capital in Excess of Stated Value, Common Stock.
D. Issuing Stock for Noncash Assets
1. Issuing par value stock for other assets
a. Record the transaction at the market value of the noncash asset as of the transaction date.
c. Record the amount that market value exceeds par value or stated value of stock in the Paid–
2. Issuing par value stock for organizational costs—stock is issued in exchange for the promoters’
work in organizing the corporation
a. Record the transaction at the market value of the services received debiting this amount to
Organization Expense.
b. Record par or stated value of shares issued in stock account and any value received above
this in Paid-In Capital in Excess account.
III. Dividends
A. Cash Dividends—decision to pay dividends rest with the board of directors and is based on
evaluating the amounts of retained earnings and cash as well as many other factors.
1. Accounting for Cash Dividends—involves three important dates.
b. Date of Record—date specified for identifying stockholders (owners on this date will
2. Cash Dividend Entries—reduce in equal amounts both cash and the retained earnings
component of stockholders’ equity.
11-7
a. At declaration—Debit Retained Earnings and credit Dividends Payable.
b. At date of record – no entry needed.
c. At payment—Debit Dividends Payable and credit Cash.
3. Deficits and Cash Dividends—a debit (abnormal) balance in retained earnings is called a
retained earnings deficit.
payment in return. They do not reduce assets or total equity, just the components of equity.
1. Reasons for Stock Dividends
a. To keep the market price of stock affordable.
b. To show management’s confidence that the company is doing well.
2. Accounting for Stock Dividends—transfers a portion of equity from retained earnings to
contributed capital (called capitalizing retained earnings)
a. Small stock dividend is 25% or less of the issuing corporation’s previously outstanding
ownership. Involves “calling in” the outstanding shares of stock and replacing them with a larger
number of shares that have a lower par value.
1. Reason for stock splits is similar to those for stock dividends.
2. Only a memorandum entry is required.
3. Splits do not affect any equity account balances or any individual stockholder’s percentage of
ownership.
4. Reverse stock splits reduce number of shares and increase par value.
1. Separate contributed capital accounts are used to record preferred stock.
2. Preferred Stock account is used to record the par value of shares issued.
3. Paid-in in Excess of Par Value, Preferred Stock is used to record any value received above the
par value.
treasury stock.
stockholders.
1. Cumulative or Noncumulative
a. Cumulative preferred stock has a right to be paid both current and all prior periods’ unpaid
dividends before any dividend is paid to common stockholders. These unpaid dividends are
referred to as dividends in arrears.
b. Most preferred stock carries a cumulative dividend right.
c. Noncumulative preferred stock does not have rights to prior periods’ unpaid dividends if
they were not declared.
d. Dividends in arrears are usually reported in notes to the financial statements.
2. Participating or Nonparticipating
C. Reasons for Issuing Preferred Stock
1. To raise money without giving up control of the corporation.
2. To boost the return earned by common stockholders on corporate assets. Also called financial
leverage.
V. Treasury Stock—A corporation buys back their own shares for several reasons such as to acquire
another company, to avoid a takeover, to give to employees as compensation, or to maintain a strong
market for their stock.
A. Purchasing Treasury Stock—Cost Method
1. Reduces the corporation’s assets and stockholders’ equity by equal amounts.
D. Reissuing Treasury Stock
1. Selling Treasury Stock at Cost—Treasury stock is reduced (credited) for the cost of the
reissued shares and Cash is debited for the amount received.
2. Selling Treasury Stock above Cost—the amount received in excess of cost is credited to Paid-
in Capital, Treasury Stock.
Financial and Managerial Accounting, 8e
VI. Reporting of Equity
A. Statement of Retained Earnings—Retained Earnings is the total cumulative amount of reported net
income minus any net losses and dividends declared. It is part of stockholders’ equity (claim to the
assets) and does not mean 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.
2. Prior Period Adjustments
3. 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
period.
VII. Decision Analysis—Earnings per Share, Price-Earnings Ratio, Dividend Yield, and Book Value
per Share
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
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.
11-10
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.
Financial and Managerial Accounting, 8e
11-11
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.
2019
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.
31
Closed the Income Summary account. A $25,000 loss was
2020
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.
2021
Jan.
31
Paid the previously declared dividends.
Required:
1. Prepare general journal entries to record the selected transactions.
11-12
Chapter 11 Solution: Alternate Demonstration Problem #1
Part 1
2019
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
30
25,000
Buildings ………………………………………………
Machinery …………………………………………….
Common Stock
Paid–In Capital in Excess of Par
Value, Common Stock ………………….
Dec.
31
Retained Earnings …………………………………
25,000
Income Summary …………………………….
25,000
2020
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
2021
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
11-14
Chapter 11 Alternate Demonstration Problem #2
At the beginning of 2019, 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:
Purchased 1,000 shares of treasury stock at $40 per share.
Sold 500 of the treasury shares at $45 per share.
the January 20 stockholders of record. The market value of
the stock was $40 per share.
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.
11-15
Chapter 11 Solution: Alternate Demonstration Problem #2
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
Transactions ………………………………..
2,500
20
Cash ……………………………………………………..
19,000
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, 2019
Retained earnings, January 1, 2019 ……………………
$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, 2019 ……………….
$247,300
Common stock dividend distributable, 480 shares ……………….
12,000
Total common stock issued and to be issued …………………
612,000
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 ……………………………………………………………….
Total stockholders’ equity ……………………………………….
$958,000