Chapter 12 Stocks and dividends
What does price by the marketplace follow?
The trend of a company earnings and dividends
Why does a company split stocks?
to reduce market price per share of a stock
Issuing stock at a premium Assume that Caldwell company issues 2000 shares of $50 par preferred stock for cash at $55.
7/1 Debit: Cash 110000 Credit: preferred stock 100000 Paid in capital excess of par 10000 A=L+E + +
Premium on stocks with non cash assets Assume a corporation acquired land with a fair market value that can't be determined. In exchange, the corporation issued 10000 shares of its $10 par common stock. If the common stock gas a market price of $12 per share, the transactions as follows
7/1 Debit: Cash 120000 Credit: preferred stock 100000 Paid in capital excess of par 20000 A=L+E + +
Outstanding stock
A corporation may reacquire some of the stock that has been issued. The stock remaining in the hands of stockholders is then called outstanding stock. DIVIDENDS ARE ONLY PAID ON OUTSTANDING SHARES
Preferred stock
A stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common stock dividends. May be expressed as a dollar amount per share or as a percentage of par value. preferred $4 stock, $50 par preferred 8% stock, $50 par
Treasury shares are A. shares held as an investment by the treasurer of the corporation. B. shares held as an investment of the corporation. C. issued but not outstanding shares. D. issued and outstanding shares.
C. issued but not outstanding shares.
If cash dividends payable haven't been paid by the end of the period what happens?
Cash dividends payable will be reported on the balance sheet as a liability
Two types of paid-in capital
Common stock and preferred stock
Journal for organizing a corporation
Debit: Organizational expense Credit: Cash A=L+E - -(exp)
Issuing stock
Debit:cash Credit: Common stock or preferred stock A=L+E + +
Declaration and issuance of cash dividends
Decrease in Assets Decrease in Equity: (divid) Cash dividends are transferred into retained earnings as a part of the closing process. Db:RE Cr: Cash dividends
Earnings per share
Earnings per share=net income-preferred dividends/average number of common shares outstanding
What determines the price per share?
Interaction between buyers and sellers
Is paid in capital excess of par a liability, equity, or asset account?
equity that follows common stock
Cumulative dividends on preferred stock
has a right to receive regular dividends that were not declared(paid) in prior years
Stock dividends
is a distribution of shares if stock to stockholders. Only issued on common stock!!
Par value
is an arbitrary amount assigned to each share of stock when it is authorized.
Retained earnings
is net income that a corporation retains for future use.
Treasury stock
is stock that a company issues but then reacquires.
Date of record
is the date the corporation uses to determine which stockholders will receive the dividend. This means that any investors purchasing the stock before the date of record will receive the dividend NO JOURNAL ENTRY
Date of payment
is the date the corporation will pay the dividend to the stockholders who owner stock on the date of record. Any new investors after the date of record will no receive dividends.
Stock split
is the process by which a corporation reduces the par or stated value of its common stock and issues a proportionate number of additional shares.
Paid in capital
is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.
What is the main source of paid-in capital?
issuing stock
Whats is a stock?
publicly held ownership of a company
Treasury stock journals
purchase of stock Debit: Treasury stock Credit: Cash A=L+E - - Sold shares Debit: cash Credit: treasury stock Paid in capital A=L+E + + Debit: cash Paid in capital (debited when par> selling) Credit: Treasury stock A=L+E + +
How is stock dividends transferred?
From retained earnings to paid in capital
disadvantages of forming a corporation
1. Ownership is separate from management (board of directors may not have the best interest of the shareholders) 2. Double taxation of dividends (Corporation is taxed then when shareholders receive dividends they are considered net income taxed) 3. Regulatory cost (corporations must satisfy many requirements like SOA)
Advantages of forming a corporation
1. Separate legal existence 2. continuous life (cooperation life separate from owners) 3. raising large amounts of capital (selling stocks) 4. Ownership is easily transferable (buying and selling of stocks) 5. Limited liability (creditors are only are responsible up to amount invested)
Three conditions of cash dividends
1. Sufficient retained earnings 2. Sufficient cash 3. Formal action by the board of directors
Major rights that accompany ownership of a share of stock are:
1. The right to vote in matters concerning the corporation. 2. The right to share in distributions of earnings. 3. The right to share in assets upon liquidation
Three important dates in dividends
1. date of declaration 2. Date of record 3. date of payment
Why does a company buy its own stock back?
1. provide shares for resale to employees 2. reissue as bonuses to employees 3. to support the market price
Factors that effect setting price for new stock
1. the company's anticipated future earnings 2. its expected dividend rate per share 3. its current financial position 4. the current state of the economy 5. the current state of the securities market
On January 1, 2017, Rose Company issued 1,000 shares of common stock of $1 par value at par. Record the transaction.
1/1 Debit: Cash 1000 Credit: Common stock 1000 A=L+E + +
Assume that on January 9, a corporation issues 10000 shares of no-par common stock at $40 a share. On June 27, the corporation issues an additional 1000 shares at $36. Assuming the proceeding example the stated value is $25. Record his issuance
1/9 Debit: Cash 400000 Credit: Common stock 250000 Paid in capital excess of stated value 150000 6/27 Debit: Cash 36000 Credit: Common stock 25000 Paid in capital excess of stated value 11000 A=L+E + +
No par stock Assume that on January 9, a corporation issues 10000 shares of no-par common stock at $40 a share. On June 27, the corporation issues an additional 1000 shares at $36. Record his issuance
1/9 Debit: Cash 400000 Credit: Common stock 400000 6/27 Debit: Cash 36000 Credit: Common stock 36000 A=L+E + +
The common stock account on a company balance sheet is measured as: A. The number of common shares outstanding x the stock's par value per share. B. The number of common shares outstanding x the stock's current market value per share. C. The number of common shares issued x the stock's par value per share. D. None of the above is correct.
C. The number of common shares issued x the stock's par value per share.
When dividends are declared in one fiscal year and paid in the next fiscal year, the liability for the dividend should be recorded as of the: A. Last day of the fiscal year. B. Date of record. C. Date the dividend is declared. D. Last day of the fiscal year.
C. Date the dividend is declared.
What are dividends in arrears
Cumulative preferred stock dividends that have not been paid in previous years are said to be in arrears. These must be paid before any common stock dividends.
The declaration and issuance of a stock dividend will A. decrease total assets B. increase retained earnings C. decrease paid in capital D. not affect total stockholders equity
D. not affect total stockholders equity
Repurchasing shares of common stock A. increases the number of shares outstanding and increases earnings per share. B. reduces the number of shares outstanding and reduces earnings per share. C. increases the number of shares outstanding and decreases earnings per share. D. reduces the number of shares outstanding and increases earnings per share.
D. reduces the number of shares outstanding and increases earnings per share.
Stock dividends declaration and issuance
Date of declaration Debit: Stock dividends Credit: Stock dividends distributable Paid in capital excess of par-CS A=L+E +- Date of record N/A Date of payment Debit: Stock dividends distributable Credit: Common stock A=L+E +-
Cash dividends journal entries
Date of declaration Debit: cash dividends Credit: Cash dividends payable A=L+E + -(div) Date of record N/A Date of payment Debit: cash dividends payable Credit: Cash A=L+E - -
What is included in the stock certificate?
Name of company, name of stockholder and number of shares. May also indicated dollar amount assigned to each share of stock called par value.
Are dividends always paid?
No not always it depends on the earnings. When dividends are paid they are paid to creditors/debts first then preferred stock then common stockholders
How do you find outstanding shares?
Outstanding shares= Issued Shares-Treasury Shares DIVIDENDS ARE ONLY PAID ON OUTSTANDING SHARES
Two sources of stockholders equity
Paid in capital (common stock) and Retained earnings(NI and dividends)
What is required by sufficient balance retained earnings to declare dividends
Retained earnings must be large enough to be more than dividends and not create a debit balance. Not too large though.
When stock is sold at a discount?
Stock is sold(issued) for a price that is less than the par value selling price<par common stock
When stock is sold at a premium?
Stock is sold(issued) for a price that is more than the par value selling price>par common stock
Cash dividends
a cash distribution of earnings by corporation to its shareholders.
Authorized stock
The number of shares of stock that a corporation is authorized to issue is stated in the charter
Issued stock
The term issued refers to the shares issued to the stockholders.
Noncumulative dividends on preferred stock
Undeclared dividends from current and prior years do not have to be paid in future years.
Date of declaration
When the board of directors formally authorizes the payment of the dividend. On this date, the corporation incurs the liability to pay the amount
