CH 15

CHAPTER 15
Stockholders Equity
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1. Corporate form: capital

stock system.
1, 2
2. Stockholders equity
components.
3, 4, 5, 6,
16, 18
7, 10, 11,
16, 17, 18
1, 2, 3, 9,
12
3. Issuance of stock.
7, 10
1, 2, 6
1, 2, 4,
6, 9, 18
1, 3, 4, 9
12
4. Lump sum sales; noncash stock transactions;

stock issue costs.
8, 9, 10
4, 5, 6
3, 4, 5, 6,
18
1, 4, 9, 12
5. Treasury stock
transactions.
11, 12, 16,

17
7, 8
6, 7, 9, 10,
18
1, 2, 3, 5,
6, 7, 9, 12
6, 7
6. Preferred stock.
3, 13,
14, 15
1, 3, 12
7. Dividend policy.
19, 20, 21
10, 11, 12
12, 16
7, 10
5, 7
8. Cash, property, and

liquidating dividends.
16, 22, 25
10, 11, 12
8, 12, 15,
16, 18
3, 6, 7, 8,
10, 11
5, 6
9. Restrictions of retained
earnings.
27, 28
13, 14
13, 14
8, 9, 11
4, 5
10, 19, 20
10. Stock dividends and stock

splits.
11. Analysis of stockholders
equity.
22, 23, 24
1, 3
1, 3
Copyright 2013 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 15/e Instructors Manual (For Instructor Use Only)
15-1
12. Presentation of
stockholders equity.
*13. Dividend preferences

and book value.
15, 18
7, 8, 10,
11, 16, 17,
18
29
15
21, 22,
23, 24
1, 2, 3, 5,
6, 9, 11,
12
3, 6
*This material is covered in an Appendix to the chapter.
15-2
Copyright 2013 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 15/e Instructors Manual(For Instructor Use Only)
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
1.
Discuss the characteristics of the corporate

form of organization.
2.
Identify the key components of stockholders

equity.
3.
Explain the accounting procedures for issuing

shares of stock.
1, 2, 4, 5, 6
1, 2, 3, 4, 5,
6, 8, 9, 10
1, 3, 4, 9, 12
4.
Describe the accounting for treasury stock.
3, 7, 8
6, 7, 9, 10, 18
1, 2, 3, 5,
6, 7, 9, 12
5.
Explain the accounting for and reporting

of preferred stock.
6.
Describe the policies used in distributing

dividends.
10, 11, 12
16
7.
Identify the various forms of dividend

distributions.
11, 12
11, 12, 15,

16, 18
3, 6, 7, 8,
9, 11, 12
8.
Explain the accounting for small and large

stock dividends, and for stock splits.
13, 14
11, 13, 14,

15, 16, 18
3, 8, 10,
11, 12
9.
Indicate how to present and analyze

17, 19, 20
1, 2, 6, 9,
11, 12
*10.
Explain the different types of preferred stock

dividends and their effect on book value
per share.
15
21, 22,
23, 24
*11.
Compare the procedures for accounting for

stockholders equity under GAAP and IFRS.
15-3
ASSIGNMENT CHARACTERISTICS TABLE

Item
Description
Level of
Difficulty
Time
(minutes)
E15-1
Recording the issuances of common stock.
Simple
1520
E15-2
Recording the issuance of common and preferred stock.
Simple
1520
E15-3
Stock issued for land.
Simple
1015
E15-4
Lump-sum sale of stock with bonds.
Moderate
2025
E15-5
Lump-sum sales of stock with preferred stock.
Simple
1015
E15-6
Stock issuances and repurchase.
Moderate
2530
E15-7
Effect of treasury stock transactions on financials.
Moderate
1520
E15-8
Preferred stock entries and dividends.
Moderate
1520
E15-9
Correcting entries for equity transactions.
Moderate
1520
E15-10
Analysis of equity data and equity section preparation.
Moderate
2025
E15-11
Equity items on the balance sheet.

Cash dividend and liquidating dividend.
Simple
Simple
1520
1015
E15-13
Stock split and stock dividend.
Simple
1015
E15-14
Entries for stock dividends and stock splits.
Simple
1012
E15-15
Dividend entries.
Computation of retained earnings.
Simple
1015
Simple
0510
Stockholders equity section.

Dividends and stockholders equity section.
Moderate
2025
Moderate
3035
Comparison of alternative forms of financing.
Moderate
2025
Trading on the equity analysis.
Moderate
1520
E15-12
E15-16
E15-17
E15-18
E15-19
E15-20
*E15-21
Preferred dividends.
Simple
1015
*E15-22
Preferred dividends.
Moderate
1520
*E15-23
Preferred stock dividends.
Complex
1520
*E15-24
Computation of book value per share.
Moderate
1015
P15-1
Equity transactions and statement preparation.
Moderate
5060
P15-2
Treasury stock transactions and presentation.
Simple
2535
P15-3
Equity transactions and statement preparation.
Moderate
2530
P15-4
Stock transactionslump sum.
Moderate
2030
P15-5
Treasury stockcost method.
Moderate
3040
P15-6
Treasury stockcost methodequity section preparation.

Cash dividend entries.
Moderate
Moderate
3040
1520
Dividends and splits.
Moderate
2025
Simple
2025
Moderate
3545
Simple
2535
Complex
3545
P15-7
P15-8
P15-9
P15-10
P15-11
P15-12
15-4
Stockholders equity section of balance sheet.

Stock dividends and stock split.
Stock and cash dividends.
Analysis and classification of equity transactions.
CA15-1
Preemptive rights and dilution of ownership.
Moderate
1020
CA15-2
Issuance of stock for land.

Conceptual issuesequity.
Moderate
Moderate
1520
2530
Stock dividends and splits.
Simple
2530
Stock dividends.
Simple
1520
CA15-3
CA15-4
CA15-5
CA15-6
Stock dividend, cash dividend, and treasury stock.
Moderate
2025
CA15-7
Treasury stock, ethics.
Moderate
1015
*This material is presented in an appendix to the chapter.
15-5
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.
7.
8.
9.
*10.
Discuss the characteristics of the corporate form of organization.

Identify the key components of stockholders equity.
Explain the accounting procedures for issuing shares of stock.
Describe the accounting for treasury stock.
Explain the accounting for and reporting of preferred stock.
Describe the policies used in distributing dividends.
Identify the various forms of dividend distributions.
Explain the accounting for small and large stock dividends, and for stock splits.
Indicate how to present and analyze stockholders equity.
Explain the different types of preferred stock dividends and their effect on book value
per share.
*11. Compare the procedures for accounting for stockholders equity under GAAP and IFRS.
*This material is covered in an Appendix to the chapter.
15-6
CHAPTER REVIEW
1. Chapter 15 focuses on the stockholders equity section of the corporate form of business
organization. Stockholders equity represents the amount that was contributed by the
shareholders and the portion that was earned and retained by the enterprise. There is
a definite distinction between liabilities and stockholders equity that must be understood if
one is to effectively grasp the accounting treatment for equity issues. This chapter
addresses the accounting issues related to capital contributed by owners of a business
organization, and the means by which profits are distributed through dividends.
The Corporate Form of Organization
2. (L.O. 1)The corporate form of business organization begins with the submitting of
articles of incorporation to the state in which incorporation is desired. Assuming the
requirements are properly fulfilled, the corporation charter is issued and the corporation is
recognized as a legal entity subject to state law. The laws of the state of incorporation that
govern owners equity transactions are normally set out in the states business corporation
act.
3. Within a given class of stock, each share is exactly equal to every other share. A persons
percent of ownership in a corporation is determined by the number of shares he or she
possesses in relation to the total number of shares owned by all stockholders.
4. In the absence of restrictive provisions, each share carries the right to share proportionately in:
(a) profits, (b) management, (c) corporate assets upon liquidation, and (d) any new
issues of stock of the same class (preemptive right).
Share System
5. The transfer of ownership between individuals in the corporate form of organization is
accomplished by one individual selling or transferring his or her shares to another
individual. The only requirement in terms of the corporation involved is that it be made
aware of the name of the individual owning the stock. A subsidiary ledger of stockholders
is maintained by the corporation for the purpose of dividend payments, issuance of stock
rights, and voting proxies. Many corporations employ independent registrars and transfer
agents who specialize in providing services for recording and transferring stock.
6. The basic ownership interest in a corporation is represented by common stock. Common
stock is guaranteed neither dividends nor assets upon dissolution of the corporation.
Common stockholders are considered to hold a residual interest in the corporation.
However, common stockholders generally control the management of the corporation and
tend to profit most if the company is successful. In the event that a corporation has only
one authorized issue of capital stock, that issue is by definition common stock, whether or
not it is so designated in the charter.
15-7
Corporate Capital
7. (L.O. 2)Owners equity in a corporation is defined as stockholders equity, share holders equity, or corporate capital. The following categories normally appear as part of
a. Capital stock.
b. Additional paid-in capital.
c. Retained earnings.
Stockholders Equity: Contributed Capital
8. Capital stock and additional paid-in capital constitute contributed (paid-in) capital; retained
earnings represents the earned capital of the company not distributed as dividends.
Contributed capital (paid-in capital) is the total amount paid in on capital stock. Earned
capital is the capital that develops from profitable operations.
9. Stockholders equity is the difference between the assets and the liabilities of the
companyalso known as the residual interest. Stockholders equity is not a claim to
specific assets, but a claim against a portion of the total assets.
Accounting for the Issuance of Stock
10. (L.O. 3)The par value of a stock has no relationship to its fair value. Par value associated
with most capital stock issues is generally very low. Low par values help companies avoid
the contingent liability associated with stock that is issued below par.
11. When par value stock is issued, the capital stock (common or preferred) account is
credited for an amount equal to par value times the number of shares issued. Any amount
received in excess of par value is credited to additional paid-in capital. For example, if
200 shares of common stock with a par value of $2 per share are sold for $500, the
following journal entry would be made:
Cash.................................................................................
Common Stock (200 $2)..........................................
Paid-in Capital in Excess of Par..................................
500
400
100
Par value stock is always credited at its issue date for its par value times the number of
shares issued.
12. When no-par stock is issued, the capital stock account is credited for an amount equal to
the value of the consideration received. If no-par stock has a stated value, it may be
accounted for in the same way as true no-par stock with the entire proceeds from
issuance credited to the capital stock account, or the stated value may be treated similar
to par value with any excess above stated value being accounted for as additional paid-in
capital.
15-8
Lump-Sum Sales
13. More than one class of stock is sometimes issued for a single payment or lump sum
amount. Such a transaction requires allocation of the proceeds between the classes of
securities involved.
14. The two methods of allocation used are (a) the proportional method and (b) the
incremental method. The proportional method is used when the fair value for each class
of security is readily determinable, and the incremental method is used when only one
class fair value is known.
Stock Issued in Noncash Transactions
15. Stock issued for services or property other than cash should be recorded by using the fair
value of the property or services or the fair value of the stock issued, whichever is more
clearly determinable. In cases where the fair value of both items is not clearly
determinable, the board of directors has the authority to establish a value for the transaction.
Costs of Issuing Stock
16. Direct costs incurred to sell stock such as underwriting costs, accounting and legal fees,
and printing costs should be debited to Paid-in Capital in Excess of Par. Management
salaries and other indirect costs related to the stock issue should be expensed as
incurred.
Treasury Stock
17. (L.O. 4)Treasury stock is a corporations own stock that (a) was outstanding, (b) has been
reacquired by the corporation, and (c) is not retired. Treasury stock is not an asset and is
reported in the balance sheet as a reduction of stockholders equity.
18. The reasons corporations purchase their outstanding stock include: (a) to provide tax
efficient distributions of excess cash to shareholders; (b) to increase earnings per share
and return on equity; (c) to provide stock for employee stock compensation contracts; (d) to
thwart takeover attempts or to reduce the number of stockholders; and (e) to make a
market in the stock.
19. Two methods are used in accounting for treasury stock, the cost method and the par
value method. Under the cost method, treasury stock is recorded in the accounts at
acquisition cost. When the treasury stock is reissued, the Treasury Stock account is
credited for the acquisition cost. If treasury stock is reissued for more than its acquisition
cost, the excess amount is credited to Paid-in Capital from Treasury Stock. If treasury
stock is reissued for less than its acquisition cost, the difference is debited to any paid-in
capital account from previous treasury stock transactions. If the balance in this account is
insufficient, the remaining difference is charged to retained earnings.
20. The following example shows the accounting for treasury stock under the cost method. No
previous acquisitions or sales of treasury stock have occurred.
15-9
10,000 shares of common stock with a par value of $5 per share were originally issued
at $12 per share.
A. Entry for Purchase: 2,000 shares of common stock are reacquired for $20,000.
Treasury Stock...........................................................
Cash.....................................................................
20,000
20,000
B. Entry for Resale: 1,000 shares of treasury stock are resold for $8,000.
Cash...........................................................................
Retained Earnings......................................................
Treasury Stock......................................................
8,000
2,000
10,000
21. Retirement of Treasury Stock. The retirement of treasury stock is similar to the sale of
treasury stock except that the corporation debits the paid-in capital accounts applicable to
the retired shares instead of cash.
22. The cost of treasury stock is shown in the balance sheet as a deduction from the total of
all stockholders equity accounts.
Preferred Stock
23. (L.O. 5)Preferred stock is the term used to describe a class of stock that possesses
certain preferences or features not possessed by the common stock. The dividend
preference of preferred stock is normally stated as a percentage of the preferred stocks
par value. However, a preference as to dividends does not assure the payment of
dividends; it merely assures that corporations must pay the applicable amount to the
preferred stock prior to paying any dividends on common stock.
24. The following features are those most often associated with preferred stock issues:
a. Preference as to dividends.
b. Preference as to assets in the event of liquidation.
c. Convertible into common stock.
d. Callable at the option of the corporation.
e. Nonvoting.
Some features used to distinguish preferred stock from common stock tend to be restrictive.
For example, preferred stock may be nonvoting, noncumulative, and nonparticipating.
A corporation may attach whatever preferences or restrictions in whatever combination it
desires to a preferred stock issue, so long as it does not specifically violate its state
incorporation law.
15-10
25. Certain terms are used to describe various features of preferred stock. These terms are
the following:
a. Cumulative.Dividends not paid in any year must be paid first in a later year before
paying any dividends to common stockholders. Unpaid annual dividends on cumulative preferred stock are referred to as dividends in arrears and are disclosed in a
note to the financial statements.
b. Participating.Holders of participating preferred stock share with the common stockholders
in any profit distribution beyond the prescribed preference rate. This participation involves
a pro rata distribution based on the total par value of the outstanding preferred and
common stock.
c. Convertible.Preferred stockholders may, at their option, exchange their preferred
shares for common stock on the basis of a predetermined ratio.
d. Callable.At the option of the issuing corporation, preferred shares can be redeemed
at specified future dates and at stipulated prices.
e. Redeemable.Redeemable stock has a mandatory redemption period or a
redemption feature that the issuer cannot control. Debt-like securities, such as
redeemable preferred stock, are classified as liabilities and measured and accounted
for similar to liabilities.
Accounting and Reporting of Preferred Stock
26. Preferred stock is accounted for similar to common stock at issuance. The proceeds are
allocated between the par value and additional paid-in capital.
27. Preferred stock generally has no maturity date and therefore no legal obligation exists to
pay preferred stock dividends. As a result, preferred stock is classified as part of
stockholders equity. Mandatory redeemable preferred stock is reported as a liability.
Dividend Policy
28. (L.O. 6)Very few companies pay dividends in amounts equal to their legally available
retained earnings. The major reasons are: (a) to maintain agreements with creditors, (b) to
meet state corporation laws, (c) to finance growth or expansion, (d) to provide for
continuous dividends whether in good or bad years, and (e) to build a cushion against
possible future losses.
29. Before a dividend is declared, management must consider availability of funds to pay the
dividend. Directors must also consider economic conditions, most importantly, liquidity.
30. The SEC encourages companies to disclose their dividend policy in their annual report.
For example, companies that (a) have earnings but fail to pay dividends or (b) do not
expect to pay dividends in the foreseeable future are encouraged to report this information.
In addition, companies that have had a consistent pattern of paying dividends are
encouraged to indicate whether they intend to continue this practice in the future.
15-11
Types of Dividends
31. (L.O. 7)Dividends may be paid in cash (most common means), stock, or some other asset.
Dividends other than a stock dividend reduce the stockholders equity in a corporation
through an immediate or promised distribution of assets. When a stock dividend is declared,
the corporation does not pay out assets or incur a liability. It issues additional shares of
stock to each shareholder and nothing more.
Cash Dividends
32. The accounting for a cash dividend requires information concerning three dates: (a) date
of declaration, (b) date of record, and (c) date of payment. A liability is established by
a charge to retained earnings on the declaration date for the amount of the dividend
declared. No accounting entry is required on the date of record. The stockholders who
have earned the right to the dividend are determined by who owns the shares on the date
of record. The liability is liquidated on the payment date through a distribution of cash. The
following journal entries would be made by a corporation that declared a $50,000 cash
dividend on March 10, payable on April 6 to shareholders of record on March 25.
Declaration Date (March 10)
Retained Earnings (Cash Dividends Declared)..........
Dividends Payable.................................................
No entry
50,000
50,000
Record Date (March 25)
Payment Date (April 6)

Dividends Payable......................................................
Cash......................................................................
50,000
50,000
Property Dividends
33. Property dividends represent distributions of corporate assets other than cash. A property
dividend is a nonreciprocal transfer of nonmonetary assets between an enterprise and its
owners. Such transfers should be recorded at the fair value of the assets
transferred. Fair value is measured by the amount that would be realized in an outright
sale near the time of distribution. Just before a property dividend is declared, the value of
the property is adjusted to fair value and a gain or loss is recognized. The fair value then
serves as the basis used in accounting for the property dividend.
34. For example, if a corporation held stock of another company that it intended to distribute to
its own stockholders as a property dividend, it would first adjust the carrying amount to
reflect current fair value. If on the date the dividend was declared, the difference between
the cost and fair value of the stock to be distributed was $75,000, the following additional
entry would be made.
Equity Investments......................................................
15-12
75,000
Unrealized Holding Gain or LossIncome...........

Liquidating Dividends
75,000
35. Liquidating dividends represent a return of the stockholders investment rather than
a distribution of profits. In a more general sense, any dividend not based on profits must
be a reduction of corporate capital, and to that extent, it is a liquidating dividend.
Stock Dividends
36. (L.O. 8)A stock dividend can be defined as a capitalization of retained earnings that
results in a reduction in retained earnings and a corresponding increase in certain
contributed capital accounts. Total stockholders equity remains unchanged when a stock
dividend is distributed. All stockholders retain their same proportionate share of
ownership in the corporation.
37. When the stock dividend is less than 2025% of the common shares outstanding at the
time of the dividend declaration, generally accepted accounting principles (GAAP) require
that the accounting for stock dividends be based on the fair value of the stock issued.
When declared, Retained Earnings is debited at the fair value of the stock to be
distributed. The entry includes a credit to Common Stock Dividend Distributable at par
value times the number of shares, with any excess credited to Paid-in Capital in Excess
of Par. Common Stock Dividend Distributable is reported in the stockholders equity
section of the balance sheet once declared and prior to issuance.
38. Consider the following set of facts. Vonesh Corporation, which has 50,000 shares of $10
par value common stock outstanding, declares a 10% stock dividend on December 3. On
the date of declaration the stock has a fair value of $25 per share. The following entry is
made when the stock dividend is declared:
Retained Earnings (5,000 $25)................................
Common Stock Dividend Distributable..................
Paid-in Capital in Excess of Par............................
125,000
50,000
75,000
When the stock is issued, the entry is:

Common Stock Dividend Distributable.......................
Common Stock......................................................
50,000
50,000
Large Stock Dividend

39. If the number of shares issued in a stock dividend exceeds 20 or 25% of the shares
outstanding, calling it a stock split is warranted, and only the par value of the shares
issued is transferred from retained earnings.
15-13
Stock Split
40. A stock split results in an increase or decrease in the number of shares outstanding with
a corresponding decrease or increase in the par or stated value per share. In general, no
accounting entry is required for a stock split as the total dollar amount of all stockholders
equity accounts remains unchanged. A stock split is usually intended to improve the
marketability of the shares by reducing the market price of the stock being split. In
general, the difference between a stock split and a stock dividend is based upon the size
of the distribution.
Restrictions on Retained Earnings
41. In many corporations restrictions on retained earnings or dividends exist, but no formal
journal entries are made. Such restrictions are best disclosed by note.
Presentation of Stockholders Equity
42. (L.O. 9)An example of a comprehensive stockholders equity section of a balance sheet is
provided in the textbook. A company should disclose the pertinent rights and privileges of the
various securities outstanding. Examples of information that should be disclosed are
dividend and liquidation preferences, participation rights, call prices, and dates.
43. Statements of stockholders equity are frequently presented in the following basic format:
a. Balance at the beginning of the period.
b. Additions.
c. Deductions.
d. Balance at the end of the period.
Analysis of Stockholders Equity
44. Several ratios use stockholders equity related amounts to evaluate a companys profitability
and long-term solvency. The following three ratios are discussed and illustrated in the
chapter: (1) rate of return on common stock equity, (2) payout ratio, (3) book value per share.
Net income Preferred dividends
Rate of Return
=
On Common Stock Equity Average common stockholders' equity
Payout Ratio =
Book Value Per Share =
15-14
Cash dividends
Common stockholders' equity
Outstanding shares
Dividend Preferences
*45. (L.O. 10)Preferred stock generally has a preference in the receipt of dividends. Preferred
stock can also carry features that require consideration at the time a dividend is declared
and at the time of payment. These features are (a) the cumulative feature, and (b) the
participating feature.
Book Value Per Share
*46. Book value per share is computed as net assets divided by outstanding common shares
at the end of the year. There are complications that impact book value such as the
number of authorized and unissued shares, the number of treasury shares on hand,
commitments with respect to the issuance of unissued shares, and the relative rights of
various types of authorized stock.
15-15
LECTURE OUTLINE
The material in this chapter is straightforward and can be covered in two class sessions. Treasury
stock transactions under the cost method should be emphasized. Consider emphasizing the
difference between stock splits and stock dividends and the accounting difference between small
and large stock dividends.
A. (L.O. 1)The Corporate Form of Organization.
1. The primary forms of business organization are the proprietorship, the partnership, and
the corporation.
2.
Influence of state corporate law. Each state has its own business corporation act. These
acts are complex and vary in their provisions and definitions.
3. Capital stock system. Each share represents an ownership right with the following
privileges:
a.
To share proportionately in profits and losses.
b.
To share proportionately in management (vote for directors).
c.
To share proportionately in corporate assets upon liquidation.
d.
To share proportionately in any new issues of stock of the same class (preemptive
right).
4. The share system provides easy transferability of ownership interests.

5. Variety of ownership interests.
a.
Common stock.The residual corporate interest that bears the ultimate risks of
loss and receives the benefits of success.
b.
Preferred stock.In return for certain preferences to earnings, preferred

stockholders may sacrifice their rights to a voice in management or the right to
share in profits above a stated rate.
c.
Different classes of common stock may have differences in voting rights.
B. (L.O. 2)Corporate Capital.

1. The stockholders interest in a company is a residual interest. It can be derived from the
basic accounting equation: assets less liabilities equals stockholders equity.
15-16
2. The two primary sources of equity are:

TEACHING TIP
Illustration 15-1 can be used to provide an overview of the major components of stockholders
equity that are described in the chapter.
a.
Stockholders investments (contributed capital, consisting of capital stock and

additional paid-in capital).
b.
Retained earnings (earned capital).

TEACHING TIP
Illustration 15-2 can be used to demonstrate the variety and scope of transactions and
events that cause changes in Stockholders Equity.
C. (L.O. 3)Accounting for the Issuance of Stock.
TEACHING TIP
Illustration 15-3 provides a numerical example of the journal entries made to issue par value
and no-par value stock.
1. Par value stock.
a.
The par value is credited to the respective capital stock account.
b.
The excess of proceeds over par value is credited to paid-in capital in excess of
par (excess over par).
2. No-par stock.The issuance of no-par stock avoids any contingent liability and also
prevents par value from being misused as a basis for fair value. In some cases, no-par
stock is given a stated or minimum value.
3. Lump-sum sales.Either the proportional method or the incremental method can be
used to allocate proceeds among the different securities.
4. Noncash stock transactions.When stock is issued for services or property other than
cash, the property or services should be recorded at either its fair value or the fair
value of the stock issued, whichever is more clearly determinable.
5. Costs of issuing stock.These costs are treated as a reduction of the amounts paid
in and debited to Paid-in Capital in Excess of Par.
15-17
D. (L.O. 4)Reacquisition of Shares.

1. Corporations may buy their own stock for a variety of reasons.
a.
To provide tax-efficient distributions of excess cash to shareholders.
b.
To increase earnings per share and return on equity.
c.
To provide stock for employee stock compensation contracts or to meet potential

merger needs.
d.
To thwart takeover attempts or to reduce the number of shareholders.
e.
To make a market for the stock.
2. Treasury stock is a contra-stockholders equity account, not an asset. Treasury stock

does not vote, receive dividends, or have other rights afforded stockholders. A
corporation cannot own a part of itself.
3. Treasury stock is most often accounted for using the cost method.
TEACHING TIP
Illustration 15-4 provides a numerical example of the journal entries made under the cost
method of accounting for treasury stock.
a.
The cost method results in debiting the Treasury Stock account for the reacquisition
cost and reporting this amount as a deduction from total paid-in capital and retained
earnings on the balance sheet.
(1) Sale of Treasury Stock above cost.The difference between the cost and
the selling price is credited to Paid-in Capital from Treasury Stock. The
company identifies which shares are sold using a FIFO, average cost, or
specific identification basis.
(2) Sale of Treasury Stock below cost. The difference is debited to:
(a) Paid-in Capital from Treasury Stock until that account is depleted.
(b) Any balance is debited to Retained Earnings.
(3) Retiring Treasury Stock.Retired treasury shares have the status of
authorized and unissued shares. The accounting is similar to the sale of treasury
stock except the debits are to the Paid-in Capital accounts applicable to the
retired shares.
15-18
E. (L.O. 5)Preferred Stock.Preferred stock is usually issued with a par value. Sometimes,
preferred stock has more debt characteristics than equity characteristics. Preferred stock is
a special class of stock which may carry a variety of features or preferences.
1. Preference as to dividends.Preferred stockholders receive dividends before common
stockholders are paid dividends. The dividend preference is expressed as a percentage
of par value or as a specific dollar amount.
a.
Cumulative preferred stock. Dividends in arrears must be paid before payment

of the current years dividend to either preferred or common stockholders.
Dividends in arrears are not a liability until declared by the Board of Directors. They
are disclosed in the footnotes.
b.
Participating preferred stock. Preferred stockholders share ratably with common

stockholders in any dividends beyond the prescribed preference rate.
2. Preference as to assets in the event of liquidation.

3. Convertible into common stock.
4. Callable at the option of the corporationat set prices.
5. Nonvoting.
6.
Redeemable preferred stock. This preference has a mandatory redemption period or

redemption feature that the issuer cannot control.
a.
Because it has characteristics of debt, the FASB requires that it be classified as

liabilities and be measured and accounted for similar to liabilities.
F. Accounting and Reporting of Preferred Stock.

1. The accounting for preferred stock at issuance is similar to common stock. The
proceeds are allocated between the par value of the preferred stock and additional
paid-in capital.
2. Convertible preferred stock is reported as part of stockholders equity.
G. (L.O. 6)Dividend Policy.
1.
Very few companies pay dividends in amounts equal to their legally available retained
earnings. Among the reasons: reinvestment of earnings in assets, the desire to
build up a cushion, and the smoothing out of dividend payments.
2.
Legality of dividends.The legality of a dividend is determined by applicable state laws.
3.
Financial condition of the company:Before dividends are declared, the availability of

funds to pay the dividend should be considered.
4.
The SEC encourages companies to disclose their dividend policy in the annual report.
15-19
H. (L.O. 7)Types of Dividends.

TEACHING TIP
Use Illustration 15-5 to emphasize the importance of various dates in distributing dividends
and to summarize the various types of dividend distributions.
1.
Cash dividends.Once declared, a dividend (except a stock dividend) is a liability (usually

current). Dividends are not declared and paid on treasury stock.
2.
Property dividends.These are dividends payable in assets of the corporation other than
cash. Just prior to declaration, the fair value principle is used in valuing the assets
distributed as dividends.
3.
Liquidating dividends.Dividends that are not based on earnings are liquidating

dividends. They reduce paid-in capital when declared.
I. (L.O. 8)Stock dividends and stock splits.No assets are distributed and each stockholder
retains the same proportionate interest in the corporation.
1.
Small (ordinary) stock dividends.The fair value of the stock issued is used to record
the stock dividend by debiting Retained Earnings and crediting Common Stock and Paidin Capital in Excess of Par.
2.
Large stock dividends.If the dividend is more than 20-25% of the outstanding shares,
then the par value of the stock issued is used to record the stock dividend by debiting
Retained Earnings and crediting Common Stock.
3. Stock splits.No entry is made to recognize a stock split. A memorandum note is made
to indicate that the number of shares outstanding and the par value of the shares have
changed.
TEACHING TIP
Illustration 15-6 summarizes the differences between stock splits and stock dividends.
J. Disclosure of Restrictions on Retained Earnings.
1.
Restrictions are best disclosed by note, and should include the source of the restriction,
pertinent provisions, and the amount of retained earnings subject to restriction, or the
amount not restricted.
K. (L.O. 9)Presentation and Analysis of Stockholders Equity.

1. Presentation.
15-20
a.
On the balance sheet, three categories normally appear.

(1) Capital stock.
(2) Additional paid-in-capital.
(3) Retained earnings or deficit.
b.
On the statement of stockholders equity, the basic format is usually:

Beginning balance + Additions Deductions = Ending balance
c.
2.
Disclosures related to stockholders equity include dividend and liquidation

preferences, participation rights, and call and conversion information.
Analysis.Several ratios use stockholders equity amounts to evaluate a companys

profitability and long-term solvency.
Rate of Return
=
On Common Stock Equity Average common stockholders' equity
Payout Ratio =
Book Value Per Share =

a.
Cash dividends
Common stockholders' equity
Outstanding shares
Trading on the equity at a gain occurs when the return on total assets is lower
than the rate of return on the common stockholders investment.
TEACHING TIP
Illustration 15-7 presents the ratios using stockholders equity amounts used to measure
profitability and long-term solvency.
*L. (L.O. 10)Dividend Preferences and Book Value per Share.
1. Dividend preferences.
a.
Preferred stock is noncumulative and nonparticipating.
b.
Preferred stock is cumulative and nonparticipating.
c.
Preferred stock is noncumulative and fully participating.
d.
Preferred stock is cumulative and fully participating.
2. Book value per share.

15-21
Net assets
a.
In simplest form:
b.
Complications may occur if preferred stock exists. For example:
Outstanding shares at end of year
(1) Preferred dividends are in arrears.

(2) Preferred stock is participating.
(3) The redemption or liquidation value of the preferred stock is higher than its
carrying amount.
c.
These complications require that the retained earnings be allocated between the
preferred and common stockholders when computing the book value per share.
*M. IFRS Insights

1. The primary IFRS related to stockholders equity are IAS 1 (Presentation of Financial
Statements), IAS 32 (Financial Instruments: Presentation), and IAS 39 (Financial
Instruments: Recognition and Measurement).
2. Similarities
a. The accounting for the issuance of shares and purchase of treasury stock are
similar under both IFRS and GAAP.
b. The accounting for declaration and payment of dividends and the accounting for
stock splits are similar under both IFRS and GAAP.
3. Differences
15-22
a.
Major differences relate to terminology used, introduction of concepts such as

revaluation surplus, and presentation of stockholders equity information.
b.
Many countries have different investor groups than the United States. For example,
in Germany, financial institutions like banks are not only the major creditors but
often are the largest shareholders as well. In the United States and the United
Kingdom, many companies rely on substantial investment from private investors.
c.
The accounting for treasury share retirements differs between IFRS and GAAP.
Under GAAP, a company has three options: (1) charge the excess of the cost of
treasury shares over par value to retained earnings, (2) allocate the difference
between paid-in capital and retained earnings, or (3) charge the entire amount to
paid-in capital. Under IFRS, the excess may have to be charged to paid-in capital,
depending on the original transaction related to the issuance of the shares.
d.
The statement of changes in equity is usually referred to as the statement of

stockholders equity (or shareholders equity) under GAAP.
e.
Both IFRS and GAAP use the term retained earnings. However, IFRS relies on the
term reserve as a dumping ground for other types of equity transactions, such as
other comprehensive income items as well as various types of unusual transactions
related to convertible debt and share option contracts. GAAP relies on the account
Accumulated Other Comprehensive Income (Loss). We also use this account in the
discussion below, as it appears this account is gaining prominence within the IFRS
literature.
f.
Under IFRS, it is common to report revaluation surplus related to increases or

decreases in items such as property, plant, and equipment; mineral resources; and
intangible assets. The term surplus is generally not used in GAAP. In addition,
unrealized gains on the above items are not reported in the financial statements
under GAAP.
15-23
ILLUSTRATION 15-1
COMPONENTS OF CAPITAL
15-24
15-25
ILLUSTRATION 15-2
SOURCES OF CHANGES IN STOCKHOLDERS EQUITY
15-26
15-27
ILLUSTRATION 15-3
ACCOUNTING FOR THE ISSUANCE OF STOCK
15-28
15-29
ILLUSTRATION 15-4
TREASURY STOCK TRANSACTIONSCOST METHOD
15-30
ILLUSTRATION 15-4 (continued)
15-31
ILLUSTRATION 15-5
JOURNAL ENTRIES FOR VARIOUS TYPES OF
DIVIDEND DISTRIBUTIONS
15-32
15-33
ILLUSTRATION 15-6
EFFECTS OF COMMON STOCK DIVIDENDS AND STOCK SPLITS
ON STOCKHOLDERS EQUITY
15-34
15-35
ILLUSTRATION 15-7
STOCKHOLDERS EQUITY ANALYSIS
15-36

CH 15

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CH 15

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CHAPTER 15

1. Corporate form: capital

4. Lump sum sales; noncash stock transactions;

11, 12, 16,

8. Cash, property, and

10. Stock dividends and stock

*13. Dividend preferences

*This material is covered in an Appendix to the chapter.

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Discuss the characteristics of the corporate

Identify the key components of stockholders

Explain the accounting procedures for issuing

Describe the accounting for treasury stock.

Explain the accounting for and reporting

Describe the policies used in distributing

Identify the various forms of dividend

11, 12, 15,

Explain the accounting for small and large

11, 13, 14,

Indicate how to present and analyze

Explain the different types of preferred stock

Compare the procedures for accounting for

ASSIGNMENT CHARACTERISTICS TABLE

Recording the issuances of common stock.

Recording the issuance of common and preferred stock.

Stock issued for land.

Lump-sum sale of stock with bonds.

Lump-sum sales of stock with preferred stock.

Stock issuances and repurchase.

Effect of treasury stock transactions on financials.

Preferred stock entries and dividends.

Correcting entries for equity transactions.

Analysis of equity data and equity section preparation.

Equity items on the balance sheet.

Stock split and stock dividend.

Entries for stock dividends and stock splits.

Stockholders equity section.

Comparison of alternative forms of financing.

Trading on the equity analysis.

Preferred stock dividends.

Computation of book value per share.

Equity transactions and statement preparation.

Treasury stock transactions and presentation.

Equity transactions and statement preparation.

Stock transactionslump sum.

Treasury stockcost method.

Treasury stockcost methodequity section preparation.

Dividends and splits.

Stockholders equity section of balance sheet.

Preemptive rights and dilution of ownership.

Issuance of stock for land.

Stock dividends and splits.

Stock dividend, cash dividend, and treasury stock.

Treasury stock, ethics.

*This material is presented in an appendix to the chapter.

Discuss the characteristics of the corporate form of organization.

*This material is covered in an Appendix to the chapter.

Record Date (March 25)

Payment Date (April 6)

Unrealized Holding Gain or LossIncome...........

When the stock is issued, the entry is:

Large Stock Dividend

Book Value Per Share =