Accounting Chapter 18

Shares Issued for Noncash Consideration

-May be to pay for promotional and legal services with shares rather than cash -Share may be given in payment for land, or for equipment, or for some other noncash asset *issuance of shares should be recorded at grant-date fair value*

Resale of shares

-Subsequent sale of shares is recorded exactly like any sale of shares -Resale of treasury shares is viewed as the consummation of the "single transaction" begun when the treasury shares were purchased -Allocating the cost of treasury shares occurs when the shares are resold

Share Repurchases

-Viewed as a way to distribute company profits without paying dividends -Decreasing the supplier shares in the marketplace supports the price of remaining shares -acquisition of a companies own shares does not create an asset -Company buy back shares to offset the increase in shares issued to employees in compensation plans

Two attributes of OCI

1. Components of comprehensive income created during the reporting period in the statement of comprehensive income 2. The comprehensive income accumulated (AOCI) over the current and prior periods in the balance sheet.

Accounting for buy back

1. Shares can be formally retired 2. Shares can be called treasury stock

True (read)

A stock distribution of 25% or higher can be accounted for in one of two ways: 1. As a large stock dividend (stock split effected in the form of a stock dividend) 2. As a stock split (thus a 100% stock dividend could be labeled a 2 for 1 stock split and accounted for as such.

Fractional shares

A stock dividend or stock split that results in some shareholders being entitled to fractions of whole shares. Cash payments usually are made when shareholders are entitled to fractions of whole shares Called "cash in lieu of payments"

Participating (PS)

Allows preferred shareholders to receive additional dividends beyond the stated amount

reduction in retained earnings

Any net decrease in assets resulting from the sale and subsequent repurchase is reflected as

Paid in capital share repurchase

Any net increase in assets resulting from the sale and subsequent repurchase is reflected as

Preferred shares

Are somewhat hybrid securities a cross between equity and debt. Equity because preferred shareholders receive dividends each year the company pays dividends Debt because the company is obligated to pay cash at a fixed or determinable rate in the future

D

Beamer Co. issued 50,000 shares of $0.01 par common stock for 230,000. Which of the following will Beamer Co. record as part of the journal entry for this transaction A. Credit to paid in capital-excess of par for $230,000 B. Credit to common stock for $229,500 C. Credit to Paid in capital-excess of par for $500 D. Credit to common stock for $500

More than one security issued for a single price

Cash received usually is the sum of the separate market values of the two securities. If only one securities value is known the second security's market value is inferred from the total selling price.

Additional Paid in Capital (APIC)

Companies keep track of indicators additional paid in capital accounts in company records but they report these amounts as a single subtotal called:

reasons for stock dividends

Companies try to give shareholders the illusion that they are receiving a real dividend to enable the corporation to take advantage of the accepted accounting practice of capitalizing retained earnings

Preferred shares may be

Cumulative or non cumulative Participating Or nonparticipating

Retained earnings restrictions

Designates A portion of the balance as being unavailable for dividends it's indicated by disclosure note to the financial statements

stock dividend

Distribution of additional shares of stock to current shareholders of the corporation affects neither the asset nor the liabilities of the firm Shareholders proportional interest in the firm remains unchanged

Dividends

Distribution of assets the company has earned on behalf of its Shareholders

Liquidating dividends

Dividend exceeds the balance in retained earnings the excess is referred to as Any portion of a dividend not representing a distribution of earnings should be debited to additional paid in capital

Cumulative (PS)

Dividends in arrears accumulate and must be made up in a later dividend year before any dividends are paid on common shares

retained earnings

Earnings accumulated on behalf of the shareholders and reported as a single amount

Accumulated Other Comprehensive Income (AOCI)

Extends our view of income beyond net income reported in an income statement to include four types of gains and losses not included in income statements: 1. Net holding gains or losses on available for sale investment in debt securities 2. Gains (losses from and amendments to post retirement benefit plan 3. Deferred gains or losses on derivatives 4. Adjustments from foreign currency translation

Nature of Shareholders Equity

External financing= debt (creditors interest) + equity (owners interest)

True

If more than one class shares is authorized by the articles of corporation, the specific rights of each must be stated

C

In 2021 bro Inc. reacquired 3000 shares of its common stock as treasury Shares at $55 per share. In 2022 bro Inc. sold 1000 shares of the treasury stock at $75 per share. Which of the following would be included in the 2022 entry? A. Credit Cash for $165,000 B. Debit Treasury Stock for $75,000 C. Credit Treasury stock for $55,000 D. Credit Cash for $75,000

Registered owner

In order to be this, the investor must purchase the shares before the ex dividend date which is usually one business day before the date of record.

Credit balance (retained earnings)

Indicates a dollar amount of assets previously earned and reinvested by the firm

debit balance (retained earnings)

Indicates deficit (bad)

Liability

Is recorded when directors declare a cash dividend and retained earnings is reduced

Stock market reaction to stock distribution

Market price per share will decline in proportion to the increase in the number shares distributed in a stock dividend Capitalizing retained earnings for a stock dividend artificially re-classifies earned capital as invested capital

Accounting For a Stock split

No journal entry, par value will reduce by one half

Cash dividends

No legal obligation's exist for paying dividends to shareholders, Liability is not recorded until companies Board of Directors votes to declare a dividend

Property dividends

Noncash Assets distributed to shareholders as dividend Often called a dividend in kind or non-reciprocal transfer to owners Securities held as investment or the assets most often distributed in a property dividend Should be recorded at fair value of the assets to be distributed

Reverse stock split

Occurs when a company decreases outstanding shares no journal entries necessary market price per share theoretically would increase, often done by struggling companies trying to increase the stock price

Common shares

Ownership rights held by common shareholders unless specifically withheld by agreement with the shareholder, are: 1. The right to vote on matters that come before the shareholders (including the election of corporate directors) 2. The right to share in profits when dividends are declared 3. The right to share in the distribution of assets if the company is liquidated

Shareholders equity (includes)

Paid in Capital, retained earnings, treasury stock, accumulated other comprehensive income

Ownership Interest

Paid in capital and retained earnings

True

Preferred shareholders sometimes have the right of conversion or a redemption privilege

Accounting for treasury stock (Cost method)

Purchase of treasury stock is viewed as a temporary reduction of shareholders equity Cost of acquiring shares is "temporarily" debited to the treasury stock amount Purchase of treasure stock and its subsequent resale is considered to be a "single transaction"

retained earnings

Represents a corporation's accumulated undistributed net income More descriptive title would be reinvested earnings

Preemptive right

Right to maintain one's percentage share of ownership when new shares are issued

Stock dividend, proposed merger, defense against hostile takeover

Shares might be reacquired to distribute in a

Treasury Stock

Shares previously sold to shareholders that are bought back bu the corporation

Preferred Shares

Shares with certain preferences or features that distinguish them from common shares Rights include one or both of the following 1. If the board of directors declares dividends, preferred shareholders will receive the designated dividend before any dividends are paid to common shareholders 2. Preferred shareholders customarily have a preference over common shareholders as to the distribution of assets in the event the corporation is dissolved

date of record (dividends)

Stated specific date as to when the determination will be made of the recipients of the dividends Registered owners of shares of stock on the state are entitled to receive the dividend

Accounting for the large stock dividend

Stock split Effected in the form of a stock dividend avoids the change to the records by recording an entry to change the balance in the stock account

Stock split

The Objective is to induce the per-share market price decline that follows the motivation for reducing the per-share market price is to increase the stocks marketability by making it attractive to larger number of potential investors

B

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 2021 after paying $20,000 cash dividends in 2020 and $40,000 in 2019. What is the amount of dividends common shareholders will receive in 2021? A. $18,000 B. $22,000 C. $26,000 D. $28,000

B

Which of the following is not a component of paid in capital? A. Amounts invested by shareholders when they purchase shares of stock from the corporation B. Earnings accumulated on behalf of shareholders C. Amounts arising from share-based compensation activities D. Amounts arising from share repurchases

C

Which of the following items would not be reported in the statement of comprehensive income as other comprehensive income? A. Decrease in the value of available for sale debt securities B. Loss on post retirement benefit plan assets C. Gain on sale of equipment D. Adjustment for foreign currency translation

A

Which of the following statements is true regarding retained earnings? A. Accumulated, undistributed net income results in a credit balance in retained earnings B. A more descriptive title would be investment earnings C. Retained earnings represents accumulated distributed net income D. An accumulated deficit results in a credit balance in retained earnings

paid-in capital

consists primarily of amounts: -invested by shareholders when they purchase shares of stock from the corporation or -arise from the company buying back some of those shares or -from share based compensation activities

Dividends paid > assets earned by the company

management is returning to shareholders a portion of their investments

Mandatorily Redeemable Preferred Shares

must be reported in the balance sheet as a liability, not as shareholders' equity