Accounting Ch 11
The declaration date journal entry ex. Assume that on December 1, 2014, the directors of Media General declare a 50 cent per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is $50,000 (100,000 × 50 cents) and the entry to record the declaration is:
Cash Dividends 50,000 Dividends Payable 50,000 (To record declaration of cash dividend)
If Scientific-Leasing has 5,000 shares of 7%, $100 par value cumulative preferred stock outstanding, then the annual dividend is $35,000 ( 5,000 shares × $7 per share). If dividends were two years in arrears, preferred stockholders are entitled to receive the following before any dividends are paid to common stockholders.
Dividends in arrears ($35,000 × 2) 70,000 Current-year dividends 35,000 Total preferred dividends 105,000
Balance Sheet ( for stockholder equity)
Stockholders' equity Paid-in capital Common stock, $5 par value, 400,000 shares authorized, 100,000 shares issued and 96,000 shares outstanding $500,000 Retained earnings 200,000 Total paid-in capital and retained earnings 700,000 Less: Treasury stock (4,000 shares) (32,000) Total stockholders' equity $668,000 $668,000
Three dates are important in connection with dividends
The declaration date. The record date. The payment date. *Accounting entries are required on the declaration date and the payment date.*
Preferred stock may have either
a par value or no-par value.
Dividends depend on factors such as
adequate retained earnings and availability of cash
Payment of the dividend REDUCES
both current assets and current liabilities but has no effect on stockholders' equity.
The payout ratio measures the percentage of earnings distributed in the form of cash dividends to common stockholders and is computed
by dividing total cash dividends to common shareholders by net income.
A corporation may issue a class of stock in addition to common stock,
called preferred stock.
Preferred stock has
contractual provisions that give it preference or priority over common stock.
Preferred stockholders have a priority in relation to:
dividends assets in the event of liquidation
When preferred stock is cumulative, preferred dividends not declared in a given period are called
dividends in arrears
When a corporation has more than one class of stock,
each paid-in capital account title should identify the stock to which it relates.
Retained earnings is
earned capital held for future use in the business.
Pro rata means that
if you own 10% of the common shares, you will receive 10% of the dividend.
The amount of dividends in arrears should be disclosed
in the notes to the financial statements.
A stock dividend results in a decrease in retained earnings
increase in paid-in capital.
Treasury stock
is a corporation's own stock that has been issued, fully paid for, reacquired by the corporation and held in its treasury for future use.
Par value stock
is capital stock that has been assigned a value per share in the corporate charter
No-par value stock
is capital stock that has not been assigned a value per share in the corporate charter.
A large stock dividend (greater than 20%-25% of the corporation's issued stock)
is recorded at par or stated value per share.
A small stock dividend (less than 20%-25% of the corporation's issued stock)
is recorded at the fair market value per share.
A stock split
like a stock dividend, involves the issuance of additional shares of stock to stockholders according to their percentage ownership. However, a stock split results in a reduction in the par or stated value per share.
par value is not equal to
market value of the stock.
states value is not equal to
market value of the stock.
Dividends in arrears are not a liability because
no obligation exists until the board of directors declares a dividend.
Preferred stockholders have the right to share in the distribution of corporate income before common stockholders.
share in the distribution of corporate income before common stockholders.
stock split does not affect the balances in any stockholders' equity accounts which means
stock split does not affect the balances in any stockholders' equity accounts, a company does not need to journalize a stock split.
If Scientific-Leasing has 5,000 shares of 7%, $100 par value cumulative preferred stock outstanding, then the annual dividend is
$35,000 ( 5,000 shares × $7 per share).
The primary objectives in accounting for the issuance of common stock are
1) to identify the specific sources of paid-in capital and (2) to maintain the distinction between paid-in capital and retained earnings
Paid-in capital is
Paid-in capital is stockholders in exchange for shares of ownership.
A stock dividend does not decrease
decrease total stockholders' equity or total assets
The purpose of the record date is to identify the persons or entities
that will receive the dividend, not to determine the dividend liability.
The stated value of no-par stock may be changed at any time by action of the directors.
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A corporation may acquire treasury stock for various reasons. These reasons include
1. To reissue the shares to officers and employees under bonus and stock compensation plans. 2.To increase trading of the company's stock in the securities market. Companies expect that buying their own stock will signal that management believes the stock is underpriced, which they hope will enhance its market price. 3.To have additional shares available for use in acquiring other companies. 4.To reduce the number of shares outstanding and thereby increase earnings per share
If Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock at par for cash, the entry to record this transaction is:
Cash 1,000 Common Stock 1,000 (To record issuance of 1,000 shares of $1 par common stock at par)
value of the shares is NOT the same as the cash price example
Cash 5000 Common Stock 1000 Paid-in Capital in Excess of Par Value 4000 (To record issuance of 1,000 shares of $1 par common stock)
the payment date for Media General, the entry on that date is:
Dividends payable 50,000 cash 50,000 (To record payment of cash dividend)
For a corporation to pay a cash dividend, it must have the following:
Retained earnings Adequate cash Declared dividends
If Mead, Inc. has 100,000 shares of $5 par value common stock outstanding (all issued at par value) and it decides to acquire 4,000 shares of its stock at $8 per share, the entry is:
Treasury Stock 32,000 Cash 32,000 (To record purchase of 4,000 shares of treasury stock at $8 per share)
Under the cost method, companies increase (debit) Treasury Stock by the price paid to reacquire the shares. but when sold
Treasury Stock decreases by the same amount
The amount of retained earnings cannot be associated with the balance of any asset account for ex
a $100,000 balance in retained earnings does not mean that there should be $100,000 in cash.
A stock split has no effect
on total paid-in capital, retained earnings, and total stockholders' equity.
If preferred stock is cumulative,
preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends.
A stock dividend is a
pro rata distribution of the corporation's own stock to stockholders.
The purchase of treasury stock is generally accounted for by the cost method, with
the cost method the Treasury Stock account is maintained at the cost of the shares purchased.
When the issuance of common stock for cash is recorded, and the par value of the shares is NOT the same as the cash price
the par value is credited to common stock, and the portion of the proceeds that is above or below par value is recorded in a separate paid-in-capital account.
When the issuance of common stock for cash is recorded, and the issue price is the same as the par value of the stock,
the par value of the shares is and debited to Cash and credited to Common Stock
Stock dividends change the composition of stockholders' equity because a portion of retained earnings is transferred to paid-in capital. However,
total stockholders' equity and the par or stated value per share remain the same.