ACIS 3116 Chapter 18

journal entry to record a stock dividend

*transfer fair value of additional shares distributed from retained earnings to paid in capital -debit retained earnings credit common stock far par and PIC excess of par for the remainder

reasons for a stock dividend

-company tries to give shareholders the illusion that they are receiving a real dividend -enable the corporation to take advantage of the accepted accounting practice of capitalizing retained earnings (reducing the balance in retained earnings--aka what's available for cash dividends-- and reinvesting those earned assets

preferred shareholder rights usually include one or both of the following:

-if a dividend is declared, they receive the designated dividend before any dividends are paid to common shareholders -typically have a preference over common shareholders as to the distribution of assets in the event the corporation is dissolved ***important to remember preferred shareholder rights must be stated in the contract

why might a company buy back their own stock?

-if management feels the price of their stock is undervalued, it may attempt to support the price by decreasing the supply of stock in the marketplace -it offsets the increase in shares that routinely are issued to employees under stock award and stock option compensation programs -to distribute in a stock dividends -a proposed merger -defense against a hostile takeover

affects of a stock dividend

-market price per share declines in proportion to the increase in the number of shares distributed in the stock dividend -capitalizing retained earnings for a stock dividend reclassifies earned capital as invested capital -a corporation CANNOT increase its market value by distributing additional stock certificates (cutting a pizza into more slices doesn't give you more pizza)

four classifications within shareholders equity

-paid in capital -retained earnings -accumulated other comprehensive income -treasury stock

preemptive right

-the right to maintain your percentage share of ownership when new shares are issued -each shareholder is offered the opportunity to buy a percentage of any new shares issued equal to the percentage of shares he owns at the time -another right sometimes given to shareholders

a stock distribution/dividend of 25% or higher can be accounted for in 1 of 2 ways:

1. large stock dividend 2. stock split

comprehensive income extends our view of income beyond net income reported in an income statement to include 4 types of gains and losses not included in income statements:

1. net holding gains (losses) on available for sale investments in debt securities 2. gains (losses) from and amendments to post retirement benefit plans 3. deferred gains (losses) on derivatives 4. adjustments from foreign currency translation

what are the ownership rights that common shareholders have (unless specifically withheld by agreement with shareholders)?

1. right to vote on matters that come before the shareholders, like the election of corporate directors (each share = one vote) 2. right to share in profits when dividends are declared (% of shares owned by a shareholder determines his share of dividends distributed) 3. right to share in the distribution of assets if the company is liquidated (% of shares owned by a shareholder determines his share after creditors ad preferred shareholders are paid)

the choice a company has for how to account for a buyback

1. shares can be formally retired 2. shares can be called treasury stock

mandatorily redeemable preferred shares must be reported in the balance sheet as...

a liability, rather than shareholders equity, because the company is obligated to buy them back

right of conversion

a right sometimes given to preferred shareholders that allows them to exchange shares of preferred stock for common stock at a specified conversion ratio

date of record

a stated date as to when the determination will be made of the recipients of the dividend -registered owners of the shares of stock on this date are entitled to receive a cash dividend

retained earnings

accumulated on behalf of shareholders and not (yet) distributed as dividends

any portion of a dividend that doesn't represent a distribution of earnings should be debited to _____, rather than _____

additional paid in capital rather than retained earnings

participating preferred shares

allow preferred shareholders to receive additional dividends beyond the stated amount (rare today)

how to handle the sale of new shares after shares are formally retired

any subsequent sale of shares is recorded as a new, unissued share and is accounted for accordingly

paid in capital

consists primarily of amounts: -invested by shareholders when they purchase shares of stock from the corporation -from the company buying back some of those shares -from share-based compensation activities

accounting treatment of a large stock dividend

debit PIC--excess of par and credit common stock to avoid RE from reducing

deficit

debit balance in retained earnings

stock dividend

distribution of additional shares of stock to current shareholders of the corporation -affects neither the asset nor the liabilities of the firm -each shareholder receives at the same percentage increase in shares, so shareholders' proportional interest in the firm remains unchanged -reclassifies earned capital as invested capital

the par value concept

has been eliminated from the model business corporation act; however, most shares continue to bear arbitrarily designated par amounts -if there is no par associated with a share, there is no reason to allocate proceeds between stated capital and addition paid in capital

cumulative preferred shares

if the specified dividend is not paid for a given year, the unpaid dividends (dividends in arrears) accumulate and must be paid in a later dividend year before any dividends are paid on common shares

when treasury stock is purchased, the shares are considered to be _____, but not ______

issued but not outstanding

accounting treatment of a stock split

make no journal entry

redemption privilege

might allow preferred shareholders the option to return their shares for a predetermined redemption price

does buying back a company's own shares create an asset?

no, it's viewed as a way to distribute company profits without paying dividends

accumulated other comprehensive income

not included in net income (aka don't affect retained earnings) but are a part of OCI and are included as a separate component of shareholder's equity -AOCI is in the balance sheet

entry to record when buying back shares under retirement method

pay cash for the amount it tells you, reduce common stock and PIC-excess of par accounts by the same amounts they were increased by when the shares were issued, and credit PIC-share repurchase for the difference *if difference is a debit, debit PIC-share repurchase to empty out the balance in the account and debit the remaining difference to retained earnings

just as net income is reported periodically in the income statement and also on a cumulative basis as part of retained earnings, OCI is reported periodically in... and also...

periodically in the statement of comprehensive income and also as AOCI in the balance sheet along with retained earnings

what happens when a company declares a cash dividend

retained earnings is reduced and a liability is recorded

entry to record when treasury stock is later sold

reverse the entry recorded for the buyback

treasury stock

shares previously sold to shareholders that are bought back by the corporation and not retired

how to handle shares issued for consideration other than cash

some companies may issue shares to pay for promotional/legal services, land, equipment, etc. -issuance of shares should still be recorded at fair value

share issue costs

sometimes when a company sells shares, it obtains legal, promotional, and accounting services necessary to effect the sale -cost of these services reduces the net proceeds from selling the shares (aka reduces cash received and paid in capital)

entry to record when buying back shares under treasury stock method

temporarily reduce shareholders equity with a debit to a contra shareholders equity account (treasury stock) and credit to cash

what is the purpose of the statement of shareholder's equity?

the balance sheet reports the annual balances of shareholders' equity accounts, but companies should disclose the sources of the changes in the statement of shareholders equity

ex-dividend date

the date that shares need to be purchased by in order for an investor to be a registered owner at the date of record -shares purchased after the ex-dividend date don't have the right to receive the declare dividend

liquidating dividend

the excess of a dividend exceeding the balance in retained earnings (because some of the invested capital is being liquidated) -might occur when a corporation is being dissolved and assets are distributed to shareholders

how are preferred shares somewhat hybrid securities?

they are a cross between equity and debt -equity recuasse shareholders receive dividends each year the company pays dividends -debt because the company is obligated to pay csh (or other assets) at a fixed or determinable rate in the future

how do companies handle addition paid in capital accounts?

they keep track of individual paid-in capital account in company records but they report the amounts in a single subtotal called additional paid-in capital

a frequent reason for issuing a stock dividend is to induce the per share market price decline. Why would a company want to do that?

to increase the stock's marketability by making it attractive to a larger number of potential investors

reverse stock split

when a company decreases its outstanding shares -no journal entry necessary

property dividend (dividend in kind or nonreciprocal transfer to owners) and how to handle them

when a non cash asset is distributed -should be recorded at the fair value of the assets to be distributed, measured at the day of declarations (may require a gain or loss to be recognized for the difference between book and fair value before reducing RE and recording a liability)