Financial Accounting - Module 13: Stockholder's Equity
In addition to its common stock, a corporation had 20,000 shares of $60 par value, 8%, cumulative preferred stock outstanding for all of 20X5. The corporation did not declare any dividends for the past two years (20X4 and 20X3). The corporation will declare and pay a dividend of $300,000 in 20X5 to be distributed between its preferred and common shareholders. Required: In the chart below, indicate how the total 20X5 declared dividend amount should be allocated to the common and preferred stock shares, respectively.
To calculate the preferred dividend amount in a given year, first, calculate the preferred dividend amount for a single year as follows:# of shares of preferred stock outstanding x par value x dividend rate. 20,000 shares x $60 par x 8% = $96,000 Next, give preferred shareholders their dividend-in-arrears amount(s) starting with the oldest year first. If the dividend amount is sufficient in amount, give them their current year's dividend amount as well. Preferred should first receive their cumulative dividends, then their current dividend. $96,000 (for 20X3) + $96,000 (for 20X4) + $96,000 (current year) = $288,000. Common shareholders receive any remaining dividend after preferred shareholders have received their portion. Total dividend of $300,000 - $288,000 to preferred stock = $12,000 to common shareholders.
What is another formula for total preferred stock dividend?
Total PS Dividend = Dividend rate * number of shares outstanding * par value per share
What is the formula to determine the set dividend amount for preferred stock?
Total PS dividend = Dividend rate * total par value of the PS
True or False Stock splits do not require the company to make a journal entry, whereas stock dividends do.
True
True or False: Most publicly-held companies have more than just two Stockholders' equity accounts
True. a) Common Stock b) Retained Earnings * in this course has mentioned the "common stock" and "retained earnings"
On October 1, Hawking Corp. had 40,000 shares of $2 par value common stock outstanding before it declared a 2-for-1 stock split. At the time of the split, the stock was selling for $50 per share. Answer the following two questions: Question #1: After the split, how many shares of common stock are outstanding, and what is their par value per share?
With a stock split, the number of shares increases in direct proportion to a decrease in the stock's par value. The market price of the stock will also decrease in proportion to the split. Before the split: 40,000 sharesAfter the split: 40,000 shares X 2 = 80,000 shares Before the split: $2 parAfter the split: $2 par ÷ 2 = $1 par Before the split: market value of $50 per shareAfter the split: market value of $25 per share
A company has 1,000,000 shares of common stock authorized, out of which 400,000 shares are issued, and 350,000 shares are outstanding. How many treasury shares does the company have, and if the company declares and pays a dividend of $.50 per share, what is the total dividend amount?
a) 1,000,000 authorized shares b) 400,000 shares issued c) 350,000 shares outstanding - therefore 50,000 shares in treasury d) 600,000 shares unissued Therefore 350,000 shares outstanding * $0.50 = $175,000
SMALL stock dividends are less than ___% - ____% whereas LARGE stock dividends are more than ____% - _____%
a) 20-25% b) 20-25% * if a company declares a stock dividend between 20-25%, it must research the accounting literature to determine the dividend type
What are Dividends?
a) Are a return of a corporation's net earnings to its stockholders. b) Dividends are NOT an expense; therefore, they do not reduce net income
What is Retained Earnings?
a) Represents the accumulation over time of all the company's earnings less any dividends declared b) if a company chooses to pay or distribute a dividend, it is paid out of retained earnings c) The most popular form is cash
Only the stock dividend reduces the "_____________" account balance and increases the "________" account balance
a) Retained earnings b) Common stock
Stock splits and stock dividends both cause the market price per share to _________ and the number of shares to ________, but only the stock split changes the par value per share
a) decrease b) increase
What is Par Value?
a) has no real financial significance b) original purpose of having a par value for the stock was to protect creditors by establishing a legal minimum of capital
Both stock splits and large stock dividends: (check all that apply)
a) increase the number of shares outstanding b) decrease the market price per share
Treasury shares are still considered _______ because they have been issued at least once. But they are no longer _______
a) issued b) outstanding
What is Cumulative preferred stock?
annual set dividend that stockholders do not receive becomes what is commonly referred to as "dividends in arrears"
The maximum number of common shares a company may issue is referred to as:
authorized shares
Which of the following columns would not be included on a statement of stockholders' equity?
notes payable * Notes Payable is a liability account. The statement of stockholders' equity should only include columns that are stockholder's equity accounts.
Shares held by a stockholder are deemed as
outstanding
Only __________ shares are permitted to receive a dividend
outstanding shares
Shares that have been issued at least once and are still owned by stockholders are referred to as being:
outstanding shares
Which classification of common stock shares has voting rights for the company's Board of Directors?
outstanding shares
What is the effect on a company's market price per share of common stock if a large amount of treasury stock is purchased?
the market price will increase
A small stock dividend should be valued at:
the market value of the shares distributed.
A large stock dividend should be valued at:
the par value of the shares distributed.
The balance in the "Dividends" (or Dividends Declared) account should be reported on which financial statement?
the statement of stockholders' equity (or the statement of RE)
True or False: If a company has both common and preferred shares outstanding, the preferred shares will receive their portion of the dividend first
true
True or False: The market value is usually much lower than a stock's par value
true
True or false: In a year in which dividends are declared, preferred stockholders receive their portion of dividends before common stockholders receive theirs.
true
True or false: In the event the corporation is dissolved, preferred stockholders receive their share of any remaining net assets before common stockholders.
true
What are Subscribed Shares?
unissued shares that are held for a specific shareholder to purchase at a later date
At the end of the year, Wolfpack Corp. has 100,000 shares of 8%, $40 par, preferred stock outstanding. How much is the preferred stock's set dividend amount?
$100,000 * 0.08 * $40 = $320,000
What is the Ex-dividend Date?
1) A stockholder needs to purchase the stock before the ex-dividend date to be entitled to the dividend as of the date of record
If the "dividends declared" account is NOT an expense, where is the balance reported?
1) It's balance is reported on the statement of retained earnings or statement of stockholder's equity 2) Retained earnings account is decreased in the period of the dividends are DECLARED not necessarily in the period they are paid
What are the 6 major characteristics of Common Stock?
1) May have a par value, stated value, or be no-par 2) Has voting rights. Common stockholders can vote for whom they wish to sit on the company's Board of directors. The more stock a shareholder owns, the more votes the shareholder can cast 3) Common stockholders usually have what is called PREEMPTIVE RIGHT. Which allows current stockholders to keep their current percentage ownership by purchasing new shares of stock before those shares are sold in the open market 4) Entitled to receive a dividend if the Board of Directors declares a dividend and if a sufficient amount remains after preferred shareholders have been paid 5) Does not have a variety of dividend options like those that preferred stock has 6) Usually NOT redeemable 7) common stock is usually not convertible into another type of equity (e.g a share of common stock would not convert into a share of preferred stock) 8) is subordinate to preferred stock in liquidation 9) May have a stock warrant attached. a stock warrant gives the holder the option to purchase additional shares of stock in the future at a predetermined amount
If a company had issued preferred stock instead, the entry would be the same except in the place of the words "common stock", this would be used:
1) Preferred stock * there are separate "Additional Paid-in Capital in Excess of Par" accounts for common, preferred, and treasury stock, so its important to make this distinction in the account name
How are dividend amounts chosen?
1) Stockholders do NOT choose their dividend amount, rather the Company's Board of Directors determines the amount and timing of the dividend and announces this information in the board of directors' minutes
Describe issued Authorized shares:
1) Sub classification - have been issued at least once
Describe unissued Authorized shares:
1) Sub classification: - have never been issued or have been retired - SUBscribed shares: a) are unissued but they have been set aside and are promised to a specific shareholder in exchange for a partial payment - UNsubscribed shares: a) are unissued and are available to be issued at the discretion of the company
What does the Articles of Incorporation or Charter explain?
1) The charter will explain the nature of the company's business, including its name and purpose
What is the Date of Declaration?
1) When the board of directors officially announces the dividend 2) Dividends become a legal obligation; therefore a liability exists - dividends declared on this date will be paid later 3) Eligible to recieve their share of the dividend, a shareholder must own the shares by the date of record
What are the different ways a stockholder can earn a return?
1) receiving dividends - this dividend can be in the form of either cash or additional stock 2) Selling the stock investment for an amount greater than its cost - e.g if you paid $5,000 for ABC Company's stock and later sold that stock for $8,000 you would have a capital gain of $3,000
What are 5 reasons that company's buy its stock?
1) to have shares on hand to reissue to officers or employees under bonus and employee stock option plans 2) To avoid a hostile takeover by another company - by buying up their shares, fewer shares are in the marketplace for others to buy to gain control of the company 3) Increase the market price per share of the stock 4) Increase the earnings per share (EPS) ratio - EPS is calculated by dividing net income by the weighted average number of common shares outstanding 5) additional shares on hand to exchange those shares with another company under a merger or acquisition plan
What are the 6 characteristics of Preferred Stock?
1) will usually have a par value or stated value 2) does NOT have voting rights 3) Does NOT have a preemptive right 4) has a preference over common stockholders concerning dividends. Although not guaranteed, the preferred stock dividend (if dividend) is based on a percentage of the preferred stock's par or stated value 5) Have more dividend preferences depending on the nature of the preferred stock. e.g the preferred stock can be cumulative 6) May be "redeemable" which means the shares may be converted into cash in the future at either the discretion of the company 7) may be "convertible", which means that the stockholder has the right to convert those shares into common shares at some future point. 8.) has a preference over common stockholders when the company is liquidating (going out of business) 9) may have a stock warrant attached
On January 31, Sargent Corp. had 1,000,000 shares of $2 common stock outstanding before declaring a 10% stock dividend. The market price per share was $50 per share on the declaration date. Question: In the journal entry to record this dividend, the "Retained Earnings" account will be debited by what amount?
1,000,000 shares x 10% = 100,000 shares distributed as a stock dividend. Since the percentage is less than 20%, this is a small stock dividend. Small stock dividends are valued at the market price of the shares. 100,000 shares x $50 market price = $5,000,000 total value. The total value should be debited to the "Retained Earnings" account. The full journal entry would be: debit Retained Earnings for $5,000,000, credit Common Stock for $2,000,000 and credit Additional Paid-in Capital for $3,000,000. The correct answer is: $ 5,000,000
A company has 1,000,000 common shares authorized, out of which 400,000 are issued, and 375,000 are outstanding. How many treasury shares does the company have? A. 1,400,000 B. 1,375,000 C. 775,000 D. 25,000 E. 600,000
25,000 (400,000 - 375,000)
The following information is available for a company's common stock: 7,000,000 shares are authorized 3,000,000 shares are issued 2,600,000 shares are outstanding Question: How many treasury shares does the company have?
3,000,000 shares issued - 2,600,000 shares outstanding = 400,000 treasury shares
Which type of stock has voting rights to determine the company's Board of Directors? (check all that apply) a) Common Stock b) Preferred Stock
Common Stock
Dividends become a legal obligation (liability) on the:
Date of declaration
Dividends first become a legal obligation of the Company on the:
Date of declaration
On which date do dividends first become a legal liability? A. The date of declaration B. The ex-dividend date C. The date of record D. The date of payment
Date of declaration
Like a cash divided, a stock dividend ________ the company's retained earnings balance.
Decreases however, whereas a cash dividend will eventually decrease cash, a stock dividend does NOT affect cash
Unlike creditor claims, stockholder claims __ ____ have to be satisfied with cash or some other form of payment at set due dates like many creditor claims
Do Not
True or False: The par value of a company's stock is the same as its market value.
False
True or False: The par value of a company's stock should be the same as the stock's market value
False
True or false: For purposes of electing the company's board of directors, preferred stockholders can cast more votes than common stockholders.
False
True or false Preferred shareholders are guaranteed to receive a higher dividend amount than common shareholders.
False a) Preferred shareholders have a preference over common shareholders with respect to the order of dividend allocation and distribution of net assets in the event the corporation is dissolved. b) Preferred shareholders do not necessarily receive a higher dividend amount than common shareholders. c) Most preferred shareholders are not eligible to vote for the company's board of directors
At the beginning of 20X5, Poole Inc. had total asset and total liabilities of $500,000 and $275,000, respectively. The following occurred during 20X5: earned net income of $105,000, declared and paid dividends totaling $52,000, and received $20,000 cash from the issuance of new shares of stock. Question: What should be Poole's ending stockholders' equity balance at 12/31/X5?
First, calculate the beginning stockholders' equity balance by applying the accounting equation. The beginning stockholders' equity balance is increased by net income, decreased by dividends declared, and increased by the cash received from new stock issuance. The beginning stockholders' equity balance is $225,000. 225,000 + 105,000 - $52,000 + 20,000 = 298,000 The correct answer is: $ 298,000
Which classification of shares is generally entitled to receive a dividend? A. Authorized shares B. Issued shares C. Outstanding shares D. Treasury shares
Outstanding shares
Assuming dividends are declared, which type of stock receives its portion first?
Preferred stock
What is the Date of Payment?
The date the previously declared dividends are paid to the stockholders of record
When a company buys back a significant amount of treasury shares, what is the most likely effect on the company's market price per share?
The market price per share will increase. * The purchase of treasury stock reduces the number of outstanding shares. Therefore, the perceived value of the company is spread over fewer shares resulting in an increase in the market price per share.
What is needed to be done to prevent the halting of share trades in the marketplace between the date of declaration and ex-dividend date?
The quoted market price of a stock is often increased by the dividend amount between the date of declaration and ex-dividend dates
What is the Date of Record?
The registered owner on this date will be the stockholder who eventually receives the dividend on the payment date.
What is non-cumulative preferred stock?
The set dividend amount for a particular year will not have to be paid to the preferred shareholders in subsequent years
What are the two sub-classification categories for Issued Shares?
1) Outstanding shares 2) Treasury shares
What are the 3 reasons for a company distributing a stock dividend include:
1) To allow a company to preserve its cash while still giving a dividend to its stockholders 2) To decrease the market price per share. If the dividend is large enough, the individual market price per share of a company's stock may decrease by increasing the total number of shares outstanding. Companies may want to intentionally drive down their stock's market price to make it more attractive to potential stockholders 3) To emphasize to stockholders that some of the retained earnings have been permanently reclassified as common stock. Future cash dividends are usually paid with retained earnings
The main motivation for most stockholders is to earn a __________________________
1) return on their investment a) we can think of a "return" as a type of reward for allowing the corporation to use a stockholder's investment
What are Small stock dividends?
Are valued at their fair market value on the declaration date, whereas large stock dividends are valued at the par or stated value of the stock
Example (no par): On January 1, 20X1, Bailey Corp. issued 10,000 shares of no-par common stock for $15 per share. The journal entry to record the issuance is as follows:
Cash (10,000 shares * $15) 150,000 dr. Common stock (no par) 150,000 cr. * Overall effect on the balance sheet from this transaction is as follows: Assets = a) total assets increased by $150,000 Stockholders' Equity = a) Total contributed capital by $150,000
On September 9, Tillman Corp. issued 1,000 shares of its $4 par value common stock for $16 per share. Required: In the journal below, prepare the entry to record the stock issuance.
Cash 16,000 dr Common Stock 4,000 cr Additional paid-in capital 12,000 cr
What is the formula for earnings per share?
EPS = dividing net income by the weighted average number of common shares outstanding
The account called "Additional Paid-in Capital in Excess of Par" is a(n):
Equity account
True or False: Shareholders decide the amount of their own dividends.
FALSE *It is the company's Board of Directors that decides if there will be a dividend, and what the dividend amount will be.
True or False: A corporation is generally required to pay yearly dividends to its stockholders
False
True or False: Preferred stockholders are guaranteed to receive a dividend every year.
False
True/False The stockholders' section of the balance sheet shows or explains how each of the stockholders' equity accounts changed during the year.
False * The statement of stockholders' equity explains the changes. The stockholders' equity section of the balance sheet only reports the end of the year balances.
True or False: Preferred shareholders are guaranteed they will receive a dividend every year.
False False - They are not guaranteed they will receive a dividend. They will only receive a dividend if the Board of Directors declares one.
True or false: When stock is issued for more than its par value, the excess is considered to be revenue and should be reported on the income statement.
False The excess is considered to be additional paid-in-capital. It is still an owner contribution and considered part of contributed capital.
Which of the following would be the most likely reason for describing an increase in the Common Stock account?
Issuance of new shares
On March 1, Serena Corp. had 20,000 shares of common stock authorized and 3,000 shares of $5 par common stock issued and outstanding when it declared a $2.00 per share dividend to be paid on March 31. Required: In the journal below, record the journal entry on the declaration and payment dates.
Mar 1: Dividends 6,000 dr Dividends payable 6,000 cr Mar 31: Dividends payable 6,000 dr Cash 6,000 cr
When a company buys back its own stock, which of the following statements is most likely true? A. The par value per share will increase. B. The par value per share will decrease. C. The market value per share will increase. D. The market value per share will decrease
Market value per share will increase
What is the overall dollar effect on stockholders' equity when there is a stock dividend?
No effect * A stock dividend causes retained earnings to decrease and contributed capital to increase. Therefore, there is no overall effect on the amount of total stockholders equity.
What are Treasury Shares?
Shares of stock that a company purchases from existing stockholders to reissue later
What is an authorized share?
The maximum number of shares that a company can issue
What are Treasury Stocks?
When a company buys back its own shares of common stock and the company intends to reissue those shares in the future
At a minimum, all corporations must issue:
a common stock
What does the Statement f Stockholder's Equity report?
a) How each stockholders' equity account balance CHANGED during the accounting period. b) in contrast, the stockholders' equity section of the balance reports stockholders' equity account balances at the end of the accounting period
What is Dividend Preference?
a) Recall that one of the advantages of owning preferred stock b) If the corporation does declare a dividend and has both common and preferred stock, the preferred stockholders will get their portion of the total dividend first
What is Stockholders' equity section represent?
a) Represents owner claims to the company's net assets b) net assets equal the difference between assets and liabilities.
Why does a company do a stock split?
a) To decrease the market price per share b) A company will want to decrease the market price of its stock if it feels the stock price is overvalued
___________ shares are still considered to be issued, but they are no longer outstanding. Therefore, they are NOT eligible to receive a portion of any ______ declared
a) Treasury b) dividends
What are the tax advantages to the stockholder when they receive a stock dividend?
a) Whereas a cash dividend is likely to be taxable in the year received, there is usually no tax impact for a stock dividend to the stockholder until they sell the shares they receive.
What is Stock Dividend?
a) another way companies can return their profits to stockholders b) instead of receiving a cash payment, stockholders receive additional shares of stock
The balance in the "Dividends Payable" account should be reported on which financial statement?
balance sheet Yes - It should be reported on the liability side of the balance sheet.
Which type(s) of stock is (are) generally eligible to vote for a company's Board of Directors? A. Common stock B. Preferred stock C. Both common and preferred stock D. Treasury stock
common stock
The account called "Treasury Stock" is an example of a(n):
contra equity account
The treasury stock account is an example of a _____________ account
contra-equity account
The "Treasury Stock" account is best described as a(n):
contra-equity account *The "Treasury Stock" account balance is reported in the stockholders' equity section of the balance sheet. As its balance increases, total stockholders' equity decreases. It also has a normal debit balance. Therefore, it is best described as a contra-equity account.
As a company purchases treasury stock, the effect on total stockholders' equity will be a(n):
decrease Treasury stock is a contra-equity account. As its balance increases, total stockholders' equity decreases.
Both large stock dividends and stock splits result in a(n):
decrease to the market price of the company's stock
Preferred stock has a preference over common stock with respect to: (check all that apply) a) Dividend allocation b) Market value c) Par value
dividend allocation * Preferred stock may or may not have a market value higher than the common stock.
At the end of the accounting cycle, the balance in the "Dividends" (or Dividends Declared) account should be closed to which account?
dividends payable
True or false: Dividends in arrears are a liability because they have not been declared
false it is NOT a liability the company should make a note disclosure in its annual report if they exist
Both stock dividends and stock splits: A. Increase the number of shares outstanding B. Decrease the par value per share C. Decrease the number of shares outstanding D. Increase the par value per share
increase the number of shares outstanding
Once a share has been given to a shareholder in an exchange:
issued
Dividends are paid to:
shares that are issued and outstanding
Which of the following does NOT require the company to make a journal entry? A. The purchase of treasury stock B. A stock dividend C. The issuance of preferred stock D. The declaration of a dividend E. A stock split
stock split
The account called "Dividends Declared" or "Dividends" is an example of a:
temporary account
When discussing stock, the word "issue" refers to:
the act of exchanging stock for an asset (usually cash)
The total number of shares a corporation may sell or issue is known as:
the authorized number of shares
Which classification of shares is eligible to receive a dividend?
the outstanding number of shares
Shares that have been issued at least once but have been bought back are referred to as:
treasury
Repurchased shares that a company has bought back from its stockholders with the intention of reissuing at a later date are known as:
treasury shares
When a company buys back its own stock, what account should be debited?
treasury stock
Which of the following is an example of a contra-equity account? A. Additional Paid-in Capital B. Common Stock C. Retained Earnings D. Preferred Stock E. Treasury Stock
treasury stock - treasury stock reported in the equity section of the balance sheet. - it has a normal debit balance - so its balance increases, total owners equity decreases
