ACCT 314: Ch 18 Shareholders Equity

Ownership interests of shareholders arise primarily from two sources:

(1) amounts invested by shareholders in the corporations - Paid-in Capital (2) amounts earned by the corporation on behalf of its shareholders - Retained Earnings

A stock distribution of 25% or higher can be accounted for in one of two ways:

(1) as a "large" stock dividend; or (2) as a stock split (thus, a 100% stock dividend could be labeled a 2 for 1 sock split and accounted for as such.)

How should we treat a difference in the cash paid to buy the shares and the amount the shares originally sold for when repurchasing:

1. If a "credit" difference is created, we credit paid-in capital-share repurchase -purchased at a lower price 2. If a "debit" difference is created, we debit paid-in capital-share repurchase, but only if that account already has a credit balance. wise, we debit retained earnings. (reducing paid-in capital beyond its previous balance would create a negative balance, which can never happen

Accumulated Other Comprehensive Income:

1. Net holding gains and losses on investments 2. Gains (losses) from and amendments to post-retirement benefit plans 3. Deferred gains (losses) on derivatives 4. Adjustments from forex translations

The four classifications within Shareholders' Equity on the B/S:

1. Paid-in capital 2. Retained earnings 3. Accumulated other comprehensive income 4. Treasury stock

Typical Rights of Preferred Shares

1. Preferred shareholders typically have a preference to a specified amount of dividends (stated dollar amount per share or % of par value per share). That is, if the board of directors declares dividend, 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

Rights of ownership of common stock:

1. The right to vote on matters that come before the shareholders, including the election of corporate directors, each share represents one vote 2. The right to share in profits when dividends are declared. The percentage of shares owned by a shareholder determined his/her share of dividends distributed 3. The right to share in the distributions of assets if the company is liquidated. The percentage of shares owned by a shareholder determines his/her share of assets after creditors and preferred shareholders are paid

Liquidating Dividend

A dividend declared out of paid-in capital. when the company goes bankrupt when dividends exceed retained earnings

Limited Liability

A form of business ownership in which the owners are liable only up to the amount of their individual investments.

Why do companies have a stock split in the form of a stock dividend?

Because the per share par value of the shares is NOT changed, however, the market value of shares changes. this does not change an investors market value of their equity

Cash dividends

No legal obligations ecists for paying dividends to shareholders Liability is not recorded UNTIL the comapny's BOD votes to declare a dividend

reverse stock split

Occurs when a company decreases, rather than increases, its outstanding shares.

Date of record

Reduce retained earnings and credit a liability (cash dividends payable) stated specific date as to when the determination will be made of the recipients of the dividends registered owners of shares of stock on this date are entitled to receive the dividend

Stock Splits

To induce the per share market price decline that follows The motivation for reducing the per share market price is to increase the stock's marketability by making it attractive to a larger number of potential investors

Paymendts made by a corporation to retired its own shares are viewed as:

a distribution of corporate assets to shareholders

reaquired shared are equal to

authorized but unissued shares

defecit

debit balance in the retained earnings account

Dividends

distributions of assets the company has generated on behalf of its shareholders

treasury stock

firms repurchased but not retired no voting rights and no cash dividends we view the purchase as a temporary reduction of shareholders' equity to be reversed later when treasury stock is resold. the cost of acquiring the shares is "temporarily debited" to the treasury stock account at cost of the repurchase

stock dividend

is a distribution of additional shares of a corporation's own stock to current shareholders of the corporation affects neither the assets nor the liabilities of the firm shareholders' proportional interest in the firm remains unchanged reduce retained earnings and credit C/S and APIC

For a stock split there is

no JE

Since the total par represents twice as many shares in a 2-for-1 stock split, the par value per share will reduce by:

one half

When par value shares are issued:

only the par value amount is credited to the stock account; the remainder to paid-in capital in excess of par

dividends in arrears

preferred dividends that were supposed to be declared but were not declared during a given period they are cumulative

Comprehensive Income

provide a more expansive view of the change in shareholders' equity for a reporting period its the total "non-owner" change in equity for a reporting period

Share Issue Costs

reduce the net cash proceeds from selling the shares and thus paid capital excess of par

statement of shareholders equity

reports the transactions that cause changes in its shareholders' equity account balances

Retained Earnings

represents earned capital is accumulated on behalf of shareholders and reported as a single amount

Preemptive right

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

Net assets equals

shareholders' equity

Shares Issued for Noncash Consideration:

shares should be issued at the fair market value of the shares

Paid-in capital

the amount stockholders have invested in the company 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

Payment date

the date cash dividend payments are made to stockholders

ex-dividend date

the date two business days before the date of record, establishing those individuals entitled to a dividend

property dividend

the distribution of a noncash asset to stockholders usually in the form of securities hekd as investments the fair value of the assets to be distributed is the amount recorded for a property dividend

when cash is paid to retire stock

the effect is to decrease both cash and shareholders equity; the size of the company is literally reduced

When no par stock is issued:

the entire amount is credited to the Common stock account

when we declare the property dividend:

the property must be adjusted to fair value at the declaration date

when shares are formally retired:

we should reduce precisely the same accounts that previously were increased when the shares were sold, namely, common (or preferred) stock and paid in capital-excess of par

When the stock dividend is < 25%:

we use the market value to record the dividend

When the stock dividend is >= 25%:

we use the par value to record the dividend