Chapter 11

Stock dividend

-A pro rata distribution of corporation's own stock to stockholders. -Like a cash dividend is paid in cash, a stock dividend is paid in stock -Results in decrease to retained earnings and increase in paid in capital -Unlike cash dividend, it does not decrease total stockholders' equity or total assets.

S Corporation

-Allows for legal treatment as a corporation but tax treatment as a partnership. So no double taxation. -Company can't have more than 100 shareholders.

Retained earnings restrictions

-Circumstances that make a portion of retained earnings currently unavailable for dividends.

Stock split

-Issuance of additional shares of stock to stockholders according to their percentage ownership. -However, it results in a reduction in par or stated value per share. -Purpose is to increase marketability of stock by lowering its market price per share. This makes it easier for corporation to issue additional stock. -In a 2 for 1 split, the company exchanges one share of $10 par value stock for two shares of $5 par value stock. -No effect on paid in capital, retained earnings, total stockholders' equity, so no journal entry -Number of shares outstanding increases

Payout ratio

-Measures the percentage of earnings a company distributes in form of cash dividends to common stockholders. (cash dividends declared on common stock)/ net income

How do stock dividends affect stockholder's equity?

-They change the composition of stockholders' equity because they result in transfer of portion of retained earnings to paid-in capital. But total stockholder's equity remains same. -Stock dividends also have no effect on par or stated value per share, number of shares outstanding does increase.

authorized stock

-amount of stock corporation is authorized to sell as indicated in charter -authorization of common stock does not result in entries because no change is made to assets/stockholders equity

Declaration date

-board of directors formally authorizes the cash dividends and announces it to stockholders -declaration of cash dividend commits corporation to binding legal obligation

difference between paid in capital and retained earnings

-corporations can make distributions of earnings (declare dividends) out of retained earnings in all state -in many states can't declare dividends out of paid in capital

comprehensive income

-includes all changes in stockholders' equity during a period expect those changes resulting from investments by stockholders and distributions to stockholders. -includes adjustments to pension plan assets, types of foreign currency gains and losses, gains and losses on investments

If a company wants to increase return on common stockholders' equity, what can it do

-increase return on common stockholders' equity -increase reliance on debt financing

Assume you have 2% ownership interest in Cetus, you own 20 of its 1000 shares of common stock. If Cetus declares a 10% stock dividend, how many shares of stock does it issue? How many shares do you get? What is your ownership interest?

-it issues 100 shares (10% x 1,000) -you get 2 shares (2% x 100) ownership is still 2%, (22/1100)

Return on common stockholders' equity (ROE)

-measures profitability from common stockholders' viewpoint -Shows how many dollars of net income a company earned for each dollar of common stockholders' equity

Purposes and benefits of stock dividend

1. satisfy stockholders' dividend expectations without spending cash 2. increase marketability of stock by increasing number of shares outstanding and decreasing market price per share. 3. emphasize that a company has permanently reinvested in business a portion of stockholder's equity, which is unavailable for cash dividends.

Stockholder's rights

1. vote in election of board of directors and vote on actions 2. share corporate earnings through receipt of dividends 3. keep same percentage of ownership when new shares of stock issued 4. share in assets upon liquidation in proportion to their holdings.

Privately held corporation

A corporation that has only a few stockholders and whose stock is not available for sale to the general public

Publicly held corporation

A corporation that may have thousands of stockholders and whose stock is traded on a national securities market.

Payment date

Company makes cash dividend payments to stockholders on record. It also records payment of dividend.

Scientific Leasing has 5,000 shares of 7%, $100 par value cumulative preferred stock outstanding. If dividends are two years in arrears, preferred stockholders are entitled to receive what in current year?

Each $100 share pays $7 dividend (.07x100). Annual dividend is 35,000 (5,000x7)

deficit

If cumulative losses and dividends exceed cumulative income over a company's life, a debit balance in retained earnings results.

Effects that result when Medland Corp. declares a 10% stock dividend on its $10 par common stock when 50,000 shares were outstanding. Market price was $15 per share. Flip

In example, total paid in capital increases by $75,000 (50,000 shares x 10% x $15), retained earnings decreases by same amount. -Stockholders equity is unchanged at $800,000 -Number of shares increases by 5,000 (50,000x10%)

outstanding stock

The number of shares of issued stock that are being held by stockholder's. Shares issued (1,000) - treasury stock (4,000) = difference is number of shares of stock outstanding (96,000)

dividends in arrears

When preferred stock is cumulative, preferred dividends not declared that were supposed to be declared are called this

Treasury Stock

a corporation's own stock that has been reacquired by corporation and held for future use.

dividend

a distribution by a corporation to its stockholders on a pro rata (proportional to ownership) basis if you own 10% of common shares, you get 10% dividend

cash dividend

a pro rata (proportional to ownership) distribution of cash to stockholder's

What account is other comprehensive income closed to

accumulated other comprehensive income

After acquisition of treasury stock, what does stockholder's equity section of balance sheet look like?

buying treasury stock reduces stockholder's equity

par value stock

capital stock assigned a value per share in corporate charter

no par value stock

capital stock that has not been assigned value in corporate charter

Two classifications of paid in capital and description

capital stock: preferred and common stock. Report info about par value, shares authorized, shares issued, and shares outstanding for each class of stock. additional paid in capital: includes excess of amounts paid in over par or stated value

record date

company determines ownership of outstanding shares for dividend purposes. No entry required on this date

Hydro slide issues 1,000 shares of $1 par value common stock at par for cash. Journal entry is what

debit cash 1,000 credit common stock 1,000 (to record issuance of 1,000 shares of $1 par common stock at par)

Assume Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Journal entry

debit cash 120,000 credit preferred stock 100,000 credit paid in capital in excess of par value- preferred stock 20,000 (to record issuance of 10,000 shares of $10 par value preferred stock)

Hydroslide issues additional 1,000 shares of $1 par value common stock for cash at $5 per share. Journal entry

debit cash 5,000 credit common stock (1,000x1) 1,000 credit paid in capital in excess par value ($5-$1) 4,000 (to record issuance of 1,000 shares of common stock in excess of par)

Assume on December 1, 2017, directors of Media General declare $0.50 per share cash dividend on 100,000 shares of $10 par value common stock. Entry to record declaration

debit cash dividends 50,000 credit dividends payable 50,000 dividend is 100,000 x.50

journal entry for payment date

debit dividends payable credit cash

On February 1, 2017, Mead acquires 4,000 shares of stock at $8 per share. What is journal entry

debit treasury stock 32,000 credit cash 32,000 (to record purchase of 4,000 shares of treasury stock at $8 per share)

When Medland issues dividend shares, journal entry

debits common stock dividends distributable 50,000 credit common stock 50,000 (to record issuance of 5,000 shares in a stock dividend)

retained earnings

net income company retains in business

stockholder's equity section of corporation's balance sheet consists of what

paid in (contributed) capital retained earnings (earned capital)

issuance of common stock only affects what accounts

paid in capital

cumulative dividend

preferred stockholders must be paid current year dividends and any unpaid prior year dividends before common stockholders are paid dividends

Assume Medland Corporation has balance of $300,000 in retained earnings and declares a 10% stock dividend on its 50,000 shares of $10 par value common stock. The current fair value of its stock is $15 per share. Journal entry

shares to be issued are (10% x 50,000) = 5,000 total amount to be debited to stock dividends is (5,000 x 15)= 75,000 debit stock dividends 75,000 credit common stock dividends distributable 50,000 credit paid in capital in excess of par value 25,000 (to record declaration of 10% stock dividend)

paid in capital

total amount of cash and other assets paid in to corporation by stockholders in exchange for capital stock