Chapter 11 Stockholders’ Equity: Capital Stock and Dividends 513GLOSSARY
List the major sources of paid-in capital, including
the various classes of stock. The main source of paid-
in capital is from issuing stock. The two primary classes of
stock are common stock and preferred stock. Preferred stock
may be cumulative or noncumulative. In addition to the is-
suance of stock, paid-in capital may arise from treasury
stock transactions.
Describe the financial statement effects of issuing
stock.When a corporation issues stock at par for cash,
the cash account is debited and the class of stock issued is
credited for its par amount. When a corporation issues stock
at more than par, Paid-In Capital in Excess of Par is credited
for the difference between the cash received and the par
value of the stock. When stock is issued in exchange for as-
sets other than cash, the assets acquired should be recorded
at their fair market value.
When no-par stock is issued, the entire proceeds are
credited to the stock account. No-par stock may be assigned
a stated value per share, and the excess of the proceeds over
the stated value may be credited to Paid-In Capital in
Excess of Stated Value.
Describe the financial statement effects of treasury
stock transactions. When a corporation buys its own
stock, the cost method of accounting is normally used.
Treasury Stock is debited for its cost, and Cash is credited.
If the stock is resold, Treasury Stock is credited for its cost,
and any difference between the cost and the selling price is
normally debited or credited to Paid-In Capital from Sale of
Treasury Stock.
Describe the effect of stock splits on the financial
statements.When a corporation reduces the par or
stated value of its common stock and issues a proportionate
number of additional shares, a stock split has occurred.
There are no changes in the balances of any corporation
accounts, and no entry is required for a stock split.
Analyze the impact of issuing common stock or
bonds.Common stock dilution occurs when a common
stock issuance results in an earnings per share decline.
Dilution can be avoided by issuing common stock when the
stock price is high. When capital is raised through debt, a
return in excess of the interest rate will cause earnings per
share to increase. In comparing the earnings per share
between a debt or common stock offering, the common
Accumulated other comprehensive income (loss)The
cumulative effect of other comprehensive income items dis-
closed in the Stockholders’ Equity section of the balance sheet.
Cash dividendA cash distribution of earnings by a corpo-
ration to its shareholders.
Common stockThe stock outstanding when a corporation
has issued only one class of stock.
Comprehensive income (loss)Net income and other com-
phensive income items combined together. Often disclosed
on the statement of stockholders’ equity.stock offering will be favored when the stock price is
high. The opposite is the case when the common stock price
is low.Describe the financial statement effects of cash divi-
dends and stock dividends. The entry to record a
declaration of cash dividends debits Retained Earnings and
credits Dividends Payable for each class of stock. The pay-
ment of dividends is recorded in the normal manner. When
a stock dividend is declared, Retained Earnings is debited
for the fair value of the stock to be issued. Stock Dividends
Distributable is credited for the par or stated value of the
common stock to be issued. The difference between the fair
value of the stock and its par or stated value is credited to
Paid-In Capital in Excess of Par–Common Stock. When the
stock is issued on the date of payment, Stock Dividends
Distributable is debited, and Common Stock is credited for
the par or stated value of the stock issued.Describe financial statement presentations of stock-
holders’ equity. The statement of stockholders’ equity
discloses changes in the stockholders’ equity accounts, in
columnar format. The balance of each account at the
bottom of the column reconciles with the balance sheet dis-
closure of each account. The statement of stockholders’
equity will often include a column for accumulated other
comprehensive income (loss), which identifies the other
comprehensive income (loss) items for the period. These
items include foreign currency items, pension liability ad-
justments, and unrealized gains and losses on investments.
These items are recognized for their impact on stockholders’
equity directly, rather than as net income on retained
earnings.Compute and interpret the dividend yield and divi-
dend payout ratio on common stock. The dividend
yield indicates the rate of return to stockholders in terms of
cash dividend distributions. It is computed by dividing the
annual dividends paid per share of common stock by the
market price per share at a specific date. This ratio is of spe-
cial interest to investors whose main objective is to receive a
current dividend return on their investment.
The dividend payout ratio measures dividend safety by
computing the percentage of net income paid out in divi-
dends. When this ratio is high, or exceeds 1.0, it suggests a
dividend rate that will be difficult to maintain.