Chapter 18: Shareholders' Equity
General components of Stockholders' Equity on balance sheet
- Additional Paid in Capital - Preferred Stock - Common Stock - Accumulated Other Comprehensive Income - Retained Earnings - Treasury Stock
Types of issue costs
- Registration fees - Underwriter commissions - Printing and clerical costs - Legal and accounting fees - Promotional costs
Legal Capital
- The portion of shareholders' equity that must be contributed to the firm when stock is issued - The amount of capital, required by state law, that must remain invested in the business - Refers to par value, stated value, or full amount paid for no-par stock
What do treasury shares not have?
- Voting rights - Dividend rights - Preemptive rights - Liquidation rights
Steps on how a corporation is established
- articles of incorporation are filed with the state - state issues a corporate charter - shares of stock issued - board of directors elected by shareholders - board of directors appoint officers
What causes the non owner related changes for accumulated other comprehensive income?
- net holding gains/losses on investments held for sale - gains/losses from amendments or changes in actuarial assumptions relating to pension plans - deferred gains/losses on derivatives - gain/loss adjustments from foreign currency translation relating to consolidation
Typical reasons for repurchase of shares are to:
- support the market price - increase earnings per share - distribute in stock option plan - issue a stock dividend - use in mergers and acquisitions - thwart takeover attempts
What is the order of dividends being paid out?
1. Creditors 2. Preferred stockholders 3. Common stockholders (remaining)
How do we treat resale of shares under the treasury method?
As continuation of repurchasing the treasury shares
Who determines dividends?
Board of Directors
Who elects board of directors?
Common stockholders
Important dates for dividends
Declaration date, ex-dividend date, date of record, payment date
Property Dividends (Dividends in Kind)
Declaring and paying a dividend using an asset other than cash
If the issuance cost is less than par value, how does if affect paid-in capital?
Decreases
Stock Dividend
Distribution of additional shares of stock to current shareholders of the corporation. - No impact on assets or liabilities of entity - Distinguished as small (<25%) or large (> or equal to 25%) stock dividend which impacts treatment - No impact on value of shareholder's total holdings
Dividends
Distribution of assets the company has earned to shareholders
Cash Dividends
Dividends paid in cash
Retained Earnings
Represents a corporation's accumulated, undistributed net income or loss. Also considered reinvested earnings. A credit balance signifies assets previously earned but not distributed to shareholders
What are ways repurchase can be enacted through?
Retirement of shares or holding stock as treasury shares
Stock Split
Stock Distribution of 25% or more of outstanding shares that is labeled a stock split. - No journal entry necessary - No impact on value of shareholder's total holdings
Date of record
Stockholders registered as of this date are entitled to receive dividend. Must have bought shares before ex-dividend date to be registered as stockholders
Common Stock
The basic voting stock of the corporation. It ranks preferred stock for dividend liquidation distribution
Share Buybacks
The repurchase of outstanding shares by a corporation
Payment Date
Date dividends are distributed. Book journal entry
Declaration Date
Date when board declares a dividend. Book journal entry
Ex-Dividend Date
Date when shares begin trading without right to receive dividend
No-par Stock
Dollar amount per share is not designated in corporate charter. Many states now allow this - Corporations can assign a stated value per share (treated as if par value)
Par Value
Dollar amount per share is stated in the corporate charter and rules dictated by state law - No relationship to market value
If purchase price is greater than issue price how does paid-in capital get affected?
First must deduct from paid-in capital --share repurchase (debit) until zero balance and then deduct from retained earnings (debt)
Board of Directors
Have governance responsibilities for the corporation
Retired Shares
Have the same status as authorized but unissued shares
If purchase price is less than issue price how does paid-in capital get affected?
Increase (credited)
If the issuance cost is greater than par value, how does it affect paid-in capital?
Increases
Outstanding Shares
Issues shares that are owned by stockholders
Types of Dividends
Liquidating divided, cash dividends, property dividends (dividends in kind), stock dividend, stock split
What shares are issued shares?
Outstanding shares and treasury shares
Liquidating Dividends
Portion of dividends paid out in excess of retained earnings balance
Share issue costs
Reduce net proceeds from selling shares, resulting in a lower amount of additional paid-in capital
Retirement Shares
Reduce the same capital accounts that were increased when the shares were issued--common stock, and additional paid-in capital--excess of par
Treasury Stock
Reflects issued shares that have been bought back (reacquired) by the corporation but not retired
How is resale treated under the retirement method?
The method of "resale" of shares is nonexistent and the sale is treated like the initial sale of shares - No need to track retired shares - No cost flow assumption method necessary
Cost of resold shares
The price that the company paid for them based on a cost flow assumption of FIFO, LIFO, or Weighted Average Method
Why can't shares be sold below par value?
To protect existing shareholder's investments
Treasury Shares
Treasury stock account is increased (debited) by cost of acquisition