Chapter-05

Owners’ Equity (Accounting for Issuance of Stock)

Corporation
A corporation is created by law, and its continued existence depends upon the corporate statutes
of the state in which it is incorporated. A corporation is a separate entity for both accounting and
legal purpose. As a legal entity, a corporation has most of the rights and privileges of a person.
Owners of a corporation are called stockholders or shareholders.

Special characteristics of the corporate form:

1. Influence of state corporate law.
• Corporation must submit articles of incorporation to the state in which
incorporation is desired.
• State issues a corporation charter.
• Advantage to incorporate in a state whose laws favor the corporate form of
business organization.

2. Use of capital stock or share system.

In the absence of restrictive provisions, each share carries the following rights:
• To share proportionately in profits and losses.
• To share proportionately in management (the right to vote for directors).
• To share proportionately in assets upon liquidation.
• To share proportionately in any new issues of stock of the same class—
called the preemptive right.

3. Development of a variety of ownership interests.

i) Common stock is the residual corporate interest.
• Bears ultimate risks of loss.
• Receives the benefits of success.
• Not guaranteed dividends nor assets upon dissolution.
ii) Preferred stock is a special class of stock is created by contract, when stockholders’
sacrifice certain rights in return for other rights or privileges, usually dividend
preference.
Features often associated with preferred stock:
1. Preference as to dividends.
2. Preference as to assets in the event of liquidation.
3. Convertible into common stock.
4. Callable at the option of the corporation.
 5. Nonvoting.

Corporate Capital
Two Primary Sources of Equity
1. Contributed Capital: i) Common Stock Account ii) Preferred Stock Account iii) Additional
Paid-in Capital Account
2. Retained Earnings Account
Less: Treasury Stock Account
Assets – Liabilities = Equity

Accounting procedures for issuing shares of stock:

Stock issue considerations
a) Authorized Capital: The amount of stock that a corporation is authorized to sell is
indicated in it MOA. The total amount of authorized stock at the time of incorporation
normally anticipates both initial and subsequent capital need of a company.
b) Issued Capital: A corporation can sell stock directly (privately held) or indirectly
(publicly held). To sell directly, it advertises its stock issuance to potential buyers. To sell
indirectly, a corporation pays a brokerage house to issue its stock.
c) Paid in Capital: Paid in capital is the term used to describe the total amount of cash and
other assets paid in to the corporation by stockholders in exchange for capital stock.
d) Market Value of Stock: Market value is the price at which a stock is bought and sold.
Expected future earnings, dividends, growth, and other company and economic factors
influence market value.
e) Par value stock: Par value stock is a class of stock assigned a par value, which an amount
is assigned per share by the corporation in its MOA.
f) No Par Value Stock: No Par Value Stock, or no par stock, is stock not assigned a value
per share by the corporate charter (MOA). No par stock may be no par with stated value
or no par without stated value. In case of former, the directors assigned a stated value per
share. Stated value per share becomes the minimum legal capital. In case of later, the
entire proceeds are treated as legal capital per share.

Accounting for Common Stock:

1. Common stock at par:

Date Accounts Title and Explanation Debit Credit
Cash *****
Common Stock *****

2. Common stock at premium:

Date Accounts Title and Explanation Debit Credit
Cash *****
 Common Stock *****
Paid in capital in excess of par *****

3. Common stock at discount:

Date Accounts Title and Explanation Debit Credit
Cash *****
Discount on Common stock *****
Common Stock *****

4. Common stock for service:

Date Accounts Title and Explanation Debit Credit
Organizational costs *****
Common Stock *****

5. Common stock for non cash assets:

Date Accounts Title and Explanation Debit Credit
Land or Others *****
Common Stock *****

6. Common stock for no par: Issuance 20,000 shares of no-par value common stock for Tk.
3,00,000 cash
Date Accounts Title and Explanation Debit Credit
Cash 3,00,000
Common Stock, No-par value 3,00,000

Accounting for Preferred Stock:

1. Common Preferred stock at par:

Date Accounts Title and Explanation Debit Credit
Cash *****
Preferred Stock *****

2. Common Preferred stock at premium:

Date Accounts Title and Explanation Debit Credit
Cash *****
Preferred Stock, par value *****
Paid in capital in excess of par *****

Accounting for Treasury Stock:

Treasury stock, also known as treasury shares or reacquired stock refers to previously
outstanding stock that is bought back from stockholders by the issuing company. The result is
that the total number of outstanding shares on the open market decreases. These shares are issued
but no longer outstanding and are not included in the distribution of dividends or the calculation
of earnings per share (EPS).
Treasury stock is a contra equity account recorded in the shareholder's equity section of
the balance sheet. Because treasury stock represents the number of shares repurchased from the
open market, it reduces shareholder's equity by the amount paid for the stock.

In addition to not issuing dividends and not being included in EPS calculations, treasury shares
also have no voting rights. The amount of treasury stock repurchased by a company may be
limited by its nation's regulatory body. In the United States, the Securities and Exchange
Commission (SEC) governs buybacks.

Corporations purchase their outstanding stock to:

• Provide tax-efficient distributions of excess cash to stockholders.

• Increase earnings per share and return on equity.
• Provide stock for employee stock compensation contracts or to meet potential
merger needs.
• Thwart (Impede, Hamper) takeover attempts or to reduce the number of
stockholders.
• Make a market in the stock.

Treasury Shares vs. Retired Shares

Treasury stock can be retired or held for resale in the open market. Retired shares are
permanently canceled and cannot be reissued later. Once retired, the shares are no longer listed
as treasury stock on a company's financial statements. Non-retired treasury shares can be
reissued through stock dividends, employee compensation, or a capital rising.

Companies use two general methods of handling treasury stock in the accounts: the cost method
and the par value method. Both methods are generally acceptable. The cost method enjoys more
widespread use.
• The cost method results in debiting the Treasury Stock account for the reacquisition cost and
in reporting this account as a deduction from the total paid-in capital and retained earnings on
the balance sheet.
• The par (stated) value method records all transactions in treasury shares at their par value and
reports the treasury stock as a deduction from capital stock only.

1. Purchase of Treasury Stock:

Date Accounts Title and Explanation Debit Credit
Treasury Stock *****
cash *****

2. Sale of Treasury Stock above cost:

Date Accounts Title and Explanation Debit Credit
Cash *****
 Treasury Stock *****
Paid in capital from Treasury Stock *****

3. Sale of Treasury Stock above cost:

Date Accounts Title and Explanation Debit Credit

Cash *****
Paid in capital from Treasury Stock *****
Treasury Stock *****

Dividend Policy

Types of Dividends
1. Cash dividends.
2. Property dividends
3. Liquidating dividends.
4. Stock dividends.
All dividends, except for stock dividends, reduce the total stockholders’ equity in the
corporation.
Three dates for dividends record:
a. Date of declaration
b. Date of record
c. Date of payment

Illustration: David Freight Corp. on June 10 declared a cash dividend of 50 cents a share on 1.8
million shares payable July 16 to all stockholders of record June 24.

At date of declaration (June 10)

Retained Earnings 900,000
Dividends Payable 900,000
At date of record (June 24) No entry
At date of payment (July 16)
Dividends Payable 900,000
Cash 900,000

Property Dividends
• Dividends payable in assets other than cash.
• Restate at fair value the property it will distribute, recognizing any gain or
loss.
Hopkins, Inc. transferred to stockholders some of its equity investments costing $1,250,000 by
declaring a property dividend on December 28, 2013, to be distributed on January 30, 2014, to
stockholders of record on January 15, 2014. At the date of declaration, the securities have a
market value of $2,000,000. Hopkins makes the following entries.

At date of declaration (December 28, 2013)

Equity Investments 750,000
Unrealized Holding Gain or Loss—Income 750,000
Retained Earnings 2,000,000
Property Dividends Payable 2,000,000

Hopkins, Inc. transferred to stockholders some of its equity investments costing $1,250,000 by
declaring a property dividend on December 28, 2013, to be distributed on January 30, 2014, to
stockholders of record on January 15, 2014. At the date of declaration, the securities have a
market value of $2,000,000. Hopkins makes the following entries.

At date of distribution (January 30, 2014)

Property Dividends Payable 2,000,000

Equity Investments 2,000,000

Liquidating Dividends
• Any dividend not based on earnings reduces corporate paid-in capital.
• The portion of these dividends in excess of accumulated income represents a return of
part of the stockholder’s investment

Illustration: Horaney Mines Inc. issued a “dividend” to its common stockholders of

$1,200,000. The cash dividend announcement noted stockholders should consider $900,000 as
income and the remainder a return of capital. Horaney Mines records the dividend as follows.

Date of declaration
Retained Earnings 900,000
Paid-in Capital in Excess of Par-Common 300,000
Dividends Payable 1,200,000
Date of payment
Dividends Payable 1,200,000
Cash 1,200,000

Stock Dividends and Stock Splits

Stock Dividends
• Issuance by a company of its own stock to stockholders on a pro rata basis,
without receiving any consideration.
• Used when management wishes to “capitalize” part of earnings.
• If stock dividend is less than 20–25 percent of the common shares
outstanding, company transfers fair market value from retained earnings
(small stock dividend).
Illustration: Koebele Corporation has outstanding 1,000 shares of $100 par value common
stock and retained earnings of $50,000. If Koebele declares a 10 percent stock dividend, it issues
100 additional shares to current stockholders. If the fair value of the stock at the time of the stock
dividend is $130 per share, the entry is:
Date of declaration
Retained Earnings 13,000
Common Stock Dividend Distributable 10,000
Paid-in Capital in Excess of Par-Common 3,000
Date of distribution
Common Stock Dividend Distributable 10,000
Common Stock 10,000

Stock Split
• To reduce the market value of shares.
• No entry recorded for a stock split.
• Decrease par value and increase number of shares.
Problem-01:
Omega company issued 10,000 shares of Tk. 10 per common stock for Tk. 1,50,000 on January
2, 2019. On February 5, the company issued 1,000 shares of Tk. 20 per preferred stock at Tk. 2
premium per share. Additional 2,000 shares of common stock were issued on April 13, 2019 to
the land holder to purchase the land. The fair market value of this land was Tk. 26,000. Record
the stock transactions and also show the presentation of shareholders equity on Balance sheet.
Assume that there was a credit balance of retained earnings total Tk. 3,000 at the end of
accounting period on December 31, 2019.
Solution-01:
Omega Company
Journal Entries

Debit Credit
Date Accounts Title and Explanation
(Tk.) (Tk.)
2019 Cash 1,50,000
January 2 Common stock-Tk. 10 par 1,00,000
Paid in capital in excess of Par common stock 50,000
(To record issue 10,000 common stock at Tk.
1,50,000)
February 5 Cash 22,000
Preferred stock-Tk. 20 par 20,000
Paid in capital in excess of Preferred stock 2,000
(To record issue 1,000 Preferred stock at Tk.
22)
April 13 Land 26,000
Common stock-Tk. 10 par 20,000
Paid in capital in excess of Par common stock 6,000
(To record issue 2,000 common stock to the
land holder)

Omega Company
Balance Sheet (Partial)
December 31, 2019

Particulars Tk. Tk.

Stockholder’s Equity
Paid-in Capital:
Common stock-Tk. 10 par value, 12,000 shares issued and outstanding 1,20,000
Add: Paid in capital in excess of Par- common stock 56,000 1,76,000
Preferred stock-Tk. 20 par value, 1,000 shares 20,000
Add: Paid in capital in excess of par- Preferred stock 2,000 22,000
Total Paid-in Capital 1,98,000
Retained Earnings 3,000
Total Stockholder’s Equity 2,01,000

Problem-02:
The Doss Pond Company issued 30,000 shares no par value at Tk. 6, 00,000 on January 7, 2015.
The directors of the company was decided that the value of the share should be Tk. 15 per share.
On March 15, the company issued 1,500 of Tk. 20 par value preferred stock to Mr. Box, who has
assisted to establish the company, as a settlement of debt Tk. 37,500. On May 17, 2015 the
company reacquired 5,000 shares of common stock for Tk. 17 per share. On June 15, the
company resale the reacquired stock 3,000 shares for Tk. 54,000. Again 1,500 treasury stock was
sold at Tk. 16 per share on July 20. Remaining 500 no-par stated value treasury stocks was
retired on December 25, 2015.
Journalize all the transactions and also show the presentation of shareholder’s equity on the
Balance sheet as on December 31, 2015. Assume that the closing balance of retained earnings
was Tk. 50,000.
Dos Pond Company
Journal Entries

Debit Credit
Date Accounts Title and Explanation
(Tk.) (Tk.)
2015 Cash 6,00,000
January 2 Common stock-Tk. 15 par 4,50,000
Paid in capital in excess of Par common stock 1,50,000
(To record issue 30,000 no par stated value
common stock at Tk. 6,00,000)
March 15 Organizational Costs 37,500
Preferred stock-Tk. 20 par 30,000
Paid in capital in excess of Preferred stock 7,500
(To record issue 1,500 Preferred stock par
value to meet organizational cost)
May 17 Treasury stock 85,000
Cash 85,000
(To record purchase 5,000 treasury stock at Tk.
17 each)
June 15 Cash 54,000
Treasury Stock 51,000
Paid in capital from Treasury Stock 3,000
(To record sale 3,000 treasury stock at above
cost.)
July 20 Cash 24,000
Paid in capital from Treasury Stock 1,500
Treasury Stock 25,500
(To record sale 3,000 treasury stock at above
 cost.)
December 25 Common Stock-Tk. 15 stated value (500X15) 7,500
Paid in capital in excess of stated value 2,500
(500X5)
Paid in capital from Treasury Stock 1,500
(3,000-1,500)
Treasury Stock (500X17) 8,500
Retained earnings (Balancing figure) 3,000

Dos Pond Company

Balance Sheet (Partial)
December 31, 2015

Particulars Tk. Tk.

Stockholder’s Equity
Paid-in Capital:
Common stock-Tk. 15 par value, 29,500 shares issued and outstanding 4,42,500
Add: Paid in capital in excess of Par- common stock (150000-2500) 1,47,500 5,90,000
Preferred stock-Tk. 20 par value, 1,500 shares 30,000
Add: Paid in capital in excess of par- Preferred stock 7,500 37,500
Total Paid-in Capital 6,27,500
Retained Earnings (50,000+3,000) 53,000
Total Stockholder’s Equity 6,80,500

Note:
1. On selling remaining treasury stock, any gain or loss balance of treasury stock
transactions should be zero.
2. Any balancing figure should be adjusted with Retained Earnings Account.

Problem-03:
Record the following transactions relating the stock in the books of ABC enterprise in 2019:

January 5 Common stock 10,000 shares of Tk. 10 par value was issued for Tk. 12 each.
March 3 Issued 1,500 preferred stock of Tk. 25 par value at Tk. 23 per shares.
August 7 Reacquired 4,000 own common stock from the market for Tk. 52,000.
October 2 Sale 3,000 common stock at Tk. 15 each which was purchased on August 7.
November 9 Resale 400 common stock for Tk. 4,800 that was acquired as Treasury stock.
December 8 Sale the remaining treasury stock for Tk. 10 each.
Show the Balance sheet presentation of Stockholders equity.

ABC Enterprise
Journal Entries

Debit Credit
Date Accounts Title and Explanation
(Tk.) (Tk.)
2015 Cash (10,000X12) 1,20,000
 January 5 Common stock-Tk. 10 par value 1,00,000
Paid in capital in excess of Par common stock 20,000
(To record issue 10,000 par common stock at
premium)
March 3 Cash (1,500X23) 34,500
Discount (1,500 X 2) 3,000
Preferred Stock-Tk. 25 par (1,500 X25) 37,500
(To record issue of 1,500 Preferred stock at
discount)
August 7 Treasury stock (4,000X13) 52,000
Cash 52,000
(To record purchase 4,000 treasury stock at Tk.
13 each)
October 2 Cash (3,000X15) 45,000
Treasury Stock (3,000X13) 39,000
Paid in capital from Treasury Stock 6,000
(To record sale 3,000 treasury stock at above
cost.)
Nov. 9 Cash (400X12) 4,800
Paid in capital from Treasury Stock 400
Treasury Stock (400X13) 5,200
(To record sale 400 treasury stock at below
cost.)
December 8 Cash (600X10) 6,000
Paid in capital from Treasury stock 1,800
Treasury Stock (600X13) 7,800
(To record the sale of 600 remaining treasury
stock)
December 8 Paid in capital from Treasury stock 3,800
Retained earnings (Balancing figure) 3,800
(6,000-400-1,800)

ABC Enterprise
Balance Sheet (Partial)
December 31, 2019

Particulars Tk. Tk.

Stockholder’s Equity
Paid-in Capital:
Common stock-Tk. 10 par value, 10,000 shares issued and outstanding 1,00,000
Add: Paid in capital in excess of Par- common stock 20,000 1,20,000
Preferred stock-Tk. 25 par value, 1,500 shares 37,500
Less: Discount- Preferred stock 3,000 34,500
Total Paid-in Capital 1,54,500
Retained Earnings 3,800
Total Stockholder’s Equity 1,58,300
Note:
3. On selling remaining treasury stock, any gain or loss balance of treasury stock
transactions should be zero.
4. Any balancing figure should be adjusted with Retained Earnings Account.

Problem-04:
Record the following transactions of Z enterprise in 2019:

January 2 25,000 shares of common stock were issued for Tk. 5, 00,000.
April 17 Issued 1,000 preferred stock of Tk. 20 par value at Tk. 25 per shares.
September 13 Reacquired 5,000 own common stock from the market for Tk. 1,35,000.
October 12 Sale 3,000 common stock at Tk. 30 each which was purchased on September 13.
December 10 Resale 1,000 common stock for Tk. 26,000 that was acquired as Treasury stock.
December 25 Retired the remaining treasury stock.
Show the Balance sheet presentation of Stockholders equity.

Z Enterprise
Journal Entries

Debit Credit
Date Accounts Title and Explanation
(Tk.) (Tk.)
2019 Cash 5,00,000
January 2 Common stock-no par common stock 5,00,000
(To record issue 25,000 par common stock)
April 17 Cash (1,000X25) 25,000
Preferred Stock-Tk. 20 par (1,000 X20) 20,000
Paid in capital from Preferred Stock 5,000
(To record issue of 1,000 Preferred stock at
premium)
September 13 Treasury stock 1,35,000
Cash 1,35,000
(To record purchase 5,000 treasury stock at Tk.
27 each)
October 12 Cash (3,000X30) 90,000
Treasury Stock (3,000X27) 81,000
Paid in capital from Treasury Stock 9,000
(To record sale 3,000 treasury stock at above
cost.)
December 10 Cash 26,000
Paid in capital from Treasury Stock 1,000
Treasury Stock (1,000X27) 27,000
(To record sale 1,000 treasury stock at below
cost.)
December 25 Common stock-No par {(5,00,000/25,000)x1,000 20,000
 Paid in capital from Treasury stock (9000-1000) 8,000
Treasury Stock (1000X27) 27,000
Retained earnings (Balancing figure) 1,000
(To record the retirement of 1,000 no-par
common stock)

Z Enterprise
Balance Sheet (Partial)
December 31, 2019

Particulars Tk. Tk.

Stockholder’s Equity
Paid-in Capital:
Common stock-no par 24,000 shares outstanding 4,80,000
Preferred stock-Tk. 20 par value, 1,000 shares 20,000
Paid-in Capital in excess of par- Preferred stock 5,000 25,000
Total Paid-in Capital 5,05,000
Retained Earnings 1,000
Total Stockholder’s Equity 5,06,000

ASSIGNMENT/HOMEWORK (16th edition) (Intermediate Accounting; Kieso, Kimmel,

Weigndt) (Chapter-15)

Exercise no. 15.2; 15.18

Problem no. 15.1; 15.2; 15.3