ACCT 405 C18
Property dividend
distributions of noncash assets to shareholders >recorded at fair market value
Noncumulative preferred stock
has no rights to prior periods' dividends if they were not declared in those prior periods
Characteristics of treasury stock
has no voting rights, does not receive cash dividends, is stock that is repurchased by the company
Redemption
right to return preferred stock
Treasury shares
shares that have been issued to stockholders, but have since been repurchased by the corporation
Preferred stock usually has a
stated dividend that is expressed as a percentage of its par value
Declaration dates
the date on which the board of directors officially approves a dividend
Issuance of shares when sold for noncash consideration
transaction should be recorded at fair market value of shares issued OR fair value of noncash consideration received, whichever is more determinable
Retired shares
treasury shares that have the same status as authorized but unissued shares
Preferred stock, $10 par, 8% dividend rate = $100,000. Common stock, $1 par = $50,000. The preferred stock is noncumulative and nonparticipating. No dividends were paid in 2016 or 2017. In 2018, company declared a dividend of $90,000. In 2018, the common stockholders will receive a dividend of:
$66,000 Preferred= 100,000 x 8% x 3 years = 24,000 Common = 90,000 - 24,000
In year 1, Corp issues 1,000 shares of $1 par value common stock for $10 per share. In year 4, Corp repurchased and immediately retired 100 shares of the stock at $6 per share. What entries would be included to retire the shares?
CS 100 (100 x 1) PIC excess of par 900 (1,000 x 1 - 100) PIC share repurchase 400 (900+100-600) cash 600 (100 x 6)
On March 1, 2018, corporation declared a dividend of $3,000. The record date is March 20, 2018, and the payment date is April 1, 2018. What is the journal entry required on April 1, 2018?
Cash dividends payable 3,000 Cash 3,000
Under IFRS, the critical feature that distinguishes a liability is if the issuer can be required to deliver ___ or another financial instrument to the holder.
cash
Corp issues 5,000 shares of $10 par value preferred stock and 20,000 of $1 par value common stock for $150,000. The fair value of the preferred stock is $20 per share and the fair value of common shares is unknown. What is the journal entry?
cash 150,000 CS 20,000 (1 x 20,000) PIC excess of par 30,000 (150,000 - 100,000 - 20,000) PS 100,000 (20 x 5,000)
Brandon issues 1,000 shares of $5 par value common stock for $20 per share. Stock issue costs are $500. The journal entry to record the issuance of stock will include:
cash 19,500 (20,000 - 500) CS 5,000 (1,000 x 5) PIC excess of par 14,500 (1,000 x 20 - 5,000 - 500)
Types of dividends
cash, liquidating, property, stock
Corporate dividends
corporation provides a return to its shareholder by paying them a dividend from accumulated earnings
Accounting retired shares
credit CS (or preferred) and PIC excess of par
If price paid < issue price
credit PIC share repurchase
Issuance of shares when sold for cash
credit stock account (common or preferred) for par value of shares issued and credit paid in capital excess of par for difference between cash proceeds and total par value
Which feature of preferred stock requires that when a dividend is declared, all previous undeclared dividends must be paid on preferred stock?
cumulative
Retained earnings represents
cumulative net income of the firm since its beginning that has not been distributed to its stockholders in the form of dividends.
When investors purchase shares of stock from a corporation, it is recorded by the corporation as
paid in capital
What are the sources of shareholders' equity?
paid in capital (amounts earned by corporation) and retained earnings (amounts invested by shareholders)
Company issues 1 million CS, $1 par per share, in exchange for patent. Cannot determine fair value of patent but know that the stock is at $20 per share. What is the journal entry?
patent 20m (1m x $20) CS 1 (1m x $1 par) PIC excess of par 19 (remainder)
What ways do companies record stock splits effected in the form of dividends?
reduce the paid in capital-excess of par account and capitalize retained earnings
How should cash dividends be reported on the statement of shareholders' equity?
reduction of retained earnings
When a company decreases its outstanding shares of stock by exchanging 1 share of stock for 10 shares, this is referred as
reserve stock split (decrease shares and increase market price)
Corporation has 100,000 shares of $1 par value common stock issued and outstanding. Corporation declares a 20% stock dividend when the fair value of the stock is $8 per share. The debit to retained earnings for the stock dividend is:
retained earnings 160,000 (100,000 x 20% x $8) CS 20,000 (100,000 x 20% x $1) PIC excess of par 40,000 (difference)
Ownership interests of the investors in a corporation are referred to as
shareholders' equity
Large stock dividends
use par value of new shares issued to reduce retained earnings or PIC excess of par
Shareholders influence a company by
voting for the board of directors
Preferred stock, $10 par, 8% dividend rate = $100,000. Common stock, $1 par = $50,000. The preferred stock is noncumulative and nonparticipating. No dividends were paid in 2016 or 2017. In 2018, company declared a dividend of $90,000. The common stockholders will receive a dividend of:
$82,000 Preferred= 100,000 x 8% = 8,000 Common = 90,000 - 8,000
Components of shareholder's equity
+ common stock + preferred stock + PIC excess of par (added together for both CS and PS) + PIC share repurchase + retained earnings (net income) - treasury stock
Components of shareholders' equity
+ paid-in capital + retained earnings + AOCI - treasury stock
Comprehensive income components
+/- net holding gain (loss) on investments +/- net unrecognized gains (loss) on pensions +/- gains (losses) from foreign currency translations +/- deferred gains (losses) from derivatives
In year 1, Corp purchases 1,000 shares of treasury stock for $10 per share. In year 2, Corp reissues 100 shares of the treasury stock for $12 per share. In year 3, Corp reissues 500 shares of its treasury stock for $9 per share. What entries would be included to the reissuance of the treasury stock in year 3?
Y 2: cash 1,200 (100 x 12) TS 1,000 PIC SR 200 (diff) Y3: cash 4,500 (500 x 9) PIC SR 200 (from Y2) retained earnings 300 (500-200) TS 5,000 (10 x 500)
Liquidating dividend represents
a return of the stockholder's invested capital rather than a reduce contributed capital (debit PIC rather than retained earnings)
Preferred stock
a stock usually has a high par value and a percentage of par value dividend rate
What account is stockholders' equity account?
additional paid in capital
Paid in capital represents
amounts that shareholders have invested by buying shares of stock from the company
A company has available for sale debt 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 shareholders' equity? (Assume fair value option is not elected)
as an increase in comprehensive income
Stock dividend does not reduce
assets of firm or create a liability
Number of shares a specific corporation is authorized to issue is set forth in
its articles of incorporation
Small stock dividend
less than 25% of outstanding shares of stock
Mandatorily redeemable preferred stock is reported as
liability on balance sheet
When dividend exceeds the balance in retained earnings, the excess is referred to as a
liquidating dividend
Authorized shares
maximum number of shares of stock that a corporation is legally permitted to issue and sell to the public as specified in its articles of incorporation
Comprehensive income includes
net income reported on income statement and OCI that bypassed the income statement
Corporations raise equity capital by
operating at a profit and issuing stock
Cumulative preferred stock
preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid (most preferred stocks are cumulative)
Mandatorily redeemable preferred stock
preferred stock that has contractual rights in which the company is obligated to repurchase the stock at a specific future date
When a company issues its shares of stock for a noncash asset, which may provide evidence of fair value of the transaction?
quoted market price for the shares and the amount of cash that would be paid to purchase the asset
Fully participating preferred shares
receive a pro rata share of all dividends declared based on the relative par value amounts of common and preferred shares outstanding
On March 1, 2018, corporation declared a dividend of $3,000. The record date is March 20, 2018, and the payment date is April 1, 2018. What is the journal entry required on March 1, 2018?
retained earnings 3,000 cash dividend payable 3,000
McChesney Mines Inc. issued a "dividend" to its common stockholders of $1,200,000. The cash dividend announcement noted that stockholders should consider $900,000 as income and the remainder a return of capital. McChesney Mines records the dividend on date of declaration:
retained earnings 900,000 PIC excess par 300,000 cash dividends payable 1,200,000
When a company repurchases its own shares of stock, what are the two acceptable accounting choices for the transaction?
retired or called treasury stock
Conversion
right to exchange preferred stock for common stock
Under IFRS, shareholders' equity is typically classified under two categories referred to as
share capital and reserves
Who owns and controls a corporation?
shareholders
Issued shares
shares of stock that have been sold to investors at some point
Outstanding shares
shares that have been issued and are currently owned by stockholders
When a property dividend is declared, a gain or loss is recognized for:
the difference between the fair value and the book value of the assets distributed
The statement of shareholder's equity reports
the transactions that cause changes in all of the shareholders' equity account balances for the reporting period
Comprehensive income represents
total change in equity excluding only transactions with owners
Shares of stock previously sold by the corporation that are repurchased are called
treasury stock
McChesney Mines Inc. issued a "dividend" to its common stockholders of $1,200,000. The cash dividend announcement noted that stockholders should consider $900,000 as income and the remainder a return of capital. McChesney Mines records the dividend on date of payment:
cash dividend payable 1,200,000 cash 1,200,000
On April 1, 2018, corporation declared a dividend of $0.30 per share. Corp has 100,000 shares authorized and 40,000 issued and outstanding. The record date is April 28, 2018, and the payment date is May 15, 2018. What is the journal entry required on May 15, 2018?
cash dividend payable 12,000 (40,000 x .30) cash 12,000
The statement of shareholders' equity reports
changes in each shareholder equity account for the period
A business that has equity accounts labeled "common stock" and "retained earnings" is a
corporation
Net assets is
assets - liabilities
The balance sheet reports
balances of shareholders' equity accounts
When a corporation issues shares of common stock for an amount above par, what entries occur?
cash additional paid in capital common stock
When a corporation issues two securities for a single price, how is the issue price usually allocated?
cash received is allocated based on the relative market value of each security
Ex-dividend date
date before which investors must purchase stock in order to receive a dividend (one day before date of record) (no journal entry)
Record date
date that a determination is made as to recipients of a dividend (no journal entry)
Payment date
date that corporate assets are transferred
If treasury stock is resold for less than acquisition cost:
debit PIC share repurchase (if PIC share repurchase doesn't exist, debit retained earnings instead or for excess)
If price paid > issue price
debit PIC share repurchase (if it exists, if not, debit retained earnings instead or for excess)
For US GAAP reporting purposes, mandatorily redeemable preferred stock is classified as
debt
If preferred shares must be redeemed by a certain date, they should be classified as
debt
Dates for dividends
declaration, ex-dividend, record, and payment
Cash dividend
declared by board of directs >no legal obligation to declare a dividend >once declared, there is a legal obligation to pay dividend which is paid quarterly
When a corporation issues a stock dividend, the fair value of the shares should normally:
decreases
When a corporation repurchases its stock as treasury stock, the number of shares outstanding:
decreases (less on the market)
When a company issues different classes of shares, it must
distinguish the rights for each class of stock
Preferred stockholders usually have preference over common stockholders with respect to what items?
distribution of assets in liquidation and dividends
Stock dividends
distributions of stock to current shareholders of a corporation (do not reduce the total stockholder's equity like the rest of the dividends do)
Noncumulative
dividends are paid in the current year only if declared
Cumulative
dividends, if not declared, accumulate, and must be paid in the future when a dividend is declared
Nonparticipating preferred stock
do not receive any dividends beyond the stated amount
If treasury stock is resold for more than acquisition cost:
excess amount is credited to PIC SR
If a corporation issues its shares of stock for a noncash asset, at what amount should the transaction be recorded?
fair value of the stock
Partially participating preferred shares
have a limit on the amount of additional dividends beyond the stated amount
Stock split results
in an increase in the number of shares outstanding with a corresponding decrease in the par per share
All dividends in arrears on cumulative preferred stock must be paid
in full before any dividends can be paid to common stockholders
Most likely reason to declare a reverse stock split is to
increase market value of the shares
On September 1, the board of directors declares a property dividend of 10,000 shares of Corp's preferred stock that company had purchased in May for $5 per share (BV). On September 1, the market value of the shares is $6 per share (FV). The date of record is September 30, and the shares will be distributed on October 15. The journal entry on September 1 will include what entries?
investment in equity securities 10,000 gain on investments 10,000 (10,000 x 6-5) retained earnings 60,000 (10,000 x $6) property dividends payable 60,000
Stock splits are used to
reduce price for which shares trade on the market
Net assets equal
shareholders' equity
To pay a cash dividend, a corporation must have two things
sufficient retained earnings to absorb the dividend without going negative and enough cash to pay the dividend.
Preemptive right
the right to purchase additional shares of stock to maintain one's percentage of ownership when new shares are issued
When common stock has a designated par value, and common stock is issued at an amount above par, what entry is recorded?
cash common stock paid in capital excess of par
Corp issues 10,000 shares of $1 par value common stock for $10 per share. Stock issue costs are $3,000. The journal entry to record the issuance of stock will include?
cash 100,000 PS 10,000 (10,000 x 1) PIC excess par 87,000 (100,000 - 10,000 - 3,000)
Corp issues 1,000 shares of $10 par value preferred stock and 3,000 shares of $1 par value common stock for $48,000. The fair value of the preferred stock is $20 per share, and the fair value of the common shares is $10 per share. What is the journal entry?
cash 48,000 CS 30,000 (3,000 x 10) PIC excess of par 25,800 (30,000 / (30,000 + 20,000) x 48,0000) - 3,000) PS 20,000 (20 x 1,000)
Newly issued stock may be exchanged for
cash, services, non-cash assets (land, equipment)