Chapter 11 Study guide, Study notes of Accounting

Download Chapter 11 Study guide and more Study notes Accounting in PDF only on Docsity! Chapter 11: Reporting and Analyzing Stockholders’ Equity Study Guide Learning Objectives: 1. Discuss the major characteristics of a corporation. 2. Explain how to account for the issuance of common, preferred, and treasury stock. 3. Explain how to account for cash dividends, stock dividends, and stock splits. 4. Discuss how stockholders’ equity is reported and analyzed. Learning Objective 1: Discuss the major characteristics of a corporation. A corporation is an entity that is separate and distinct from its owners. Two ways to classify corporation are by purpose and ownership.  Separate Legal Existence o Corporation acts under its own name rather than in the name of its stockholders.  Limited Liability of Stockholders o Limited to their investment  Transferable Ownership Rights o Shareholders may sell their shares.  Ability to Acquire Capital o Corporation can obtain capital through the issuance of stock.  Continuous Life o Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.  Corporate Management o Separation of ownership and management prevents owners from having an active role in managing the company. ACCT 2001: Ch. 11 Page 1 of 14 Chapter 11: Reporting and Analyzing Stockholders’ Equity Study Guide  Government Regulations o Company is affected by state laws, SEC laws, stock exchange requirements, and federal regulations  Additional Taxes o Corporations pay income taxes as a separate legal entity and stockholders pay taxes on cash dividends Characteristics of a Corporation Forming a Corporation  File application with the Secretary of State.  State grants charter  Corporation develops by-laws.  Many companies incorporate in a state whose laws are favorable to the corporate form of business (Delaware for example). Corporations engaged in interstate commerce must obtain a license from each state in which they do business. 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. 3) Keep the same percentage ownership when new shares of stock are issued. This is called preemptive right. ACCT 2001: Ch. 11 Page 2 of 14 Chapter 11: Reporting and Analyzing Stockholders’ Equity Study Guide  Paid-in Capital in Excess of Par Value—Preferred Stock  Paid-in Capital in Excess of Par Value—Common 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. Accounting for Treasury Stock Treasury stock - corporation’s own stock (usually common stock) that it has reacquired from shareholders and is being held for future use. Purchase of Treasury Stock  Generally accounted for by the cost method.  Treasury Stock will be debited for the price paid.  Treasury Stock is a contra stockholders’ equity account, not an asset.  Purchase of treasury stock reduces stockholders’ equity. Mead, Inc. has the following Balance Sheet before purchasing shares of its own stock: Illustration: On February 1, 2025, Mead acquires 4,000 shares of its stock at $8 per share. Prepare the entry. ACCT 2001: Ch. 11 Page 5 of 14 Chapter 11: Reporting and Analyzing Stockholders’ Equity Study Guide Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed. Review of Paid-in Capital Accounts: ACCT 2001: Ch. 11 Page 6 of 14 Chapter 11: Reporting and Analyzing Stockholders’ Equity Study Guide Learning Objective 3: Explain how to account for cash dividends, stock dividends, and stock splits. Dividends A distribution of cash or stock to stockholders on a pro rata (proportional to ownership) basis. Types of Dividends: 1. Cash dividends. 2. Stock dividends 3. Property dividends (not covered in our class). Cash Dividends For a corporation to pay a cash dividend, it must have: 1. Retained earnings 2. Adequate Cash. 3. Declaration by the Board of Directors. Illustration: On Dec. 1, the directors of Media General declare a 50¢ per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on Jan. 20 to shareholders of record on Dec. 22: Declaration Date: Record Date: Payment Date: ACCT 2001: Ch. 11 Page 7 of 14 Chapter 11: Reporting and Analyzing Stockholders’ Equity Study Guide Illustration: Assuming that instead of issuing a 10% stock dividend, Medland splits its 50,000 shares of common stock on a 2-for-1 basis. Differences between the effects of stock dividends and stock splits: Learning Objective 4: Discuss how stockholders’ equity is reported and analyzed. Retained Earnings  Retained earnings is net income that a company retains for use in the business.  The balance in Retained Earnings is part of the stockholders’ claim on the total assets of the corporation. It does not represent a claim on any specific asset.  Net income increases Retained Earnings and a net loss reduces Retained Earnings.  A debit balance in Retained Earnings is identified as a deficit. ACCT 2001: Ch. 11 Page 10 of 14 Chapter 11: Reporting and Analyzing Stockholders’ Equity Study Guide Retained Earnings Restrictions: Restrictions can result from: 1. Legal restrictions. 2. Contractual restrictions. 3. Voluntary restrictions. Presentation of Stockholders’ Equity Two classifications of paid-in capital: 1. Capital stock 2. Additional Paid-In capital ACCT 2001: Ch. 11 Page 11 of 14 Chapter 11: Reporting and Analyzing Stockholders’ Equity Study Guide In Class Problems E11-3  Journalize issuance of common stock. During its first year of operations, Mona Corporation had these transactions pertaining to its common stock. Jan. 10 Issued 30,000 shares for cash at $5 per share. July 1 Issued 60,000 shares for cash at $7 per share. Instructions: 1.  Journalize the transactions, assuming that the common stock has a par value of $5 per share. 2.  Journalize the transactions, assuming that the common stock is no-par with a stated value of $1 per share. ACCT 2001: Ch. 11 Page 12 of 14