Chapter 18 - Shareholder's Equity

paid-in capital

- investment made by shareholders when buying preferred/common stock from company - corporate stock reported as common/preferred accounts at PAR value -Any amount paid for stock in excess of par value = APIC (additional paid in capital)

Shareholder's Equity

- represents the ownership interest of the shareholders in a corp -is the residual (leftover) amount after creditor claims have been subtracted from assets -any transactions w/ owners of the company (stockholders) will NOT affect the I/S (net income) or comprehensive income

Retained Earnings

-An amount earned by a corporation and not yet distributed to stockholders. -Revenues and expenses from I/S are closed into RE

Cumulative Dividend

-Stockholders have right to be paid in BOTH current or all prior periods any unpaid dividends

Issued Shares

-authorized shares SOLD to the public -composed of outstanding shares & treasury shares (not outstanding)

Treasury Shares

-issued shares reacquired TEMPORARILY by the company -expected to be reissued in the future -do NOT have voting rights and do NOT receive cash dividends

Authorized shares

-maximum # of shares of stock that can be sold to the public. -specified in the corporate charter -composed of issued & unissued shares

Share issue costs

-reduce net proceed from selling shares -(ex. registration costs, legal&accounting fees, printing costs) -If stock issued has no par value = CR Common Stock (no APIC account) -Share issue costs result in lower amount of APIC recorded

Retired Shares

-shares once outstanding that are reacquired by the company but retired (can't be sold again) -NOT expected to be reissued in the future

Treasury Stock

-shares previously sold that were reacquired by the corporation from shareholders -last item on SE -Recorded @ cost and always has debit balance (contra SE account)

Common Stock

-type of capital stock -basic voting stock of the company -2nd place after preferred stock in terms of dividend & liquidation distributions

Preferred Stock

-type of capital stock -non voting stock that is preferred for dividend & liquidation preference rather than common stock -dividends can be cumulative or noncumulative

Fractional Shares

A stock dividend or stock split that results in some shareholders being entitled to fractions of whole shares. This is included when investors purchase new shares of stock when they are participating in a Dividend Reinvestment Program (DRIP). Cash payments are made based on stock price @ declaration date DR Retained Earnings CR Common Stock CR Cash

Shareholder's Equity

Assets - Liabilities

Retired Shares: Price paid to acquire stock is less than og price

CR APIC - Share Repurchase

If retained earnings balance is insufficient to cover the full dividend payable, the difference is recorded as:

DR APIC

Large Dividend (Stock Split)

DR APIC CR Common/Preferred Stock

Retired Shares: Price paid to acquire stock is more than og price

DR APIC - Share Repurchase and/or DR Retained earnings

MMC Corp issued 1,000 shares of $5 par CS for $15,000 Prepare JE @ issuance

DR Cash 15,000 CR Common Stock 5,000 (1,000 x $5) CR APIC 10,000 (Plug)

MMC Corp retired 5,000 shares of $2 par common stock at $17 per share. Stock was og issued for $20 per share. APIC - Share repurchase balance = $30,000 at beginning of the year Prepare JE @ share retirement

DR Common Stock 10,000 ($2 x 5,000) DR APIC 90,000 ($18 x 5,000) CR Cash 85,000 ($17 x 5,000) CR APIC Share Repurch 15,000 (PLUG)

MMC issued $1m of $1 par common stock for custom built factory with no cash price available. Wall street lists MMC's stock as $10 per share. Prepare JE @ issuance

DR Factory 10m ($10 x 1,000,000 stock) CR Common Stock 1m (1,000,000 stock x $1 par) CR APIC 9m (Plug)

Property Dividends JE @ declaration

DR Investment in Company CR Gain on Investment DR Retained Earnings CR Property Dividends Payable

Property Dividends JE @ distribution date

DR Property Dividends Payable CR Investment in Company

Large Dividend (Distribution)

DR Retained Earnings CR Common/Preferred Stock

Treasury Stock sold for more than acquisition price

Difference in price: CR APIC-Share Repurchase

Treasury Stock sold for less than acquisition price

Difference in price: DR APIC-Share Repurchase and/or DR Retained Earnings

Stock Dividends

Distribution of additional shares of stock to stockholders Stock dividends do NOT change assets or liabilities of the company stockholders have more shares of stock but retain same percentage ownership as before the dividend based on percentage increase in the # of shares outstanding all entires to record are recorded on declaration date

Property Dividends

Distributions of non-cash assets value of dividend is recorded as FV of assets to be distributed measured at the declaration date gain/loss is recognized for the diff between BV & FV of the assets

Accumulated Other Comprehensive Income (AOCI)

OCI transactions includes: - unrealized gain/loss on available sale investments -gain/loss from amendments to pension plans, -gain/loss from foreign currency translation -deferred gain/loss from cash flow hedge derivatives

APIC - Share Repurchase

Represents the amount of og investment that has NOT been distributed to shareholders Can only have a zero or credit balance

Accumulated Other Comprehensive Income (AOCI)

SE section where other comprehensive income (OCI) for the year are closed into. This does NOT affect net income

Retired Shares

When shares are formally retired, acquired shares are treated as if they were NEVER issued

Accounting for Treasury Shares

acquisition is a temporary reduction of SE that will be reversed when stock is resold

unissued shares

authorized shares NOT sold to the public

Why are share buybacks done?

company may reacquire shares to support market price, increase EPS, in anticipation of the exercise of stock options, or to use in mergers & acquisitions

Arrears

cumulative dividends that have not been paid from prior periods become a liability (dividends payable)

Declaration Date

date when directors declare a cash dividend creates dividends payable and reduces retained earnings DR Retained Earnings CR Dividends Payable

Ex-dividend date

first day the shares trade w/o right to receive declared dividend. No JE required

Small Stock dividends

increase the number of outstanding shares is less than 25% considered a distribution made to shareholders like a cash/noncash dividend at declaration date, amount recorded is based on current FV

Large Stock dividends

increase to shares outstanding is greater than or equal to 25% considered as distribution or stock split @ delaration date, amount recorded is based on stock's PAR value

Outstanding Shares

issued shares owned by stockholders

Property Dividends JE @ record date

no JE required

Date of Payment

record payment of dividend & eliminate the payable DR Dividends Payable CR Cash

Issuance of Shares issued for cash

record transaction for amount received

Issuance of shares issued for noncash

record transaction value as FV of stock given up or FV of asset received (the one more clearly evident)

Noncumulative

stockholders do NOT have the right to prior period's dividends if they were NOT declared in those prior periods

Date of Record

stockholders holding shares on this date receive the dividend No JE required

What accounts are eliminated when retiring shares?

the same accounts that were created when shares were originally issued (ex. common/preferred stock & APIC)

Treasury Shares when purchased

treasury stock increases for the total acquisition price (contra-equity account)

Treasury Shares when resold

treasury stock is reduced by original cost to acquire the treasury stock

Subsequent sales of retired stock

treated as sale of new, unissued shares

Share buybacks

when company reacquires shares of stock outstanding -companies can account for buybacks by retiring or holding them as treasury stock