ACCT Ch. 11

Common Stock

- Basic voting stock - Ranks after preferred stock - Dividend set by board of directors

Cash Dividends

- Declared by board of directors - Not legally required - Creates liability at declaration - Requires sufficient retained earnings and cash

Stock Dividends

- Distribution of additional shares of stock to owners on a pro rata basis - no change in total stockholders' equity - no change in par values - all stockholders retain same percentage ownership

Preferred Stock

- Preference over common stock - Usually has no voting rights - Usually has a fixed dividend rate

Reasons to issue preferred stock

- Raise capital without sacrificing control - boost return EPS earned by common stockholders - appeal to investors who may believe the common stock is too risky or the expected return on common stock is too low

Reasons for corporations to acquire its own stock

- Use their shares to buy other companies - avoid hostile takeover - reissue to employees as compensation - support the market price

Reasons for corporation to issue stock dividends

- reduce market price per share of stock to make the shares more affordable for investors to purchase - signal that the management expects strong financial performance in the future

Stock Options

Allows employees to purchase stock form the corporation at at predetermined fixed price over a specified period of time. If market price of stock rises, stock option holders can sell the stock option at a profit. Stock options can motivate employees to increase financial performance which can increase the stock price.

Issued Shares

Authorized shares of stock that have been sold

Unissued shares

Authorized shares of stock that never have been sold

Journal entry for recording a Small Stock Dividend

Bob has 100,000 shares of $1 par value stock outstanding. On dec 31, 2009 bob declared a 2% stock dividend, when the stock was selling for $10 per share. The stock will be distributed to stockholders on jan 20, 2010. Dec 31, Declaration fo 25 stock didivdd, selling $10 per share Dr. Retained earnings (100,000 x 2%= 2000 x $10 = $20,000) 20,000 Cr. Common Stock (2000 X $1) 2000 Cr. Capital in excess of Par 18,000

Journal entry of sale and issuance of capital stock

Bob issued 100,000 shares of $0.01 par value comma stock for $20 per share. Dr. Cash 2,000,000 Cr. Common Stock (100,000 shares x $0.01 par value) 1,000 Cr. Capital in excess of par value 1,999,000

Journal entry for issuing stock for Non cash Assets

Bob issued 100,000 shares of $2 par value stock for land valued at $2,500,000. Dr. Land 2,500,000 Cr. Common Stock 200,000 Cr. Paid in Capital in Excess of Par 2,300,000

Journal entry for issuance of preferred stock

Bob issued 2000 shares of $100 par value preferred stock for $102 per share. Dr. Cash 204,000 Cr. Preferred Stock 200,000 Cr. Capital in excess of par preferred stock 4000

Record resistance of treasury stock

Bob reissued 10,000 shares of treasury stock at $30 per share Dr. Cash (10,000 x $30) 300,000 Cr. Treasury Stock (10,000 shares x $20) 200,000 Cr. Capital in Excess of Par Value 100,000 Bob sold stock for $15 per share Dr. Cash (100,000 x 15) 150,000 Dr. Capital in excess of par 50,000 Cr. Treasury Stock 200,000

Journal entry to record a stock being reacquired, a treasury stock.

Bob reqcquried 100,000 shares of its common stock at $20 per share. Dr. Treasury Stock 200,000 Cr. Cash 200,000

Journal entry for recording a large stock dividend

Declaration of stock dividend Dr. Retained Earnings (50,000 x 40% = 20,000 x $1) 20,000 Cr. Common Stock 20,000

Stock Issued for Employee Compensation

Employee compensation package includes salary and stock options.

Sale and Issuance of Common Stock

IPO: 1st time corporate sells stock to the public Seasoned new issue: Subsequent sales of new stock to the public

Journal Entry for Cash Dividends

Issue of Cash dividends Dr. Retained Earnings Cr. Dividends Payable Payment of dividend payment Dr. Dividends payable Cr. Cash

Outstanding shares

Issued shares that are owned by stockholders

Treasury Shares

Issued shares that have been reacquired by the corporation

Authorized shares

Maximum number of shares of capital stock that can be sold to the public

Dividends on Preferred Stock

Preferred stock offers a dividend preference: current vs. cumulative 1. Current Dividend Preference: Current preferred dividends must be paid before paying any dividends to common stock. 2. Cumulative dividend preference: any unpaid dividends form periods years (dividends in arrears) and current year dividends must be paid before common dividends are paid. *if preferred stock is non cumulative, any dividends not declared in previous years are lost permanently

Preferred Stock

Separate class of stock, have priority over common shares in dividends distributions and distribution of assets in case of liquidation. - has stated dividend rate - no voting right

Treasury Stock

Shares of a company's own stock that have been bought back.

Accounting for Stock Dividends

Small: stock dividend < 25% of outstanding shares -> record at current market value of stock Large: Stock dividend > 25% of outstanding shares -> record at par value of stock

Stock Split

Stock splits change the par value per share but the total par value is unchanged

Pro rata basis

Stockholder with 10% of outstanding shares would receive 10% of any additional shares -> all stockholders retain same percentage ownership

Secondary Markets

Transactions between two investors that DO NOT AFFECT the corporation's accounting records