Chapter 18: Shareholders' Equity

General components of Stockholders' Equity on balance sheet

- Additional Paid in Capital - Preferred Stock - Common Stock - Accumulated Other Comprehensive Income - Retained Earnings - Treasury Stock

Types of issue costs

- Registration fees - Underwriter commissions - Printing and clerical costs - Legal and accounting fees - Promotional costs

Legal Capital

- The portion of shareholders' equity that must be contributed to the firm when stock is issued - The amount of capital, required by state law, that must remain invested in the business - Refers to par value, stated value, or full amount paid for no-par stock

What do treasury shares not have?

- Voting rights - Dividend rights - Preemptive rights - Liquidation rights

Steps on how a corporation is established

- articles of incorporation are filed with the state - state issues a corporate charter - shares of stock issued - board of directors elected by shareholders - board of directors appoint officers

What causes the non owner related changes for accumulated other comprehensive income?

- net holding gains/losses on investments held for sale - gains/losses from amendments or changes in actuarial assumptions relating to pension plans - deferred gains/losses on derivatives - gain/loss adjustments from foreign currency translation relating to consolidation

Typical reasons for repurchase of shares are to:

- support the market price - increase earnings per share - distribute in stock option plan - issue a stock dividend - use in mergers and acquisitions - thwart takeover attempts

What is the order of dividends being paid out?

1. Creditors 2. Preferred stockholders 3. Common stockholders (remaining)

How do we treat resale of shares under the treasury method?

As continuation of repurchasing the treasury shares

Who determines dividends?

Board of Directors

Who elects board of directors?

Common stockholders

Important dates for dividends

Declaration date, ex-dividend date, date of record, payment date

Property Dividends (Dividends in Kind)

Declaring and paying a dividend using an asset other than cash

If the issuance cost is less than par value, how does if affect paid-in capital?

Decreases

Stock Dividend

Distribution of additional shares of stock to current shareholders of the corporation. - No impact on assets or liabilities of entity - Distinguished as small (<25%) or large (> or equal to 25%) stock dividend which impacts treatment - No impact on value of shareholder's total holdings

Dividends

Distribution of assets the company has earned to shareholders

Cash Dividends

Dividends paid in cash

Retained Earnings

Represents a corporation's accumulated, undistributed net income or loss. Also considered reinvested earnings. A credit balance signifies assets previously earned but not distributed to shareholders

What are ways repurchase can be enacted through?

Retirement of shares or holding stock as treasury shares

Stock Split

Stock Distribution of 25% or more of outstanding shares that is labeled a stock split. - No journal entry necessary - No impact on value of shareholder's total holdings

Date of record

Stockholders registered as of this date are entitled to receive dividend. Must have bought shares before ex-dividend date to be registered as stockholders

Common Stock

The basic voting stock of the corporation. It ranks preferred stock for dividend liquidation distribution

Share Buybacks

The repurchase of outstanding shares by a corporation

Payment Date

Date dividends are distributed. Book journal entry

Declaration Date

Date when board declares a dividend. Book journal entry

Ex-Dividend Date

Date when shares begin trading without right to receive dividend

No-par Stock

Dollar amount per share is not designated in corporate charter. Many states now allow this - Corporations can assign a stated value per share (treated as if par value)

Par Value

Dollar amount per share is stated in the corporate charter and rules dictated by state law - No relationship to market value

If purchase price is greater than issue price how does paid-in capital get affected?

First must deduct from paid-in capital --share repurchase (debit) until zero balance and then deduct from retained earnings (debt)

Board of Directors

Have governance responsibilities for the corporation

Retired Shares

Have the same status as authorized but unissued shares

If purchase price is less than issue price how does paid-in capital get affected?

Increase (credited)

If the issuance cost is greater than par value, how does it affect paid-in capital?

Increases

Outstanding Shares

Issues shares that are owned by stockholders

Types of Dividends

Liquidating divided, cash dividends, property dividends (dividends in kind), stock dividend, stock split

What shares are issued shares?

Outstanding shares and treasury shares

Liquidating Dividends

Portion of dividends paid out in excess of retained earnings balance

Share issue costs

Reduce net proceeds from selling shares, resulting in a lower amount of additional paid-in capital

Retirement Shares

Reduce the same capital accounts that were increased when the shares were issued--common stock, and additional paid-in capital--excess of par

Treasury Stock

Reflects issued shares that have been bought back (reacquired) by the corporation but not retired

How is resale treated under the retirement method?

The method of "resale" of shares is nonexistent and the sale is treated like the initial sale of shares - No need to track retired shares - No cost flow assumption method necessary

Cost of resold shares

The price that the company paid for them based on a cost flow assumption of FIFO, LIFO, or Weighted Average Method

Why can't shares be sold below par value?

To protect existing shareholder's investments

Treasury Shares

Treasury stock account is increased (debited) by cost of acquisition