Chapter 11 Accounting

Where are dividends in arrears disclosed?

- However, companies should disclose in the notes to the financial statements the amount of dividends in arrears. Doing so enables investors to assess the potential impact of this commitment on the corporation's financial position

What is a corporation?

-A company organized as a separate legal entity, with most of the rights and privileges of a person.

What does the term outstanding stock mean?

Capital stock that has been issued and is being held by stockholders

Are dividends in arrears considered liabilities?

Dividends in arrears are not considered a liability.

What is the effect to stockholder's equity of a stock split?

However, a stock split results in a reduction in the par or stated value per share.

. What is the cumulative effect on a company's financial statements of a declaration and payment of a cash dividend?

The cumulative effect of the declaration and payment of a cash dividend on a company's financial statements is to decrease both stockholders' equity and total assets.

What is the significance of the declaration date and what entry is made on this date?

The date the board of directors formally authorizes the dividend and announces it to stockholders. -debit Cash Dividends credit Dividends payable

What is the significance of the record date and what entry is made on this date?

The date when the company determines ownership of outstanding shares for dividend purposes. -Record date No entry necessary

What are dividends in arrears?

-Preferred dividends that were supposed to be declared but were not declared during a given period.

What is the significance of the payment date and what entry is made on this date?

-The date cash dividend payments are made to stockholders. -debit Payment Date credit Dividends payable credit Cash

How is treasury stock generally accounted for?

-The purchase of treasury stock is generally accounted for by the cost method - companies increase (debit) Treasury Stock by the price paid to reacquire the shares. Treasury Stock decreases by the same amount when the company later sells the shares.

What kind of account is treasury stock?

-Treasury Stock is a contra stockholders' equity account.

What is the journal entry to record the issuance of preferred stock?

-debit Cash credit Preferred Stock creditPaid-in Capital in Excess of Par Value—Preferred Stock

What is treasury stock?

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

What is a dividend?

A distribution by a corporation to its stockholders on a pro rata (proportional to ownership) basis.

How is a corporation formed?

A document that describes a corporation's name and purpose, types of stock and number of shares authorized, names of individuals involved in the formation, and number of shares each individual has agreed to purchase.

What is a cumulative dividend?

A feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends.

What is a cash dividend?

A pro rata (proportional to ownership) distribution of cash to stockholders.

What is a stock dividend?

A pro rata (proportional to ownership) distribution of the corporation's own stock to stockholders. - A stock dividend results in a decrease in retained earnings and an increase in paid-in capital

What journal entry is made for a stock split?

Because a stock split does not affect the balances in any stockholders' equity accounts, a company does not need to journalize a stock split

What is preferred stock?

Capital stock that has contractual preferences over common stock in certain areas.

Is a cash dividend paid on treasury stock?

Cash dividends are not paid on treasury shares

What are retained earnings restrictions?

Circumstances that make a portion of retained earnings currently unavailable for dividends

Where are retained earnings restrictions disclosed?

Companies generally disclose retained earnings restrictions in the notes to the financial statements.

What are the two preferences of owning preferred stock?

DIVIDEND PREFERENCES -As indicated above, preferred stockholders have the right to share in the distribution of corporate income before common stockholders. LIQUIDATION PREFERENCE -Most preferred stocks have a preference on corporate assets if the corporation fails. This feature provides security for the preferred stockholder. The preference to assets may be for the par value of the shares or for a specified liquidating value.

What is the journal entry for stock issued at par?

Debit Cash Credit Common Stock

What is the journal entry for stock issued at greater than par?

Debit Cash Credit Common Stock Credit Paid-in Capital in excess of par value

What is par value and no-par value stock?

Par value- Capital stock that has been assigned a value per share in the corporate charter. No Par value-Capital stock that has been assigned a value per share in the corporate charter.

What can cause retained earnings restrictions?

Restrictions result from one or more of these causes: legal, contractual, or voluntary.

What are retained earnings?

Retained earnings is earned capital held for future use in the business. In this section, we discuss the accounting for paid-in capital. In a later section, we discuss retained earnings.

What three criteria must be met for a company to pay a cash dividend?

Retained earnings. Payment of dividends from retained earnings is legal in all states. In addition, loan agreements frequently constrain companies to pay dividends only from retained earnings. Many states prohibit payment of dividends from legal capital. However, payment of dividends from paid-in capital in excess of par is legal in some states. Adequate cash. Recently, Nike had a balance in retained earnings of $5,451 million but a cash balance of only $2,291 million. If it had wanted to pay a dividend equal to its retained earnings, Nike would have had to raise $3,160 million more in cash. It would have been unlikely to do this because it would not be able to pay this much in dividends in future years. In addition, such a dividend would completely deplete Nike's balance in retained earnings, so it would not be able to pay a dividend in the next year unless it had positive net income. Declared dividends. The board of directors has full authority to determine the amount of income to distribute in the form of dividends. Dividends are not a liability until they are declared.

What is authorized stock?

The amount of stock that a corporation is authorized to sell as indicated in its charter.

What is stated value?

The amount per share assigned by the board of directors to no-par stock.

What is paid-in capital?

The amount stockholders paid in to the corporation in exchange for shares of ownership.

What is a stock split?

The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share.

What is the purpose of a stock split?

The purpose of a stock split is to increase the marketability of the stock by lowering its market value per share.

What is the effect to stockholder's equity of a stock dividend?

They change the composition of stockholders' equity because they result in a transfer of a portion of retained earnings to paid-in capital. However, total stockholders' equity remains the same. Stock dividends also have no effect on the par or stated value per share, but the number of shares outstanding increases.

Why may a corporation acquire its own stock?

To reissue the shares to officers and employees under bonus and stock compensation plans. 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 value. To have additional shares available for use in acquiring other companies. To reduce the number of shares outstanding and thereby increase earnings per share.

What are the three important dates in connection with dividends?

To satisfy stockholders' dividend expectations without spending cash. To increase the marketability of the stock by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the stock makes it easier for smaller investors to purchase the shares. To emphasize that the company has permanently reinvested in the business a portion of stockholders' equity, which therefore is unavailable for cash dividends.

What is common stock?

When a corporation has only one class of stock, it is identified as common stock.

What is the significance of a stock dividend?

You now own more shares of stock, but your ownership interest has not changed.