Accounting Chapter 11

Illustration: At December 31, 2016, IBR declares a $50,000 cash dividend. Show the allocation of dividends to each class of stock.

2015 2016 Dividends declared 6,000 50,000 dividends in arrears 2,000 Allocation to preffered 6,000 8,000

for issuance of cash dividend on common stock do this: Example: common stock ($4 stated value, 300,000 shares authorized) total common stock = $1,000,000 Declared a $0.50 per share cash dividend to common stockholders of record on December 15, payable December 31, 2017. dividend equals = total common stock $/stated value so 250,000 in this case add: additional issued common stock Less: Treasury stock Times the per share dividend declaration

250,000* + 5,000 - (5,000 + 1,000)] X $.50 = 124,500

Does shares outstanding equal shares authorized?

Does not necessarily equal shares authorized, because 1)Firms may not choose to issue all of their shares 2)Firms may purchase back shares

Illustration: On Dec. 1, the directors of Media General declare a 50 cents per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on Jan. 20 to shareholders of record on Dec. 22.

Entry for declaration date: Cash dividends 50,000 dividends payable 50,000 Entry for Date of Record: No entry Entry for Payment date: Dividends payable 50,000 Cash 50,000

Why is corporate management both an advantage and a disadvantage?

It enables a company to hire professional managers to run the business (owners may not be qualified to run the company) However, the separation of ownership and management reduces an owners ability to actively manage the company ~Principal-Agent dilemma

MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017. At December 31, 2017, the company declared a $60,000 cash dividend. Determine the dividend paid to preferred stockholders and common stockholders under each of the following scenarios. The preferred stock is cumulative, and the company did not pay a dividend in each of the two previous years.

Preferred stockholders (3 x 2,000 x .06 x $100) $ 36,000 Common stockholders ($60,000 - $36,000) 24,000 Total dividends $60,000

Reasons why corporations issue stock dividends:

Satisfy stockholders' dividend expectations without spending cash. Increase the marketability of the corporation's stock. Emphasize that a portion of stockholders' equity has been permanently reinvested in the business.

Advantages of Corporation

Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporate Management

For dividends in arrearas or whatever, the preferred stock has to be what?

cumulative

However a distribution of stock dividends leads to decreased ________ and an increase in ___________

decrease in retained earnings and a increase in paid in capital

The issue of common stock can go...

directly to investors or indirectly through an investment banking firm.

Preferred stockholders have priority in relation too..?

dividends and assets in the event of liquidation

The price of stock tends to follow the trend of a companys ________

earnings and dividends

True/False: Treasury Stock decreases a different amount than the original value when the company later sells the shares.

false

Cumulative Dividend

holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends.

Closing retained earnings if: net income = 280,000 total cash dividends = 145,500

income summary 280,00 retained earnings 280,000 Retained earnings 145,500 Cash dividends 145,500 Dividends payable 124,500 (income summary - RE) cash 124,500

Treasury stock

is a corporation's own stock that has been reacquired by the corporation and is being held for future use.

Par value stock

is capital stock that has been assigned a value per share

Do most states require a par value?

no

Is there an accounting entry for being authorized common stock?

no

Stock split 2 for 1 basis means number of stocks outstanding ....?

number of stocks outstanding double

Stock splits reduce the value

of stocks per SHARE

Preferred stockholders sometimes dont have the....?

right to vote

Shares outstanding

the amount of shares issued that are being held by stockholders

After the distribution of stock dividend, the number of shares owned _______ but the percentage of the company owned __________

the number of shares owned increases but the percentage of the company owned stays the same.

True/ False:Charter will specify how many shares the company is authorized to sell

true

True/False: Treasury stock is a contra stockholders' equity account, not an asset.

true

True/False: If there is only one class of stock, it will be identified as common stock

true

When can a corporation begin to sell shares of stock

when the corporation receives its charter

Is there an accounting entry for issuing common stock?

yeah

Is a no-pair value stock pretty common? what do they do instead?

yeah In many states the board of directors assigns a stated value to no-par shares

Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide's journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.

(a) Cash 1,000 Common Stock (1,000 x $1) 1,000 (b) Cash 5,000 Common Stock (1,000 x $1) 1,000 Paid-in Capital in Excess of Par Value 4,000

Forming a Corporation

1) File application with the Secretary of State 2) State grants charter (Articles of Incorporation) 3)Corporation develops by-laws -> which are Rules that each party (owners, directors, executives) must abide by Note* Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey). Note *Corporations engaged in interstate commerce must obtain a license from each state in which they do business

Primary objectives of accounting for common stock

1) Identify the specific sources of paid-in capital. ~Par Value (Stated Value) ~Paid-in Capital In Excess of Par Value (Stated Value) 2) Maintain the distinction between paid-in capital and retained earnings.

Reasons why corporations purchase their outstanding stock?

1)To reissue shares to officers and employees under bonus and stock compensation plans. 2) To increase trading of the company's stock in the securities market. 3) To have additional shares available for use in acquiring other companies. 4) To increase earnings per share.

Each share of common stock gives the stockholder ownership rights to...?

1)Vote 2)Share in corporate earnings 3)Keep same percentage of ownership (pre-emptive right) 4)Share in assets upon liquidation (residual claim)

Disadvantages of corporation

Corporate Management Government Regulations Additional Taxes

Illustration: On December 31, 2015, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock. It also has 50,000 shares of $10 par value common stock outstanding. At December 31, 2015, the directors declare a $6,000 cash dividend. Prepare the entry to record the declaration of the dividend.

Cash Dividends 6,000 Dividends Payable 6,000

Types of dividends

Cash dividends Property dividends. Stock dividends. Scrip (promissory note)

Payout ratio

Cash dividends declared on common stock / net income measures the percentage of earnings a company distributes in the form of cash dividends.

Effects of Stock Dividends

Changes the composition of stockholders' equity. Total stockholders' equity remains the same. No effect on the par or stated value per share. Increases the number of shares outstanding.

Stock dividend example: Illustration: Medland Corp. declares a 10% stock dividend on its $10 par common stock when 50,000 shares were outstanding. The market price was $15 per share. Before the change, the companies common stock equaled what? outstanding shares equaled what? After the split, the common stock equaled, outstanding shares equaled? and paid in excess equals what?

Common stock = 500,000 Outstanding shares = 50,000 After: Common stock = 550,000 (5,000 shares * 10) Paid in capital in excess = 25,000 (5000*15 - 5000*10) Shares outstanding = 55,000 (50,000 + 5,000)

What three dates do cash dividends require?

Declaration date Cash dividends Dividends Payable Record Date No entry Payment Date Dividends payable Cash

Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par value, cumulative preferred stock outstanding. Each $100 share pays a $7 dividend (.07 x $100). The annual dividend is $35,000 (5,000 x $7 per share). If dividends are two years in arrears, preferred stockholders are entitled to receive the following dividends in the current year.

Dividends in arrears ($35,000 × 2) $ 70,000 Current-year dividends 35,000 Total preferred dividends $105,000

Return on common stockholder's equity

Net income - preferred dividends / avg common stockholder's equity This ratio shows how many dollars of net income a company earned for each dollar of common stockholders' equity.

Balance sheet for stock holders equity

Stockholder's equity paid-in capital Common Stock 2,000 Paid-in capital in excess of par value 4,000 -------------------------------------------------- Retained earnings 27,000 Total paid in capital & retained e 33,000 Less: Treasury Stock (4,000 shares) 4000 Total stockholders equity 29,000

What method of accounting is used for the purchase of treasury stock?

The cost method

Illustration: On February 1, 2015, Mead acquires 4,000 shares of its stock at $8 per share.

Treasury Stock (4,000 x $8) 32,000 Cash 32,000

A dividend is..?

a distribution to stockholders on a pro rata (proportional to ownership) basis.