Financial Accounting II: Ch 18

Share rights

-common shares: the right to vote on matters that come before shareholders, the right to share in profits when dividends are declared, the right to share in the distribution of assets if the company is liquidated -preemptive right: right to maintain one's % share of ownership when new shares are issued

Rights of preferred shares

-if dividends are declared, pref shareholders will receive the designated dividends before common shareholders -pref shareholders have a preference over common shareholders as to the distribution of assets if the company is liquidated -right of conversion: convert pref shares into common shares -redemption privilege: the right to request the company to buy back shares -cumulative: dividends in arrears accumulate and must be made up in a later dividend year before any dividends are paid on common shares -noncumulative -participating: allows pref shareholders to receive additional dividends beyond the stated amount -nonparticipating

AOCI (Accumulated Other Comprehensive Income)

1. net holding gains (losses on AFS) investment debt securities 2. gains (losses) from and amendments to pension plans 3. deferred gains (losses) on derivatives 4. adjustments from foreign currency translation

Dividends on preferred shares: The shareholders' equity section of Corbin Enterprises includes the items shown below. The board of directors declared dividends of $360,000, $500,000, and $700,000 in its first three years of operation—2017, 2018, and 2019 respectively. Common stock $ 3,000,000 Paid‐in capital—excess of par, common 9,800,000 Preferred stock, 8% 6,000,000 paid in cap-excess of par, pref 780,000 Determine the amount of dividends to be paid to preferred and common shareholders in each of the three years, assuming that the preferred stock is cumulative and nonparticipating

2017 Pref: 360K Common: 0 2018 Pref: 500K Common: 0 2019 Pref: 580K Common: 120K

Concept Check: Treasury Stock Accounting and Subsequent Sale of Shares In 2018, Broyles, Inc. reacquired 3,000 shares of its common stock at $55 per share. In 2019, Broyles, Inc. reissued 1,000 shares of the stock at $75 per share. Which of the following would be included in the 2019 entry? a. Credit Cash for $165,000 b. Debit Treasury Stock for $75,000 c. Credit Treasury Stock for $55,000 d. Credit Cash for $75,000

3K * 44 = 165K 1K * 75K = 75K 2018 Entry: Dr TS 165K Cr Cash 165K 2019 Entry: Dr Cash 75K Cr PIC-Share Repurchase 20K Cr TS 55K

Concept Check: Dividends in Arrears The shareholders' equity of FSU Industries includes $200,000 of $1 par common stock and $400,000 par value of 6% cumulative preferred stock. The board of directors declared cash dividends of $50,000 in 2018 after paying $20,000 cash dividends in 2017 and $40,000 in 2016. What is the amount of dividends common shareholders will receive in 2018?

400K * 6% =24K goes to pref 2016: 40K total 24K goes to pref 16K goes to common 2017: 20K total 20K goes to pref 0 goes to common 2018: 50K total 28K goes to pref (cover 4K missing from last year) 22K goes to common

More than one security sold for a single price: AP&P issues 4 million of its common shares, $1 par per share, and 4 million of its preferred shares, $10 par, for $100 million. Today's issue of The Wall Street Journal lists AP&P's common at $10 per share

Dr Cash 100M Cr Common Stock (par value) 4M Cr Paid in Capital 36M Cr Pref Stock (par value) 40M Cr Paid in Capital-Excess of Par 20M

Shares sold for cash: Dow Industrial sells 100K of its common shares, $1 par value per share, for $10 per share

Dr Cash 1M Cr Common Stock (par value) 100K Cr Paid in Capital-Excess of Par 900K

Shares sold for noncash consideration: DuMont Chemicals issues 1 million of its common shares, $1 par per share, in exchange for a custom‐built factory for which no cash price is available. Today's issue of The Wall Street Journal lists DuMont's stock at $10 per share.

Dr PPE 10M Cr Common Stock(par value) 1M Cr Paid in Capital-Excess of Par 9M

Concept Check: Cash and Stock Dividends The following data were reported in the shareholders' equity section of the Brandon Industries' comparative balance sheets for the years ended December 31 ($ in millions): 2018 2017 Common stock, $1 par per share $306 $300 Paid‐in capital—excess of par 174 150 Retained earnings 314 300 During 2018, Brandon declared and paid cash dividends of $45 million. The company also issued a stock dividend. No other changes occurred in shares outstanding during 2018. What was Brandon's net income for 2018?

Find NI for 2018: RE 2017 + x - Cash div - stock div for 2018= RE 2018 300 + x - 45 -30 = 314 x=89 89M NI in 2018 stock div for 2018: 306 common stock 2018 - 300 common stock 2017 = 6 PIC 174 2018 - PIC 150 2017 = 24 24+6= 30 stock div declared in 2018

Cash dividends: On June 1, the board of directors of Craft Industries declares a cash dividend of $2 per share on its 100 million shares, payable to shareholders of record June 15, to be paid July 1

June 1 Declaration date: Dr RE 200M Cr Cash Dividends Payable 200M June 13 Ex-Dividend date: No entry June 15 Date of Record: No Entry July 1 Payment date: Dr Cash Dividends Payable 200M Cr Cash 200M

Como, Inc. was organized on January 1, 2018. The firm was authorized to issue 150,000 shares of $1 par common stock. During 2018, Ellsworth had the following transactions relating to shareholders' equity: Issued 20,000 shares of common stock at $7 per share• Issued 20,000 shares of common stock at $8 per share• Reported a net income of $130,000• Paid dividends of $20,000• Purchased 3,000 shares of treasury stock at $10 What was total shareholders' equity at the end of 2018?

Paid in Cap: 20K * 7 = 140K 20K * 8 = 160K 140K + 160K = 300K SE: +300K PIC +100K NI -(50K) Div -(30K) TS =320K SE at the end of 2018

Best evidence of FV

a quoted market price for the shares a SP established in a recent issue of shares for cash cash price an independent appraisal of the value of the asset received

Paid in capital

amounts: invested by stockholders when they purchase shares of stock arise from the company buying back some of those shares from share based compensation activities

RE credit balance: debit balance:

credit balance: $ earned and reinvested, accumulated undistributed NI debit balance: deficit

Cash dividends

date of record- when registered owners are entitled to receive the dividend registered owner- must purchase the shares before the ex dividend date (usually 2 business days before the date of record)

Dividends

distributions of assets the company has earned on behalf of its shareholders when dividend paid > assets earned by the company RE), management is returning to shareholders a portion of their investments (paid in capital)

Stock div

does NOT affect liabilities OR assets use RE to increase PIC (just reclassification) stock price= firm value does NOT go up/# of shares increases, so stock price GOES DOWN

RE

earnings accumulated on behalf of the shareholders and not yet distributed as dividends RE = NI - Dividends

Equity vs Debt

equity- pref shareholders receive dividend each year the company pays dividends debt- the company is obligated to pay cash (and other assets)

Concept Check: Reporting Share Buyback The balance sheet of Chunn Industries included the following shareholders' equity section at December 31, 2018 ($ in millions): Common stock ($1 par value, authorized 100M shares, issued and outstanding 90M shares) $ 90 Paid‐in capital—excess of par 540 Retained earnings 280 Total shareholders' equity $910 On January 5, 2019, Chunn purchased and retired 1 million shares for $9 million. Immediately after the purchase of the shares, the balances in the paid‐in capital—excess of par and retained earnings accounts are

how much per share: PIC/Common stock =540/90 = $6 per share Repurchased share: Dr PIC-Excess Par 6M (1M*6) Dr Common stock (par) 1M (1*1M) Cr Cash 9m RE 2M Common stock and PIC don't cover, so use RE 9M - 7M = 2M covered by RE^^ PIC = 540 - 6M = 534M RE = 280 - 2M = 278M

More than one security issued for a single price

if only 1 security's value is known, the second security's market value is inferred from the total SP

What are the components of stockholder's equity?

paid in capital RE treasury stock AOCI

Treasury stock

shares previously sold to shareholders that are bought back by the corporation

Liquidating dividend

when a dividend exceeds the balance in retained earnings any portion of a dividend not representing a distribution of earnings should be debited to additional paid in capital