Ch 15 - Stockholder's Equity

Contributed (paid-in) capital

-capital stock -additional paid-in capital

Cash dividend declaration

-creates a current liability DR retained earnings (or cash dividends declared) CR Dividends Payable Companies do not declare or pay cash dividends on treasury stock.

Large stock dividend

A stock dividend (a corporation's issuance of its own stock to its stockholders, on a pro rata basis) of more than 20-25 percent of the number of shares previously outstanding. The company transfers, from retained earnings to capital stock, the par value of the stock issued. Such a distribution (often referred to as a split-up effected in the form of a stock dividend) typically reduces the market price of the stock, making it more marketable. The effects of large stock dividends thus make them more like stock splits than like an ordinary stock dividend. Declaration: DR Retained Earnings for additional shares x par value CR Common Stock Dividend Distributable Distribution: DR Common Stock Div Dist CR Common Stock

Book value per share

Common stockholder's equity / outstanding common shares the amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet

Sale of treasury stock above cost

DR Cash CR Treasury Stock CR PIC from treasury stock

Sale of treasury stock below cost

DR Cash DR PIC from treasury stock CR Treasury Stock After eliminating the credit balance in PIC from treasury stock, the remainder is debited to Retained Earnings.

Liquidating dividends

Dividends based on other than retained earnings such dividends are a return of the stockholder's investment rather than of profits. any dividend not based on earnings reduces corporate paid-in capital DR Retained Earnings for amount of income DR PIC in Excess of Par-Common Stock for return of investment CR Dividends Payable

No par stock

Record when issued. DR Cash CR Common Stock Some states require a stated value - then company would treat as par value (DR Cash, CR Common Stock, CR Additional PIC, CS)

Trading on the equity

The practice of using borrowed money or issuing preferred stock in hope of obtaining a higher rate of return on the money used (improving return on common stock equity). If return on the assets is higher than the cost of financing these assets, the excess accrues as a profit to the common stockholders.

How does the issuance & declaration of a large stock dividend affect stockholder's equity?

The stock dividend decreases retained earnings but does not change total stockholders' equity.

Property dividend declaration

aka dividend in kind restate at fair value the property it will distribute, recognizing any gain or loss as the difference between the property's fair value and carrying value at date of declaration. The corporation may then record the declared dividend as a debit to Retained Earnings (or Property Dividends Declared) and a credit to Property Dividends Payable, at an amount equal to the fair value of the distributed property. Upon distribution of the dividend, the corporation debits Property Dividends Payable and credits the account containing the distributed asset (restated at fair value)

Costs of issuing stock

direct costs incurred to sell stock reduces proceeds from the sale of stock DR PIC in Excess of Par

Participating preferred stock

fully participating preferred stock will receive its return on preferred stock along with dividends at the same rates as those paid to common stockholders.

Stock issued in noncash transaction

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

Cumulative preferred stock

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 Because no liability exists until the board of directors declares a dividend, a corporation does not record a dividend in arrears as a liability but discloses it in a note to the financial statements.

Stock dividend

issuance by a corporation of its own stock to its stockholders on a pro rata basis the company distributes no assets. Each stockholder maintains exactly the same proportionate interest in the corporation and the same total book value after the company issues the stock dividend. the book value per share is lower because each stockholder holds more shares

Convertible preferred stock

part of stockholders' equity. there is no theoretical justification for recognition of a gain or loss. A company recognizes no gain or loss when dealing with stockholders in their capacity as business owners. Instead, the company employs the book value method: debit Preferred Stock, along with any related Paid-in Capital in Excess of Par—Preferred Stock, and credit Common Stock and Paid-in Capital in Excess of Par—Common Stock (if an excess exists).

Stock split

reduces the market price of shares for better marketability no journal entry

Retained Earnings

represents earned capital of the company, the capital that develops from profitable operations. It consists of all undistributed income that remains invested in the company

Retiring treasury shares

similar to the sale of treasury stock except that corporations debit the paid-in capital accounts applicable to the retired shares instead of cash DR for amount originally sold

Basic format of statement of stockholder's equity

1. balance at beginning of period (preferred & common stock) 2. additions (additional paid-in capital) 3. deductions (treasury stock, accum other comp loss) 4. balance at end of period

Property dividend

usually in the form of securities of other companies that the distributing corporation holds as an investment at declaration, the corporation should restate at fair value the property it will distribute, recognizing any gain or loss as the difference between the property's fair value and carrying value at date of declaration DR Asset (difference between FV and cost) CR Unrealized Holding Gain or Loss-Income DR Retained Earnings or Property Dividends Declared at FV CR Property Dividends Payable at FV

What serves as the basis for cash dividends paid?

# of shares outstanding

Purchase of treasury stock

-reduces stockholder's equity -subtracted from total PIC & RE at cost (most companies use cost method) -DR Treasury Stock CR Cash, credits Treasury Stock when shares are reissued - # of issued shares doesn't change stock outstanding = # of shares issued - # of shares in treasury stock

3 types of dividends

1. Cash dividends. 2. Property dividends. 3. Liquidating dividends All dividends, except for stock dividends, reduce the total stockholders' equity in the corporation. When declaring a stock dividend, the corporation does not pay out assets or incur a liability. It issues additional shares of stock to each stockholder and nothing more.

Stockholder's Equity

Assets - Liabilities Net assets Represents the cumulative net contributions by stockholders plus retained earnings

How should the cash dividend on treasury stock be determined?

It does not need be determined because no cash dividends are paid on treasury stock

JT Engineering declares a dividend. A portion of the dividend is liquidating. What impact will this distribution have on additional paid-in capital and retained earnings?

It will cause a decrease to additional paid-in capital and a decrease to retained earnings

Return on common stock equity/return on equity (ROE)

Net Income - Preferred Dividends (inc avail to common sh/h) / Avg common stockholder's equity -measures profitability from the common stockholders' viewpoint -shows how many dollars of net income the company earned for each dollar invested by the owners. -helps investors judge the worthiness of a stock when the overall market is not doing well. preferred equity is defined, it's the common stock that fluctuates.

Does the payment of a dividend have to be in the same period it was declared?

No

Redeemable preferred stock

Preferred stock that has a mandatory redemption period or a redemption feature that the issuer cannot control, making the security more like debt than like an equity instrument. The FASB requires that these (and similar) debt-like securities be classified and accounted for as liabilities.

Because they do not result in the payout of assets or incursion of a liability, ________ dividends do not result in a reduction of total stockholders' equity.

Stock dividends

Lump-sum sales of stock with other securities

a corporation issues two or more classes of securities for a single payment or lump sum 1. proportional (find cost of FV x shares) / TC of FV for all securities x lump sum paid 2. incremental - find FV of the one you do know, and the rest goes to the other.

Convertible preferred stock

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

Payout ratio

cash dividends to net income (doesn't include stock dividends) if preferred stock is outstanding, the dividends are those paid to common stockholders dividend payout on preferred stock is defined so no need to evaluate.

The most common type of preferred stock is:

cumulative preferred stock

Preemptive right

protects each stockholder's proportional interest in the company. The preemptive right protects an existing stockholder from involuntary dilution of ownership interest. Without this right, stockholders might find their interest reduced by the issuance of additional stock without their knowledge and at prices unfavorable to them

Small (ordinary) stock dividends

stock dividend is less than 20-25 percent of the common shares outstanding at the time of the dividend declaration, the company is therefore required to transfer the fair value of the stock issued from retained earnings Declaration entry: DR Retained Earnings for fair value CR Common Stock Dividend Distributable for par value CR PIC in Excess of Par-Common Stock Distribution entry: DR Common Stock Div Dist (PV) CR Common Stock