26) Prior Period Adjustments

If an error is made on a previously issued income statement (as opposed to a change in estimate), a corporation must restate its beginning retained earnings balance. If the error understated the corporation's net income, the beginning retained earnings balance must be increased (a credit to Retained Earnings). If the error had overstated the corporation's net income, the beginning retained earnings balance must be decreased (a debit to Retained Earnings). The adjustment to the beginning balance is shown on the current retained earnings statement as follows:

Beginning retained earnings balance, as previously reported	XXX
Adjustment: Correction of error in prior period	X
Beginning retained earnings balance restated	XXX

27) Book Value

The term "book value" is used in a number of ways: book value of an asset, book value of bonds payable, book value of a corporation, and the book value per share of stock. We will focus on the last two.

Book Value of the Corporation

The book value of an entire corporation is the total of the stockholders' equity section as shown on the balance sheet. In other words, the book value of a corporation is the balance sheet assets minus the liabilities.

Since the balance sheet amounts reflect the cost and matching principles, a corporation's book value is not the same amount as its market value. For example, the most successful brand names of a consumer products company may have been developed in-house, meaning they would not be included in the company's assets since they were not purchased. Other long-term assets may have actually appreciated in value at the same time the accountant has been properly depreciating them; as a result, they are listed on the balance sheet at a small fraction of their fair market value.

As these examples suggest, a corporation could have a market value far greater than its book value. In contrast, a corporation that has recently purchased many assets, but is unable to operate profitably, may have a market value that is less than its book value. Although we can calculate a corporation's book value from its stockholders' equity, we cannot calculate a corporation's market value from its balance sheet. We must look to appraisers, financial analysts, and/or the stock market to help determine an approximation of a corporation's fair market value.

Book Value: Common Stock Only

Let's use the following stockholders' equity information to calculate (1) the book value of a corporation, and (2) the book value per share of common stock:

Stockholders' Equity
Paid-in capital
Common stock, $0.10 par, 10,000 shares authorized, 2,000 shares issued and outstanding	$    200
Paid-in capital in excess of par - common	49,800
Total paid-in capital	50,000
Retained earnings	28,000
Total stockholders' equity	$ 78,000

1. The book value of a corporation having only one class of stock–common stock–is equal to the total amount of stockholders equity: $78,000.

2. If common stock is the only class of stock issued by the corporation, the book value per share of common stock is $39. It is calculated as follows:

Total stockholders' equity of $78,000 divided by the 2,000 shares of common stock that are outstanding: $78,000/2,000 shares = $39.00 per share of common stock

Book Value: Preferred Stock and Common Stock

When a corporation has both common stock and preferred stock, the corporation's stockholders' equity must be divided between the preferred stock and the common stock. To arrive at the total book value of the common stock, compute the total book value of the preferred stock, and then subtract that amount from the total stockholders' equity.