Accounting chapter 11 (stock and dividends)

how to issue preferred stock?

>>debit: cash >>>credit: preferred stock, $ par value >>>credit: paid in capital in excess of par value, preferred stock

selling treasury stock (at cost)

>>debit: cash >>>credit: treasury stock, common

selling treasury stock (above cost)

>>debit: cash >>>credit: treasury stock, common >>>credit: paid-in capital, treasury stock **no gain is ever reported from the sale of a treasury stock

what does stockholders equity consist of?

- paid in/contributed capital: total amount of cash and other assets the corporation receives from its stockholders in exchange for stock -retained earnings: cumulative net income (and net loss) not distributed to its stockholders

selling treasury stock below cost

-Journal entries depends on whether the paid-in capital, treasury stock account has a credit balance -zero balance: excess cost over the sales price is debited to retained earnings -credit balance: debited for the excess of the cost over the selling price but not to exceed the credit balance -When the credit balance is eliminated: any remaining difference between the cost and selling price is debited to retained earnings

what is participating preferred stock?

-allows preferred stockholders to share with common stockholders any dividends paid in excess of the amount stated on the preferred stock -this participation feature applies after common stockholders get dividends equal to preferred stock's dividend percent

how does the balance sheet change when small stock dividend is declared?

-common stock dividend distributable, equity accounts that exists only until the shares are distributed, never a liability, bc it never reduces assets -paid in capital in excess of par increases, with either the amount in excess or par or stated value -retained earnings decreases, reflecting the increase in both common stock and paid-in capital in excess of par

how to account for cash dividends

-date of declaration: the date the directors vote to declare and pay a dividend >>debit: retained earnings >>>credit: common dividend payable -date of record: the date for identifying those stockholders to receive dividends (** no journal entry needed) -date of payment: the date when the corporation makes payment >>debit: common dividend payable >>>credit: cash

what is cumulative preferred stock?

-gives its owners a right to be paid both the current and all prior periods' unpaid dividends before any dividend is paid to common stockholders

What are some disadvantages of a corporation?

-government regulation -corporate taxation >>>double taxation: incur corporate income usually taxed a second time as part of stockholders' personal income when they receive cash dividends

what are the 5 steps to record stock dividends?

-identify number of shares outstanding -identify the stock dividend percentage -compute the number of new shares (step #1 X step #2) -value new shares at market (small stock dividend) or par (large stock dividend) -determine debit (reduction) or retained earnings (step #3 X step #4)

advantages for stock dividends

-keep market price of stock affordable -a stock dividend shows management's confidence that the company is doing well and will continue to do well

what is nonparticipating preferred stock? (most preferred)

-limits dividends each year. once preferred stockholders receive a stated amount, the common stockholders get any and all additional dividends

what is stated value stock?

-no-par stock that has an assigned "satted value per share -stated value per share is the minimum legal capital share in this case

purchasing treasury stock

-reduces corporations assets and equity by equal amounts -journal entry for purchasing treasury stock: >>debit: treasury stock, common >>>Credit: cash

What are some advantages of corporations?

-separate legal entity -limited liability -transferable ownership of rights -continuous life -no mutual agency for stockholders >>>lack of mutual agency: stockholders, who are not officers and managers, cannot bind the corporation to contracts -easier capital accumulation

what is no-par value stock (no-par stock)?

-stock not assigned an amount per share by corporate charter -has no legal capital

reasons for treasury stock

-use their shares to acquire another corporation -avoid a takeover of the company -give them to employees as compensation -maintain a strong market

what are the special rights of preferred stock?

-usually include a preference for receiving dividends and assets in liquidation -preferred stock has the rights of common stock unless the corporate character excludes them (like the right to vote)

What is a publicly held corporation?

A corporation that offers its stock for public sale and can have thousands of stockholders

issuing stated value stock: any amount above the stated value is credited to paid in capital in excess of stated value

debit: cash credit: common stock (stated value X # of shares) credit: paid in capital in excess of stated value, common stock)

issuing no-par value stock

debit: cash credit: common stock, no par value

issuing par value stock at a premium: the premium ("paid in capital in excess of par value") is reported as a part of equity

debit: cash (full amount) credit: common stock credit: paid in capital in excess of par value, common stock (cash MINUS common stock)

What does it mean to sell stock indirectly?

a corporation pays investment bankers to sell its stock >>some investment bankers underwrite stock (buy stock from corporation and resell it to investors)

What is a privately held corporation?

a corporation that does not offer its stock for public sale and usually has few stockholders

What does it mean to sell stock directly?

common with privately held corporations and when the offer the stock to its buyers

what is stockholders equity?

corporations equity is called stockholder's equity or shareholders equity

issuing par value stock at par: when common stock is issued at par value, record both asset(s) received and the par value stock issued

debit: cash credit: common stock

what is a small stock dividend?

distribution of 25% or less of previously outstanding shares -recorded by capitalizing retained earnings for an amount equal to the market value of shares to be distributed

what is a large stock dividend?

distribution of 25% or more of previously outstanding shares -recorded by capitalizing retained earnings for the par of stated value of the stock

what is a stock dividend?

distribution of additional shares of its own stock to its stockholders without any payment in return (does not reduce assets and equity but instead transfers a portion of equity from retained earnings to contributed capital

what are cash dividends?

distributions of cash to stockholders

what is noncumulative stock?

does not have rights to prior periods' unpaid dividends if they were not declared in those prior periods

how to record a large stock dividend?

journal entry at date of declaration: >> debit: retained earnings >>>credit: common stock dividend distributable journal entry date of payment: >>debit: common stock dividend distributable >>>credit: common stock

how to record a small stock dividend?

journal entry for date of declaration: >>debit: retained earnings >>>credit: common stock dividend distributable >>>>credit: paid in capital in excess of par value, common stock journal entry for date of payment: >>debit: common stock dividend distributable >>>credit: common stock

what is preferred stock?

preferred stock has special rights that give it priority over common stock in one or more areas

what is treasury stock

stock buyback: when corporations buy back their own stock -contra equity account and has a debit balance

issuing stated value stock: when value stock is issued...

the stated value is credited to the stock account

if no-par stock is issued, stock is recorded at the assets' market value

stock issued for noncash assets is recorded at the market value of either the stock or the noncash assets, whichever is more determinable

What is par value stock?

stock that has the amount assigned per share by the corporation

what is a stock split?

the distribution of additional shares to stockholders according to their percent ownership

what is dividends in arrears?

the unpaid dividends when preferred stock is cumulative and directors either don't declare a dividend to preferred stockholders or declare one that does not cover the total amount of cumulative dividends -not a liability

what are some reasons for issuing preferred stock

used to/for -raise money without giving up control -boost the return by common stockholders -appeal to some investors who believe that the corporation's common stock is too risky or that the expected return on common stock is too low