Accounting Chapter 11

Preferred Stock: non cumulative calculation

The company only needs to calculate one year's dividend for the preferred shareholders. The company multiplies the preferred stock dividend rate by the number of shares outstanding to determine the preferred dividend to be paid.

Cash Dividend dates: payment and associated journal entries Prior period adjustments

The date dividend checks are mailed to stockholders. January 20 (Payment Date) d. Dividends payable 50,000 c. Cash 50,000

Cash Dividend dates: declaration

The date the board of directors formally declares the dividend and announces it to stockholders. December 1 (Declaration Date) d. Cash dividends 50,000 c. Dividends payable 50,000

Cash Dividend dates: record

The date when ownership of outstanding shares is determined for dividend purposes. No journal entry for Cash

Preferred Stock: cumulative calculation

To illustrate, assume that Scientific Leasing has 5,000 shares of 7%, $100 par value, cumulative preferred stock outstanding. Each $100 share pays a $7 dividend . The annual dividend is . If dividends are two years in arrears, preferred stockholders are entitled to receive the following dividends in the current year.

Preferred Stock: cumulative

contains a cumulative dividend feature. This means that preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends. When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears.

Preferred Stock:

has contractual provisions that give it some preference or priority over common stock. Typically, preferred stockholders have a priority as to (1) distributions of earnings (dividends) and (2) assets in the event of liquidation. However, they generally do not have voting rights. For example, if Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share, the entry to record the issuance is: d. Cash 120,000 c. Preferred Stock 100,000 c. Paid-in Capital in Excess of Par, Preferred Stock 20,000 (To record the issuance of 10,000 shares of $10 par value preferred stock)

ISSUING COMMON STOCK FOR SERVICES OR NONCASH ASSETS

in journal entries simply replace the cash in the debt with land, organization expense, etc

Stock Dividend

is a pro rata distribution to stockholders of the corporation's own stock. Whereas a company pays cash in a cash dividend, a company issues shares of stock in a stock dividend. A stock dividend results in a decrease in retained earnings and an increase in paid-in capital. Unlike a cash dividend, a stock dividend does not decrease total stockholders' equity or total assets.

Treasury Stock: journal entries to acquire treasury stock and later sell them

Companies generally account for treasury stock by the cost method. This method uses the cost of the shares purchased to value the treasury stock. Under the cost method, the company debits Treasury Stock for the price paid to reacquire the shares. When the company disposes of the shares, it credits to Treasury Stock the same amount it paid to reacquire the shares. February 1, 2014, Mead acquires 4,000 shares of its stock at $8 per share. The entry is: d. Feb. 1 Treasury Stock 32,000 c. Cash 32,000 (To record purchase of 4,000 shares of treasury stock at $8 per share) can be viewed as the purchasing of common stock.

Advantages of the corporate form of business- Continuous Life

Continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer.

Advantages of the corporate form of business- Separate Legal Existence

Corporation acts under its own name rather than in the name of its stockholders.

Advantages of the corporate form of business- Ability to Acquire Capital

Corporation can obtain capital through the issuance of stock.

Disadvantages of the corporate form of business- Additional taxes

Corporations pay income taxes as a separate legal entity and in addition, stockholders pay taxes on cash dividends.

Common Stock: excess of par value (no par or stated value)

H corporation sold 3,000 shares of its $2 par value common stock for $8 a share. d. Cash(3,000 x 8) 24,000 c. Common Stock (3,000 x 2) 6,000 c. Paid-in Capital in Excess of Par,Common Stock 18,000

Common Stock: par value

Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock at par for cash. The entry to record this transaction is: d. Cash 1,000 c. Common Stock 1,000 (To record issuance of 1,000 shares of $1 par common stock at par)

SALE OF TREASURY STOCK ABOVE COST

If the selling price of the treasury shares is equal to their cost, the company records the sale of the shares by a debit to Cash and a credit to Treasury Stock. When the selling price of the shares is greater than their cost, the company credits the difference to Paid-in Capital from Treasury Stock. To illustrate, assume that on July 1, Mead, Inc. sells for $10 per share the 1,000 shares of its treasury stock, previously acquired at $8 per share. The entry is as follows. d. July 1 Cash 10,000 c. Treasury Stock 8,000 c. Paid-in Capital from Treasury Stock 2,000 (To record sale of 1,000 shares of treasury stock above cost)

Advantages of the corporate form of business- Limited Liability of Stockholders

Limited to their investment.

Preferred Stock: non cumulative.

Noncumulative preferred stock refers to shares of preferred stock that has the dividends start over each year. If the company chooses not to pay dividends one year, the dividends do not go into arrears. The company only needs to pay dividends for the current year before paying the remaining amount to the common shareholders.

Disadvantages of the corporate form of business- Corporate Management

Separation of ownership and management prevents owners from having an active role in managing the company.

Advantages of the corporate form of business- Transferable Ownership Rights

Shareholders may sell their stock.

full depletion of credit balance in Paid-in Capital from Treasury Stock

When a company fully depletes the credit balance in Paid-in Capital from Treasury Stock, it debits to Retained Earnings any additional excess of cost over selling price. To illustrate, assume that Mead, Inc. sells its remaining 2,200 shares at $7 per share on December 1. The excess of cost over selling price is . In this case, Mead debits $1,200 of the excess to Paid-in Capital from Treasury Stock. It debits the remainder to Retained Earnings. The entry is: d. Cash 15,400 d. Paid-in Capital from Treasury Stock 1,200 d. Retained Earnings 1,000 c. Treasury Stock 17,600 (To record sale of 2,200 shares of treasury stock at $7 per share)

SALE OF TREASURY STOCK BELOW COST

When a company sells treasury stock below its cost, it usually debits to Paid-in Capital from Treasury Stock the excess of cost over selling price. Thus, if Mead, Inc. sells an additional 800 shares of treasury stock on October 1 at $7 per share, it makes the following entry. d. Oct. 1 Cash 5,600 c. Paid-in Capital from Treasury Stock 800 c. Treasury Stock 6,400 (To record sale of 800 shares of treasury stock below cost)

Common Stock: stated value

When no-par common stock has a stated value, the entries are similar to those illustrated for par value stock. The corporation credits the stated value to Common Stock. Also, when the selling price of no-par stock exceeds stated value, the corporation credits the excess to Paid-in Capital in Excess of Stated Value—Common Stock. For example, assume that instead of $1 par value stock, Hydro-Slide, Inc. has $5 stated value no-par stock and the company issues 5,000 shares at $8 per share for cash. The entry is: d. Cash (8,000 x 5) 40,000 c. Common Stock (5000 x 5) 25,000 c. Paid-in Capital in Excess of Stated Value,Common Stock 15,000 (To record issue of 5,000 shares of $5 stated value no-par stock)