Int. Acct II - Ch 18
Corporations raise capital by
1. Issuing stock 2. Issuing debt 3. Operating at a profit.
Hybrid organizations
1. LLC 2. S Corp 3. LLP
Quasi organization
1. Revalue assets. 2. Eliminate debit balance in RE 3. RE is dated.
Will not affect treasury stock
1. Small stock dividends 2. Cash dividends 3. Property dividends
Reasons to not record any entry for any transaction that occurred on the date of record:
1. The dividends will not be paid for those who buy the stock after the date of record. 2. The company does not record any transactions on the date of record. 3. The ownership of shares alone is verified.
Retiring repurchased shares effects on the equity accounts
1. Total shareholder's equity is the same. 2. Paid-in capital in excess of par is lower. 3. Common stock is lower.
If a company repurchases its shares of stock and does not retire the shares, the shares are reported as
A contra equity account--treasury stock.
Dividends
A distribution of assets to shareholders
Quasi reorganization
A firm undergoing financial difficulties, but with favorable future prospects, may use this to write down inflated asset values and eliminate an accumulated deficit (debit balance to RE).
Stock distribution of 25% or higher
A large stock dividend A stock split.
When treasury stock is purchased, the cost of the treasury stock is reported as
A reduction in shareholders' equity
Journal entry to eliminate a portion of the deficit against available paid-in capital
Additional paid-in capital DR RE CR
When common stock has a designated par value, and common stock is issued at an amount above par, which entry is recorded?
Cash (# shares at FV price/share) DR Common Stock (# shares at par value) CR Pd-In Capital -- excess of par (remainder) CR
Journal entry to record reissue of treasury stock above cost to buy back
Cash (# shares reissued x Purchase price) DR Treasury stock (# shares reissued x buyback pric) CR Pd-In capital (Difference) CR
Journal entry to record sale of stock
Cash (# shares x SP) DR Common Stock (# shares x par) CR Pd-In Capital (excess of par - remainder) CR
Fractional shares
Cash payments
Ex-dividend date
Date before which investors must purchase stock in order to receive a dividend.
Record date
Date that a determination is made as to recipients of a dividend.
Payment date
Date that corporate assets are transferred to shareholders.
Declaration date
Date that the corporate board of directors announces dividend
When a cash dividend is declared and paid in the same year, the total effects on the balance sheet include:
Decrease assets. Decrease stockholder's equity.
Stock dividends issued, the fair value of the shares
Decreases
When a corporation repurchases its stock as treasury stock, the number of shares outstanding
Decreases
Difference classes of shares must
Distinguish the rights for each class of stock.
Liquidating dividend
Dividend exceeds the balance in RE
Noncumulative preferred shares
Dividends are paid in the currently year only if declared.
Cumulative preferred shares
Dividends, if not declared, accumulate and must be paid in the future when a dividend is declared.
When a corporation repurchases its stock as treasury stock, the number of shares authorized
Does not change
Earnings price ratio
Earnings per share / market price per share
Reverse stock split
Ex. One share in exchange for two outstanding shares
A stock split effected in the form of a large dividend
Has no effect on the par value of the stock. Reduces paid-in capital - excess of par.
Effect of the repurchase of treasury stock on the earnings per share ratio
Increase
The effect of share issue costs is to
Reduce paid-in capital in excess of par
Recording stock splits
Reduce the paid-in capital in excess of par account and capitalize RE.
Cash dividend
Reduces RE and a current asset.
Large stock dividend
Reduces RE by par, increases CS by par.
Small stock dividend
Reduces RE for FV; increases CS by par value; increased additional paid-in capital.
Net assets equals
Shareholder's equity
Additional paid-in capital
Stockholder's equity
AOCI is reported on
The balance sheet.
The statement of shareholder's equity reports
The changes in each shareholder equity account.
When a company repurchases its stock and immediately retires the stock:
The equity accounts are reduced for the amount in which the shares were originally sold.
For IFRS reporting, the critical feature that distinguishes a liability from equity is if
The issuer is required to deliver cash or another financial instrument to the holder.
Shareholder's equity
The ownership interests of the investors in a corporation.
Preemptive right
The right to purchase additional shares of stock to maintain one's percentage of ownership when new shares are issued.
OCI is reported on
The statement of comprehensive income.
Paid-in capital
When investors purchase shares of stock.
Preferred stock is similar to a bond when it has these features:
1. A dividend rate 2. A redemption feature
A company has available-for-sale securities in its portfolio that have increased in value at year-end. How should the unrealized gain on the available-for-sale securities be reported on the statement of shareholder's equity.
As an increase in comprehensive income.
Recording shares for noncash, non publicly traded stock
Asset (FV of asset if no FV of stock is available) DR CS (# shares x Par value) CR Pd-In Capital (excess) CR
How can shareholder's influence a company?
By voting for the BOD
Reverse stock split
Increases the market value of the shares.
A property dividend
Is a noncash distribution to owners and reduces RE.
Corporations raise equity capital by
Issuing stock and operating at a profit
______________ requirements and ______________ objectives make it preferable to separate a corporation's capital into several separate shareholder's equity accounts
Legal, disclosure
Earnings-price ratio reflects the percentage earned for each dollar of
Market value of CS
Redeemable preferred stock
May be exchanged for cash at the option of the corporation or the shareholders.
Treasury shares are the same as shares that have never been issued; therefore, treasury shares
May not vote or receive cash dividends.
ROE
NI / Average total Shareholder's equity
A credit balance in RE indicates that
Net income has exceeded the dividends distributed to shareholders.
Nonreciprocal transfer to owners
Property dividend
A business that has one equity account labeled "capital" is a
Proprietorship
The two categories under IFRS that shareholder's equity is classified
Share capital and reserves
Stock repurchases are often used to offset the effects of
Shares issued for stock awards and stock option programs.
Treasury stock
Shares of stock that are repurchased and not retired.
Accounting for treasury stock is consistent with a _________ transaction approach.
Single
RE is reported as a ____________ line item.
Single
A reason for using stock dividends is
To capitalize RE in the CS and paid-in capital accounts.
Publicly held corporations may be traded
1. On an exchange 2. Over the counter
A corporation may repurchase its share of stock because management
Believes the market price of the stock is undervalued.
Journal entry for share repurchase and retirement (if purchased below original sale price)
CS (# shares repurchased at par) DR Pd-In Capital (# shares repurchased x (FV-Par) at time of original sale) DR Cash (# shares repurchased at FV) CR Pd-In Capital - Share repurchase (plug) CR
Journal entry for share repurchase and retirement (if purchased above original sale price)
CS (# shares repurchased at par) DR Pd-In Capital (# shares repurchased x (FV-Par) at time of original sale) DR RE (# shares repurchased x OG SP - Current SP) DR Cash (# shares repurchased at FV) CR
Journal entry to eliminate the remainder of the deficit against CS
CS DR RE CR
A frequent reason for a stock plot is to
Cause the market price per share to decline.
A _________ balance indicates a deficit.
Debit
Journal entry for declaration date
RE DR Div Pay CR
Par value is also referred to as
Stated capital
A variation on the return on shareholder's equity
Used when a company has both preferred and common stock outstanding. Return to common shareholder's equity: Numerator of ROSHE (NI) - Dividends to Preferred Shareholders/Average common shareholder's equity
IFRS reporting allows shareholder's equity to be reported:
1. After liabilities on the balance sheet; or 2. Before liabilities on the balance sheet
Two sources of shareholder's equity.
1. RE 2. Pd-in Capital
When a property dividend is declared, the property is revalued to FV, and the resulting gain or loss is
Recognized in income for the period
Consistent with US GAAP, comprehensive income may be reported as
1. An expanded version of the income statement, or, 2. A separate statement immediately following the income statement.
A business that incorporates must file a document with the state, which includes a description of the business activities, the shares to be issued, and the composition of the board of directors. Two terms used to describe this document.
1. Articles of incorporation 2. Corporate charter
Preferred stockholders usually have preference over common stockholders with respect to:
1. Dividends 2. Distribution of assets in liquidation.
Two components of OCI
1. Amount created during reporting period 2. Amount of AOCI over the current and prior periods In order to determine prior year's total: AOCI - Current reporting period amount
Participating stock feature
Requires that preferred stock receive additional dividend distributions above the amount stated on the preferred stock certificate.
The Model Business Corporation Act
Serves as the model for corporate laws in most states.
Reported as NI on the IS
1. Gain on sale of land 2. Increase in FV of investments in trading securities 3. Loss on sale of patent. 4. Increase in the FV of bonds outstanding due to change in general interest rates; FV option
Included in the duties of the BOD:
1. Establish corporate policies 2. Appoint officers to manage the corproation
Reported as OCI on the IS
1. Increase in the FV of investments in available-for-sale securities 2. Loss on pension plan assets (actual return less than expected) 3. Gain from foreign translation 4. Prior service cost 5. Gain on post retirement plan assets (actual return more than expected).
Types of gains and losses not included in income statements
1. Net holding gains (losses) on investments. 2. Gains (losses) from and amendments to post retirement benefit plans. 3. Deferred gains (losses) on derivatives. 4. Adjustments from foreign currency transactions.
Other comprehensive income
Nonowner changes to equity during a particular accounting period that are not reported as part of traditional net income.
Redemption privilege
Preferred shareholders - Gives the option, under specified conditions, to return their shares for a predetermined redemption price. Shareholder and corporation hold this right
Right of conversion
Preferred shareholders - allows them to exchange shares of preferred stock for common stock at a specified conversion ratio.
Nonparticipating preferred stock feature
Preferred shareholders receive a dividend equal to the amount stated in the preferred stock certificate.
Participating preferred stock feature
Preferred shareholders receive additional dividends above that amount stated in the preferred stock certificate.
When a small stock dividend is declared and distributed, the FV of the stock is
Reclassified from RE to CS and additional paid-in capital
Property dividend
Reduces RE, recognizes gain on appreciation on IS.
Balance sheet with respect to reporting the stockholder's equity
Reports amounts of shareholder's equity at end of reporting periods.
Statement of stockholder's equity with respect to reporting the stockholder's equity
Reports sources of the changes in stockholder's equity accounts.
Comprehensive income
Represents the total change in equity for a reporting period not arising from transactions with owners.
A corporation's accumulated income that has not been distributed as dividends to shareholders is referred to as
Retained earnings
When treasury shares are reissued for an amount less than cost and no paid-in capital from treasury shares account exists, the amount that is less than the cost decreases
Retained earnings
A company that repurchases its own securities accounts for the shares of stock as
Retired shares of treasury shares.
Consistent with IFRS, capital stock is referred to as
Share capital
When a company repurchases its own securities without formally retiring them, the stock is recorded in this account:
Treasury stock
