acct chapter 11 Reporting and analyzing Stockholders Equity
outstanding shares
# of shares held at the moment by the general public
Other Forms if Business Organization
- Limited Partner -Limited liability partnerships (LLPs) - Limited liability companies (LLCs) -S Corporation ►No double taxation ►Cannot have more than 100 shareholders.
Preferred stock holders DO NOT have voting rights & each paid - in capital account title should identify the stock to which it relates
- Paid-in Capital in Excess of Par Value—Preferred Stock - Paid-in Capital in Excess of Par Value—Common Stock
Characteristics that distinguish corporations from proprietorships and partnerships - Continuous Life
- continuance as a going concern is not affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer. - As a result, a successful corporation can have a continuous and perpetual life
Define Record Date
- date at which the company determines *ownership* of the outstanding shares for dividend purposes - no entry is required! - registered shareholders are eligible for dividend
Characteristics that distinguish corporations from proprietorships and partnerships - Transferable Ownership Rights
- ownership of a corp is held in SHARES of capital stock.... which are transferrable units -Stockholders may dispose of part or ALL of their *interest* in a corporation simply by SELLING their STOCK - the transfer of an ownership interest in a partnership requires the *consent of each partner* - the transfer of stock is entirely at the discretion of the stockholder (it DOES NOT require approval of other the corporation or other stockholders) - transfer of ownership normally has no effect on the operating activities of the corporation or the corp's assets, liabilities, and total stockholders equity!!! - a company does NOT participate in the transfer of ownership between individual owners AFTER the original sale of the capital stock!
Characteristics that distinguish corporations from proprietorships and partnerships - Ability to Acquire capital
- relatively easy for a corp to obtain capital through the issuance of stock - *buying stock* in a corp is attractive to an investor bc a stockholder has limited liability and shares of stock are *readily transferable* - numerous indiv can become stockholders by investing small amounts of money
Define Payment Date
- the company makes(issues) cash dividend payments to the stockholders on record as of this date - records payment of dividend
EFFECT of Stock dividends **final**
- they change the COMPOSITION of stockholders equity bc they result in a transfer of a proportion of retained earnings to paid in capital BUT.... SH Equity remains the same - stock dividends have NO effect on the par or stated value per share!!! but the # of shares outstanding INCREASES
Characteristics that distinguish corporations from proprietorships and partnerships - Corporate Management
-Although stockholders LEGALLY own the corporation, they manage it INDIRECTLY through a board of directors they elect - The board formulates the operating policies for the company selects officers, such as a president and one or more vice presidents, to execute policy and to perform daily management functions - As a result of the Sarbanes-Oxley Act, the board is required to monitor management's actions closely - The CEO has overall responsibility of managing the business
Characteristics that distinguish corporations from proprietorships and partnerships - Additional Taxes
-Owners of proprietorships and partnerships report their share of earnings on their personal income tax returns - The individual owner then pays taxes on this amount. -Corporations, on the other hand, must pay federal and state income taxes as a separate legal entity. - Many argue that corporate income is taxed twice (double taxation)—once at the corporate level and again at the individual level stockholders are required to pay taxes on cash dividends
The purchase of treasury stock - generally accounted for the _______ - Debit Treasury Stock for the ______ - Treasury stock is a _____ _____, NOT an asset - treasury stock decreases by the same amount when the company later sells the shares
-cost method - price paid - contra stockholder's equity
Types/ Forms of Dividends
1. Cash Dividend 2. Property dividends 3. Stock dividends 4. Scrip (promissory note)
What are the INITIAL steps for forming a corporation?
1. File application with the Secretary of State 2. State grants *charter* 3. Corporation develops *by-laws* -Companies generally incorporate in a state whose laws are FAVORABLE to the corporate form of business -Corporations engaged in interstate commerce must obtain a license from each state in which they do business.
The stockholders equity section of a *corporations* balance sheet consists of 2 parts!!!!!
1. Paid in (contributed) capital 2. Retained Earnings
What are the 2 most important things about a corporation?
1. Primary benefit of being a corp = no personal liability - you only lose what you invest as compared to a partnership where you lose that amount and more 2. Negative = 2 levels of tax -corporate and individual level
For a corporation to pay a cash dividend, it must have:
1. Retained Earnings- payments of dividends from retained earnings is legal in all states 2. Adequate cash 3. Declaration- by the Board of Directors
Characteristics that distinguish corporations from proprietorships and partnerships
1. Separate Legal Existence: 2. Limited Liability of Stockholders equity: 3. Transferable Ownership Rights 4.Ability to Acquire Capital 5. Continuous Life 6. Corporation Management 7. Government Regulations 8. Additional Taxes
Wh do corporations purchase their outstanding stock? aka treasury stock once its been bought (4)
1. To REISSUE shares to officers and employers under *bonus and stock compensation plans* 2. To *increase trading* of the companys stock in the securities market 3. To have additional shares available for use in *acquiring other companies* 4. To *increase earnings per share*
What, then, are the purposes and benefits of a stock dividend? Corporations generally issue stock dividends for one of the following reasons:
1. To satisfy stockholders' dividend expectations WITHOUT spending cash. 2. 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 3. To emphasize that the company has permanently reinvested in the business a portion of stockholders' equity, which therefore is unavailable for cash dividends.
Dividends are expressed as....
1. a % of the par or stated value 2. a dollar amount per share
What are the 2 biggest differences between bonds and stocks?
1. bond must be REPAID at some point in future... stock does not, u will never be forced to buy back a stock 2. Must pay INTEREST with a bond.... with stocks you elect to pay a dividend but you do not have to
Primary objectives in accounting for the issuance of common stock are
1. identify the specific sources of paid- in capital 2. to maintain the distinction between paid in capital and retained earnings
Which characteristics are advantages/ disadvantages
Advantage Separate Legal Identity Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Disadvantage Continuous Life Corporation Management Government Regulations Additional Taxes
2 common classifications of a corporations are
An entity separate and distinct from its owners - can be classified by 1. by Purpose (not for profit, for profit) 2. By ownership (publicly held, privately held)
What are stock issue considerations?
Authorized stock Issuance of Stock Par and No - Par Value Stock
Define declaration date
Board of directors AUTHORIZES cash dividend - this date commits the corporation to a binding legal obligation
Treasury stock is a what kind of account?
CONTRA stockholders equity account
ABC Corp. issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, credits are made to:
Common stock 10,000 and Paid in Capital in Excess of Par Value $2,000
The authorization of capital stock does or does not result in a formal accounting entry?
DOES NOT
**Best example for explaining par value of common stock/ preferred stock** Example: Hydro Slide Co issues $1000 shares of $1 par value common stock at par for cash Debit Cash 1,000 Credit common stock 1,000 Now Assume Hydro Clide Co issues an additional 1,000 shares of the $1 par value common stock for cash at $5 per share (the amount received above the par value is $4 ($5-$1 → this would be credited to Paid- In Capital in excess of Par Value )
Debit Cash 5,000 Credit Common stock (1,000*$1) 1,000 Credit Paid-In Capital in Excess of Par Value 4,000
what is the entry for a Payment Date
Debit Dividends Payable Credit Cash
Purchase of treasury stock accounting illustration: On February 1, 2017, Mead acquires 4,000 shares of its stock at $8 per share. Prepare the entry.
Debit Treasury Stock (4,000*$8) 32,000 Credit Cash 32,000 On balance sheet under Total paid-in capital and retained earnings is lists "Less: Treasury Stock"
Accounting for Preferred Stock Accounting Illustration: Stine Corporation issues 10,000 shares of$10 par value preferred stock for $12 cash per share. Journalize the issuance of the preferred stock.
Debit cash 120,000 Credit Preferred Stock (10,000 * $10) 100,000 Credit Paid- In Capital in Excess of Par - Preferred Stock 20,000
*** final*** when you contribute money into a company (common stock or preferred stock) what is the entry
Debit cash for the total that you bring in Credit: Common Stock or PreferredStock account based on the par value Credit Paid-In Capital in Excess of Par Value (amount above the amount based on par value)
Example using the Declaration Date, Record Date, & Payment Date) On December 1, the directors of Media General declare a $0.50 per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on January 20 to shareholders of record on December 22:
Declaration Date Debit Cash Dividends 50,000 Credit Dividends Payable 50,000 Record Date - No Entry Payment Date Debit Dividend Payable 50,000 Credit Cash Payable 50,000
What 3 dates are important in connection with dividends
Declaration Date Record Date Payment Date
Example: assume that on December 1, 2017, the directors of Media General declare a $0.50 per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is $50,000 → ($100,000 * $0.50). The entry to record the declaration is as follows
Declaration Date Dec 1 Debit Cash Dividends 50,000 Credit Dividends payable 50,000
Companies make accounting entries on ___ date and ____ date NOT the ____ date
Declaration Date Payment Date Not Record Date
A stock dividend does or does not decreases total SH Equity or total assets unlike Cash dividends
Does NOT
Characteristics that distinguish corporations from proprietorships and partnerships - Limited Liability of Stockholders
Even in the event of bankruptcy of the corporation...stockholders losses are generally limited to the amount of capital they have invested in the corporation
Corporation organization chart
Highest Ranking to Lowest Stock holders Chairman & Board of Directors President and Chief Exec Officer secretary-VP Marketing=VP Finance-CP Operations-VP HR Treasurer- Controller
Santa Anita Inc. purchases 3,000 shares of its $50 par value common stock for $180,000 cash on July 1. It expects to hold the shares in the treasury until resold. Journalize the treasury stock transaction.
July 1 Debit Treasury Stock 180,000 Credit Cash 180,000
Cayman Corporation begins operations on March 1 by issuing 100,000 shares of $1 par value common stock for cash at $12 per share. On March 28, Cayman issues 1,500 shares of $10 par value preferred stock for cash at $30 per share. Journalize the issuance of the common and preferred shares.
Mar 1 Debit Cash 1,200,000 Credit common Stock (100,000*$1) 100,000 Credit Paid-in Capital in Excess of Par Value— Common Stock 1,100,000 Mar 28 Debit Cash 45,000 Credit Preferred Stock (1,500*$10) 15,000 Credit Paid-in Capital in Excess of Par Value— Preferred Stock 30,000
Would the original paid- in capital account, Common Stock, be affected?
NO bc the # of issues share does not change
Define Retained Earnings
Net income that a corp retains in the business - Net Income is recorded in RE by *closing entry* that debits Income Summary and Credits RE -The RE account is reduced by dividends (cash dividends and stock dividends) by a closing entry that debits RE and credits Dividends
does authorization of common stock have result on accounting entry?
No the event has no immediate effect on either corporate assets or stock holders equity
Corporation stockholder equity =
Paid in capital (common stock + preferred stock) + Retained Earnings
The issuance of common stock only affects what account?
Paid-In Capital Account
To appeal to a larger segment of potential investors, a corporation may issue an additional class of stock, called _________ which has contractual provisions that give it preferences or priority over common stock in certain areas
Preferred stock
where are cash dividends closed to at end of the accounting period?
Retained Earnings
Which of these statements about stock dividends is true? a. Stock dividends reduce a company's cash balance. b.A stock dividend has no effect on total stockholders' equity .c.A stock dividend decreases total stockholders' equity .d.A stock dividend ordinarily will increase total stockholders' equity.STOCK DIVIDENDS
Stock dividends reduce a company's cash balance.
Stock holder Equity Section for the previous problem will look like:
Stockholders Equity - Paid in Capital -- Common Stock 2,000 --Paid in Capital in excess of par value 4,000 ---Total paid-in capital 6,000 -Retained Earnings 27,000 Total Stockholders Equity $33,000
remember: on the declaration date .....
The company must make an entry to recognize the increase in Cash Dividends and the increase in the liability Dividends Payable
What are stockholder rights? 4
VOTE, SHARE, PREEMPTIVE RIGHT, RESIDUAL CLAIM 1. vote in the election of board of directors and on actions that require stock holders equity 2. share the corporate earnings through receipt of dividends 3. keep the same % ownership when new shares of stock are issued (preemptive right) 4. share in assets upon liquidation in proportion to their holdings... called residual claim
Example of a stock dividend: To illustrate a stock dividend, assume that you have a 2% ownership interest in Cetus Inc.; you own 20 of its 1,000 shares of common stock. If Cetus declares a 10% stock dividend, it issues 100 shares (1,000 * 10%) of stock. You receive two shares (2% * 100) , but your ownership interest remains at 2% (22/1,100).
You now own more shares of stock, but your ownership interest has not changed. Moreover, the company disburses no cash and assumes no liabilities
Define dividend
a distribution to stockholders on a pro rata basis
stock dividend:
a pro rata distribution of the corporations own stock to stock holders
Issuing Par Value Common Stock for Cash Accounting Illustration:Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide's journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.
a. Debit cash 1,000 Credit Common Stock 1,000 (1,000*$1) b. Debit cash 5,000 Credit Common Stock (1,000*$1) 1,000 Credit Paid-in Capital Excess of Par Value 4,000
Expand on Stock Issue Considerations
authorized stock: amount of stock that a corporation is authorized to sell as indicated in its charter - # of authorized shares is often reported in stock holder equity's section & authorization of common stock does not require an accounting entry issuance of stock - a corp issues common stock *directly* to investors OR it can issue common stock *indirectly* through an investment banking firm par and no-par value stocks - par value stock: capital stock that has been assigned a value per share - years ago, par value determined the *legal capital* per share that a company must retain in the business for protection of corporate creditors - many states do NOT require a par value & no- par value stock is fairly common -
Define Authorized Shares Issued Shares Outstanding Shares
authorized: total number of shares issued: # of shares issued to public outstanding= issued shares - treasury shares
no par value stock:
capital stock that has not been assigned a value in the corporate charter - common today
when a corp only has 1 class of stock, it is ____ _____
common stock not preferred stock!
What does Paid-in Capital Account consist of??? EXAM
common stock + preferred stock retained earnings also makes up Stock holders equity
difference between common stock and preferred stock
common stock- dividend is option preferred stock- dividend is guaranteed
Entries for cash dividends are required on the:
declaration date and the payment date.Entries
dividends are not liability until they are ______
declared
Define Common Stock
dividend is not guaranteed
Define Charter
documentation that describes - name and purpose of the corporation - types and # of shares of stock that are authorized to be issued - name of indiv who formed the company - # of shares that these indiv agreed to purchase
define By Laws
establish *internal* rules and procedures for conducting the affairs of the corporation
T or F: Legal capital is intended to protect stockholders
false
define Preferred stock
has aspects of it being like *debt* but also aspects similar to *equity* - we agree as a company to pay a dividend to a shareholder (GUARANTEED) abt 3-4% - never gets repaid!! it is permanent
Define corporation
has the most rights and privileges of a person, subject to the same duties and responsibilities as a person (ex: must abide by law and pay taxes)-
define pro rata
if you own say 10% of the common shares you will receive 10% of the dividend
Purpose of a stock split?
inc the marketability of the stock by lowering its market prices per share making it easier for corp to issue additional stock
Define Treasury Stock:
is a corporations OWN stock that has been acquired by the corporation and is being held for FUTURE use
Stock Split
like a stock dividends involves the issuance of *additional* shares of stock to stockholders according to their ownership - pro rate distribution of the corporations own stock - # of shares owned increases, but % of company owned remains the same
The liability of stockholders is normally _____ to their investment in the corporation
limited
***REMEMBER*** Treasury Stock is always "LESS"
on the balance sheet
What does treasury stock do to shares outstanding?
outstanding= issued - treasury shares the *more* treasury shares.... the less outstanding the *less* treasury shares... the more outstanding
How does preferred stock differ from bond?
preferred stock pays dividends but DOES NOT have to be paid back... a bond MUST be paid back
The acquisition of treasury stock ____ SH Equity
reduces
Treasury stock ___ Stockholders equity
reduces
Effect of Stock Split - ______ the market value of the share - No entry to recorded for a stock split - __ par value and __ # of shares - ______ effect any balances in SH Equity
reduces decrease par value inc # of shares but DOES NOT
The payment of the dividends on the payment date reduces both ____but has no effect on ___
reduces current assets and current liabilities has NO effect on SH Equity ???
summary: par value means
some legal capital must be retained in the business for the protection of corporate creditors
Characteristics that distinguish corporations from proprietorships and partnerships - Government Regulations
state laws, SEC laws, stock exchange requirements federal regulations must be followed by corporation
Characteristics that distinguish corporations from proprietorships and partnerships - Separate Legal Entity
the corporation acts under its owns name rather than in the name of its stockholders (Example: Facebook → buys, owns, sells property; borrows money; and enters into legally binding contracts in its own name, may sue or be sued, pays taxes as a separate entity )
Define Paid-In capital:
the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock - when a corp only has 1 class of stock, it is common stock!!!
T OR F: When the dividend is declared, the board of directors determines the size of the stock dividend and the value per share to use to record the transaction → In order to meet legal requirements, the per share amount must be at least equal to the par or stated value
true
T or F: Many states do not require a par value per share for capital stock.
true
T or F: Preferred stock has either a par value or no par value
true
T or F: Preferred stock may have par value or no par value
true
T or F: cash dividends are NOT paid on treasury shares
true
T or F: the # of shares issued and outstanding and the # of shares held as treasury are disclosed
true
T or F: treasury stock will increase by the cost of shares purchased
true
T or F:The separation of ownership and management is a disadvantage of the corporate form of business.
true
it is relatively _____ for a corp to obtain capital through the issuance of stock
true
t or F: a stock dividend results in a decrease in retained earnings and an increase in paid- in capital
true
T or F: Stockholders equity is referred to by many different names
true - stockholders equity - corporate capital - owners equity!
Remember: Preferred stockholders must be given dividend before common stock comes in
you CANNOT pay any common stock shareholders until you pay the preferred shareholders everything