Chapter 18 - Shareholders' Equity

Reporting for Comprehensive Income

CI created during the reporting period can be reported either as: a. an expanded version of the income statement b. a separate statement immediately following the income statement

Property dividend (also, Dividend in Kind or a Nonreciprocal Transfer to Owners)

a noncash asset distributed to shareholders

Record date

date that a determination is made as to the recipients of a dividend

Payment date

date that corporate assets are transferred to shareholders

Treasury Stock

indicates that some of the shares previously sold were bought back by the corporation from shareholders

The primary source of Paid-In Capital

is the investment made by shareholders when buying preferred and common stock

When the dividend exceeds the balance in retained earnings, the excess is referred to as a _____ dividend.

liquidating

Retained Earnings

represents earned capital

Preferred stock feature: Participating

right to receive additional dividends beyond the stated amount (this feature is actually rare today)

Preferred stock feature: Cumulative

right to receive all previous years of undeclared dividends

Preferred stock feature: Redemption

right to receive cash in exchange for preferred stock

Model Business Corporation Act

serves as the model for the corporation statutes of most states

Other Comprehensive Income (OCI)

the nonowner changes other than those that are a part of traditional net income are the ones that are reported as "other comprehensive income"

Dividends in arrears

unpaid dividends for a period that accumulate

When common stock has a designated par value, and common stock is issued at an amount above par, which entries are recorded?

DEBIT Cash for the full amount CREDIT Common Stock for the par amount CREDIT Paid-In-Capital--Excess of Par for the excess amount (also called Additional Paid-In-Capital)

Ragle Corp. issues 1,000 shares of its $5 par value common stock in exchange for equipment. The book value of the equipment on the investor's books was $40,000, and its catalog list price was $45,000. The equipment could be purchased in the market for $42,000. The stock was not publicly traded. What is one of the journal entries that will record the issuance of the stock?

DEBIT Equipment $42,000

Where to find reported OCI and AOCI

OCI is reported in the Statement of Comprehensive Income AOCI is reported in the Balance Sheet along with retained earnings

Accumulated Other Comprehensive Income (AOCI)

OCI that has accumulated over the current and prior reporting periods

Reporting for Retained Earnings

RE is reported as a single line item

Limited liability of corporations

a corporation is a separate legal entity, responsible for its own debts; shareholders' liability is limited to the amounts they invest in the company when buying shares (unless the shareholder is also an officer of the corporation)

Best evidence for fair noncash assets (that are exchanged for stock shares):

a. a quoted market price for the shares *best evidence* b. a selling price established for a recent issue of shares for cash c. the amount of cash that would have been paid in a cash purchase of the asset or service d. an independent appraisal of the value of the asset received e. other available evidence *Whichever evidence of fair value seems more clearly evident should be used*

Preferred stockholders usually have preference over common stockholders with respect to which items?

a. dividends b. distribution of assets in liquidation

Ownership rights held by common shareholders:

a. the right to vote on matters that come before the shareholders, including the election of corporate directors; each share represents one vote b. the right to share in profits when dividends are declared; dividends distributed to the shareholder depends upon the percentage of shares they own c. the right to share in the distribution of assets if the company is liquidated; the share of assets given to the shareholder (after creditors and preferred stockholders are paid) is dependent upon their percentage of stock shares owned

Paid-In Capital

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

Ex-Dividend date

date before which investors must purchase stock in order to receive a dividend

Preemptive right

the right of shareholders to maintain their percentage share of ownership when new shares are issued (this right is usually not explicitly stated)

Clam Corp. issues 1,000 shares of $10 par value preferred stock and 3,000 shares of $1 par value common stock for $48,000. The fair value of the preferred stock is $20 per share, and the fair value of the common shares is $10 per share. What is the amount allocated to the Paid In Capital--Excess of Par, common stock?

$25,800 The relative market value of the common stock is: 30,000/50,000 * $48,000 = $28,800 less the $3,000 par value of common stock = $25,800

Brian Corp. issues 5,000 shares of $10 par value preferred stock and 20,000 shares of $1 par value common stock for $150,000. The fair value of the preferred stock is $20 per share, and the fair value of the common shares is unknown. What is the amount allocated to the Paid In Capital--excess of par, common stock?

$30,000 The amount allocated to common stock is $150,000 less the $100,000 allocated to preferred stock = $50,000. The par value of the common stock is 20,000 shares * $1 = $20,000. Therefore, the paid-in capital--excess of par for the common stock is $50,000 - $20,000 = $30,000.

Equity vs Debt

-Equity represents an ownership interest in the company -Debt represents a creditor's interest that must be paid

Preferred stock is similar to a bond when it has which features?

-a redemption feature -a dividend rate -a cumulative feature

Shareholders' Equity arises from two main sources:

1. Amounts INVESTED by shareholders in the corporation; reported as Paid-In Capital 2. Amounts EARNED by the corporation on behalf of its shareholders; reported as Retained Earnings

Other Comprehensive Income includes four types of gains/losses not included in income statements:

1. Net holding gains (losses) on investments 2. Gains (losses) from and amendments to postretirement benefit plans 3. Deferred gains (losses) on derivatives 4. Adjustments from foreign currency translation

The four classifications in Shareholders' equity:

1. Paid-In Capital 2. Retained Earnings 3. Accumulated Other Comprehensive Income (AOCI) 4. Treasury Stock

Shareholders' Equity is classified under IFRS into two categories:

1. Share capital 2. Reserves

The two attributes of OCI that we report are:

1. components of comprehensive income created during the reporting period 2. the comprehensive income accumulated over the current and prior periods

When a company repurchases its own shares of stock, what are the two acceptable accounting choices for the transaction?

1. the shares are called treasury shares 2. the shares are formally retired

Another term for Shareholders' Equity

Net Assets

Dividend

a distribution of assets to shareholders

Declaration date

date that the corporate board of directors announces a dividend; it is at this point that the dividend becomes a liability

Articles of Incorporation (also called the Corporate Charter)

describe: a. the nature of the firm's business activities b. the shares to be issued c. the composition of the initial Board of Directors

Comprehensive Income (CI)

is the total NONOWNER change in equity for a reporting period

Preferred stock feature: Conversion

right to exchange preferred stock for another class of stock