Chapter 15 - Stockholders Equity

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Large Stock Dividend

20-25 percent of the number of shares previously outstanding. Par value transferred from retained earnings to capital stock.

small stock dividend

20-25% of outstanding declared stock. fair value used.

Sales of Treasury Stock below cost: Buy 10,000 shares on March 4 at $11, sell 4,000 shares @$15 on March 10, sell remaining shares [6,000 shares] at $6 on March 21

3/4 Treasury stock 110000 Cash 110000 3/10 Cash 60000 Treasury stock 44000 PIC from Treasury Stock 16000 3/21 Cash 36000 PIC from Treasury Stock 16000 Retained Earnings 14000 Treasury Stock 66000

Payout Ratio

= (cash dividends)/(net income)

Book Value per Share

= (common stockholders' equity)/(outstanding shares) The amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet

Return on Equity (ROE)

= (net income - preferred dividends)/(average common stockholders' equity)

Leveraged Buyout (LBO)

A company borrows money to finance its stock repurchases; often when it wants to "go private"

Treasury Stock

A corporation's own stock, reacquired after having been issued and fully paid. Reduces both assets and stockholders' equity.

Liquidating dividends

A dividend not based on retained earnings which is a reduction of corporate paid-in capital.

Stated Value of No-Par Stock

A minimum value below which a company cannot issue the stock; In effect, a very low par value

liquidating dividends entries

Debit: Retained Earnings. Paid in. Credit Dividend payable. Debit: dividend payable. Credit: Cash

small stock dividend issue

Debit: Retained earnings. Credit: Common Stock Dividends Distributed. Credit: Additional paid in capital common stock.

basic cash dividend entry

Debit: Retained earnings. Credit: Dividend Payable. Debit: Dividend Payable. Credit: Cash.

Trading on the equity

Describes the practice of using borrowed money at fixed interest rates or issuing preferred stock with constant dividend rates in hopes of obtaining a higher rate of return on the money used.

Trading on the equity

Describes the practice of using borrowed money or issuing preferred stock in hopes of obtaining a higher rate of return on the money used.

Participating preferred stock

Holders of participating preferred stock share ratably with the common stockholders in any profit distributions beyond the prescribed rate.

Participating Preferred Stock

Holders share ratably with the common stockholders in any profit distributions beyond the prescribed rate

small stock dividend

If stock dividend is less than 20-25 percent of the common shares outstanding, company transfers fair market value from retained earnings

Additional paid-in capital

Indicates any excess over par value paid in by stockholders in return for the shares issued to them.

Stock Dividends

Issuance by a company of its own stock to stockholders on a pro rata basis, without receiving any consideration. Used when management wishes to "capitalize" part of earnings.

stock dividend

Issuance by a corporation of its own stock to its stockholders on a pro rata basis, without receiving any consideration.

No-Par Stock

Lacks a par value Reasons for issuance: -Avoids contingent liability. -Avoids confusion over recording par value versus fair market value.

Newark Trucking, Inc. has recently accepted a donation of land with a fair value of $1,500,000 from the Essex County Development Corp. In return Newark Trucking promises to build a distribution hub in Kearny. Newark Trucking's entry is:

Land 1,500,000 Contribution Revenue 1,500,000

incremental method: process

Lump Sum Receipt: Allocated to Common (minus fair values): Balance to rest: the residual

Par (stated) value method

Records all transactions in treasury shares at their par value and reports the treasury stock as a deduction from capital stock only.

par (stated) value method

Records all transactions in treasury shares at their par value and reports the treasury stock as a deduction from capital stock only.

Stockholders' Equity

Represents the cumulative net contributions by stockholders plus retained earnings

Retained Earnings

Represents the earned capital of the company

Cumulative Preferred Stock

Requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders

cumulative preferred stock

Requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders.

Cost method

Results in debiting the Treasury Stock account for the reacquisition cost and in reporting this account as a deduction from the total paid-in capital AND retained earnings on the balance sheet.

No-par stock

Shares issued with no per-share amount printed on the stock certificate.

Costs of Issuing Stock

Should be debited to Paid-In Capital in Excess of Par - Common Stock Effectively, these are costs of financing that should reduce the proceeds from the sale of the stock

Rate of return on common stock equity

Shows how many dollars of net income were earned for each dollar invested by owners. Calculated by (net income - preferred dividends)/average common stockholders' equity.

Preferred Stock

Special classes of stock that involve the sacrifice of some of the inherent rights of common stock ownership in exchange for other special rights

Articles of incorporation

State issues corporate charter - subject to each state's business incorporation act

Small (ordinary) stock dividends

Stock dividends which are less than 20-25 percent of the common shares outstanding at the time of the dividend declaration.

Cash dividends

The board of directors votes on the declaration of cash dividends, and if the resolution is properly approved, the dividend is declared.

Earned Capital

The capital that develops from profitable operations. Consists of all undistributed income that remains invested in the company.

Earned capital

The capital that develops if the business operates profitably; it consists of all undistributed income that remains invested in the enterprise.

Stock Issued in Noncash Transactions

The general rule is: Companies should record stock issued for services or property other than cast at either the fair value of the stock issued or the fair value of the noncash consideration received, whichever is more clearly determinable.

Paid-in Capital in Excess of PAR (Additional Paid-in Capital)

This account indicates any excess over par value paid in by stockholders in return for the shares issued to them. Once paid in, this amount becomes a part of the corporation's additional paid-in capital.

Cost Method of Accounting for the Purchase of Treasury Stock

This method results in debiting the Treasury Stock account for the reacquisition cost and in reporting this account as a deduction from the total paid-in capital and retained earnings on the balance sheet. Most commonly used

preferred stock

a special class of stock that gets some consideration for the forfeiture of basic rights. common is an assigned dividend at a preferred rate for voting rights.

split versus dividend

a stock dividend while it increases number of shares increases par not decrease.

stated value

a stupid concept for no-par stock. the minimum the stock may not legally trade below. accounting the same as for par stock.

proportional method

allocate lump sum proportional to the ready fair values of the securities in the package

convertible preferred stock

at the shareholder option they can be exchanged for common stock at a pre-set ratio. uses the book value method

no-par stock

avoids the contingent liability that may arise is par stock is issued at a discount. never use fair value. often heavy tax. k

common stock

basic owner. residual corporate interest rights. ultimate risk of loss and receives benefits of success. no guarantee to dividends or assets. usually has voting rights.

participating preferred stock

basically if the common shareholders are going to get dividends in excess of the preferred rate they will also get it.

retiring treasury Stock

board of directors approval to do this. cancel the treasury stock and issued stocks is thus reduced. debit paid in capital accounts applicable to retired shares not cash.

purchase of treasury stock

can go by the cost and par methods. cost more popular

Retiring Treasury Stock results in

cancellation of the treasury stock and a reduction in the number of shares of issued stock.

earned capital

capital from profitable operations.

stock dividends

capitalize earnings. reclassify amounts from earned to contributed capital. no asset is distributed. issuance of own stock on a pro rate basis without consideration.

payout ratio

cash dividend / net income

two forms of ownership

common and preferred

corporations and registration

corporations use registrars and transfer agents who specialize in recording/transferring stock to comply with market required controls.

cash dividends

date of declaration. date of record (no entry). date of payment. a declared dividend is a liability. a $/share or % of par.

cost method: treasury stock

debit treasury stock. credit additional credit retained earnings

costs of issuing stock

direct costs are reductions of the amounts paid-in. issue costs are costs of financing. reduce the proceeds.

property dividends

dividend in kind. payable in alternative assets. usually securities held as investments. restate at fair value the property distributed and received. gains and losses

balance sheets and SE

dividends, liquidation preferences, participation rights, call prices, conversion price, sinking funds, voting rights.

retained earnings

earned capital from operations not distributed.

cumulative preferred stock

if they don't pay a dividend in a year must make it up in future years prior to common stock dividends. any non-declared are in arrears and mean nothing

non-cash stock issuance: no fair values

if valuation methods don't work then avoid using book, par or stated values at all cost. for treasury stock use fair value not cost.

no fair value known of lump

in this case need to ask appraisers for help valuing the lump

A declared cash dividend is a

liability.

financial condition and dividends

liquidity. can't declare a dividend if all of your assets are non-current. do we need cash for other stuff? before declaring a dividend you must consider the availability of funds to pay it.

shareholder trading

may sell shares at any time at any price without company or other shareholders consent. company usually tries to keep a list of owners for dividend purposes.

stockholder's equity

net assets. A-L. residual corporation interest. represents the cumulative net contributions by shareholders and retained earnings. grows if company is profitable. claim to a portion of general assets

book value per share

net worth. each share would get if liquidated. common shareholder's equity / outstanding shares.

guarantee of preferred stock

no guarantee will get dividends. statement that they must pay stated rate or applicable amount before paying common dividends. due to a high debt to equity ratio

incremental method

no ready fair value for some of the components of the sale. allocate using fair of what you know and allocate rest to what you don't.

disclose restrictions on retained earnings

note. bond indentures, loan agreements, source of dividends, provisions, amounts restricted.

liquidating dividends

paid-in capital as a basis for dividends always identify the dividend source. any dividend based not on earnings that reduces paid in.

contributed capital

par value, discount, premium. is total amount provided by shareholders to business.

growth companies and dividends

pay practically no dividends. want appreciating value of stock price. plow back.

return on equity

profitability from shareholder's view. dollar of net income earned per dollar of investment. stock worthiness compared to bad market

preemptive rights

protects an existing shareholder from involuntary dilution of ownership. not common as restricts organization like crazy

treasury stock

reacquired non-retired shares. no an asset. decreases both assets and stockholder's equity. essentially the same as unissued capital stock.

par method: treasury stock

record par of treasury stock and ins a deduction from capital stock. (the difference is readily apparent on the financial statements.

stock issued for non-cash

record this stock issuance at fair value of stock issued or of the fair value received. whichever is clear. entry in theory is the same as par stock.

callable preferred stock

redeem at future dates at stipulated prices. reclaim ownership. sets a price ceiling

All dividends, except for stock dividends

reduce the total stockholders' equity in the corporation.

sale of treasury stock: above cost.

selling price of the TC is greater than the costs to rebuy it. no gain as not an asset and...gain from trade with shareholders.

Costs of Issuing Stock

should be reported as a reduction of the amounts paid in (Paid-in Capital in Excess of Par). Direct costs incurred to sell stock include -underwriting costs, -accounting and legal fees, -printing costs, and -taxes,

A major disadvantage of no-par stock is that

some states levy a high tax on these issues. In addition, in some states the total issue price for no-par stock may be considered legal capital, which could reduce the flexibility in paying dividends.

lump-sum sales

stock issued (multiple classes) possibly with other securities. only one payment is received. need to allocate price to the portions.

Treasury stock reduces

stockholders' equity.

state corporation laws

submit articles of incorporation in the state you want to incorporate in. legal entity. incorporate in only one state. different laws geographically. interpretation of the laws is tricky

corporation benefit

the best advantage of this type of business is the ability to raise capital.

watered stock

the board has the power to approve the non-cash stock. place for fraud if over-inflate values the SE is over inflated. correct by writing down over valued assets

outstanding stock

the number of issued shares actually owned by shareholders. Issued minus treasury stock.

secret reserves

the opposite of watered stock.

par value stock

the par value has no relation to fair value. 1) preferred and common stock: together the classes get the par value of issued shares. credit account on issuance. 2) Additional paid-in: excess over par values.

average common shareholder's equity

total shareholder's equity - par value preferred stock.

Companies do not declare or pay cash dividends on

treasury stock.

note on no-par

true no-par stock is in the accounts at issue price without a discount or any additional paid-in capital.

trading in equity

trying to borrow money or issue preferred stock to increase the return.

capital stock/share system

units of shares equal shareholders equity. if we have only one class of stock they are all congruent in rights within the stock. the number of shares is your respective ownership interest. can restrict rights on occasion.

dividend preferrence

usually a % of par value. or if a no-par preferred stock it is expressed as a $ amount per share.

note on dividend value

very few companies pay dividends equal to retained earnings.

stock splits

a device to control the price of a stock. usually to spread ownership. no official entry. a memot

redeemable preferred stock

a mandatory redemption period or feature that the issuer cannot control. similar to debt.

Rate of Return on Common Stock Equity

(net income - preferred dividends) / (Average common stock equity)

Statement of stockholders' equity

1. Balance at the beginning of the period. 2. Additions 3. Deductions. 4. Balance at the end of the period.

Hopkins, Inc. transferred to stockholders some of its equity investments costing $1,250,000 by declaring a property dividend on December 28, 2013, to be distributed on January 30, 2014, to stockholders of record on January 15, 2014. At the date of declaration, the securities have a market value of $2,000,000. Hopkins makes the following entries.

-At date of declaration (December 28, 2013) Equity Investments 750,000 Unrealized Holding Gain or Loss—Income 750,000 Retained Earnings 2,000,000 Property Dividends Payable 2,000,000 -At date of distribution (January 30, 2014) Property Dividends Payable 2,000,000 Equity Investments 2,000,000

Luna Steel, Inc. declared a 30 percent share dividend on November 20, payable December 29 to stockholders of record December 12. At the date of declaration, 1,000,000 shares, par value $10, are outstanding and with a fair value of $200 per share. The entries are:

-Date of Declaration Retained Earnings 3000000 CS Dividend Distributable 3000000 -Date of Distribution CS Dividend Distributable 3000000 Common Stock 3000000 1,000,000 shares x 30% = 300000 shares 300000x$10 = 3000000

Koebele Corporation has outstanding 1,000 shares of $100 par value common stock and retained earnings of $50,000. If Koebele declares a 10 percent stock dividend, it issues 100 additional shares to current stockholders. If the fair value of the stock at the time of the stock dividend is $130 per share, the entry is:

-Date of declaration Retained Earnings 13,000 Common Stock Dividend Distributable 10,000 Paid-in Capital in Excess of Par-Common 3,000 -Date of distribution Common Stock Dividend Distributable 10,000 Common Stock 10,000

Horaney Mines Inc. issued a "dividend" to its common stockholders of $1,200,000. The cash dividend announcement noted stockholders should consider $900,000 as income and the remainder a return of capital. Horaney Mines records the dividend as follows.

-Date of declaration Retained Earnings 900,000 Paid-in Capital in Excess of Par-Common 300,000 Dividends Payable 1,200,000 -Date of payment Dividends Payable 1,200,000 Cash 1,200,000

Few companies pay dividends in amounts equal to their legally available retained earnings. Why?

-Maintain agreements with creditors. -Meet state incorporation requirements. -To finance growth or expansion. -To smooth out dividend payments. -To build up a cushion against possible losses.

Features often associated with preferred stock.

-Preference as to dividends. -Preference as to assets in the event of liquidation. -Convertible into common stock. -Callable at the option of the corporation. -Nonvoting. A corporation may attach whatever preferences or restrictions, as long as it does not violate its state incorporation law.

Two primary sources of equity

-contribution capital (common and preferred stock) -retained earnings (less the treasury stock account)

issuance of stock

1) authorization. 2) offer for sale. 3) enter into a contract. 4) gets money. 5) issues shares

categories of shareholder's equity

1) capital stock. 2) additional paid-in capital. (1+2=contributed capital). 3) retained earnings.

types of dividends

1) cash. 2) property. 3) liquidating. except for stock dividends all reduce SE. be clear about the source of your dividends

features of preferred stock

1) dividends. 2) preference to assets. 3) convertible. 4) callable at corporation option. 5) non-voting

basic elements of stock

1) par stock. 2) no-par stock. 3) lump sum. 4) non-cash stock. 5) costs of issuance.

allocating lump-sum sales

1) proportional method. 2) incremental method.

rights of stock

1) proportional profits/losses. 2) rights to vote in board. 3) share in liquidation of assets. 4) preemptive right to new stock issuance (not common).

re-acquisition of stock

1) provided tax efficient distribution of excess cash to shareholders. 2) increases EPS and ROE (short term). 3) have stock for compensations and mergers. 4) stop takeovers or reduce the number of holders. 5) make a market for the stock. (make demand, stabilize or increase price).

business types

1) sole proprietorship. 2) partnership. 3) corporation

special traits of corporate form

1) state corporation law. 2) using capital stock/shares systems. 3) develop a variety of ownership interests.

reasons for dividends valuation

1) to maintain bond covenants. 2) meet corporate state laws saying to have enough capital to be equivalent to TS. 3) to retain assets or grow. plow back. 4) smooth out payments over good and bad years. 5) build a buffer against losses.

The stockholders' equity for Cripe after purchase of the treasury stock.

1,190,000 =1300000-110000

Large stock dividend

A stock dividend of more than 20-25 percent of the number of shares previously outstanding.

Convertible Preferred Stock

Allows stockholders, at their option, to exchange preferred shares for common stock at a predetermined ratio

Liquidating Dividends

Any dividend not based on earnings reduces corporate paid-in capital. The portion of these dividends in excess of accumulated income represents a return of part of the stockholder's investment.

Dividends in Arrears

Any passed dividend on cumulative preferred stock

David Freight Corp. on June 10 declared a cash dividend of 50 cents a share on 1.8 million shares payable July 16 to all stockholders of record June 24.

At date of declaration (June 10) Retained Earnings 900,000 Dividends Payable 900,000 At date of record (June 24) No entry At date of payment (July 16) Dividends Payable 900,000 Cash 900,000

Journal Entry, Small Stock Dividend

At declaration: Dr - Retained Earnings Cr - Common Stock Dividend Distributable (for par value) Cr - Paid-in Capital in Excess of Par - Common Stock (for difference between FV and Par) At distribution: Dr - Common Stock Dividend Distributable Cr - Common Stock

Journal Entry, Liquidating Dividend

At declaration: Dr - Retained Earnings (for Cash Div. portion) Dr - Paid-in Capital in Excess of Par - Common Stock (for Liquidating portion) Cr - Dividends Payable At date of payment: Dr - Dividends Payable Cr - Cash

Journal Entry, Large Stock Dividend

At declaration: Dr - Retained Earnings (for par value x # of shares issued) Cr - Common Stock Dividend Distributable At distribution: Dr - Common Stock Dividend Distributable Cr - Common Stock

Journal Entry, Cash Dividend

At declaration: Dr - Retained Earnings (or Cash Dividends Declared) Cr - Dividends Payable At date of record - no entry At date of payment: Dr - Dividends Payable Cr - Cash

Journal Entry, Property Dividend

At declaration: Dr - Retained Earnings (or Property Dividends Declared) Cr - Property Dividends Payable At date of record - no entry At date of payment: Dr - Property Dividends Payable Cr - (Asset account)

Advantages of a cooperation

Capital stock or share system -Share proportionately in profits/losses -Share in mgt -Share in assets upon liquidation -Preemptive right (buy shares before they become available)

Bishop Co. issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Bishop records the issuance as follows:

Cash 120,000 Preferred stock 100,000 Paid-in Capital in Excess of Par - Preferred 20,000

Journal Entry for Proportional

Cash 13,500 Preferred Stock (100 x $50) 5,000 Paid-in Capital in Excess of Par - Preferred 3,100 Common Stock (300 x $10) 3,000 Paid-in Capital in Excess of Par - Common 2,400 PIC Prefered = 8100-5000 PIC Common = 5400-3000

Journal Entry for Incremental

Cash 13,500 Preferred Stock (100 x $50) 5,000 Paid-in Capital in Excess of Par - Preferred 2,500 Common Stock (300 x $10) 3,000 Paid-in Capital in Excess of Par - Common 3,000

Cripe acquired 10,000 treasury share at $11 per share. It now sells 1,000 shares at $15 per share on March 10. What is the required entry?

Cash 15,000 Treasury Stock 11,000 Paid-in Capital from Treasury Stock 4,000

Blue Diamond Corporation issued 300 shares of $10 par value common stock for $4,500. Prepare the journal entry to record the issuance of the shares

Cash 4,500 Common Stock (300 x $10) 3,000 Paid-in Capital in Excess of Par Value 1,500

Cripe sells an additional 1,000 treasury shares on March 21 at $8 per share. What is the required entry?

Cash 8,000 Paid-in Capital from Treasury Stock 3,000 Treasury Stock 11,000

Payout Ratio

Cash Dividends / (Net income - Preferred dividends)

Book Value per Share

Common Stock equity / Outstanding shares

Proportional Method: Beveridge Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $13,500. Common stock has a market value of $20 per share, and preferred stock has a market value of $90 per share. What is the total value of the preferred and common stock

Common: 300*20=6000 (40%) Preferred: 100*90=9000 (60%) 15000 (100%) Common: 13500*40%= 5400 Preferred: 13500*60%= 8100

Incremental Method: Beveridge Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $13,500. Common stock has a market value of $20 per share, and preferred stock market value is unknown.

Common: 300*20=6000=fair market value 13500-6000= 7500 Common: 6000 Preferred 7500

General Rule for Stock Issued in Noncash Transactions

Companies should record stock issued for services or property other than cash at the -fair value of the stock issued or -fair value of the noncash consideration received Whichever is more easily measurable

sale of treasury stock: above cost journal entry

Debit: Cash. Credit: treasury stock. Credit: Additional Paid-in Capital-Treasury stock. a line item on the balance sheet

closing of excess treasury stock

Debit: Cash. Debit: Additional Paid-Capital TS (what's left). Debit: Retained Earnings. Credit: Treasury stock.

sale of treasure stock: below cost.

Debit: Cash. Debit: Additional Paid-in Capital: TS (can't do if no credit balance). Credit: Treasury stock.

Reacquisition

Corporations purchase their outstanding stock to: -Provide tax-efficient distributions of excess cash to stockholders. -Increase earnings per share and return on equity. -Provide stock for employee stock compensation contracts or to meet potential merger needs. -Thwart takeover attempts or to reduce the number of stockholders. -Make a market in the stock.

two methods for treasury stock purchase

Cost method (more widely used). Par (Stated) value method.

Secret Reserves

Created if recorded assets are undervalued as a result of the issuance of stock for property or services

Three dates for cash dividends

Date of declaration Date of record Date of payment

property dividends entries

Debit: Asset. Credit: unrealized gain. Debit: retained earnings. Credit Dividend payable (fair). Debit: property dividend payable. Credit Asset.

journal entry for no-par issuance

Debit: Cash (usually). Credit: Common Stock (no-par).

accounting and reporting preferred stock

Debit: Cash. Credit: preferred stock. Credit: additional paid in capital- preferred stock

small stock dividend distribution

Debit: Common Stock Dividend Distributed. Credit: Common Stock.

Cumulative preferred stock

Dividends not paid in any year must be made up in a later year before any profits can be distributed to common stockholders.

Property Dividends

Dividends payable in assets other than cash. -Restate at fair value the property it will distribute, recognizing any gain or loss.

Journal Entry, Issuance of Preferred Stock with Par

Dr - Cash Cr - Preferred Stock Cr - Paid-in Capital in Excess of Par - Preferred Stock

Journal Entry, Sale of Treasury Stock, Selling Price Equals Cost

Dr - Cash Cr - Treasury Stock

Journal Entry, Sale of Treasury Stock, Above Cost

Dr - Cash Cr - Treasury Stock Cr - Paid-in Capital from Treasury Stock

Journal Entry, Sale of Treasury Stock, Below Cost

Dr - Cash Dr - Paid-in Capital from Treasury Stock (up to balance, the Dr - Retained Earnings) Cr - Treasury Stock

Journal Entry, Treasury Stock Purchase, Cost Method

Dr - Treasury Stock Cr - Cash

Redeemable Preferred Stock

Has a mandatory redemption period or a redemption feature that the issuer cannot control. Measured and accounted for similar to liabilities.

return on common stock equity

Often referred to as return on equity (ROE). Measures profitability from the common stockholders' viewpoint. Formula: (Net Income - Preferred Dividends)/(Average Common Stockholders' Equity)

Cripe Company issued 100,000 shares of $1 par value common stock at a price of $10 per share. In addition, it has retained earnings of $300,000. What is the total stockholder equity?

PIC = 10*100000= 1000000 +Retained Earnings= 300000 = 1,300,000 = Stockholder equity

Arganda cannot readily determine the fair value of the stock nor the fair value of the patent. An independent consultant values the patent at $125,000 based on discounted expected cash flows.

Patents 125,000 Common stock 100,000 Paid-in Capital in Excess of Par - Common 25,000

The following series of transactions illustrates the procedure for recording the issuance of 10,000 shares of $10 par value common stock for a patent for Arganda Company, in various circumstances. 1. Arganda cannot readily determine the fair value of the patent, but it knows the fair value of the stock is $140,000. 2. Arganda cannot readily determine the fair value of the stock, but it determines the fair value of the patent is $150,000.

Patents 140,000 Common Stock 100,000 Paid-in Capital in Excess of Par - Common 40,000 Patents 150,000 Common stock 100,000 Paid-in Capital in Excess of Par - Common 50,000

Callable Preferred Stock

Permits the corporation, at its option, to call or redeem the outstanding preferred shares at specified future dates and at stipulated prices. When redeemed, it must pay any dividends in arrears.

Redeemable preferred stock

Preferred stock that has a mandatory redemption period or a redemption feature that is outside the control of the user.

Two methods of allocating proceeds:

Proportional method. Incremental method.

Preemptive Right

Protects an existing stockholder from involuntary dilution of ownership interest

Par Value Method of Accounting for the Purchase of Treasury Stock

Records all transactions in treasury shares at their par value and reports the treasury stock as a deduction from capital stock only

Stated value

The minimum value of a stock below which it cannot be issued.

Outstanding Stock

The number of shares of issued stock that stockholders own

Payout ratio

The ratio of cash dividends to net income.

Common Stock

The residual corporate interest that bears the ultimate risks of loss and receives the benefits of success. No guarantee of dividends or assets upon dissolution.

Contributed (Paid-in) Capital

The total amount paid in on capital stock - the amount provided by stockholders to the corporation for use in the business

Cripe Company issued 10,000 shares of $1 par value common stock at a price of $10 per share. In addition, it has retained earnings of $300,000. On January 20, Cripe acquires 10,000 of its shares at $11 per share. Cripe records the reacquisition as follows.

Treasury Stock 110,000 Cash 110,000

Lump-sum sales

Two or more classes of securities are issued for a single payment or lump sum.

Paid-in Capital from Treasury Stock

Used for the difference between the cost and the resale price of the shares

stock split

Used to reduce market price of shares. Records no entry but enters a memo note to indicate the changed par value of the shares and the increased number of shares.

ROE formula

[Net income - preferred dividend] / [average common shareholders equity].


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