Copyright 2012 John Wiley & Sons, Inc.

. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only) 15-1
CHAPTER 15
Stockholders Equity
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics Questions
Brief
Exercises Exercises Problems
Concepts
for Analysis
1. Stockholders rights;
corporate form.
1, 2, 3 1
2. Stockholders equity. 4, 5, 6, 16,
17, 18
3 7, 10,
16, 17
1, 2, 3, 9
3. Issuance of shares. 7, 10 1, 2, 6 1, 2, 4,
6, 9
1, 3, 4
4. Noncash stock trans-
actions; lump sum sales.
8, 9 4, 5 3, 4, 5, 6 1, 4 2
5. Treasury stock trans-
actions, cost method.
11, 12, 17 7, 8 3, 6, 7, 9,
10, 18
1, 2, 3,
5, 6, 7
7
6. Preferred stock. 3, 13,
14, 15
9 8 1, 3
7. Stockholders equity
accounts; classifications;
terminology.
10, 11, 17 9, 11, 12 3
8. Dividend policy. 19, 20, 21,
22, 25, 26
10 12, 15, 16 7, 10
9. Cash and stock dividends;
stock splits; property
dividends; liquidating
dividends.
22, 23, 24 10, 11, 12,
13, 14
13, 14,
15, 18
6, 7, 8,
10, 11
4, 5, 6
10. Restrictions of retained
earnings.
27, 28 9
11. Analysis. 17, 19, 20
*12. Dividend preferences
and book value.
29 15 21, 22,
23, 24
*This material is covered in an Appendix to the chapter.

15-2 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only)
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises Exercises Problems
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.
1, 2, 4, 5, 6 1, 2, 3, 4, 5,
6, 8, 9, 10
1, 3, 4, 9, 12
4. Describe the accounting for treasury stock. 3, 7, 8 6, 7, 9, 10, 18 1, 2, 3, 5,
6, 7, 9, 12
5. Explain the accounting for and reporting
of preferred stock.
9 5, 8 4
6. Describe the policies used in distributing
dividends.
10, 11, 12 16
7. Identify the various forms of dividend
distributions.
11, 12 11, 12, 15,
16, 18
3, 6, 7, 8,
9, 11, 12
8. Explain the accounting for small and large
stock dividends, and for stock splits.
13, 14 11, 13, 14,
15, 16, 18
3, 8, 10,
11, 12
9. Indicate how to present and analyze
stockholders equity.
3 17, 19, 20 1, 2, 6, 9,
11, 12
*10. Explain the different types of preferred stock
dividends and their effect on book value
per share.
15 8, 21, 22,
23, 24

Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only) 15-3
ASSIGNMENT CHARACTERISTICS TABLE
Item Description
Level of
Difficulty
Time
(minutes)
E15-1 Recording the issuances of common stock. Simple 1520
E15-2 Recording the issuance of common and preferred stock. Simple 1520
E15-3 Stock issued for land. Simple 1015
E15-4 Lump-sum sale of stock with bonds. Moderate 2025
E15-5 Lump-sum sales of stock with preferred stock. Simple 1015
E15-6 Stock issuances and repurchase. Moderate 2530
E15-7 Effect of treasury stock transactions on financials. Moderate 1520
E15-8 Preferred stock entries and dividends. Moderate 1520
E15-9 Correcting entries for equity transactions. Moderate 1520
E15-10 Analysis of equity data and equity section preparation. Moderate 2025
E15-11 Equity items on the balance sheet. Simple 1520
E15-12 Cash dividend and liquidating dividend. Simple 1015
E15-13 Stock split and stock dividend. Simple 1015
E15-14 Entries for stock dividends and stock splits. Simple 1012
E15-15 Dividend entries. Simple 1015
E15-16 Computation of retained earnings. Simple 0510
E15-17 Stockholders equity section. Moderate 2025
E15-18 Dividends and stockholders equity section. Moderate 3035
E15-19 Comparison of alternative forms of financing. Moderate 2025
E15-20 Trading on the equity analysis. Moderate 1520
*E15-21 Preferred dividends. Simple 1015
*E15-22 Preferred dividends. Moderate 1520
*E15-23 Preferred stock dividends. Complex 1520
*E15-24 Computation of book value per share. Moderate 1015
P15-1 Equity transactions and statement preparation. Moderate 5060
P15-2 Treasury stock transactions and presentation. Simple 2535
P15-3 Equity transactions and statement preparation. Moderate 2530
P15-4 Stock transactionslump sum. Moderate 2030
P15-5 Treasury stockcost method. Moderate 3040
P15-6 Treasury stockcost methodequity section preparation. Moderate 3040
P15-7 Cash dividend entries. Moderate 1520
P15-8 Dividends and splits. Moderate 2025
P15-9 Stockholders equity section of balance sheet. Simple 2025
P15-10 Stock dividends and stock split. Moderate 3545
P15-11 Stock and cash dividends. Simple 2535
P15-12 Analysis and classification of equity transactions. Complex 3545
CA15-1 Preemptive rights and dilution of ownership. Moderate 1020
CA15-2 Issuance of stock for land. Moderate 1520
CA15-3 Conceptual issuesequity. Moderate 2530
CA15-4 Stock dividends and splits. Simple 2530
CA15-5 Stock dividends. Simple 1520
CA15-6 Stock dividend, cash dividend, and treasury stock. Moderate 2025
CA15-7 Treasury stock, ethics. Moderate 1015
*This material is presented in an appendix to the chapter.

15-4 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only)
LEARNING OBJECTIVES
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.
*10. Explain the different types of preferred stock dividends and their effect on book value
per share.
*This material is covered in an Appendix to the chapter.

Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only) 15-5
CHAPTER REVIEW
1. Chapter 15 focuses on the stockholders equity section of the corporate form of business
organization. Stockholders equity represents the amount that was contributed by the
shareholders and the portion that was earned and retained by the enterprise. There is
a definite distinction between liabilities and stockholders equity that must be understood
if one is to effectively grasp the accounting treatment for equity issues. This chapter
addresses the accounting issues related to capital contributed by owners of a business
organization, and the means by which profits are distributed through dividends.
The Corporate Form of Organization
2. (L.O. 1) The corporate form of business organization begins with the submitting of
articles of incorporation to the state in which incorporation is desired. Assuming the
requirements are properly fulfilled, the corporation charter is issued and the corporation is
recognized as a legal entity subject to state law. The laws of the state of incorporation
that govern owners equity transactions are normally set out in the states business
corporation act.
3. Within a given class of stock, each share is exactly equal to every other share. A persons
percent of ownership in a corporation is determined by the number of shares he or she
possesses in relation to the total number of shares owned by all stockholders. In the absence
of restrictive provisions, each share carries the right to participate proportionately in: (a) profits,
(b) management, (c) corporate assets upon liquidation, and (d) any new issues of
stock of the same class (preemptive right).
4. The transfer of ownership between individuals in the corporate form of organization is
accomplished by one individual selling or transferring his or her shares to another
individual. The only requirement in terms of the corporation involved is that it be made
aware of the name of the individual owning the stock. A subsidiary ledger of stockholders
is maintained by the corporation for the purpose of dividend payments, issuance of stock
rights, and voting proxies. Many corporations employ independent registrars and transfer
agents who specialize in providing services for recording and transferring stock.
5. The basic ownership interest in a corporation is represented by common stock. Common
stock is guaranteed neither dividends nor assets upon dissolution of the corporation.
Thus, common stockholders are considered to hold a residual interest in the corporation.
However, common stockholders generally control the management of the corporation and
tend to profit most if the company is successful. In the event that a corporation has only
one authorized issue of capital stock, that issue is by definition common stock, whether or
not it is so designated in the charter.

15-6 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only)
Corporate Capital
6. (L.O. 2) Owners equity in a corporation is defined as stockholders equity, share-
holders equity, or corporate capital. The following categories normally appear as part of
stockholders equity.
a. Capital stock.
b. Additional paid-in capital.
c. Retained earnings.
Stockholders Equity: Contributed Capital
7. Capital stock and additional paid-in capital constitute contributed (paid-in) capital; retained
earnings represents the earned capital of the company not distributed as dividends.
Contributed capital (paid-in capital) is the total amount paid in on capital stock. Earned
capital is the capital that develops from profitable operations.
8. Stockholders equity is the difference between the assets and the liabilities of the
companyalso known as the residual interest. Stockholders equity is not a claim to
specific assets but a claim against a portion of the total assets.
Accounting for the Issuance of Stock
9. (L.O. 3) The par value of a stock has no relationship to its fair value. At present, the par
value associated with most capital stock issues is very low. Low par values help
companies avoid contingent liability associated with stock sold below par.
10. When par value stock is issued, the Capital Stock (common or preferred) account is
credited for an amount equal to par value times the number of shares issued. Any amount
received in excess of par value is credited to additional paid-in capital. For example, if
200 shares of common stock with a par value of $2 per share are sold for $500, the
following journal entry would be made:
Cash ............................................................................................ 500
Common Stock ................................................................... 400
Paid-in Capital in Excess of Par ..................................... 100
Par value stock is always credited at issue date for its par value times the number of
shares issued.
11. When no-par stock is issued, the Capital Stock account is credited for an amount equal
to the value of the consideration received. If no-par stock has a stated value, it may be
accounted for in the same way as true no-par stock. Alternatively, the stated value may
be considered similar to par value with any excess above stated value being accounted
for as additional paid-in capital.

Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only) 15-7
Lump Sum Sales
12. More than one class of stock is sometimes issued for a single payment or lump sum
amount. Such a transaction requires allocation of the proceeds between the classes of
securities involved. The two methods of allocation used are (a) the proportional method
and (b) the incremental method. The former method is used when the fair value for each
class of security is readily determinable, and the latter method is used when only one
classs fair value is known.
Stock Issued in Noncash Transactions
13. Stock issued for consideration other than cash should be recorded by using the fair value
of the consideration or the fair value of the stock issued, whichever is more clearly
determinable. In cases where the fair value of both items is not clearly determinable, the
board of directors has the authority to establish a value for the transaction.
Costs of Issuing Stock
14. Direct costs incurred to sell stock such as underwriting costs, accounting and legal fees,
and printing costs should be debited to Paid-in Capital in Excess of Par. Management
salaries and other indirect costs related to the stock issue should be expensed as
incurred.
Treasury Stock
15. (L.O. 4) Treasury stock is a corporations own stock that (a) was outstanding, (b) has been
reacquired by the corporation, and (c) is not retired. Treasury stock is not an asset and
should be shown in the balance sheet as a reduction of stockholders equity. Treasury
stock is essentially the same as unissued stock. The reasons corporations purchase their
outstanding stock include: (a) to provide taxefficient distributions of excess cash to
shareholders; (b) to increase earnings per share and return on equity; (c) to provide stock
for employee stock compensation contracts; (d) to thwart takeover attempts or to reduce
the number of stockholders; and (e) to make a market in the stock.
16. Two methods are used in accounting for treasury stock, the cost method and the par
value method. Under the cost method, treasury stock is recorded in the accounts at
acquisition cost. When the treasury stock is reissued the Treasury Stock account is
credited for the acquisition cost. If treasury stock is reissued for more than its acquisition
cost, the excess amount is credited to Paid-in Capital from Treasury Stock. If treasury
stock is reissued for less than its acquisition cost, the difference should be debited to any
paid-in capital from previous treasury stock transactions. If the balance in this account is
insufficient, the remaining difference is charged to retained earnings. The following example
shows the accounting for treasury stock under the cost method.
10,000 shares of common stock with a par value of $5 per share were originally issued at
$12 per share.

15-8 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only)
A. 2,000 shares of common stock are reacquired for $20,000.
Entry for Purchase
Treasury Stock................................................................... 20,000
Cash............................................................................... 20,000
B. 1,000 shares of treasury stock are resold for $8,000.
Entry for Resale
Cash ..................................................................................... 8,000
Retained Earnings............................................................. 2,000
Treasury Stock............................................................. 10,000
17. The cost of treasury stock is shown in the balance sheet as a deduction from the total of
all stockholders equity accounts.
Preferred Stock
18. (L.O. 5) Preferred stock is the term used to describe a class of stock that possesses
certain preferences or features not possessed by the common stock. The following
features are those most often associated with preferred stock issues:
a. Preference as to dividends.
b. Preference as to assets in the event of liquidation.
c. Convertible into common stock.
d. Callable at the option of the corporation.
e. Nonvoting.
Some features used to distinguish preferred stock from common stock tend to be restrictive.
For example, preferred stock may be nonvoting, noncumulative, and nonparticipating.
A corporation may attach whatever preferences or restrictions in whatever combination it
desires to a preferred stock issue so long as it does not specifically violate its state
incorporation law. The dividend preference of preferred stock is normally stated as a per-
centage of the preferred stocks par value. For example, 9% preferred stock with a par
value of $100 entitles its holder to an annual dividend of $9 per share.
However, a preference as to dividends does not assure the payment of dividends; it
merely assures that corporations must pay the applicable amount to the preferred stock
prior to paying any dividends on common stock.

Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only) 15-9
19. Certain terms are used to describe various features of preferred stock. These terms are
the following:
a. Cumulative. Dividends not paid in any year must be made up in a later year before
paying any dividends to common stockholders. Unpaid annual dividends on cumu-
lative preferred stock are referred to as dividends in arrears and are disclosed in a
note to the financial statements.
b. Participating. Holders of participating preferred stock share with the common stockholders
in any profit distribution beyond a prescribed rate. This participation involves a pro rata
distribution based on the total par value of the outstanding preferred and common stock.
c. Convertible. Preferred stockholders may, at their option, exchange their preferred
shares for common stock on the basis of a predetermined ratio.
d. Callable. At the option of the issuing corporation, preferred shares can be redeemed
at specified future dates and at stipulated prices.
e. Redeemable. The stock has a mandatory redemption period or a redemption feature
that the issuer cannot control.
Reporting of Preferred Stock
20. Preferred stock generally has no maturity date and therefore no legal obligation exists to
pay preferred stock. As a result, preferred stock is classified as part of stockholders equity.
Mandatory redeemable preferred stock, however, is to be reported as a liability.
Dividend Policy
21. (L.O. 6) Very few companies pay dividends in amounts equal to their legally available
retained earnings. The major reasons are: (a) agreements with creditors, (b) state corporation
laws, (c) to finance growth or expansion, (d) to provide for continuous dividends whether
in good or bad years, and (e) to build a cushion.
22. Before a dividend is declared, management must consider availability of funds to pay the
dividend. Directors must also consider economic conditions, most importantly, liquidity.
23. The SEC encourages companies to disclose their dividend policy in their annual report.
For example, companies that (a) have earnings but fail to pay dividends or (b) do not
expect to pay dividends in the foreseeable future are encouraged to report this information.
In addition, companies that have had a consistent pattern of paying dividends are
encouraged to indicate whether they intend to continue this practice in the future.
24. (L.O. 7) Dividends may be paid in cash (most common means), stock, or some other asset.
Dividends other than a stock dividend reduce the stockholders equity in a corporation
through an immediate or promised distribution of assets. When a stock dividend is declared,
the corporation does not pay out assets or incur a liability. It issues additional shares of
stock to each shareholder and nothing more.

15-10 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only)
Cash Dividends
25. The accounting for a cash dividend requires information concerning three dates: (a) date
of declaration, (b) date of record, and (c) date of payment. A liability is established by
a charge to retained earnings on the declaration date for the amount of the dividend
declared. No accounting entry is required on the date of record. The stockholders who
have earned the right to the dividend are determined by who owns the shares on the date
of record. The liability is liquidated on the payment date through a distribution of cash. The
following journal entries would be made by a corporation that declared a $50,000 cash
dividend on March 10, payable on April 6 to shareholders of record on March 25.
Declaration Date (March 10)
Retained Earnings (Cash Dividends Declared)........... 50,000
Dividends Payable ....................................................... 50,000
Record Date (March 25)
No entry
Payment Date (April 6)
Dividends Payable.............................................................. 50,000
Cash................................................................................ 50,000
Property Dividends
26. Property dividends represent distributions of corporate assets other than cash. According
to APB Opinion No. 29, a property dividend is a nonreciprocal transfer of nonmonetary
assets between an enterprise and its owners. Such transfers should be recorded at
the fair value of the assets transferred. Fair value is measured by the amount that
would be realized in an outright sale near the time of distribution. When the property
dividend is declared, fair value should be recognized in the accounts with the appropriate
gain or loss recorded. The fair value then serves as the basis used in accounting for the
property dividend. For example, if a corporation held stock of another company that it
intended to distribute to its own stockholders as a property dividend, it would first be
required to make sure the carrying amount reflected current fair value. If on the date the
dividend was declared, the difference between the cost and fair value of the stock to be
distributed was $75,000, the following additional entry would be made.
Equity Investments............................................................. 75,000
Unrealized Holding Gain or LossIncome............ 75,000
Liquidating Dividends
27. Liquidating dividends represent a return of the stockholders investment rather than
a distribution of profits. In a more general sense, any dividend not based on profits must
be a reduction of corporate capital, and to that extent, it is a liquidating dividend.

Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only) 15-11
Stock Dividends
28. (L.O. 8) A stock dividend can be defined as a capitalization of retained earnings that
results in a reduction in retained earnings and a corresponding increase in certain
contributed capital accounts. Total stockholders equity remains unchanged when a stock
dividend is distributed. Also, all stockholders retain their same proportionate share of
ownership in the corporation.
29. When the stock dividend is less than 2025% of the common shares outstanding at the
time of the dividend declaration, generally accepted accounting principles (GAAP) require
that the accounting for stock dividends be based on the fair value of the stock issued.
When a stock dividend is declared, Retained Earnings is debited at the fair value of the
stock to be distributed. The entry includes a credit to Common Stock Dividend
Distributable at par value times the number of shares, with any excess credited to Paid-
in Capital in Excess of Par. Common Stock Dividend Distributable is reported in the
stockholders equity section between the declaration date and date of issuance. For
example, consider the following set of facts. Vonesh Corporation, which has 50,000
shares of $10 par value common stock outstanding, declares a 10% stock dividend on
December 3. On the date of declaration the stock has a fair value of $25 per share. The
following entry would be made when the stock dividend is declared:
Retained Earnings (5,000 X $25) ................................... 125,000
Common Stock Dividend Distributable.................... 50,000
Paid-in Capital in Excess of Par ............................... 75,000
When the stock is issued, the entry is:
Common Stock Dividend Distributable.......................... 50,000
Common Stock ............................................................. 50,000
Stock Split
30. A stock split results in an increase or decrease in the number of shares outstanding with
a corresponding decrease or increase in the par or stated value per share. In general, no
accounting entry is required for a stock split as the total dollar amount of all stockholders
equity accounts remains unchanged. A stock split is usually intended to improve the
marketability of the shares by reducing the market price of the stock being split. In
general, the difference between a stock split and a stock dividend is based upon the size
of the distribution. If the number of shares issued in a stock dividend exceeds 20 or
25% of the shares outstanding, calling it a stock split is warranted, and only the
par value of the shares issued is transferred from retained earnings.
Restrictions on Retained Earnings
31. In many corporations restrictions on retained earnings or dividends exist, but no formal
journal entries are made. Such restrictions are best disclosed by note.

15-12 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only)
Stockholders Equity
32. (L.O. 9) An example of a comprehensive stockholders equity section taken from a balance
sheet is given in the textbook. A company should disclose the pertinent rights and privileges
of the various securities outstanding. Examples of information that should be disclosed
are dividend and liquidation preferences, participation rights, call prices, and dates.
33. Statements of stockholders equity are frequently presented in the following basic format:
a. Balance at the beginning of the period.
b. Additions.
c. Deductions.
d. Balance at the end of the period.
34. Several ratios use stockholders equity related amounts to evaluate a companys profitability
and long-term solvency. The following three ratios are discussed and illustrated in the
chapter: (1) rate of return on common stock equity, (2) payout ratio, (3) book value per share.
Rate of Return
On Common Stock Equity
=
Net income Preferred dividends
Average common stockholders' equity
Payout Ratio =
Cash dividends
Net income Preferred dividends
Book Value Per Share =
Common stockholders' equity
Outstanding shares
Dividend Preferences
*35. (L.O. 10) Preferred stock generally has a preference in the receipt of dividends. Preferred
stock can also carry features which require consideration at the time a dividend is
declared and at the time of payment. These features are (a) the cumulative feature, and
(b) the participating feature. The text material includes computational examples of these
features in various combinations showing their impact on dividend distributions when both
common and preferred stock are involved. When computing book value per share there
are additional complications.

Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only) 15-13
LECTURE OUTLINE
The material in this chapter is straightforward and can be covered in two class sessions. Treasury
stock transactions under the cost method should be emphasized. Consider emphasizing the
difference between stock splits and stock dividends and the accounting difference between small
and large stock dividends.
A. (L.O. 1) The Corporate Form of Organization.
1. The primary forms of business organization are the proprietorship, the partnership, and
the corporation.
2. Influence of state corporate lawEach state has its own business corporation act. These
acts are complex and vary in their provisions and definitions.
3. Capital stock systemEach share represents an ownership right with the following
privileges:
a. To share proportionately in profits and losses.
b. To share proportionately in management (vote for directors).
c. To share proportionately in corporate assets upon liquidation.
d. To share proportionately in any new issues of stock of the same class (preemptive
right).
The share system provides easy transferability of ownership interests.
4. Variety of ownership interests.
a. Common stock: The residual corporate interest that bears the ultimate risks of
loss and receives the benefits of success.
b. Preferred stock: In return for certain preferences to earnings a preferred stock-
holder may sacrifice their right to a voice in management or the right to share in
profits above a stated rate.
c. Different classes of common stock which may differ in voting rights.
B. (L.O. 2) Corporate Capital.
1. The stockholders interest in a company is a residual interest. It can be derived from
the basic accounting equation: assets less liabilities equals stockholders equity.

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2. The two primary sources of equity are:
TEACHING TIP
Illustration 15-1 can be used to provide an overview of the major components of Stockholders
Equity that are described in the chapter.
a. Stockholders investments (contributed capital).
b. Retained earnings (earned capital).
TEACHING TIP
Illustration 15-2 can be used to demonstrate the variety and scope of transactions and
events that cause changes in Stockholders Equity.
C. (L.O. 3) Accounting for the Issuance of Stock.
TEACHING TIP
Illustration 15-3 provides a numerical example of the journal entries made to issue par value
and no-par value stock.
1. Par value stock.
a. Paid-in capital in excess of par (excess over par).
2. No-par stock. The issuance of such stock avoids any contingent liability and also
prevents par value from being used as a basis for fair value. In some cases, no-par
stock is given a stated or minimum value.
3. Lump-sum sales. Either the proportional method or the incremental method can be
used to allocate proceeds among the different securities.
4. Noncash stock transactions. When stock is issued for services or property other than
cash the property or services should be recorded at either its fair value or the fair
value of the stock issued, whichever is more clearly determinable.
5. Costs of issuing stock. These costs are treated as a reduction of the amounts paid
in and debited to Paid-in Capital in Excess of Par.

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D. (L.O. 4) Reacquisition of Shares.
1. Corporations may buy their own stock for a variety of reasons.
a. To provide tax-efficient distributions of excess cash to shareholders.
b. To increase earnings per share and return on equity.
c. To provide stock for employee stock compensation contracts or to meet potential
merger needs.
d. To thwart takeover attempts or to reduce the number of shareholders.
e. To make a market for the stock.
2. Treasury stock is not an asset. Treasury stock does not vote, receive dividends, or
have the other rights afforded stockholders. A corporation cannot own a part of itself. It
is a contra-stockholders equity account.
3. Treasury stock is most often accounted for using the cost method.
TEACHING TIP
Illustration 15-4 provides a numerical example of the journal entries made under the cost
method.
a. The cost method results in debiting the Treasury Stock account for the reacquisition
cost and reporting this amount as a deduction from total paid-in capital and retained
earnings on the balance sheet.
(1) Sale of Treasury Stock above cost. The difference is credited to Paid-in
Capital from Treasury Stock. The company identifies which shares are sold
using a FIFO, average cost, or specific identification basis.
(2) Sale of Treasury Stock below cost. The difference is debited to:
(a) Paid-in Capital from Treasury Stock until that account is depleted, and then
(b) Retained Earnings.
(3) Retiring Treasury Stock. Retired treasury shares have the status of authorized
and unissued shares. The accounting is similar to the sale of treasury stock except
the debits are to the Paid-in Capital accounts applicable to the retired shares.

15-16 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only)
E. (L.O. 5) Preferred Stock: Usually issued with a par value. Sometimes, preferred stock
has more debt characteristics than equity characteristics. Preferred stock is a special class
of stock which may carry a variety of features or preferences including:
1. Preference as to dividends. Preferred stockholders are paid before common stockholders.
a. The dividend is expressed as a percentage of par value or as a specific dollar amount.
b. Cumulative preferred stockdividends in arrears must be paid before the current
years dividend is paid to either preferred or common stockholders. Dividends in
arrears are not a liability until declared by the Board of Directors. Dividends in arrears
are disclosed in the footnotes.
c. Participatingpreferred stockholders share ratably with common stockholders in
any dividends beyond the prescribed rate.
2. Preference as to assets in the event of liquidation.
3. Convertible into common stock.
4. Callable at the option of the corporationat set prices.
5. Nonvoting.
6. Debt characteristicssome preferred stock has all the characteristics of debt (fixed
return, no vote, and redeemable).
a. The FASB requires that redeemable preferred stock be classified as liabilities and
be measured and accounted for similar to liabilities.
F. (L.O. 6) Dividend Policy.
1. Very few companies pay dividends in amounts equal to their legally available retained
earnings. Among the reasons: reinvestment of earnings in assets, the desire to
build up a cushion, and the smoothing out of dividend payments.
2. Legality of dividends: The legality of a dividend can be determined by the applicable
state laws.
3. Financial condition of the company: Before dividends are declared, the availability of
funds to pay the dividend should be considered.
G. (L.O. 7) Types of Dividends.
TEACHING TIP
Use Illustration 15-5 to emphasize the importance of various dates in distributing dividends
and to summarize the various types of dividend distributions.
1. Cash dividends. Once declared, a dividend (except a stock dividend) is a liability (usually
current). Dividends are not declared and paid on treasury stock.

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2. Property dividends. These are dividends payable in assets of the corporation other than
cash. The fair value principle is used in valuing the assets distributed as dividends.
3. Liquidating dividends. Dividends not based on earnings are liquidating dividends, which
reduce paid-in capital.
4. (L.O. 8) Stock dividends. No assets are distributed and each stockholder retains the
same proportionate interest in the corporation.
a. Small (ordinary) stock dividends. The fair value of the stock issued is used to
record the stock dividend by debiting Retained Earnings and crediting Common
Stock and Paid-in Capital in Excess of Par.
b. Large stock dividends. If the dividend is more than 20-25% of the outstanding
shares, then the par value of the stock issued is used to record the stock dividend
by debiting Retained Earnings and crediting Common Stock.
5. Stock splits. No entry is made, only a memorandum note to indicate that the number of
shares outstanding and the par value of the shares has changed.
TEACHING TIP
Illustration 15-6 summarizes the differences between stock splits and stock dividends.
H. (L.O. 9) Presentation and Analysis of Stockholders Equity.
1. Presentation.
a. On the balance sheetthree categories normally appear.
(1) Capital stock.
(2) Additional paid-in-capital.
(3) Retained earnings or deficit.
b. On the statement of stockholders equitythe basic format is usually:
(1) Beginning balance.
(2) Additions.
(3) Deductions.
(4) Ending balance.
c. Disclosures related to stockholders equity include dividend and liquidation
preferences, participation rights, and call and conversion information.

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2. Analysis. Several ratios use stockholders equity amounts to evaluate a companys
profitability and long-term solvency.
a.
Rate of return on
common stock equity
=
Net income Preferred dividends
Average common stockholders equity
(1) Trading on the equity at a gain. When the return on total assets is lower
than the rate of return on the common stockholders investment.
b. Payout ratio =
Cash dividends
Net income preferred dividends
c. Book value per share =
Common stockholders' equity
Outstanding sharees
TEACHING TIP
Illustration 15-7 presents the ratios using stockholders equity amounts used to measure
profitability and long-term solvency.
I. (L.O. 10) APPENDIX 15A. Dividend Preferences and Book Value per Share.
1. Dividend preferences.
a. Preferred stock is noncumulative and nonparticipating.
b. Preferred stock is cumulative and nonparticipating.
c. Preferred stock is noncumulative and fully participating.
d. Preferred stock is cumulative and fully participating.
2. Book value per share.
a. In simplest form:
Net assets
Outstanding shares at end of year
b. Complications may occur if preferred stock exists. For example:
(1) Preferred dividends are in arrears.
(2) Preferred stock is participating.
(3) The redemption or liquidation value of the preferred stock is higher than its
carrying amount.
c. These complications require that the retained earnings be allocated between the
preferred and common stockholders when computing the book value per share.

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*IFRS Insights
The primary IFRS related to stockholders equity are IAS 1 (Presentation of Financial
Statements), IAS 32 (Financial Instruments: Presentation), and IAS 39 (Financial
Instruments: Recognition and Measurement). The accounting for transactions related to
stockholders equity, such as issuance of shares, purchase of treasury stock, and declaration
and payment of dividends, are similar under both IFRS and GAAP. Major differences relate to
terminology used, introduction of terms such as revaluation surplus, and presentation of
stockholders equity information.
RELEVANT FACTS
Many countries have different investor groups than the United States. For example, in
Germany, financial institutions like banks are not only the major creditors but often are the
largest shareholders as well. In the United States and the United Kingdom, many
companies rely on substantial investment from private investors.
The accounting for treasury share retirements differs between IFRS and GAAP. Under
GAAP, a company has three options: (1) charge the excess of the cost of treasury shares
over par value to retained earnings, (2) allocate the difference between paid-in capital and
retained earnings, or (3) charge the entire amount to paid-in capital. Under IFRS, the
excess may have to be charged to paid-in capital, depending on the original transaction
related to the issuance of the shares.
The statement of changes in equity is usually referred to as the statement of stockholders
equity (or shareholders equity) under GAAP.
Both IFRS and GAAP use the term retained earnings. However, IFRS relies on the term
reserve as a dumping ground for other types of equity transactions, such as other
comprehensive income items as well as various types of unusual transactions related to
convertible debt and share option contracts. GAAP relies on the account Accumulated
Other Comprehensive Income (Loss). We also use this account in the discussion below, as
it appears this account is gaining prominence within the IFRS literature.
Under IFRS, it is common to report Revaluation Surplus related to increases or decreases
in items such as property, plant, and equipment; mineral resources; and intangible assets.
The term surplus is generally not used in GAAP. In addition, unrealized gains on the above
items are not reported in the financial statements under GAAP.

15-20 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only)
ILLUSTRATION 15-1
COMPONENTS OF CAPITAL

Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only) 15-21
ILLUSTRATION 15-2
SOURCES OF CHANGES IN STOCKHOLDERS EQUITY

15-22 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only)
ILLUSTRATION 15-3
ACCOUNTING FOR THE ISSUANCE OF STOCK

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ILLUSTRATION 15-4
TREASURY STOCK TRANSACTIONSCOST METHOD

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ILLUSTRATION 15-4 (continued)

Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only) 15-25
ILLUSTRATION 15-5
JOURNAL ENTRIES FOR VARIOUS TYPES OF
DIVIDEND DISTRIBUTIONS

15-26 Copyright 2012 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 14/e Instructors Manual (For Instructor Use Only)
ILLUSTRATION 15-6
EFFECTS OF COMMON STOCK DIVIDENDS AND STOCK SPLITS
ON STOCKHOLDERS EQUITY

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ILLUSTRATION 15-7
RATIOS USING STOCKHOLDERS EQUITY
RELATED AMOUNTS