Topic 4 - Accounting For Shareholders Equity-Contributed Capital PDF

ACCOUNTING FOR STOCKHOLDERS’
ACCOUNTING FOR STOCKHOLDERS’

EQUITY
EQUITY-CONTRIBUTED CAPITAL
ACCOUNTING AND REPORTING FOR EQUITIES

PRESENTATION
Objectives
AT END OF PRESENTATION, YOU SHOULD BE ABLE TO:
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.
4. Describe the accounting for treasury stock.
5. Explain the accounting for and reporting of preferred stock.
6. Describe the policies used in distributing dividends.
7. Identify the various forms of dividend distributions.
8. Explain the accounting for small and large stock dividends, and for
stock splits.
9. Indicate how to present and analyze stockholders’ equity.
Stockholders’ Equity
The Corporate Corporate Preferred Dividend Presentation

Form Capital Stock Policy and Analysis
Company's Issuance of Features Financial Presentation

act- stock Accounting condition and Analysis
incorporation Reacquisition for and dividend
Capital stock of shares reporting distributions
or share preferred Types of
system stock dividends
Variety of Stock split
ownership Disclosure of
interests restrictions
Common
Preferred
The Corporate Form of Organization
Three primary forms of business organization
Sole Corporation-
Partnership
Proprietorship company
Special characteristics of the corporate form:

1. Influenced by the company’s act.
2. Use of capital stock or share system to raise funds.
3. Development of a variety of ownership interests.
LO 1 Discuss the characteristics of the corporate form of organization.

Corporate Law (company's act)

Companies must submit Articles of Association
and the Memorandum of Association in the
country in which they are incorporated.
Accounting for stockholders’ equity follows the

provisions of the company’s act of the country the
business is incorporated.

Capital Stock or Share System

In the absence of restrictive provisions, each common
share share carries the following rights:
1. To share proportionately in profits and losses.
2. To share proportionately in management (the right to

vote for directors).
3. To share proportionately in assets upon liquidation.
4. To share proportionately in any new issues of stock of

the same class—called the preemptive right.

Variety of Ownership Interests
Common /ordinary stock represents basic ownership
interest.
Bears ultimate risks of loss.
Receives the benefits of success.
Not guaranteed dividends nor assets upon
dissolution.
Preferred stock is created by contract, when
stockholders’ sacrifice certain rights in return for
other rights or privileges, usually dividend
preference.
Share Capital
Common Stock
Account
Contributed Additional Paid-
Capital in Capital
Account
Preferred Stock
Account
Two Primary
Sources of Retained Earnings
Account
Equity Assets –
Liabilities =
Less:
Treasury Stock
Equity
Account
LO 2 Identify the key components of stockholders’ equity.

Share Capital
Issuance of Stock
Shares authorized - Shares sold - Shares issued
Accounting problems:
1. Par value stock.
2. No-par stock.
3. Stock issued with other securities.
4. Stock issued in noncash transactions.
5. Costs of issuing stock.
LO 3 Explain the accounting procedures for issuing shares of stock.

Share Capital
Par Value Stock
Low par values help companies avoid a contingent

liability.
Corporations maintain accounts for:

Preferred Stock or Common Stock.
Additional Paid-in Capital

Issue of Share Capital
BC ltd. issues 300,000 shares of sh.10 par value

common stock for sh4,500,000. Prepare BC’s
journal entry.
Journal entry:
Cash 4,500,000
Common stock (300,000 x sh.10) 3,000,000
Additional paid-in capital 1,500,00000

No-Par Stock
Reasons for issuance:
Avoids contingent liability.
Avoids confusion over recording par value
versus fair market value.
In Kenya company’s act require that share have a

par value.

Example: Assume BC Ltd issued 600,000 shares of no-

par common stock for sh.8,200,000. Prepare BC’s journal
entry if (a) the stock has no stated value, and (b) the
stock has a stated value of sh.2 per share.
Journal entry:
a. Cash 8,200,000
Common stock 8,200,000
b. Cash 8,200,000
Common stock (600,000 x sh.2) 1,200,000
Stock Issued with Other Securities
Two methods of allocating proceeds:

1. the proportional method – used when the
market values of both securities are known
and
2. the incremental method- used when the
market value of only one of the securities
is known.

Example: BC Ltd issued 300,000 shares of sh.10 par value common
stock and 100,000 shares of sh.50 par value preferred stock for a
lump sum of sh.13,500,000. The common stock has a market value
of sh.20 per share, and the preferred stock has a market value of
sh.90 per share.
Number Amount Total Percent

Common stock 300000 x 20.00 = 6,000,000 40%
Preferred stock 100000 x 90.00 9,000,000 60%
Fair Market Value 15,000,000 100%
Allocation: Common Preferred Proportional

Issue price 13,500.00 13,500.00 Method
Allocation % 0.40 0.60
Total 5,400.00 8,100.00
Journal entry share Capital
Example: BC ltd issued 300,000 shares of sh10 par value common
stock and 100,000 shares of sh50 par value preferred stock for a
of sh.20 per share, and the preferred stock has a market value of
sh90 per share.
Required :Journal entry using Proportional method:

Cash 13,500,000
Preferred stock (100,000 x sh.50) 5,000,000
Additional paid-in capital-preferred 3,100,000
Common stock (300,000 x sh.10) 3,000,000
Additional paid-in capital-common 2,400,000

Share Capital Issue- incremental method
Example: BC ltd issued 300,000 shares of sh.10 par value common
stock and 100,000 shares of sh.50 par value preferred stock for a
of sh.20 per share, and the value of the preferred stock is
unknown.
Number Amount Total

Common stock 300,000 x 20 = 6,000,000
Preferred stock 100,000 x 0
Fair Market Value 6,000,000
Allocation:
Issue price
Common Preferred
13,500,000
Incremental
Common -6,000,000 Method
Total 6,000,000 7,500,000

Issue of share Capital- incremental method
BC ltd issued 300,000 shares of sh10 par value common stock and
100 shares of sh50 par value preferred stock for a lump sum of
sh13,500,000. The common stock has a market value of sh20 per
share, and the value of the preferred stock is unknown.
Required :Journal entry using the Incremental method

Cash 13,500,000
Preferred stock (100,000 x sh.50) 5,000,000
Additional paid-in capital-preferred 2,500,000
Common stock (300,000 x sh.10) 3,000,000
Additional paid-in capital-common 3,000,000
Stock Issued in Noncash Transactions

The general rule: Companies should record stock
issued for services or property other than cash at
either the:
fair value of the stock issued or
fair value of the noncash consideration
received,
whichever is more clearly determinable.

Corporate Capital
Example BC ltd was organized on January 1, 2015. It is
authorized to issue 500,000,000 shares ofsh.2 par value
per share of common stock. Prepare the journal entry to
record the following.
April 1: Issued 24,000,000 shares of common stock for

land. The asking price of the land was sh.90,000,000; the
fair market value of the land was sh.80,000,000.
Land (at fair market value) 80,000,000

Common stock (24,000,000 x sh.2) 48,000,000

Example 2 BC ltd was organized on January 1, 2015.value
It is authorized to issue 500,000,000 shares of sh.2 par
per share. Prepare the journal entry to record the
following.
Aug. 1: Issued 10,000,000 shares of common stock to a

lawyer in payment of their bill of sh.50,000,000 for
services rendered in helping the company organize.
Organization expense 50,000,000

Common stock (10,000,000 x sh.2) 20,000,000
Issue of share Capital
Costs of Issuing Stock

Direct costs incurred to sell stock, such as
underwriting costs,
accounting and legal fees,
printing costs, and
taxes,
should be reported as a reduction of the amounts
paid in (additional paid-in capital).

Reacquisition of Shares
Corporations purchase their outstanding stock:
To provide tax-efficient distributions of excess cash to
shareholders.
To increase earnings per share and return on equity.
To provide stock for employee stock compensation
contracts or to meet potential merger needs.
To thwart takeover attempts or to reduce the number of
stockholders.
To make a market in the stock.
LO 4 Describe the accounting for treasury stock.
Issue of share Capital
Purchase of Treasury Stock
Two acceptable methods:

Cost method (more widely used).
Par or Stated value method.
Treasury stock, reduces stockholders’ equity.

Repurchase of Share Capital
Illustration: BC issued 100,000 shares of $1 par value

common stock at a price of $10 per share. In addition, it
has retained earnings of $300,000.

Repurchase
Corporate
of Share
CapitalCapital
Illustration cont : BC Ltd issued 100,000 shares of $1

par value common stock at a price of $10 per share. In
addition, it has retained earnings of $300,000.
On January 20, 2015, BC ltd acquires 10,000 shares of
its stock at $11 per share.
Treasury stock 110,000

Cash 110,000
Repurchase
Corporate
of Share
Capital Capital
Illustration: Stockholders’ equity section for BC ltd.

after purchase of the treasury stock.

Re issue
Corporate
of Treasury
Capital Stock
Sale of Treasury Stock
Above Cost
Below Cost
Both increase total assets and stockholders’

equity.

Re issue of Treasury Stock
Illustration: BC Ltd acquired 10,000 shares of its

treasury stock at $11 per share. It now sells 1,000
shares at $15 per share on March 10. BC Ltd records
the entry as follows.
Cash 15,000
Treasury stock (1000 * 11) 11,000
Paid-in capital from treasury stock 4,000

Re issue of Treasury Capital
Illustration: If BC sells an additional 1,000 shares of

treasury stock on March 21 at $8 per share, it records
the sale as follows.
Cash 8,000

Re issue of Treasury Stock
Illustration: Assume that BC ltd. sells an additional

1,000 shares at $8 per share on April 10.
Cash 8,000
Retained earnings 2,000
Treasury Stock Retirement
Retiring Treasury Stock
This decision results in cancellation of the

treasury stock and a reduction in the number
of shares of issued stock.

Preferred Stock
Features often associated with preferred stock.
1. Preference as to dividends.
2. Preference as to assets in liquidation.
3. Some are Convertible into common stock.
4. Some are Callable (Redeemable) at the option of the
corporation.
5. Nonvoting (do not have voting rights).
LO 5 Explain the accounting for and reporting of preferred stock.

Preferred Stock
Features of Preferred Stock

 Cumulative
A corporation may attach
 Participating
whatever preferences or
 Convertible restrictions, as long as it
 Callable does not violate its state
incorporation law.
 Redeemable
Accounting for preferred stock at issuance is

similar to that for common stock.

Preferred Stock issue
Illustration: BC ltd. issues 10,000,000 shares of sh.10

par value preferred stock for sh12 cash per share. BC
ltd. records the issuance as follows:
Cash 120,000,000
Preferred stock 100,000,000
Paid-in capital in excess of par 20,000,000

Dividend Policy
Dividend distributions generally are based on

accumulated profits (retained earnings).
Few companies pay dividends in amounts equal to their

legally available retained earnings. Why?
Maintain agreements with creditors.
Meet state incorporation requirements.
To finance growth or expansion.
To smooth out dividend payments.
To build up a cushion against possible losses.
LO 6 Describe the policies used in distributing dividends.

Types of Dividends
1. Cash dividends. 3. Liquidating dividends.

2. Property dividends. 4. Stock dividends.
Dividends require information concerning three dates:

a. Date of declaration
b. Date of record- Date of closure of shareholders
register
c. Date of payment
Types of Dividends- Cash Dividends
Procedure of declaration
Board of directors propose the dividends
Shareholder approve the dividends at the AGM

hence concluding the declaration of cash dividends.
A declared cash dividend is a not a liability rather as

part of the shareholder’s equity since the can be
revoked .
Companies do not declare or pay cash dividends on

treasury stock.
LO 7 Identify the various forms of dividend distributions.

Cash Dividend
Illustration: BC ltd. declared a sh.50,000,00 cash dividend on
March 10, payable on April 6 to shareholders of record on
March 25.
Required: Journal Entries to record the transactions.
Debit Credit
March 10 (Declaration Date)
Retained earnings 50,000,000
Dividends payable 50,000,000
March 25 (Date of Record) No entry
April 6 (Payment Date)

Cash 50,000,000
Types of Dividends
Property Dividends
Dividends payable in assets other than cash.
Restate at fair value the property it will distribute,

recognizing any gain or loss.
Property Dividend
Illustration:
BC ltd declared a property dividend on Jan. 5th
and paid it Jan. 25th, in bonds held as an
investment; the bonds have a book value of
sh.100,000,000 and a fair market value of
sh,135,000,000 on the date of declaration.
Required: Journal Entries to record the

declaration and payment.
Property Dividend
On Date of Declaration
Investment in bonds 35,000,000

Debit Credit
Gain on investment 35,000,000
Retained earnings and 135,000,000
Property dividend payable 135,000,000

Date of Issuance
Property dividend payable 135,000,000
Investment in bonds 135,000,000
Types of Dividends
Liquidating Dividends
Any dividend not based on earnings reduces
corporate paid-in capital.
In Kenya, it is illegal to pay liquidating dividends

unless on liquidation of the company
LO 7 Identify the various forms of dividend distributions.

Liquidating Dividend
Example; BC ltd declared, on April 20, a dividend of

sh.500,000,000 payable on June 1. Of this amount,
sh.125,000,000 is a return of capital (liquidating Dividend).
Required :Prepare the April 20 and June 1 entries for BC ltd
Debit Credit
April 20 (Declaration Date)
June 1 (Payment Date)

Cash 500,000,000
Types of Dividends-Stock Dividends
Issuance of own stock to stockholders on a pro rata

basis, without receiving any consideration.
It is Done if management wishes to capitalize part

of the retained earnings- thus retain them on a
more permanent basis
The company in this case distributes no asset
When stock dividend is less than 20–25 percent of

the common shares outstanding, company transfers
fair market value from retained earnings (small stock
dividend).
LO 8 Explain the accounting for small and large stock
dividends, and for stock splits.
Types of Dividends-Stock
Stock Dividends Dividends
This method is justified on the ground that “ many

recipients of the stock dividends look upon them as
distribution of corporate earnings and usually in the
amounts equivalent to the fair value of the assets
received”
Stock dividends does not change the total stockholders’

equity
Stock Dividend
Illustration: BC ltd . has 5,000,000 shares issued and
outstanding. The par per share is sh.1, book value sh.32
and market value is sh.40.
Debit Credit
Assuming 10% stock dividend is declared
Common stock dividend distributable 500,000
When the Stock is issued

Common stock div. distributable 500,000
Common stock 500,000
Note :10% * 5,000,000*1 =500,000
Large Stock Dividend
A stock dividend of more than 20–25

percent of the number of shares
previously outstanding is called a large
stock dividend
With a large stock dividend , transfer

from retained earnings to capital stock
the par value of the stock issued.
Large Stock Dividend
Illustration: BC ltd. has 5,000,000 shares issued and

outstanding. The par value per share is sh1, book
value sh.32 and market value is sh.40.
Debit Credit
Assuming a 50% stock dividend is declared
Common stock dividend distributable 2,500,000
When the Stock is issued

Common stock dividend distributable 2,500,000
Common stock 2,500,000
Stock Split
This is done to reduce the market value of

shares and bring the share prices into a
more popular trading range .
No entry is recorded for a stock split.
It Decrease par value and increased number
of shares outstanding proportionately.
Stock Split
Illustration: BC ltd. has 5,000,000 shares issued and

outstanding. The par value per share is sh.1, book
value sh.32 and market value is sh.40. Assume the
company split each share into 2 shares of sh.0.5 par
value each.
Required :Journal Entry to record 2 for 1 Stock
Split
No Entry -- Disclosure that par is

now sh.0.50 and shares outstanding
are 10,000,000
Stock Split and Stock Dividend
From a legal point of view , a split increases

the number of shares outstanding and
reduces the par value per share; a stock
dividend does not decrease the par value per
share.
If the stock dividend is large, it has the same

effect on market price as a stock split as the
share prices reduce pro-rata to the increase
in number of common shares
Restrictions on Retained earnings
 Companies often restrict a portion of retained

earnings that will not be available for distribution as
dividends for a number of reasons:
 Contractual requirements with creditors
 Board of directors policy
 For retirement of bonds
 For expansion of plants
 Retirement of preferred shares
 For general business contingencies
Restrictions on Retained earnings
 The company transfers the amount of retained

earnings restricted to an account titled Appropriated
retained earnings
 The retained earnings section may therefore report
two separate amounts:
 Retained earnings free (unrestricted)
 Retained earnings appropriated (restricted)
 Many corporations may restrict retained earnings
without any formal journal entries
 Such restrictions are best described by notes
Presentation and Analysis of
Presentation-Statement of Financial Position
LO 9 Indicate how to present and analyze stockholders’ equity.

Presentation Statement of Stockholders’ Equity

Analysis
Rate of
Net income – Preferred dividends
Return on =
Common Stock Average common stockholders’ equity
Equity
Ratio shows how much of net income the company

earned for each shilling invested by the owners.

Illustration: BC. had net income of $360,000, declared

and paid preferred dividends of $54,000, and average
common stockholders’ equity of $2,550,000

Analysis
Cash dividends
Payout Ratio =
Net income – Preferred dividends
It is important to some investors that the payout

be sufficiently high to provide a good yield on the
stock.
Illustration: BC ltd . has cash dividends of $100,000

and net income of $500,000, and no preferred stock
outstanding.
Analysis
Common stockholders’ equity

Book Value
=
Per Share
Outstanding shares
The amount each share would receive if the

company were liquidated on the basis of amounts
reported on the statement of financial position.
Illustration: BC’s common stockholders’ equity is

$1,000,000 and it has 100,000 shares of common stock
outstanding.
Dividend Preferences
Illustration: Assume that in 2015, BC Company is to distribute
$50,000 as cash dividends, its outstanding common stock has a
par value of $400,000, and its 6 percent preferred stock has a
par value of $100,000. Show the allocation of dividends
between preferred and common under the following
independent situations:
1. If the preferred stock is noncumulative and nonparticipating:
LO 10 Explain the different types of preferred stock

dividends and their effect on book value per share.
Illustration: Assume that in 2015, BC Company is to distribute
par value of $100,000.
2. If the preferred stock is cumulative and nonparticipating, and BC

Company did not pay dividends on the preferred stock in the preceding
two years: compute the dividends to preferred and common

3. If the preferred stock is noncumulative and is fully participating:
Required :Compute the total preferred and common dividends

showing clearly the allocations .

Illustration: Assume that in 2015, BC ltd is to distribute
par value of $100,000.
4. If the preferred stock is cumulative and is fully participating,
and BC Ltd did not pay dividends on the preferred stock in
the preceding two years: compute the common and preferred
dividends
Book Value Per Share- With preferred shares
•Book value per share is computed as net assets (common equity)
divided by outstanding common shares at the end of the year.
•The computation becomes more complicated if a company has

preferred stock.
In the extract below compute the Book value per share

Analysis of Stockholders’ Equity
Assume that the same facts exist except that the 5 percent preferred
is cumulative, participating up to 8 percent, and that dividends for
three years before the current year are in arrears.
Required: Compute the Book Value per Share

The End
Thank You

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ACCOUNTING FOR STOCKHOLDERS’

ACCOUNTING FOR STOCKHOLDERS’

ACCOUNTING AND REPORTING FOR EQUITIES

The Corporate Corporate Preferred Dividend Presentation

Company's Issuance of Features Financial Presentation

Three primary forms of business organization

Special characteristics of the corporate form:

LO 1 Discuss the characteristics of the corporate form of organization.

Corporate Law (company's act)

Accounting for stockholders’ equity follows the

LO 1 Discuss the characteristics of the corporate form of organization.

Capital Stock or Share System

2. To share proportionately in management (the right to

4. To share proportionately in any new issues of stock of

LO 1 Discuss the characteristics of the corporate form of organization.

LO 2 Identify the key components of stockholders’ equity.

LO 3 Explain the accounting procedures for issuing shares of stock.

Par Value Stock

Low par values help companies avoid a contingent

Corporations maintain accounts for:

LO 3 Explain the accounting procedures for issuing shares of stock.

BC ltd. issues 300,000 shares of sh.10 par value

LO 3 Explain the accounting procedures for issuing shares of stock.

In Kenya company’s act require that share have a

LO 3 Explain the accounting procedures for issuing shares of stock.

Example: Assume BC Ltd issued 600,000 shares of no-

Stock Issued with Other Securities

Two methods of allocating proceeds:

LO 3 Explain the accounting procedures for issuing shares of stock.

Number Amount Total Percent

Allocation: Common Preferred Proportional

Required :Journal entry using Proportional method:

LO 3 Explain the accounting procedures for issuing shares of stock.

Number Amount Total

LO 3 Explain the accounting procedures for issuing shares of stock.

Required :Journal entry using the Incremental method

Stock Issued in Noncash Transactions

LO 3 Explain the accounting procedures for issuing shares of stock.

April 1: Issued 24,000,000 shares of common stock for

Land (at fair market value) 80,000,000

LO 3 Explain the accounting procedures for issuing shares of stock.

Aug. 1: Issued 10,000,000 shares of common stock to a

Organization expense 50,000,000

Costs of Issuing Stock

LO 3 Explain the accounting procedures for issuing shares of stock.

Purchase of Treasury Stock

Two acceptable methods:

Treasury stock, reduces stockholders’ equity.

LO 4 Describe the accounting for treasury stock.

Illustration: BC issued 100,000 shares of $1 par value

LO 4 Describe the accounting for treasury stock.

Illustration cont : BC Ltd issued 100,000 shares of $1

Treasury stock 110,000

Illustration: Stockholders’ equity section for BC ltd.

LO 4 Describe the accounting for treasury stock.

Sale of Treasury Stock

Both increase total assets and stockholders’

LO 4 Describe the accounting for treasury stock.

Illustration: BC Ltd acquired 10,000 shares of its

LO 4 Describe the accounting for treasury stock.

Illustration: If BC sells an additional 1,000 shares of

LO 4 Describe the accounting for treasury stock.

Illustration: Assume that BC ltd. sells an additional