3-18-2024-AA Lesson

1

Horngren’s Accounting

Fourteenth Edition

Chapter 13

Stockholders’ Equity

2

Chapter 13 Learning
Objectives (1 of 2)

13.1 Identify the characteristics of a
corporation

13.2 Journalize the issuance of stock

13.3 Account for the purchase and sale
of treasury stock

13.4 Account for cash dividends, stock
dividends, and stock splits

3

Chapter 13 Learning
Objectives (2 of 2)

13.5 Prepare a corporate income
statement including earnings per
share

13.6 Explain how equity is reported
for a corporation

13.7 Use earnings per share, rate of
return on common stockholders’
equity, and the price/earnings ratio to
evaluate business performance

4

Learning Objective 13.1

Identify the
characteristics of a
corporation

5

Stockholders’ Equity Basics (1 of 3)

• The maximum number of shares of stock a corporation

may issue is called authorized stock.

• Issued stock has been issued by the corporation.

• Stock held by the stockholders is called outstanding

stock.

• Stockholders are issued stock certificates.

• Capital stock represents a stockholder’s ownership.

6

Characteristics of Corporations (1 of 2)

Unique characteristics of corporations:

• Separate legal entity

• Number of owners

• No personal liability of the owner(s)

• Lack of mutual agency

• Indefinite life

• Taxation

• Capital accumulation

7

Stockholders’ Equity Basics (2 of 3)

Exhibit F:13-2 Stock Certificate

8

Multiple Choice

Which is an advantage of a shareholder over a partner

1

owner cannot directly control business operation

2

owner can easily transfer his interest

3

Owner's liability is limited

4

b and c

9

Stockholders’ Equity Basics (3 of 3)

Exhibit F:13-3 Categories of Stock

10

Multiple Choice

Share of stock a corporation is allowed to issue

1

subscribed shares

2

treasury shares

3

authorized shares

4

issue shares

11

Stockholders’ Rights

A stockholder has four basic rights:

1. Vote―Each share of basic ownership in the corporation

carries one vote.

2. Dividends―Stockholders receive a proportionate part

of any dividend declared and paid.

3. Liquidation―Stockholders receive their proportionate

share of any assets remaining after liquidation.

4. Preemptive right―Stockholders have a right to

maintain their proportional ownership.

12

Capital Stock

• Corporations issue different classes of stock:

– Common stock represents basic ownership.
– Preferred stock gives owners certain advantages

over common stock.

• Stock may carry a par value or may be no-par stock.

• Stated value stock is no-par stock that has been

assigned an amount similar to par value.

13

Multiple Choice

Shares of a company that do not guarantee a dividend and have more risk than preferred. Right to vote for board of directors as well as on issues that come before the board at annual meetings.

1

Preferred Stock

2

Investor

3

Common Stock

4

Dividends

5

Stockbroker

14

Multiple Choice

Shares of ownership of a company in which the shareholder is guaranteed a dividend if one is declared and whose shares are usually not as volatile as common stock; no voting rights.

1

Preferred Stock

2

Investor

3

Common Stock

4

Dividends

5

Stockbroker

15

Multiple Choice

Part of a company's profits (earnings) that is pays as money to stockholders.

1

Preferred Stock

2

Investor

3

Common Stock

4

Dividends

5

Stockbroker

16

Stockholders’ Equity

• A corporation’s equity is called stockholders’ equity.

• The two basic sources of stockholders’ equity are:

– Paid-in capital represents amounts received from

stockholders for stock.

– Retained earnings is equity earned by profitable

operations that is not distributed to stockholders.

17

Learning Objective 13.2

Journalize the
issuance of stock

18

How Is the Issuance of Stock
Accounted For?

• Companies raise capital by issuing stock.

• A company can sell its stock directly to stockholders, or it

can use the services of an underwriter.

• Stocks of public companies are bought and sold on a stock

exchange, such as the New York Stock Exchange (NYSE)
or NASDAQ Stock Market.

• The issue price is the amount a corporation receives from

issuing stock.

19

Multiple Choice

The principle amount (face value)

1

Coupon Rate

2

Maturity

3

Par Value

4

Yield

20

Issuing Common Stock at a
Premium (2 of 2)

Exhibit F:13-4 Stockholders’ Equity

21

Multiple Choice

Which of the following is defined as, "Skeptical/negative market conditions."

1

Bull Market

2

Bear Market

22

Multiple Choice

Which of the following is defined as, "Positive/ambitious market conditions."

1

Bull Market

2

Bear Market

23

Multiple Choice

People typically respond to bull markets by...

1

Buying stocks

2

Selling stocks

3

Not acting

24

Multiple Choice

People typically respond to bear markets by...

1

Buying stocks

2

Selling stocks

3

Not acting

25

Multiple Choice

What is the difference between common and preferred stock?

1

Common stock gives voting rights, while preferred

2

Preferred stock gives voting rights, while common stock receives dividends

3

Common stock has priority to dividends, while preferred stock has a higher dividend yield

4

Preferred stock has priority to dividends, while common stock has a higher dividend yield

26

Learning Objective 13.3

Account for the
purchase and sale of
treasury stock

27

How Is Treasury Stock Accounted For?

• Treasury stock is a company’s stock that it has previously

issued and later reacquired.

• Companies purchase treasury stock to:

– Increase net assets by buying low and selling high
– Support the company’s stock price
– Avoid a takeover
– Reward valued employees with stock

28

Multiple Choice

What is a possible reason a company would sell stock?

1

To hire more people

2

To expand its business

3

To develop new technology

4

All of the above

29

Treasury Stock Basics

The basics of accounting for treasury stock:

• The Treasury Stock account has a normal debit balance.

Treasury Stock is a contra equity account.

• Treasury stock is recorded at cost, without reference to par

value.

• The Treasury Stock account is reported beneath Retained

Earnings on the balance sheet as a reduction to equity.

30

Purchase of Treasury Stock

On March 31, Smart Touch Learning purchases 1,000
shares of previously issued common stock, paying $5 per
share.

31

Sale at Cost

Smart Touch Learning sells 100 of the treasury shares on
April 1 for $5 each.

32

Sale Above Cost

Smart Touch Learning resells 200 of its treasury shares for
$6 per share on April 2. (Recall that the cost was $5 per
share.)

33

Sale Below Cost (1 of 2)

On April 3, Smart Touch Learning resells 200 treasury
shares for $4.30 each.

34

Sale Below Cost (2 of 2)

What happens if Smart Touch Learning resells an additional 200
treasury shares for $4.50 each on April 4?

35

Sale of Treasury Stock (1 of 2)

Exhibit F:13-7 Stockholders’ Equity After Treasury Stock Transactions

36

Sale of Treasury Stock (2 of 2)

How many common
shares are outstanding
on April 4?

• The 23,000 common

shares previously
issued minus 300
treasury shares
equals 22,700
outstanding common
shares.

37

Retirement of Stock

• A corporation may retire its stock by canceling the stock

certificates.

• Retired stock cannot be reissued.

• To repurchase previously issued stock for retirement, we

debit the stock accounts and credit Cash.

– This removes the retired stock from the company’s

books.

– It also reduces total assets and total stockholders’

equity.

38

Learning Objective 13.4

Account for cash
dividends, stock
dividends, and stock
splits

39

How Are Dividends and Stock Splits
Accounted For?

• A profitable corporation may make distributions to

stockholders in the form of dividends.

• Dividends can be paid in the form of cash, stock, or other

property.

• Legal capital refers to the portion of stockholders’ equity

that cannot be used for dividends.

40

Cash Dividends

Three dividend dates are relevant:

• Declaration date

– The board of directors announces the intention to pay the

dividend, and a liability is created.

• Date of record

– This is the date the corporation records the stockholders

that will receive dividend checks.

• Payment date

– This is the date the dividend is paid to the stockholders.

41

Declaring and Paying
Dividends―Common Stock (1 of 3)

On May 1, Smart Touch Learning declares a $0.05 per
share cash dividend on 22,700 outstanding shares of
common stock.

42

Declaring and Paying
Dividends―Common Stock (2 of 3)

• On May 15, the date of record, no journal entry is

recorded.

• On May 30, Smart Touch Learning pays the dividend to its

shareholders.

43

Declaring and Paying
Dividends―Common Stock (3 of 3)

At the end of the accounting period, Smart Touch Learning
closes the Cash Dividends account to Retained Earnings.

44

Declaring and Paying
Dividends―Preferred Stock (1 of 6)

• The cash dividend rate on preferred stock is often

expressed as a percentage of the preferred stock par
value, such as 6%.

• Sometimes, cash dividends on preferred stock are

expressed as a flat dollar amount per share, such as $3
per share.

45

Declaring and Paying
Dividends―Preferred Stock (2 of 6)

Greg’s Games, Inc. has 1,000 outstanding shares of 6%,
$50 par value preferred stock. The dividend is computed as
follows:

Preferred dividend

Outstanding shares

Par value

Preferred dividend rate

=



1,000 shares

$50 par value per share

6%

=



$3,000=

46

Declaring and Paying
Dividends―Preferred Stock (3 of 6)

• A preferred stock dividend in arrears is a dividend that

has not been paid for the year.

• Preferred stock can be:

– Cumulative preferred stock―Preferred stock whose

owners must receive all dividends in arrears plus the
current year dividends before the corporation pays
dividends to the common stockholders

– Noncumulative preferred stock―Preferred stock

whose owners do not receive passed dividends

47

Declaring and Paying
Dividends―Preferred Stock (4 of 6)

Greg’s Games, Inc. has 1,000 outstanding shares of 6%,
$50 par value cumulative preferred stock. In 2025 the
business did not pay any cash dividends. On September 6,
2026, Greg’s Games declares a $50,000 total dividend.

48

Declaring and Paying
Dividends―Preferred Stock (5 of 6)

Greg’s Games’ entry to record the declaration of this
dividend on September 6, 2026.

49

Declaring and Paying
Dividends―Preferred Stock (6 of 6)

Greg’s Games, Inc. has 1,000 outstanding shares of 6%,
$50 par value noncumulative preferred stock. In 2025 the
business did not pay any cash dividends. On September 6,
2026, Greg’s Games declares a $50,000 total dividend.

50

Stock Dividends

• A stock dividend is a distribution of a corporation’s own

stock to its shareholders.

• Stock dividends have the following characteristics:

– They affect only stockholders’ equity accounts.
– They have no effect on total stockholders’ equity.
– They have no effect on assets or liabilities.

51

Why Issue Stock Dividends?

A company issues stock dividends in order to:

• Continue dividends but conserve cash

• Reduce the market price per share of its stock

• Reward investors

52

Recording Stock Dividends (1 of 6)

• There are three dates for a stock dividend:

– Declaration date
– Record date
– Distribution date

• A small stock dividend is less than 20% to 25% of issued

and outstanding stock.

• A large stock dividend is greater than 20% to 25% of

issued and outstanding stock.

53

Recording Stock Dividends (2 of 6)

Greg’s Games distributes a 5% common stock dividend on
2,000,000 shares issued and outstanding when the market
value is $50 per share and par value is $1 per share.
Declaration date entry:

54

Recording Stock Dividends (3 of 6)

On February 25, Greg’s Games distributes the common
stock and records the following:

55

Recording Stock Dividends (4 of 6)

After the journal entry for the declaration and issuance of the
common stock dividend and the closing entry to close Stock
Dividends to Retained Earnings, Greg’s Games’ accounts are as
follows:

56

Recording Stock Dividends (5 of 6)

Exhibit F:13-8 Stockholders’ Equity—Small Stock Dividend

57

Recording Stock Dividends (6 of 6)

On March 2, Greg’s Games declares a second common stock
dividend of 50% when the market value of Greg’s Games’
common stock is $50 per share.

• Cash dividends and stock dividends are always declared

based on the number of shares issued and outstanding.

58

Stock Splits (1 of 2)

• A stock split is fundamentally different from a stock

dividend.

• A stock split increases the number of issued and

outstanding shares of stock.

• A stock split decreases the par value and the market

value per share, whereas stock dividends do not affect
par value per share.

59

Stock Splits (2 of 2)

Assume that Greg’s Games has 3,150,000 shares issued
and outstanding of $1 par common stock. The market value
is $50 per share. Greg’s Games effects a 2-for-1 stock split.

Common Stock Before Stock Split

Blank

Common Stock After Stock Split

Blank

Common Stock—$1 Par Value; 3,150,000
shares issued and outstanding

$3,150,000

Common Stock—$0.50 Par Value;
6,300,000 shares issued and outstanding

$3,150,000

• No formal journal entry is needed.

• Instead, the split is recorded in a memorandum entry,

an entry in the journal that notes a significant event but
has no debit or credit amount.

60

Cash Dividends, Stock Dividends, and
Stock Splits Compared

Exhibit F:13-9 Effects of Dividends and Stock Splits on the Accounting
Equation

Effect On

Cash

Dividend

Small Stock

Dividend

Large Stock

Dividend

Stock Split

Total Assets

Decrease

No effect

Total Liabilities

No effect

Common Stock

No effect

Increase

No effect

Paid-In Capital in
Excess of Par

No effect

Increase

No effect

Retained Earnings

Decrease

No effect

Total Stockholders'
Equity

Decrease

No effect

61

Learning Objective 13.5

Prepare a corporate
income statement
including earnings per
share

62

Exhibit F:13-10 Kevin’s Vintage Guitars, Inc.—
Income Statement

63

Continuing Operations

• The first section of the Income Statement reports

continuing operations.

• Continuing operations should continue from period to

period.

• Income from continuing operations helps investors make

predictions about future earnings.

64

Discontinued Operations

• After continuing operations, an income statement may include gains

and losses from discontinued operations.

• These gains and losses occur when a company sells or disposes of

an identifiable division.

• They are reported separately from continuing operations because

this type of disposal does not occur frequently.

• In our example, income from discontinued operations of $35,000 is

taxed at 21% and is reported net of its income tax effect:

65

Earnings per Share

• Earnings per share (EPS) is the most widely used of all

business statistics.

• EPS reports the amount of net income (loss) for each

share of the company’s outstanding common stock.

• Earnings per share is calculated as net income minus

preferred dividends divided by the weighted average
number of common shares outstanding.

66

Learning Objective 13.6

Explain how equity is
reported for a corporation

67

How Is Equity Reported for a
Corporation?

• The statement of retained earnings reports how the

company’s retained earnings balance changed from the
beginning of the period to the end of the period.

• Companies can report a negative amount in retained

earnings. This is called a deficit.

68

Statement of Retained Earnings

Exhibit F:13-11 Statement of Retained Earnings

69

Appropriations of Retained Earnings

• Cash dividends and treasury stock purchases require a

cash payment.

• Banks often require a company to maintain a minimum

level of stockholders’ equity.

• Appropriations of retained earnings are retained

earnings restrictions recorded by journal entries.

70

Prior-Period Adjustments (1 of 2)

• Occasionally a company may make an accounting error as

a result of mathematical mistakes or other errors not
discovered until the following period.

• Corrections to Retained Earnings for errors of an earlier

period are called prior-period adjustments.

71

Prior-Period Adjustments (2 of 2)

Mountain Home, Inc. recorded $30,000 of salaries expense for 2025. The
correct amount of salaries expense was $40,000. In 2026, Mountain Home
paid the extra $10,000 in salaries owed for the prior year.

Exhibit F:13-12 Statement of Retained Earnings—Prior-period Adjustment

72

Statement of Stockholders’ Equity (1 of 2)

• The statement of stockholders’ equity is another option for

reporting the changes in stockholders’ equity of a
corporation.

• It reports the changes in all stockholders’ equity accounts.

73

Statement of Stockholders’ Equity (2 of 2)

Exhibit F:13-13 Statement of Stockholders’ Equity

74

Learning Objective 13.7

Use earnings per share, rate
of return on common
stockholders’ equity, and the
price/earnings ratio to
evaluate business
performance

75

How Do We Use Stockholders’ Equity Ratios to
Evaluate Business Performance?

• Investors are constantly comparing companies’ profits.

• Three important ratios are used for comparison:

– Earnings per share (EPS)
– Rate of return on common stockholders’ equity
– Price/earnings ratio

76

Earnings per Share (1 of 2)

• The final segment of a corporate income statement reports

the company’s earnings per share (EPS).

• EPS reports the amount of net income (loss) for each

share of the company’s outstanding common stock.

77

Earnings per Share (2 of 2)

PepsiCo’s Fiscal 2021 Annual Report reports the following
amounts:

PepsiCo’s earnings per share for fiscal 2021:

(

)

Earnings per share

Net income

Preferred dividends / Average number of common shares outstanding

=

−

(

)(

)

$7,618

$0 /

1,383 + 1380 / 2



=

−




$5.51 per share=

78

Price/Earnings Ratio

• The price/earnings ratio is the ratio of the market price of a

share of common stock to the company’s earnings per share.

• This ratio tells investors how much they should be willing to pay

for $1 of a company’s earnings.

• Assuming that PepsiCo’s Corporation has a market price of

$173.71 per share of common stock, PepsiCo’s price/earnings
ratio for fiscal year 2021 is:

=

Price/earnings ratio

Market price per share of common stock/Earnings per share

= $173.71 per share/$5.51 per share

= 31.53

79

Rate of Return on Common
Stockholders’ Equity

• Rate of return on common stockholders’ equity, often

shortened to return on equity, shows the relationship
between net income to common stockholders and their
average common equity invested in the company.

• For PepsiCo’s the rate of return on common stockholders’

equity for fiscal year 2021:

(

)

=

−

Rate of return on common stockholders' equity

Net income

Preferred dividends

/ Average common stockholders' equity

(

)(

)

$7,618

$0 /

$16,151 + $13,552 / 2



=

−





=

0.51

51%

80

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3-18-2024-AA

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