Intermediate Accounting Chapter 15
Accumulated Other Comprehensive Income
- Accumulated other comprehensive income, the aggregation of OCI over the years, is the third component of stockholders equity -Firms report accumulated other comprehensive income on the balance sheet in the stockholders' equity section, along with contributed capital and retained earnings
Dividend types
- Asset Dividends - Script or liability dividends (deferred dividend) - Stock dividend -Liquidating dividends (returns of capital)
Asset Dividends
- Cash dividend (most common) -property dividend (Stock in another company)
Common Stock Issued for Cash
- Debit Cash -Credit Contributed Capital and/or additional paid in capital
Source of Dividends
- Earnings and profits (retained earnings) - Liquidating dividend (from contributed capital). ---From paid in capital in excess of par?
Script or liability dividend
- If you usually pay dividends but cannot then you give these, an IOU. - They have interest
Subscribed Stock
- Individuals sign valid contracts for stock purchase -entire PICEP is recorded at the time of subscription -Common Stock subscribed is creadited instead of stock account. -A subscription receivable account is used to account for the amounts yet to be paid - Cash is received over the subscription period -Common stock is recorded only upon receipt of cash.
Stock Dividend
- Large dividend (affects the market price of the stock, equal to par) -Small dividend (Does not affect the market price generally less than 20-25% of outstanding stock)
Economic Feasibility
- Must have available for payment --doesn't always have to be cash - Current and future requirements should be considered - Also, the effects of inflation and the impact on a historical cost basis balance sheet should be considered --we account for book value not current value.
liquidating dividend
- Return of capital
Accounting for retirement Shares
- Shares are still considered Authorized but are not issued - Used to control market price - Almost similar to the treasury Shares (Re purchase was less then the original paid in capital) -credit the difference to Additional paid in Capital-retired Shares (the Repurchase Prices is greater than the original price issued) -Debit additional paid in capital-retired shares
Examples of Other Comprehensive Income
- Unrealized gains or losses on securities classified as available for sale - gains and losses on foreign currency translations - revaluation of assets
Cost Re-issuance of Treasury shares
- Usually reissued at a selling price that is different then the cost of buying -If you get more money you credit PICEP - Treasury -If you get less then you Debit PICEP - Treasury for what ever it has left and then Debit Retained Earnings if necessary
Declaration Date
- When dividends are declared and accrual by the Board of Directors. Declared Dividends must be paid. (Liability) -Journalize: Dividends Declared Dividends Payable
Legality of Dividends
- a credit balance in retained earnings - Debt convents and contractual obligations must be considered - PICEP and donated equity capital may be used as a source (especially for perferred stock) in some states - Accumulated other comprehensive income is generally not permissible source for dividends - Deficits in retained earnings and debit balances in paid capital accounts usually must be restored - Retained Earnings must not be reduced below the cost of treasury stock in most states
Cost Method - Acquisition Treasury Shares
- does not change the common stock account of the additional PICEP - The repurchased shares are still considered issued but are not outstanding
What is Stockholders' Equity?
- represents The residual claims against the net assets of the firm - Shareholders can assert their claims only after the creditors - 3 main Components: ---Contributed Capital ---Retained Earnings ---Accumulated Other Comprehensive Income
Quasi-Reorganization- Definition and purpose
-A quasi-reorganization is the removal of a deficit balance in Retained Earnings -Established a new basis for accounting for assets n stockholders' equity (fair market value) -Allows corporations to get a "fresh Start" without being burdened by a formal court procedure and cost. ---often supervised by a court
Corporate Form: Characteristics
-Accounting for the corporate form is affected by: ---State corporate law (Delaware + Navada) ---The use of capital stock ---the verity of ownership interests (preferred stock, common stock) ---Limited Liability of the stockholders (always incorporate to protect personal assets) ---Formality of the profit distribution
Statement of Stockholders' Equity
-Changes the components of stockholders' equity must be disclosed as a separate statement or in the notes to the financial statements. -Presentation of Comprehensive Income is required and may be shown in the statement of stockholders' equity. If so, the statement may not presented in the notes.
State Corporate Law
-Corporation are "creatures of the state" (Legal persons, but cannot vote or go to jail) ---Each states has its own business incorporation act. ---Many have adopted the model Business Corporate act Prepared by the American Bar association ---Still some states have provisions that make if farverable to incorporate in that state (Delaware and Navada are hte most advatageous). -Articles of Incorporation (Kind of like the contsitution) -Corporate Charter
Prior period adjustments
-Correction of an error in a previous accounting period -Cumulative effect of a change in accounting principle -Adjustments from preaquisition tax loss carryforwards of purchased subsidies (offset future income with past loss *Carried directly to retained earnings net of tax* - Change in the beginning balance of retained earnings
Liquidating dividends procedure
-Date of declaration: ---Debit Additional Paid in Capital, Revaluation Capital, Donated Capital, then finally Capital Stock until all balances are zero (in complete liquidation) [Not until going out of business] ---Credit Dividends Payabl e - Date of Payment: pay the liability
Accounting Approaches to a quasi-reorganization
-Deficit reclassification --Elimination of a deficit in retained earnings without restating assets and liabilities --The Sec does not permit this method to be used by publicly traded companies. . -Accounting reorganization --You cannot have a net increase in values --Assets are restated to their fair market values and liabilities to their present value with the adjustments increasing or decreasing retained earnings --The Sec does not permit net write-ups for publicly traded companies.
Alternatives for retained earnings
-Distribute as dividends -leave intact and use for future operations (Growth companies) -dividend policies should be disclosed in the notes to the financial statements
Script Dividends
-Dividend is payable at some future date, but is accrued now ---Used to avoid missing a regular dividend payment - A script dividend is a special form of note payable -The recipient of script can hold it or sell it -Interest paid on scrip until dividend is paid at a later date (considered interest expense). -The interest is not apart of the dividend
restricting payments of dividends
-Dividend payments may be subject to covenant or contractual restrictions -earnings may be reinvested -corporations may smooth out payments over time to avoid fluctuations which are bad for the market -Corporations may be building up a cushion for profits -not paid on treasury stock
Property Dividends
-Payable in assets of company - investments in other companies for example. -Are non-reciprocal transfers between corporations and its shareholders. -Equal to the fair market value of assets distributed at the time of declaration (Except in reorganization) -The issuer recognizes a gain or loss on the distribution
Stockholders equity Disclosures
-Redeemable Preferred shares: ---Disclosures must be include the amount of redemption requirements in each of the five years following the date of the latest statement of financial position presented -Changes in stockholderes' Equity Accounts ---Disclosures must include changes in the separate accounts comprising stockholders' equity (in addition to retained earnings) and of the changes in the number of shares of equity securities
Property Dividend Procedure
-Revalue assets to be distributed on the day of declaration -Create a liability for the amount of dividends payable -Record the payment of the liability on the date of distribution as with cash dividends
Stockholders Have the right to:
-Share proportionally in profits and losses -Share proportionally in management -share proportionally in corporate assets upon liquidation -Share proportionally in any new issues of stock of the same class (Called the preemptive right) ---If he buys 20 more shares ---You have the right to but current owners get first dibs
Stock Dividends: Concept
-Stock Dividends result in more shares being issued as dividend (No Cash flow is involved) -Small stock dividends involve issues of less than 20%-25% of Stock -The accounting for small stock dividends is based on the fair market value of stock issued -The accounting for large stock dividends (more than 20%-25%) is based on the par value of stock issued
Quasi-Reorganization Diclosure
-The new assets and liability valuations should be fair and not deliberately understate or overstate assets, liabilities, and earnings. -After the quasi-reorganization the corporation must have zero balance of retained earnings, although it may have additional paid-in-capital arising from the quasi-reorganization. -In subsequent reports the retained earnings must be "dated": ---For a period of approximately 10 years to show the fact and the date of quasi-reorganization ---For a period of at least 3 years from the quasi-reorganization date the amount of accumulated deficit eliminated
Large Stock Dividend
-Unless there is evidence to the contrary, there us an assumption that a dividend of this size would materially reduce the market price per share of the stock when the additional shares are distributed. ---The market price is unreliable -The dividend is accounted for at the par value of the stock.
Disclosure of Restrictions on Retained Earnings
-appropriated retained ernings must be presented in the stockholders equity section of the balance sheet -improper uses of appropriated retained earnings must be disclosed by the auditors
Liquidating dividends
-are returns of corporate paid in capital -Usually distributed when a corporation is winding up operations -Are specified as to retained earnings and capital portions -reduced paid-in capital -Any dividend not based on earnings must be a reduction of corporate capital
Components of Stockholders equity
-contributed capital -Retained earnings -accumulated other comprehensive income
Participating and Cumulative Dividends
-distribute dividends in arrears (Part of the amount of dividends about to be given) -distribute current preferred dividends -Distribute common to Match on current preferred dividends -If partial participation the limit does not apply to any arrearage -NOTE: Arrearage has not effect on either common to match the limit
Required disclosures - Convertables
-events or changes in circumstances that could adjust or change the contingency, conversion price, or number of shares, including significant terms of those changes -The manner of settlement upon conversion and any alternative settlement methods
Required disclosures -Convertibles
-events or changes n circumstance that would cause a contingency to be met -any significant features necessary to understand the conversion rights and the timing of those rights -the conversion price and the number of shares into which a security is potentially convertable
Large versus Small Stock Dividends
-large stock dividends capitalize a lower amount of Retained Earnings -Investors may be influences by the accounting treatment -Violation of Restrictive debt covenants can occur because of technical default
Reasons for appropriating Retained Earnings
-legal restrictions on payment of dividends -contractual restrictions such as bond covenants -existence of possible expected loss -protection of working capital position -General or unspecified reasons --May be for one of the above reasons ---Firm may be attempting to hide something --nature of the appropriation should be fully disclosed
Factors in paying dividends
-legality of dividends ---Legally permissible ( Contractually permissible) -------in compliance with all of the laws regulations, covenants and other contractual stipulations. - Financial condition ---Economically feasible
partially participating preferred stock
-limits the extent of preferred participation -The steps in determining the dividends to each class are the same as fully participating except that the limit is calculated in step 3 before participation.
Recording Appropriations of Retained Earnings
-memo Method: no entry is made but a parenthical entry and note are made in the financial statements -Entry method --Debit Retained Earnings --Credit appropriated retained earnings --release of the appropriations is a reveraal entry --note retained earnings is always the offset to appropriated retained earnings
Cash Dividends
-once declared a cash dividend is a liability -dividends are not declared nor paid on treasury or unissued stock ---Only on outstanding stock - Dividends Declared must be used instead or retained earnings (This will close out to RE)
Balance Sheet presentation
-only one account needs to be presented. -Subsidiary accounts may be used to designate the sources of additional paid in capital -Some States permit dividends to be paid from specially designated additional paid in capital accounts -Gains and losses may not flow through the paid in capital accounts (Has to go to income statement)
Required Disclosures - Classes of Stock
-pertinent rights and privileges of the various securities outstanding -The number of shares issued upon conversion, exercise, or satisfaction of required conditions
Required Disclosures - Preferred Stock
-preference involuntary liquidation considerably in excess of the par or stated value of preferred shares -amounts at which preferred stock may be called or is subject to redemption -dividends in arrears on cumulative preferred shares (Not on balance sheet because it is not a liability)
Appropriations of Retained Earnings
-reclassification of retained earnings disclosing that management does not intend dividends up to the amount of appropriation - An appropriation does not set aside cash -Cost or losses may not be charged to appropriations retained earnings and the appropriation may not be transferred to income -when the condition giving rise to an appropriation no longer exists, that appropriations should be removed.
Par-Value Method
-records the acquisition of treasury stock at the par value of the repurchased shares
Requirements for a quasi-reorganization
-retained earnings must be reset to 0 -no deficit balance shall remain in any corporate capital account (no debit balance) - The procedure shall be made known to all stockholders entitled to vote and approved in advance by them -A fair and conservative balances sheet shall be presented as on e of the date of the reorganization, and retained earnings dated -Readjustment of values should be reasonably complete
Rights of Stockholders
-share proportionally in profits and losses -share proportionally in management -share proportionately in corporate assets upon liquidation -share proportionally in any new issues of stock of the same class (Preemptive Right)
Purposed of Share repurchases
-stock option plans, stock bonus plans, and employee stock purchase plans -treasury shares are used in exchange for another firms voting shares in a merger or acquisition - repurchase transactions are used to support the market price of the stock --- Raising the price - used to prevent takeover attempts - distributes cash to shareholders without formally increasing the cash dividend (a formal dividend price would have to be continued to avoid a scare in the market)
Scientific Leasing has the following capital structure: Preferred Stock (10%, $100 Par, 2000 shares)= $200,000 Paid in Capital in Excess of Par, Preferred = $800,000 Common Stock ($10 Par, 40,000 shares) = $400,000 Paid-in-capital in excess of par, Common = $1,500,000 Dividends have not been paid for two years when a dividend of $150,000 is declared. Cumulative Dividends:
..............................Preferred..... Common..... Balance Declared............................................................... 150,000 Arreage............ 40,000....................................... 110,000 Current.............. 20,000........................................ 90,000 To Commons............................. 90,000...................... 0 ---------------------------------------------------- Totals................. 60,000............. 90,000 **Current is what preferred is getting now **Preferred gets dividends in arrears first.
Scientific Leasing has the following capital structure: Preferred Stock (10%, $100 Par, 2000 shares)= $200,000 Paid in Capital in Excess of Par, Preferred = $800,000 Common Stock ($10 Par, 40,000 shares) = $400,000 Paid-in-capital in excess of par, Common = $1,500,000 Dividends have not been paid for two years when a dividend of $150,000 is declared. Noncumulative and Non-Participating
.............................Preferred.......... Common..... Balance Declared................................................................... 150,000 Current ...............20,000........................................ 130,000 To Commons.................................... 130,000................... 0 ----------------------------------------------------- Totals................. 20,000................. 130,000
Presenting Other comprehensive income
1, Include components of OCI after net income on one continuous statement summing to the comprehensive income. 2, Present a separate statement of other comprehensive income that begins with net income on the first line and details the components of OCI. This approach results in presenting two statements ---One displaying the details of net income (Income Statement) ---The other displays the details of other comprehensive income (the statement of Comprehensive income)
Why is other comprehensive income separate from net income?
1. OCI items have a low probability of cash flow realization in he short term and therefor should not be included in net income. Including these items would further remove net income from the underlying cash flows of the firm 2. The temporary nature of OCI would create earnings volatility when these temporary events reverse if included in net income. The deferred gain or loss on a derivative designated as a cash flow hedge that results when the derivative is adjusted to fair value at the same time as earnings are affected by the hedge transaction. 3, OCI events are not part of normal business operations, so they should not be included in net income.
What should be used instead of Earned Surplus? Capital Surplus/Paid in Surplus? Reserve?
1. Retained Earnings 2. PICEP or Additional Paid in Capital 3. Accumulated Depreciation ---this may be used for Appropriated Retained Earnings.
Quasi-reorganization Procedure
1. Revalue all assets to their fair market value 2. Charge any debit balances in any capital accounts to retained earnings (Transfer all capital debit balances to retained earnings) 3. charge the deficit in retained earnings against additional paid in capital if additional paid in capital exists 4. Restate legal capital by charging any remaining deficit in retained earnings against the capital stock accounts -Reduce the par value (requires a charter change) -reduce the number of shares outstanding -Assess stockholders an additional amount if legal capital falls below zero
Small Stock Dividends Steps
1. Vale the dividend at the market price on the date of Declaration 2. On the date of Declaration credit the dividends account by the amount of the dividend 3. Credit dividends distributable for the par value of the stock dividend. (NOT A LIABILITY NO PROMISE TO PAY ASSETS) 4. Credit additional paid in capital in excess of par for the difference between the market value and the par value of the stock to be distributed 5. When the dividend is distributed, debit Dividends Distributable and credit the common stock
What are the retained Earnings of a firm
A firms cumulative earnings or losses that has not been distributed as dividends - Can also be affected by net income and net loss (Other events can affect retained Earnings) 2 Things: --Dividends --Prior Period Adjustments
Corporate Form: Characteristics
Accounting for the corporate form is affected by; - State corporate law - use of capital stock -the veriety of ownership interests: Preferred or common -Limited Liability of the stockholder -formality of the profit distribution
Marilee discovers it did not record a $50000 sale in previous year, nor did it report the sale as taxable income. Assuming a tax rate of 40%, how would Marilee account for the error?
Accounts Receivable_______________50000 Retained Earnings-PPA______________________30000 Income Tax Payable___________________________20000 **Instead of crediting revenue
Other Comprehensive Income (OCI)
An expanded version of income that includes four types of gains and losses that traditionally have not been included in income statements. 1, Investments 2, Hedging transactions 3, pension cost 4, foreign currency translation
Structure of of retained earnings with a prior period adjustment
Debit Adjustment: -net loss -prior period adjustment -cash dividend -stock dividend -treasury stock deficiencies Credit Adjustment: -Net income -prior period adjustment -Quasi-reorganization adjustments
Additional Paid in Capital (What is the debits and credits)
Debits: -Discounts on Capital stock -Sale of treasury stock below cost -Absorption of deficit in a quasi-reorganization -Declaration of liquidating dividend Credits: -Premiums on capital stock issued -sale of treasury stock cost above -Additional Capital arising in recapitalization or revisions in the capital structure (quasi-reorganization) -Assessments on Stockholders -Conversion of convertable bonds or preferred stock -declaration of "small" stock dividend
Wallace issures a 30% stock dividend (390000 shares) when its $1 par common was selling at $15. The shares to be issued are not from treasury stock. What are the entries and composition of Stockholders' Equity?
Declaration Date: Dividends____________________________390000 Stock Dividends Distributable_____________390000 Distribution Date: Stock Dividends Distributable___390000 Common Stock__________________________________390000
Wallace issues a 15% stock dividend (195000 shares) when its $1 par common was selling at $15. The shares to be issued are not from treasury stock . what are the entries and composition of Stockholders' equity?
Declaration Date: Retained Earnings______________2925000 Stock Dividends Distributable____________195000 PICEP-Common________________________________2730000 Distribution Date: Stock Dividends Distributable__195000 Common Stock__________________________________195000
-Script Dividend is declared $0.80 per share on 2545000 shares on May 27. -Note payable is issued for dividends payable on July 27. -Interest is payable at 12% -Provide the journal entries on the declaration date and the payment date. What are the journal entries?
Declaration date: Retained Earnings___________ 2036000 --Notes Payable_______________________________2036000 Payment Date: Notes Payable_________________2036000 Interest Expense______________33833 --Cash______________________________________________2069933
Ex-Dividend Date
Determined by the relevant stock exchange - a person who purchases stock on or after this date will not receive a dividend - same day as the date of record - no journal entry
Differences in IfRS and Gaap Terminology
GAAP: 1. Contributed Capital, paid in capital, common stock 2. Additional Paid in Capital 3. Retained Earnings 4. Accumulated Other Comprehensive Income IFRS: 1. Share Capital 2. Share Premium 3. Retained Profit, Accumulated Profit and Loss 4. Reserves, other reserves
Accumulated Other Comprehensive Income
Includes the cumulative amount of items such as unrealized gains and losses on available-for-sale debt investment securities, foreign currency translation adjustments, and certain pension cost adjustments. -components -reporting
June 1, Collins Declares a property dividend of shares of ABC stock it holds to shareholders of record on June 17th, to be paid on July 7. The stock was purchased for $2500 but has the value of $3000 on the declaration date and $3250 on the payment date. what are the entries to recognize this event?
June 1 Investments 500 Gain on Distribution 500 Dividends Declared 3000 Dividends payable 3000 July 7 Dividends Payable 3000 Investments 3000
PICEP
Paid-in-capital excess of Par
Legal Capital
Par Value, total proceedes on original issue, stated value
What is the difference between par value and stated value?
Par value is in the articles of incorporation. stated value can be changed by the board of directors
Common Stock issued for non cash consideration
Paying someone with stock. (If the fair value of the stock is known) - Debit the Expense Account -credit stock and PICEP (If the fair value of the stock is not known) - Use the fair value of the services provided
Stock Issue Costs
Record Cash received as the net amount of the cost - cash received - then take the cost out of the PICEP
Stock Splits
Result in the proportionate increase in the number of equity shares and a proportionate decrease in the share's par value. --They are issued to control the price of stock For example a 2 for 1 stock split is splitting 1 stock into 2 stock -The total par value stays the same -the par value per share will divide in half -the number of shares will double -total book value stays the same -book value per share will divide in half ****Does not require a journal entry****
Stock Dividends V Stock Splits
Stock Dividend: - Par value of a share does not change - total number of shares increase - total stockholders equity does not change -The composition of equity changes (Less of retained earnings; more of stock) -Stock Dividends require journal entries Stock Splits: - Par value will decrease -total number of shares increase -total stockholders' equity does not change -The composition of equity does not change (same amounts of stock and retained earnings) -Do not require journal entries
what is discount on stock?
Stock issued below par
Date of Record
The date a list of stock holders to whom dividends are paid is finalized -no journal entry
Date of Payment
The date dividends are paid to stockholders - Journalize: Dividends Payable Cash
Additional paid-in Capital excess of par or stated value ( common, preferred, treasury)
The extra amount paid over the par or stated value
How to record treasury Stock
Usually a contra-stockholders equity account -is a reduction of stockholders equity on the balance sheet * Do not have voting rights *
Stated Value
a Legal Capital, An amount specified by the board of directors
Preferred Shareholders
are investors holding shares in a company that have preferential rights over common shares -Cumulative -Participating -Convertible -Callable -Redeemable -Fixed Dividend
Contributed Capital
includes the amount paid by common and preferred shareholders
Cost Method
records the acquisition of treasury stock at the cost of repurchased shares *Most popular method*
Issued Shares
refer to the total number of shares sold or otherwise distributed to shareholders
Unissued Shares
shares that are authorized but not issued
Treasury Shares
the coporations own shares that it repurchased and holds for some future use (for example, to be distributed to satisfy the terms of an employees stock options plan) - Reacquired shares can also be retired rather than held in treasury
Par Value
the face or stated value on the share certificate
Outstanding
the number of shares still in the hands of the stockholders and are computed as issued shares less treasury shares. - Cash dividends are only paid to these
Common Shareholders
the residual claimants of the firm who receive dividend distributions after the company has paid off all other providers of capital their return on investment -Stock Splits -Stock reissues -Stock repurchases -Retirements
Authorized Shares
the total number of shares that the firm can legally issue. - Included in the articles of incorporation field with the state
Covenant
took out a loan or a bond - an agreement to pay someone else first.
