Corporations: Paid-in Capital, Retained Earnings, Dividends, and Treasury Stock

Read this chapter, which outlines the different sources of paid-in capital and how they are presented on the balance sheet. This chapter also covers treasury stock, dividends, stock splits, and price-per-share and price-per-earnings ratios.

Analyzing and using the financial results – Earnings per share and price-earnings ratio

Understanding the learning objectives

  • Paid-in capital is presented in the stockholders' equity section of the balance sheet. Each source of paid-in capital is listed separately.

  • Sources of paid-in capital are:

  • (a) Common stock.
    (b) Preferred stock.
    (c) In excess of par value or stated value (common and preferred).
    (d) Stock dividends.
    (e) Treasury stock transactions.
    (f) Donations.

  • Cash dividend of 3 percent on USD 100,000 of outstanding common stock: declared on July 1 and paid on September 15.

July 1 Retained earnings (-SE) 3,000
Dividends payable (+L) 3,000
Sept. 15 Dividends payable (-L) 3,000
Cash (-A) 3,000

Ten percent stock dividend on 10,000 shares of common stock outstanding; par value, USD 100; market value at declaration, USD 125 per share (declared on January 1 and paid on February 1).

Jan. 1 Retained earnings (1,000 shares x $125) (-SE) 125,000
Stock dividends distributable – Common (1,000 shares x $100) (+SE) 100,000
Paid-in Capital – Stock dividends (1,000 shares x $25) (+SE) 25,000
Feb. 1 Stock dividend distributable – Common (-SE)
Common stock (+SE)

  • Thirty percent stock dividend on 10,000 shares of common stock outstanding: declared on January 1 and payable on February 1; par value, USD 100.

Jan. 1 Retained earnings (3,000 shares x $100) (-SE) 300,000
Stock dividend distributable – Common (+SE) 300,000
Feb. 1 Stock dividend distributable – Common (+SE) 300,000
Common stock (-SE) 300,000

  • Stock split: 1,000 shares of USD 50 par value common stock replaced by 2,000 shares of USD 25 par value common stock.

Common stock - $50 par value (-SE) 50,000
Common stock - $25 par value (+SE) 50,000

  • Retained earnings appropriation: USD 75,000 appropriated for plant expansion.
Retained earnings (-SE) 75,000
Retained earnings appropriated for plant expansion (+SE) 75,000

  • Treasury stock transactions: 100 shares of common stock were reacquired at USD 100 each and reissued for USD 105 each.
Treasury stock – Common (100 shares x $100) 10,000
Cash 10,000
Cash (100 shares x $105) 10,500
Treasury stock – Common (100 shares x $100) 10,000
Paid-in Capital – Common treasury stock transactions (100 shares x $5) 500

  • The income or loss (net of tax effect) from the segment's operations for the portion of the current year before it was discontinued is reported on the income statement below "Income from continuing operations".

  • The gain or loss (net of tax effect) on disposal of the segment is also reported in that same section of the income statement.

  • Extraordinary items are both unusual in nature and infrequent in occurrence. Extraordinary items appear on the income statement (net-of-tax effect) below "Income from continuing operations".

  • In the period in which a change in principle is made, the nature of the change, its justification, and its effect on net income must be disclosed in the financial statements. Also, the cumulative effect of the change on prior years' income (net of tax effect) must be shown on the income statement for the year of the change below "Income from continuing operations".

  • Prior period adjustments consist of errors in previously published financial statements. Prior period adjustments appear (net-of-tax effect) as a correction to the beginning retained earnings balance on the statement of retained earnings.

  • EPS equals the income available to common stockholders divided by the weighted-average number of common shares outstanding. Income available to common stockholders is net income less any dividends on preferred stock. EPS provides information on the return of an investment in common stock.

  • The price-earnings ratio equals the current market price per share of common stock divided by EPS. The price-earnings ratio indicates whether a stock has a future high income potential as compared to other stocks.