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8-1

CHAPTER 8

Accounting for and Presentation

of Owners’ Equity

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8-2

Nature of Owners’ Equity

Less
Total Owners’ Equity

Treasury
Stock Paid-in Capital Retained
Earnings

Preferred Common
Stock Stock

Par
Par or
or Additional
Additional Par
Par or
or Additional
Additional
Stated Paid-In
Paid-In Stated Paid-In
Paid-In
Value
Value Capital Value
Value Capital

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LO1
Owners’ Equity Section
Owners' Equity
Paid-in capital
Common stock $1 par, 100,000 shares
issued and 95,000 outstanding $ 100,000
Additional paid-in capital 2,800,000
Total paid-in capital 2,900,000
Retained earnings 1,400,000
Total paid-in capital and retained earnings 4,300,000
Less: cost of treasury stock (5,000 shares) (150,000)
Total owners' equity $ 4,150,000

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8-4

LO1
Paid-in Capital
Common Stock
On January 01, 2008, Matrix, Inc. issued 100,000 of its $3 par value
common stock for $14 per share. The following entry is recorded:
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2008
Jan. 1 Cash 1,400,000
Common stock 300,000
Additional-paid-in-capital 1,100,000

This transaction has the following effect on the financial statements of Matrix:
Balance Sheet Income Statement
Owners' Net
Assets = Liabilities + Equity income = Revenues - Expenses
Common
Cash Stock
+1,400,000 +300,000
Additional
Paid-in
Capital
+1,100,000

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LO1
Common Stock
Issued shares Issued shares
that have been include outstanding
reacquired. and treasury
Treasury shares.
Unissued

Outstanding
Authorized Issued shares that
are owned by
Shares stockholders.

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LO2
Preferred Stock
Normally
Normally nono voting
voting Has
Has aa par
par or
or stated
stated
rights,
rights, but
but dividend
dividend value
value with
with dividend
dividend
payment
payment has
has expressed
expressed as as aa
preference
preference over
over percent
percent ofof par.
par.
common
common stock.
stock.

IfIf callable
callable,,
may
may be be retired.
retired.
IfIf convertible
convertible,, maymay be
be
exchanged
exchanged for for
common
common shares.
shares.
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LO2
Preferred Stock
Normally,
Normally, preferred
preferred stock
stock is
is cumulative
cumulative meaning
meaning that
that all
all
dividends
dividends must
must be
be paid
paid before
before any
any dividends
dividends can
can be
be
paid
paid to
to common
common shareholders.
shareholders.

Preferred
Preferred may
may be
be noncumulative
noncumulative.. IfIf dividends
dividends are
are not
not
paid,
paid, the
the company
company is
is not
not required
required to to make-up
make-up the
the
missed
missed dividends.
dividends.
Matrix, Inc. has 50,000, $100 par value, 6%, cumulative preferred
stock outstanding. Calculate the annual dividend on the stock.

50,000
50,000 ×× $100
$100 == $5,000,000
$5,000,000 total
total par
par × 6%
6% == $300,000
$300,000 dividend
dividend

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8-8

LO2 Preferred Stock Versus Bonds

Comparison of Preferred Stock and Bonds Payable
Similarities
Preferred Stock Bonds Payable
Dividend is usually fixed Interest is fixed claim to
claim to income income
Redemption value is fixed Maturity value is a fixed claim
claim to assets to assets
Is usually callable and may be Is usually callable and may be
convertible convertible
Differences
Dividend may be skipped, Interest must be paid or firm
even if it must be caught up faces bankruptcy
before payments to common
Principal must be paid at
No maturity date
maturity
Dividends are not an Interest is a tax deductible
expense and are not tax expense
deductible
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LO1+2
Additional Paid-in Capital
Represents the excess of the amount
received from the sale of preferred or
common stock over par (or stated) value

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LO1+2
Retained Earnings
Represents the cumulative earnings of a
corporation less the cumulative dividends paid
since the business started operations.

Retained earnings
is NOT cash.

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LO3
Cash Dividends

Dividends
Dividends must
must bebe The
The company
company mustmust have
have
declared
declared byby the
the board
board sufficient
sufficient cash
cash and
and
of
of directors
directors before
before retained
retained earnings
earnings
they
they can
can be
be legally
legally paid.
paid. to
to pay
pay the
the dividend.
dividend.

The
The company
company is is not
not
legally
legally required
required to to
pay
pay dividends,
dividends, butbut
once
once declared
declared aa
legal
legal liability
liability
is
is created
created
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LO3
Cash Dividend
On
On January
January 5,
5, 2008,
2008, the
the Board
Board of Directors
Directors of Matrix,
Matrix,
Inc.
Inc. declares
declares aa cash
cash dividend
dividend of
of $1
$1 per
per share
share on
on the
the
500,000 shares of common stock outstanding. The
dividend is
is payable
payable to
to stockholders
stockholders of record on
February 5, and will be paid on March 5.

Date of declaration – Jan. 5

GENERAL JOURNAL
Date Account Titles and Explanation Debit Cre dit
2008
Jan. 5 Retained ea rnings 500,000
Divide nds payable 500,000

Balance Sheet Income Statement

Owners' Net
Assets = Liabilities + Equity income = Revenues - Expenses
Dividends Retained
payable earnings
+500,000 −500,000

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LO3
Cash Dividend
On
On January
January 5,
5, 2008,
2008, the
the Board
Board of Directors
Directors of Matrix,
Matrix,
Inc.
Inc. declares
declares aa cash
cash dividend
dividend of
of $1
$1 per
per share
share on
on the
the
500,000 shares of common stock outstanding. The
dividend is
is payable
payable to
to stockholders
stockholders of record on
February 5, and will be paid on March 5.

Date of record – Feb. 5

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8-14

LO3
Cash Dividend
On
On January
January 5,5, the Board of Directors of Matrix, Inc.
declares
declares aa cash
cash dividend
dividend ofof $1
$1 per
per share
share on
on the
the 500,000
500,000
shares
shares ofof common
common stock
stock outstanding.
outstanding. The
The dividend
dividend is
is
payable
payable to
to stockholders
stockholders ofof record
record on
on February
February 5,
5, and
and
will be paid on March 5.

Date of payment – Mar. 5

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2008
Mar. 5 Dividends payable 500,000
Cash 500,000

Balance Sheet Income Statement

Owners' Net
Assets = Liabilities + Equity income = Revenues - Expenses
Dividends
Cash payable
−500,000 −500,000

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LO4
Stock Dividends
Distribution of additional shares of stock to
stockholders.

No change in par value Stockholders retain percentage

of stock or in total ownership in the company
stockholders’ equity. (preemptive right)

Reasons for stock dividends:

 Preserve cash.
 Decrease market price of stock.
 Reduce retained earnings.

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LO4
Stock Dividend

Small Stock Dividend Large Stock Dividend

Stock dividend less than Stock dividend more than
25% of outstanding 25% or the outstanding
shares. shares.

Record at current Record at par or stated

market value of stock. value of stock.

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LO4
Stock Dividend
On May 10, 2008, Matrix, Inc. declares and distributes a 2% stock dividend
on its 500,000 common shares outstanding. Par Par value
value is
is $1.00
$1.00 per
per share
share
and the current market value is $17 per share.

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2008
May 10 Retained earnings 170,000
Common stock 10,000
Additional paid-in-capital 160,000

Common shares outstanding 500,000

Dividend rate 2%
New shares issued 10,000
Market price per share $ 17
Value of dividend $ 170,000

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LO4 Stock Dividend

On May 10, 2008, Matrix, Inc. declares and distributes a 2% stock
dividend on its 500,000 common shares outstanding. Par value is $1.00
per share and the current market value is $17 per share.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2008
May 10 Retained earnings 170,000
Common stock 10,000
Additional paid-in-capital 160,000

Balance Sheet Income Statement

Owners' Net
Assets = Liabilities + Equity income = Revenues - Expenses
Retained
earnings
−170,000
Common
stock
+10,000
Additional
paid-in
capital
+160,000

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LO4
Stock Split

Increase the
Decrease the par
number of shares
value per share.
outstanding.

No change to
total
stockholder’s
equity.

No journal entry required.

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LO4
Stock Split

Matrix, Inc. has 300,000 shares of $1 par

value common stock outstanding before a
2–for–1 stock split.

Before Split After Split

Common Shares 300,000 × 2 600,000
Par Value per Share $ 1.00 ÷ 2 $ 0.50
Total Par Value $ 300,000 $ 300,000

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LO5
Other Comprehensive Income
A new category in owners’ equity called
accumulated other comprehensive income
(loss) includes the following unrealized
changes to owners’ equity:
1. Cumulative foreign currency translation
adjustments,
2. Unrealized gains or losses on available-for-sale
investments, net of related income taxes,
3. Additional minimum pension liability adjustments,
net of related income taxes.
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LO6
Treasury Stock
On
On July
July 25,
25, 2008,
2008, Matrix,
Matrix, Inc.
Inc. repurchases
repurchases 5,000
5,000 of
of its
its
common
common shares
shares in
in the
the open
open market
market for
for $30
$30 per
per share.
share.

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2008
July 25 Treasury stock 150,000
Cash 150,000

Balance Sheet Income Statement

Owners' Net
Assets = Liabilities + Equity income = Revenues - Expenses
Treasury
Cash stock
−150,000 −150,000

Contra owners’ equity account

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LO6 Treasury Stock

On
On Aug.
Aug. 30,
30, 2008,
2008, Matrix,
Matrix, Inc.
Inc. resells
resells 2,000 of its
treasury stock in the
the open
open market
market for $35 per share.

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2008
Aug. 30 Cash 70,000
Treasury stock 60,000
Aditional paid-in capital 10,000

2,000 × $30 cost per share

Balance Sheet Income Statement
Owners' Net
Assets = Liabilities + Equity income = Revenues - Expenses
Treasury
Cash stock
+70,000 +60,000
Additional
paid-in
capital
+10,000

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LO7
Proprietorships and Partnerships
Proprietorships (single owner) and partnerships (two
or more owners) do not issue stock.
Proprietorship Partnership
Owners equity: Owners' equity
John Jones, Capital $ 562,500 John Jones, Capital $ 125,000
John Jones, Drawing (41,200) John Jones, Drawing (12,000)
Owners equity: $ 521,300 Ralph Smith, Capital 125,000
Ralph Smith, Drawing (12,000)
Mary West, Capital 250,000
Drawing accounts are Mary West, Drawings (20,000)
Owners' equity: $ 456,000
distributions to owners
similar to dividends.

Net income and drawing accounts are transferred

to capital accounts at the end of the period.

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LO7
Not-for-Profit Organizations
Owners’ equity in not-for-profit and
governmental organizations are referred
to as fund balances. Individual resource
providers do not have specific claims
against an organization’s assets.

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End of Chapter 8

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