Ch 15- Stockholder's Equity- Retained Earnings

Suppose a corporation has 100,000 shares outstanding, $12 par. And it wants to split it 2:1. What would be the total (1) shares outstanding (2) par value for each share & (3) the amount of stock held by a stockholder who held 100 shares of $12 par?

(1) The total shares outstanding will now be 200,000 (100,000 original shares + 100,000 newly issued shares) (2) The par value of every share will be $6 ($12/2) (3) At stockholder who held 100 shares of $12 par will now hold 200 shares of $6 par.

Suppose a corporation has 100,000 shares outstanding, $12 par. And it wants to split it 3:1. What would be the total (1) shares outstanding (2) par value for each share & (3) the amount of stock held by a stockholder who held 100 shares of $12 par?

(1) The total shares outstanding will now be 300,000 (100,000 original shares + 300,000 newly issued shares) (2) The par value of every share will be $4 ($12/3) (3) At stockholder who held 100 shares of $12 par will now hold 300 shares of $4 par.

Why would a company issued callable Preferred Stock?

- Company may want to by back p/s because c/s is cheaper -May want to buy it as back T/S -May be tired of paying dividends & have enough cash on hand don't need the funding from p/s - Or, market rates on p/s dividends is 4% and they are currently paying 8% they can buy back their 8% p/s and re-issue 4%

What are 5 characteristics of Preferred Stock?

1) 1st dibs on dividends when paid 2) Various types: Can be cumulative & fully or partially participating 3) Convertible into C/S 4) Priority pick of assets when company liquidates 5) does NOT have voting rights

What are 5 types of Preferred Stock?

1) Convertible to C/S (by stockholder) 2) Callable P/S (company's option) 3) Redeemable P/S (company's option) 4)Cumulative 5) Participating (fully or partially)/ non-participating

Partially participating preferred stock is entitled to additional dividends, using what 4 steps?

1) First give the preferred its fixed percentage 2) Then give the common the same matching percentage 3)Then give the preferred its additional percentage of participation- up to it's cap 4) Finally, give any remainder to the common.

Fully participating stock is entitled to receive an additional dividend over and above its fixed share, using what 3 steps?

1) First give the preferred its fixed percentage. 2) Then give the common the same matching percentage 3) Divide any remainder according to the ratio of par (allocate the remaining funds "pro rata")

What are the two steps involved in stock splits?

1) Increasing the number of shares outstanding 2) Reducing the par of each share proportionately

What are the 4 types of dividends?

1) Stock dividends (small & large) 2) property dividends 3) liquidating dividends 4) Cash dividends

What are the two step involved in a quasi-reorganization?

1) revalue the assets to their fair market value. 2) Offset the deficit against other paid-in capital accounts. * If there aren't any, then they must be created either by having the par value of the stock reduced or by having the stockholders donate some of their stock to the corporation.

What is the difference between a Drawing and a Dividend?

A Drawing occurs in a sole proprietorship, when the owner decides to withdraw cash for his/her own personal use. In a corporation, this decision must be made by the Board of Directors and is called a DIVIDEND.

What kind of liability is the cash dividend payable account?

A current liability b/c it is paid with in a few months typically (depending on when the payment date is in relation to the date of declaration).

What is a deficit?

A debit balance in Retained Earnings. This occurs when net losses (debits) out weight net income (credits) to the r/e account over the years.

What is a script dividend?

A special type of not payable to the stockholders promising to pay later. This is an option when the corporation wishes to pay a cash dividend but has no cash at the moment. The script may or may not pay interest.

How do you value a property dividend?

Assets should be valued at their own market value or at the market value of the stock whichever is clearer.

What are the 3 dates associated with dividends?

Date of declaration- On the date of declaration the board of directors holds a meeting and decides HOW MUCH to pay out as a dividend. **journal entry made** Date of Record- Decides WHO is to receive the dividend. Since shares change hands daily on the stock market; the BOD must decide on a cutoff date; this is the date of record. **no entry** Date of Payment- date on which dividends are paid out. **journal entry made**

What 6 debits are made to the R/E account? What 3 credits?

Debits 1) Net losses 2) Prior-period adjustments 3) Cash or scrip dividends 4) Stock dividends 5) Property dividends 6) Some treasury stock transactions Credits 1) Net Income 2) Prior-period adjustments 3) Adjustments due to quasi-reorganizations

Dividends can be expressed in two ways. What are they?

Dollar amount OR percentage of Par Ex: like with preferred stock $100, 6% $100 par with 6% dividend, which means that each share will receive $6

How must a quasi-reorganization be noted on the balance sheet?

For approx. 10 years after the reorganization, the retained earnings on the balance sheet must indicate that a reorganization took place, and also the date of the reorganization.

How is interest accounted for on a script dividend?

If it pays interest, the interest portion of the payment should be debited to Interest Expense and not be treated as part of the dividend. The interest period runs from the DATE of Record to the DATE of Payment.

How is Redeemable P/S classified if required or optional?

If required it's "mandatory" and GAAP treats it as a loan. It gets recorded as Debt on the B/S like a bond If optional it's essentially the same as "callable" p/s

What is the effect of deficits on dividends and the company's reputation?

In many states, a corporation may not legally declare a dividend so long as a deficit exists. Several years may go by without dividends as the corporation struggles to earn enough income to offset this deficit. Such nonpayment of dividends may damage the company name and even cause the price of the stock to fall.

What is net income (revenues and expenses) closed out to at year end?

Income summary to reflect Net Income for the year and then this is closed to The Retained Earnings T-account

Sometimes a corporation may not wish to issue a dividend in cash because it needs the cash in the business. What might they do instead? And how is it accounted for?

Instead they may issue a dividend in the form of property ( usually shares of stock it owns in other corporations). *According to APB Opinion No. 29, a journal entry must first be made to raise or lower the property on the books to it FAIR MKT Value. Fair mkt value can be determined by reference to quoted market prices or by independent appraisals.

What is a quasi-reorganization?

It is a legal procedure, allowed in many states, that provides a quick solution to carrying a deficit. It permits the company to "start from scratch" (be reorganized) and instantly "wipe out" the deficit.

Why is the term "earned surplus" discouraged?

It is misleading b/c it connotes a pool of cash.

What is a stock dividend?

It is when a company decides to pay a dividend in the form of its OWN shares.

What are liquidating dividends? How are they to be reported?

It is when dividends are paid out of contributed capital instead of retained earnings (as is typical). Liquidating dividends represent a reduction of the corporate additional paid-in capital (APIC). This must be disclosed in the footnotes to the financial statements. Return on capital is not taxed b/c not considered income

Do appropriations of retained earnings mean that money has been set aside for dividends?

No, Appropriations do not involve the actual setting aside of cash for these purposes. There are, rather, merely journal entries indicating that a "lock" has been placed on retained earnings prohibiting a certain amount of dividends from being distributed.

Is there a journal entry made for a stock split?

No. However, a memorandum note is made to indicate that there are now more shares outstanding.

What are appropriations of retained earnings?

Restrictions on the amount of R/E available for dividends. Companies may desire to do this for various reasons.

What constitutes a small vs large stock dividend? How are each accounted for?

Small- if the dividend is less than 20-25% of the company's outstanding common stock (at the date of declaration). R/E is then debited for the FMV of the stock dividend. Large- anything above 25% of the company's outstanding c/s. R/E is then debited at Par value.

What are 2 other names for a large stock dividend?

Split up effective in the form of a Dividend Stock split up

Concerning Stock dividends, what is the "Stock Dividend Distributable" account?

The "Stock Dividend Distributable" account is NOT a liability account. It is a temporary capital account which is replaced by the Common Stock account at the date of payment.

How are errors from previous periods accounted for? Assume that in 19X5 a company discovers that as a result of a computational error, it understated the depreciation for 19X3 by $10k. What is the entry?

They are corrected via the retained earnings account only. Dr. R/E $10,000 Cr. Accum Depr $10,000 The account Depreciation Expense is NOT debited because this account may only show depreciation relating to the current year.

In some states restrictions must be place on R/E prohibiting dividends in an amount equal to the cost of any ______________ ___________ acquired.

Treasury Stock

where are dividends paid from?

Usually they are paid from accumulated earnings in the R/E account but occasionally, they are paid from other accounts, like contributed capital (in the case of liquidating dividends)

If a corporation's stock is selling at a very high price on the market, many people will not be able to ______________ it. To make the stock __________ _______________and thus ______________ _______________ to the buying public, the corporation may effect what is called a ________ _________.

afford / less expensive / more attractive / stock split *There are cases where there are "reverse stock splits"- sometimes companies let the price of stock get high b/c it affords them a little cashe/ want a smaller group of smaller investors