Book cover for Intermediate Accounting

Intermediate Accounting

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

ISBN #9780470374948

13th Edition

695 Questions

Group icon
7,109 Students Helped

Homework Questions

Right arrow
Summary
Learning Objectives
Key Concepts
Example Problems
Explanations
Common Mistakes

Summary

Chapter 15 delves into the intricate details of stockholders’ equity in corporate accounting. It covers the core components such as contributed capital and retained earnings, as well as the procedures to record stock issuances, treasury stock transactions, and various dividend distributions. The chapter emphasizes the significance of accurate financial statement presentation and disclosure, particularly in relation to stock dividends and stock splits, ensuring stakeholders receive a transparent view of the corporation's financial health.

Learning Objectives

1

Explain the accounting treatment and presentation of stockholders’ equity.

2

Analyze the unique characteristics of the corporate form including legal structure and capital stock system.

3

Record and interpret transactions related to stock issuances, treasury stock, and dividend distributions.

4

Evaluate the impact of stock dividends and stock splits on financial statements and disclosures.

Key Concepts

CONCEPT

DEFINITION

Stockholders’ Equity

The residual interest in the assets of a corporation after deducting liabilities, comprising contributed capital, retained earnings, and other comprehensive income.

Contributed Capital

Funds provided by shareholders through the issuance of stock, including the par value of issued shares and any additional paid-in capital.

Retained Earnings

The accumulated net income of a corporation that has not been distributed to shareholders as dividends.

Treasury Stock

Shares that were previously issued and subsequently repurchased by the corporation, resulting in a reduction of total stockholders’ equity.

Stock Dividend

A dividend paid in the form of additional shares of the corporation rather than cash, affecting the number of shares outstanding and per-share metrics.

Stock Split

A corporate action that increases the number of shares outstanding by reducing the par (or stated) value per share, without changing total equity.

Example Problems

Example 1

In the absence of restrictive provisions, what are the basic rights of stockholders of a corporation?

Example 2

Why is a preemptive right important?

Example 3

Distinguish between common and preferred stock.

Example 4

Why is the distinction between paid-in capital and retained earnings important?

Example 5

Explain each of the following terms: authorized capital stock, unissued capital stock, issued capital stock, outstanding capital stock, and treasury stock.
Scroll left
Scroll right

Step-by-Step Explanations

QUESTION

How do you record a stock issuance when a corporation issues 1,000 shares at $10 per share with a par value of $1?

STEP-BY-STEP ANSWER:

Step 1: Calculate the total cash received. Multiply 1,000 shares by $10, which equals $10,000.
Step 2: Determine the par value portion. Multiply 1,000 shares by the par value of $1 to get $1,000.
Step 3: Calculate additional paid-in capital. Subtract the total par value ($1,000) from the total cash received ($10,000) to get $9,000.
Step 4: Record the journal entry by debiting Cash for $10,000, crediting Common Stock for $1,000, and crediting Additional Paid-In Capital for $9,000.
Final Answer: The entry is Debit Cash $10,000; Credit Common Stock $1,000; Credit Additional Paid-In Capital $9,000.

Stock Issuance

QUESTION

What are the steps to account for a stock dividend declared by a corporation?

STEP-BY-STEP ANSWER:

Step 1: Determine the percentage of the stock dividend and the number of new shares to be issued based on the current shares outstanding.
Step 2: Compute the fair market value of the additional shares to be issued and transfer that amount from retained earnings to contributed capital (often splitting the adjustment between common stock at par and additional paid-in capital).
Step 3: Record the declaration of the dividend by debiting Retained Earnings and crediting a Stock Dividends Distributable account.
Step 4: When the dividend is distributed, debit the Stock Dividends Distributable account and credit Common Stock.
Final Answer: The process involves calculating the dividend’s value, adjusting retained earnings, and subsequently issuing the shares with the proper journal entries.

Stock Dividend

Scroll left
Scroll right

Common Mistakes

  • Misclassifying treasury stock transactions or recording them at incorrect values.
  • Confusing stock dividends with cash dividends, leading to errors in adjusting retained earnings.
  • Neglecting the impact of stock splits on the par value and share count in the equity section.
  • Overlooking the need for detailed disclosures regarding changes in stockholders’ equity.
  • Failing to differentiate between contributed capital and retained earnings when processing dividend transactions.