Chapter 15

How is preferred stock like debt? Equity?

1. Ability to call (Principal repayment); Guaranteed dividends (Interest) 2. It is ownership of the company

Types of Capital Accounts

1. Capital Stock 2. Additional Paid-In Capital 3. Retained Earnings

No Par Value Stock (Accounts affected) How is it valued?

1. Cash 2. Common Stock or Preferred Stock By the stated value.

Par Value Stock (Accounts Affected)

1. Cash 2. Common Stock or Preferred Stock 3. Additional Paid in Capital

Types of Dividends

1. Cash dividends 2. Property dividends 3. Liquidating dividends 4. Stock dividends

Accounting for treasury stock 1. Repurchase 2. Sale above repurchase value 3. Sale below repurchase value

1. Credit Treasury Stock; Debit Cash 2. Debit Cash, Credit Treasury Stock & Additional Paid in Capital 3. Debit Cash & Additional Paid in Capital, Credit Treasury Stock (If Additional Paid in Capital will reach a credit balance, then debit the remaining from Retained Earnings)

Important Dividend Dates

1. Date of declaration 2. Date of record (ex-dividend date) 3. Date of payment

Reasons why companies might or might not pay dividends:

1. Growth stock model 2. Once you start, it's really hard to stop. The market will punish you if you stop. 3. Legally, dividends must be paid out of retained earnings

The special characteristics of the corporate form that affect accounting include:

1. Influence of state corporate law. 2. Use of the capital stock or share system. 3. Development of a variety of ownership interests.

Stock Splits (Accounts affected)

1. No journal entry for a stock split 2. Number of shares authorized, issued and outstanding must be adjusted 3. There is an adjustment to the par value of the stock

Cash dividends may be expressed as:

1. Percentage of par value (Preferred Stock) 2. Amount per share (Common Stock)

What does "preferred" mean?

1. Preference as to dividends 2. Preference as to assets in the event of liquidation 3. Sometimes convertible in to common stock 4. Sometimes callable at the option of the corporation 5. Non-voting

Common stockholders rights: 1. Share proportionally in _______ and _______. 2. Share proportionally in _______________ (The right to vote for directors) 3. Share proportionally in net _______ upon liquidation 4. Share proportionally in any _________________ of the same class

1. Profits; Losses 2. Management 3. Assets 4. New issues of stock

Stock issued with other securities (lump-sum sales) What methods used?

1. Proportional 2. Incremental

Why might a company issue a stock dividend?

1. Publicity gesture because many consider stock dividends as dividends. 2. Corporation may simply wish to retain profits in the business by capitalizing a part of retained earnings.

Small Stock Dividends (Accounts affected)

1. Retained Earnings 2. Additional Paid in Capital (Difference in FMV) 3. Common Stock Dividends Distributable 4. Common Stock

Large Stock Dividends (Accounts affected)

1. Retained Earnings 2. Common Stock Dividends Distributable 3. Common Stock

Cash Dividends (Accounts affected)

1. Retained Earnings 2. Dividends Payable 3. Cash

Why reacquisition of shares? 1. _____________ distributions to shareholders 2. Increase __________ and _____ _____ 3. Provide stock for ____________________________ contracts or to meet potential __________ needs 4. Thwart _____________ attempts or reduce the number of _______________ 5. To make a __________________ for the stock

1. Tax efficient 2. EPS; ROE 3. Employee stock compensation; merger 4. Takeover; shareholders 5. Market (set a price)

Authorized, Issued, and Outstanding 1. Authorized 2. Issued 3. Outstanding

1. The total number of shares the company has made available. 2. The amount of shares actually sold. 3. Amount of stocks issued minus the amount of Treasury stock is the amount of stock outstanding.

Anyone who wishes to establish a corporation must submit ________________________________ to the state in which incorporation is desired.

Articles of incorporation

Stock issued in non-cash transactions How is it recorded?

Companies should record stock issued for services or property other than cash at either the fair value of the stock issued or the fair value of the non-cash consideration received, whichever is more clearly determinable.

Disclosure of restrictions on Retained Earnings

Disclosed in the footnotes

What are dividends and treasury stocks relationship?

Dividends are not declared or paid on treasury stock.

Under dividend in arrears, how does the corporation record it if the dividend has not yet been declared?

It does not record a dividend in arrears as a liability but discloses it in a note to the financial statements, because no liability exists until the board of directors declares a dividend.

Regardless of the number of states in which a corporation has operating divisions, it is incorporated in only ____ state.

One

Costs of Issuing Stock (Accounts affected)

Reduce Cash and Additional Paid in Capital

Why did dividend payouts significantly decreased in the 80's and 90's?

There was a shift in opinion in the market related to dividends for various reasons. 1. Focus on growth stocks 2. Tax rates on dividends at the individual level

Liquidating Dividends (Accounts affected)

These reduce Additional Paid in Capital and are considered a "return of capital"

Property Dividends How is property valued? (Accounts affected)

Upon declaration, the property to be distributed must be restated at fair value. Accounts 1. Property Account (To get to fair value) 2. Unrealized holding gain/loss 3. Retained Earnings 4. Property Dividends Payable 5. Property Account (To record "payment")

Stock splits vs. large stock dividends

Whenever corporations issue additional shares for the purpose of reducing the unit market price, then the distribution more closely resembles a stock split than a stock dividend. This effect usually results only if the number of shares issued is more than 20-25 percent of the number of shares previously outstanding.