ACCT 3120 Exam 2
what 4 things are part of shareholders equity?
contributed capital retained earnings treasury stock accumulated other comprehensive income
does it matter which state a corporation leaves its articles?
no, but some states have more advantageous laws, such as favorable tax and liability provisions
induced conversion of convertible bonds to common stock
company offers inducements (aka sweetners) to convert bonds to common stock they want to prompt the conversion so that they no longer have to pay interest to the bondholders and so that they have no obligation to repay the principal amount of the bound
convertible bonds
converted into shares of Common Stock during some designated time period and at a designated exchange rate
what 2 methods can be used account for purchase of treasury stock
cost method (most widely used) par value method (dont need to know how to do)
what are the 2 primary sources of equity?
1. contributed capital (common stock, preferred stock, add. paid in capital) 2. retained earnings (earned capital)
advantage and disadvantage of one statement approach
A- does not require creation of new financial statement D- net income buried as a subtotal on the statement
what are dilutive securities
DEBT and EQUITY securities whose assumed exercise or conversion results in a reduction (i.e., dilution) in Earnings Per Share (EPS)
what features can preferred stocks have
•"Convertible" into shares of Common Stock. •"Callable" (i.e., company repurchases) at the company's option
what is the best evidence of fair value
•A quoted market price for the shares •A selling price established in a recent issue of shares for cash •Cash that would have been paid in a cash purchase of the asset or service •An independent appraisal of the value of the asset received
rights of preferred stock
•Preference as to dividends -Get paid dividends before Common Stockholders. •Preference over Common Shareholders at liquidation -After Secured / Unsecured Creditors; Before Common Shareholders. •Guaranteed dividend rate if dividends are declared by the BOD -Dividends are stated as a "percentage of par value" of Preferred Stock (i.e., 5% Preferred Stock). •NO voting rights
"Common Rights" of Common Stockholders:
•Voting rights proportional to ownership •Share proportionately in Net Income / Net Loss of the entity. •Share proportionately in dividends if they are paid •Share proportionately in distribution of assets upon liquidation (Secured Creditors paid 1st, Unsecured paid 2nd, Preferred Shareholders paid 3rd, and if any assets remain, distributed to Common Stockholders). •An investor's loss is limited to their investment •Share proportionately in any new issues of stock of the same class (the Preemptive Right - more stock can't be sold to dilute an investor's ownership without the owner being given the opportunity to buy shares)
The shareholders' equity of FSU Industries includes $200,000 of $1 par common stock and $400,000 par value of 6% cumulative preferred stock. The board of directors declared cash dividends of $50,000 in 2018 after paying $20,000 cash dividends in 2017 and $40,000 in 2016. What is the amount of dividends common shareholders will receive in 2018?
$22,000** need 24000 each year for pref, $400000 x 6% 2016 preferred: 24000 common: 16000 (remainder) 2017 preferred: 20000 common: 0 2018 preferred: 28000 ($24000 + $4000 in arrears) common: 22000 (remainder)
dilutive securities contain a right to
(a)Convert Convertible Bonds into Common Stock (b)Convert Convertible Preferred Stock into Common Stock (c)Exercise Stock Options or Stock Warrants to obtain shares of Common Stock
what happens when convertible bonds are converted to common stock?
(a)Interest on the Bonds is no longer paid, and (b)the Principal amount of the Bonds would not be repaid. has the benefit of being a bond and getting interest but also the privilege of exchanging bond for stock
Ellsworth Corporation was organized on January 1, 2018. The firm was authorized to issue 150,000 shares of $1 par common stock. During 2018, Ellsworth had the following transactions relating to shareholders' equity: -Issued 20,000 shares of common stock at $7 per share -Issued 20,000 shares of common stock at $8 per share -Reported a net income of $100,000 -Paid dividends of $50,000 -Purchased 3,000 shares of treasury stock at $10 What was total shareholders' equity at the end of 2018?
**$320,000 Issue of stock (20,000 × $7) $140,000 Issue of stock (20,000 × $8) 160,000 Net income 100,000 Dividends (50,000) Treasury stock (3,000 × $10) (30,000) $320,000
Which of the following statements is true regarding retained earnings?
**Accumulated, undistributed net income results in a credit balance in retained earnings As a component of equity, retained earnings has a normal credit balance. Thus, accumulated, undistributed net income results in a credit balance.
cash dividends
- BOD must vote to declare them - once declared the dividend becomes a liability Dr. Dividends or Retained Earnings Cr. Dividends Payable - companies do not declare dividends on treasury stock
what are the common stockholders equity accounts?
-All corporations have "Common Stock" which is called "Contributed Capital" because it represents the amount "contributed" by the owners. -Companies will also have "Retained Earnings" (called "Earned Capital") which is: Increased if a company has Net Income, Decreased if a company has a Net Loss, Decreased if Dividends are paid to the owners
disclosure of restrictions on retained earnings
-Most restrictions on RE due to Loan Covenants in Bonds, Bank Loans, Notes, etc. -Restrictions are best disclosed in the Notes to the Financial Statements. -Restrictions may include: (a) requirement to maintain a certain balance in RE, (b) limit or prohibit the payment of dividends, (c) require a certain level of working capital, (d) limit or prohibit additional borrowings, etc.
in what financial statements are stockholders equity presented
-balance sheet (balances by major account) -statement of stockholders equity (shows changes during the period)
how can comprehensive income be presented?
-single statement approach (statement of comprehensive income) -two statement approach (income statement + statement of comprehensive income)
what are the 4 comprehensive income items?
1. Foreign currency translation gains/losses (fairly common) 2. Unrealized gains/losses on available for sale debt securities 3. Deferred gains/losses on derivative financial instruments 4. Certain gains/losses on defined benefit pension plans
why do companies buy back outstanding stock (treasury stock)?
1. Provide stock when employees who have stock options exercise their options. 2. Increase earnings per share (i.e., if "outstanding shares" in denominator of EPS calc decline, then EPS increases). 3. Increases return on equity. 4. Meet potential acquisition needs. 5. Thwart takeover attempts (i.e., buyout dissident shareholders). 6. Increase the market value of the stock (i.e., law of "supply & demand"; fewer shares outstanding increases market price).
in order to issue/sell stock companies must:
1. Receive Articles of Incorporation and Charter. 2. Comply with Federal / State regulations to sell stock. 3.Offer shares of stock for sale: -Public sales of stock substantially more costly than private sales. 4. Company usually receives cash from the sale of stock. 5. Company issues shares of capital stock.
what are the US GAAP required disclosures for common/preferred stock?
1. par value per share (in articles of incorporation, it is a meaningless number now) 2. authorized shares (max number of share a company can legally issue, in articles of incorporation) 3. issued shares (number of shares sold to investors) 4. outstanding shares (number of shares currently held by investors/stockholders (only different than issued if the company possesses treasury stock)) 5. treasury stock (number of shares bought back by the company and held in treasury)
4 different types of dividends
1.Cash dividends ("by far" the most common) 2.Property dividends (dividends in kind; "rare"). 3.Liquidating dividends ("very rare"). 4.Stock dividends (get shares of the company's stock) all of these reduce stockholders equity EXCEPT for stock dividends all but stock Dr. Dividends or Retained Earnings Cr. Cash/PP&E stock Dr. Retained Earnings Cr. Common Stock
characteristics of corporations
1.Governed by corporate law in state of incorporation. 2.Ownership represented by shares of common stock. 3."C" corporation; the entity is taxed (not the "owners"). there is a double taxation, net income and dividends 4."LLC" corporation; the owners are taxed (not the "entity"). 5.Personal assets of "owners" are NOT "at risk" (only their "investment" in the Capital Stock "at risk").
ratios to evaluate equity
1.Rate of return on common stock equity. 2.Payout ratio. 3.Book value per share. (for company profitability and long term solvency)
different types of sales of stock
1.Sales of Par Value stock. 2.Sales of No-Par Value stock. 3.Stock sold along with other securities. 4.Stock sold in noncash transactions. 5.Costs incurred when selling stock. (underwriters, attorneys, etc.)
Initial Public Offering (IPO)
A public sale of stock, must be registered with the Securities & Exchange Commission (SEC). •Requires (a) underwriters who sell the stock on behalf of the corporation, (b) attorneys, and (c) independent accountants to sell the capital stock.
advantage and disadvantage of two statement approach
A- shows clear totals for the investors D- you have to make two separate statements
Convertible Preferred Stock
Allows stockholders to convert shares of Preferred Stock into shares of Common Stock
Callable Preferred Stock
Allows the corporation, at its option, to call/buy back the outstanding Preferred Stock BUT all dividends in arrears must be paid if the corporation calls the Preferred Stock.
ex: 3 important dates for cash dividends David Freight Corp. on June 10 declared a cash dividend of 50 cents a share on 1.8 million shares payable July 16 to all stockholders of record June 24.
At Date of Declaration (June 10) Dr. Retained Earnings 900,000 Cr. Dividends Payable 900,000 At Date of Record (June 24) No Entry At Date of Payment (July 16) Dr. Dividends Payable 900,000 Cr. Cash 900,000
common stock issued with other securities for a lump sum price
Common Stock is sold with other securities, such as Preferred Stock or Bonds. If these securities are sold together for a "lump-sum" price (which would be even more rare, but possible), there are 2 methods of allocating proceeds to the different securities: 1.Proportional method. 2.Incremental method.
In 2018, Broyles, Inc. reacquired 3,000 shares of its common stock at $55 per share. In 2019, Broyles, Inc. reissued 1,000 shares of the stock at $75 per share. Which of the following would be included in the 2019 entry?
Credit Treasury Stock for $55,000 2018 Treasury Stock 165,000 Cash 165,000 2019 Cash 75,000 Treasury stock ($165M/3) 55,000 PIC—share repurchase 20,000
Costs incurred when selling common stock or preferred stock are
Debited to additional paid in capital
Ex: induced conversion of convertible bonds to common stock Moore Corporation has outstanding 2,000, $1,000 bonds, each convertible into 50 shares of $10 par value common stock. Assume Moore wanted to reduce its annual interest cost and agreed to pay the bond holders $70,000 to convert.
Dr. Bonds Payable 2,000,000 Cr. Discount on Bonds Payable 30,000 Cr. Common Stock (2,000 x 50 x $10) 1,000,000 Cr. Paid-in Capital in Excess of Par—Common 970,000 sweetner Dr. Debt Conversion Expense 70,000 Cr. Cash 70,000
EX: accounting for conversion of convertible bonds to common stock Moore Corporation has outstanding 2,000, $1,000 bonds, each convertible into 50 shares of $10 par value common stock. The bonds are converted on December 31, 2017, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Prepare the entry to record the conversion of the bonds.
Dr. Bonds Payable 2,000,000 Cr. Discount on Bonds Payable 30,000 Cr. Common Stock (2,000 x 50 x $10) 1,000,000 Cr. Paid-in Capital in Excess of Par—Common 970,000 t accounts on slide 9 ch19
Ex: sale of preferred stock Bishop Co. issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Bishop records the issuance as follows:
Dr. Cash 120,000 Cr. Preferred stock 100,000 Cr. Paid-in Capital in Excess of Par - Preferred 20,000 NOTE: Regardless of what features, if any, that Preferred Stock may have, the sale of the Preferred Stock is recorded in exactly the same manner as shown above.
Ex: sale of treasury above cost Cripe acquired 10,000 treasury share at $11 per share. It now sells 1,000 shares at $15 per share on March 10. Cripe records the entry as follows
Dr. Cash 15,000 Cr. Treasury Stock 11,000 Cr. Paid-in Capital from Treasury Stock 4,000 **never record a gain or loss
Ex sale of $10 par value stock: Blue Diamond Corporation issued 300 shares of $10 par value common stock for $4,500. Prepare the journal entry to record the issuance of the shares
Dr. Cash 4,500 Cr. Common Stock (300 x $10) 3,000 Cr. Paid-in Capital in Excess of Par Value 1,500 *dont need to record for trades afterwards
Ex: sale of no par value Video Electronics Corp, is organized with authorized common stock of 10,000 shares without par value. If Video Electronics issues 500 shares for cash at $10 per share, it makes the following entry.
Dr. Cash 5,000 Cr. Common Stock 5,000
Ex: sale of treasury stock below cost Cripe sells an additional 1,000 treasury shares on March 21 at $8 per share, it records the sale as follows:
Dr. Cash 8,000 Dr. Paid-in Capital from Treasury Stock 3,000 Cr. Treasury Stock 11,000
Ex: stock issued in non cash transactions The following transactions illustrate the procedure for recording the issuance of 10,000 shares of $10 par value common stock for a patent for Arganda Co., in various circumstances. 1. Arganda cannot readily determine the fair value of the patent, but it knows the fair value of the stock is $140,000. 2. Arganda cannot readily determine the fair value of the stock, but it determines the fair value of the patent is $150,000.
Dr. Patents 140,000 Cr. Common Stock 100,000 Cr. Paid-in Capital in Excess of Par - Common 40,000 Dr. Patents 150,000 Cr. Common Stock 100,000 Cr. Paid-in Capital in Excess of Par - Common 50,000
Ex: repurchase of treasury stock Cripe Co. issued 100,000 shares of $1 par value common stock at a price of $10 per share. In addition, it has retained earnings of $300,000. On January 20, Cripe acquires 10,000 of its shares at $11 per share. Cripe records the reacquisition as follows.
Dr. Treasury Stock 110,000 Cr. Cash 110,000 commons stock: 100,000 apic: 900,000 retained earnings: 300,000 treasury: 110,000 (10,000 x 11)
stock issued in noncash transactions
Sometimes stock may be issued for other tangible or intangible assets. The general rule when stock is sold for property, goods or services, is that the stock sold should be recorded at the "more clearly determinable" of the: uFair value of the stock issued, or uFair value of the noncash consideration received.
Which of the following items would not be reported in the statement of comprehensive income as Other Comprehensive Income?
Gain on sale of equipment A gain on the sale of equipment would be reported in the income statement as part of Net Income.
what must a corporation submit to be official
articles of incorporation (in any state of their choosing) this allows you to have your "charter" and authority to operate
Ex: accounting for sale of convertible bonds Miller Corporation issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Record the entry at date of issuance.
Issue Price = (4,000,000 x 99% = 3,960,000) Dr. Cash 3,960,000 Dr. Discount on Bonds Payable 40,000 Cr. Bonds Payable 4,000,000
Treasury stock represents shares of stock:
Issued by the corporation, but which are no longer outstanding
Liquidating dividends
NOT ON EXAM
Comprehensive income consists of
Net income plus/minus other comprehensive income items
how are preferred stock dividends stated
as a percentage of par value, so if the Par Value of the Preferred Stock is $100, then the stated rate of dividends would be $5
Par Value has "no meaning" or "purpose" other than ...
Par Value of the stock is Credited to either Common or Preferred Stock accounts in the General Ledger. All amounts (generally "cash") received in excess of the Par Value is credited to Paid-In Capital in Excess of Par
what 2 things can a company do with treasury stock? and how do you account for them?
RESOLD: can be sold at cost, above, or below. when resold, total assets and stockholders equity are increased Dr. Cash (Assets increase) Cr. Treasury Stock (Equity increases) •If resold Above Cost, NO GAIN is recognized ** no gains or losses are recognized RETIRED: when retired then the stock is no longer considered issued Dr. Common Stock (par value) Dr. Additional Paid-in Capital Cr. Treasury Stock
The preemptive right of a common stockholder is the right to
Share proportional in any new issues of common stock of the same class so that the stockholder may, if desired, retain the same percentage ownership in the entity
Participating Preferred Stock
Share with the common shareholders in any profit distribution beyond a prescribed rate
Which dividends do not reduce stockholders equity
Stock dividends
What is stock holders equity
The "residual amount" or "net assets" (i.e., excess of total assets over total liabilities). If total liabilities exceed total assets, then the company has a "deficit".
When stock is issued in exchange for property, the best evidence of fair value might be any of the following except:
The average book value of outstanding stock Occasionally, shares are issued for consideration other than cash, maybe services or a noncash asset. In those instances, the transaction should be recorded at the fair value of the shares or the noncash consideration, whichever seems more clearly evident. This is consistent with the general rule for accounting for any noncash transaction.
what happens in Sales of no par value stock
When Capital Stock is sold, the entire proceeds (generally cash) is credited to either the Common Stock or the Preferred Stock account (there is no "Additional Paid-in Capital" account)***
is other comprehensive income net of tax?
YES, all components are net of tax
stock dividends
a company issues shares of its own stock to stockholders as a dividend; the shares could be as or more valuable than "cash".
accounting for sale of convertible bonds
accounting is same as for bonds that are not convertible any discount or premium on sale is also the same as for bonds that aren't convertible, amortized either using straight line or effective interest
What is comprehensive income?
all changes in equity during a period EXCEPT those resulting from investments by owners and distributions to owners. INCLUDES: 1. All revenues and gains, expenses and losses reported in net income 2. 4 specific Other Comprehensive Income Items that represent "gains" or "losses" but these are NOT reported in the Income Statement
accounting for the costs of selling stock
all costs incurred that are directly related to the sale of stock should be reported as a reduction in stockholders equity -Underwriting costs (underwriter sells the stock). -Attorney and legal fees. -Independent auditor fees. -Printing costs for Prospectus (selling document) and SEC-required registration statements (Form S-1, etc.).
treasury stock and JE
always has a debit balance and is a reduction of stockholders equity (contra equity) A company never recognizes a "gain" or a "loss" on the sale of its own stock, regardless of whether they sell their Treasury Stock above or below its cost.
par value of capital stock is?
an arbitrary amount (i.e., could be $0.01, $0.001, $1, $5, $10, or any amount) determined by a company's legal counsel and is stated in the Articles of Incorporation
Ex: Property dividends Hopkins, Inc. transferred to stockholders some of its equity investments costing $1,250,000 by declaring a property dividend on December 28, 2016, to be distributed on January 30, 2017, to stockholders of record on January 15, 2017. At the date of declaration, the securities have a market value of $2,000,000. Hopkins makes the following entries. (at date of declaration and date of distribution)
at date of declaration Dr. Equity Investments 750,000 Cr. Unrealized Holding Gain or Loss—Income 750,000 Dr. Retained Earnings 2,000,000 Cr. Property Dividends Payable 2,000,000 at date of distribution Dr. Property Dividends Payable 2,000,000 Cr. Equity Investments 2,000,000
limited liability partnership
at least 2 people cant have private property taken if sued.
Ex: book value per common share Uretz Corporation's common stockholders' equity is $1,000,000 and it has 100,000 shares of common stock outstanding
book value per share = common stockholders equity / outstanding shares = 1,000,000 / 100,000 = $10 per share amount each share of common stock would receive if the company were liquidated on the basis of amount reported in the balance sheet
cumulative dividends for preferred stock
company fails to pay dividends to the Preferred Stockholders in any year, the dividends must be made up in a later year BEFORE paying dividends to Common Shareholders
Presentation of equity in stockholders equity statement
columns: a stockholders equity account rows: all of the changes to in stockholders equity accounts
Ex: INCREMENTAL method to allocate proceeds in lump sum sale Beveridge Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $13,500. The common stock has a market value of $20 per share, and the value of preferred stock is unknown
common shares: 300 x $20 = $6000 preferred shares: 100 $6000 allocation: issue price ordinary common: $6000 preferred: $13500 - 6000 = $7500 DR. Cash 13,500 CR. Preferred Stock (100 x $50) 5,000 CR. Paid-in Capital in Excess of Par - Preferred 2,500 CR. Common Stock (300 x $10) 3,000 CR. Paid-in Capital in Excess of Par - Common 3,000
Ex: PROPORTIONAL method to allocate proceeds in lump sum sale Beveridge Corp. issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $13,500. Common stock has a market value of $20 per share, and preferred stock has a market value of $90 per share.
common shares: 300 x $20 = $6000 preferred shares: 100 x $90 = $9000 $6000 = 40% $9000 = 60% allocation: issue price allocation % common: $13500 x 40% = $5400 preferred: $13500 x 60% = $8100 DR. Cash 13,500 CR. Preferred Stock (100 x $50) 5,000 CR. Paid-in Capital in Excess of Par - Preferred 3,100 CR. Common Stock (300 x $10) 3,000 CR. Paid-in Capital in Excess of Par - Common 2,400
what are the two types of capital stock/contributed capital?
common stock (every corporation has) preferred stock (few corporations have, less than 10%)
accounting for conversion of convertible bonds to common stock
companies use the book value method when converting bonds to common stock no gain or loss upon the conversion
what are the 3 critical dates for stock dividends?
date of declaration (company makes dividend) date of record (the date the stockholder needs to own the stock to receive the dividend) date of payment
Ex: Small (<25%) Stock Dividends Koebele Corporation has outstanding 1,000 shares of $100 par value common stock and retained earnings of $50,000. If Koebele declares a 10 percent stock dividend, it issues 100 additional shares to current stockholders. If the fair value of the stock at the time of the stock dividend is $130 per share, the entry is: (date of declaration and date of distribution)
date of declaration: Dr. Retained Earnings 13,000 Cr. Common Stock Dividend Distributable 10,000 Cr. Paid-in Capital in Excess of Par-Common 3,000 date of distribution: Dr. Common Stock Dividend Distributable 10,000 Cr. Common Stock 10,000
Ex: Large (>25%) Stock Dividends Koebele Corporation has outstanding 1,000 shares of $100 par value common stock and retained earnings of $50,000. If Koebele declares a 30 percent stock dividend, it issues 300 additional shares to current stockholders. The fair value of the stock at the time of the stock dividend is $130 per share. The entry is: (date of declaration and date of distribution)
date of declaration: Dr. Retained Earnings 30,000 Cr. Common Stock Dividend Distributable 30,000 date of distribution: Dr. Common Stock Dividend Distributable 30,000 Cr. Common Stock 30,000
Dividend policies: SEC
disclose dividend policies in the Notes to the Financial Statements, especially those: 1.Where Loan Covenants limit or prohibit the payment of dividends by the company. 2.Where companies have earnings but fail to pay dividends. 3.Where companies do not expect to pay dividends in the foreseeable future. it is encouraged by the SEC to pay dividends when you can to show shareholders their success
dividends in arrears
dividends from prior years that have not been paid, •the Preferred Stock dividends are NOT a liability unless dividends are declared, must be disclosed in the Notes to the Financial Statements.
Where are Net Income +/- Other Comprehensive Income Items recorded?
in the Statement of Comprehensive Income other comprehensive income is below Net income
Dividend Preference example
look to slides 57-60
who monitors the stock ownership?
many companies hire a 3rd party "stock registrar" (often a bank) to maintain a list of current shareholders and who cancel and issue stock certificates when there is a stock trade Most companies don't have the administrative capabilities to monitor stock ownership
Preferred stock may have various features
may have "some" or "all" of these features -Cumulative -Participating -Convertible -Callable -Redeemable
Sole Proprietorship
one owner unlimited risk personal and business assets can be taken if sued
what is Convertible Preferred Stock
option for the holder to convert Convertible Preferred Stock into a predetermined fixed number of shares of Common Stock. If the Convertible Preferred Stock is converted to Common Stock, use the "Book Value Method" to transfer the carrying value of the Preferred Stock accounts to Common Stock (no gain or loss is recognized)
Ex: pay out ratio Midgley Co. paid cash dividends of $100,000 and earned net income of $500,000; there is no preferred stock.
payout ratio = (cash dividends) / (net income-preferred dividends) = 100,000/500,000 = 20%
stock splits (purpose and how to record)
purpose: reduce the market value of shares. No entry is recorded for a Stock Split, however: -The "Par Value" of the common stock is decreased -The number of shares of common stock outstanding is increased.
reasons you'd convert bonds to common stock
raise capital without giving up more ownership control than necessary borrow money at lower interest rate (conversion feature) accounting for convertible involves reporting at issuance, conversion, and retirement (if not converted)
Ex: rate of return on common equity Marshall's Inc. had net income of $360,000, declared and paid preferred dividends of $54,000, and average common stockholders' equity of $2,550,000.
rate of return on common stock equity = net income-preferred dividends)/(average common stockholders equity) = (360,000 - 54,000)/(2.550,000) =12% shows how many dollars of net income the company earned for each dollar invested by owners.
what are property dividends?
represent dividends paid to shareholders in some assets other than "cash". When property dividends are paid, the asset must first be "restated" from "historical cost" to "fair market value" at Date of Declaration **Any gain or loss recognized in the Income Statement.
what happens after an IPO
shares of stock may be traded (without restrictions) by investors. The stock market exchanges such as the New York Stock Exchange, and the American Stock Exchange facilitate the trading.
redemption of convertible bonds before maturity
sometimes companies will redeem/payoff convertible bonds prior to maturity or conversion to common stock. no difference in the accounting for the early redemption/payoff of convertible bonds and non convertible reported as either a "gain" or "loss" on early redemption
why would you want to convert your preferred into common stock?
there is more chances of higher dividend if company is doing well but also there is risk because if one year there is no money for common stock then you would not be guaranteed anything
dividend policies: Why don't companies pay dividends, even if they have the cash resources to do so?
typically first 2 are most common 1.To finance growth or expansion of the business. 2.Maintain compliance with debt covenants or agreements with creditors (most lenders limit or prohibit the payment of dividends). 3.Cushion against possible loss contingencies or future losses. 4.Eliminate volatility (the "ups" and "downs") in dividend payments.
accounting for stock dividends
varies based on size of stock dividend -If less than 25% (considered "small") of the common shares outstanding, the company transfers the fair market value of the stock from retained earnings. -If more than 25% (considered "large") of the common shares outstanding, the company transfers the par value of the stock from retained earnings.
