University:
California State University, Northridge
Course:
ACCT 352 | Intermediate Financial Accounting III
Academic year:

2024
Views:

216

Pages:

29
Author:

segullinnerh

Financing II: Stockholders’ Equity Topics:  Types of stock        Common Preferred treasury Issuance of stock Retained earnings Dividends Stock options Common Stock:     Residual Owners’ equity Voting right (most important: election of directors) May or may not receive dividends May or may not have par value or stated value – depends on state corporate and tax law Common Stock Example: (Balance sheet presentation) Common stock $1 par ($500,000 shares authorized, 100,000 issued, 95,000 outstanding) Additional paid in capital $100,000 $900,000 Preferred Stock Characteristics       High par value No voting rights Fixed dividends - Dividends cumulative Liquidation preference over common stock May be redeemable May be convertible Preferred Stock Example: Balance sheet presentation: Preferred stock, $100 par, 8% cumulative, convertible into 25 shares of common stock Issued and outstanding 2,000 shares $200,000 Treasury Stock:   Stock repurchased by the company with the intent to reissue it in the future Reasons:      Stock options Plan to acquire another company Buy out dissident stockholder Drive up stock price Prevent take over Treasury Stock:   Contra stockholders’ equity account (debit balance) Usually carried at cost (may be at par value) Treasury Stock Example: 1. Company repurchases 1,000 shares @ $25/share Dr. treasury stock 25,000 Cr. Cash 25,000 2. 700 shares are sold @ 15/share (stock option exercise) Dr. Cash Dr. Additional paid in capital Cr. Treasury stock 10,500 7,000 17,500 Treasury Stock Example: Balance Sheet presentation: Common stock $1 par, 100,000 shares issued, 95,000 shares outstanding $100,000 Additional paid in capital $900,000 Less treasury stock, 5,000 shares at an average cost/share of $20 (100,000) Retained Earnings     Ultimate residual owners’ equity account (ultimate plug figure) Sum of the earnings since the company started Minus the sum of dividends paid Plus/minus other adjustments Dividends  Must be voted by the board of directors     Dividends on preferred stock first, only then can common stock receive dividends! Cash dividends Dividends in kind Stock dividends Dividends    Result in reduction of retained earnings Require expenditure of cash or other assets unless: Stock dividends – also referred to as “capitalization of earnings” Cash Dividends Journal Entry:       6/15 Dr. dividends $ Cr. dividends payable 6/30 Dr. dividends payable $ Cr. Cash 6/30 Dr. retained earnings $ Cr. Dividends 3,000 $ 3,000 3,000 $ 3,000 3,000 $ 3,000 B.S. Before Small Stock Dividend: Common stock $1 par ($500,000 shares authorized, 100,000 issued, 95,000 outstanding) Additional paid in capital Treasury stock 5,000 shares Retained Earnings Total Stockholders’ Equity $100,000 $900,000 (100,000) 1,200,000 2,100,000 Small Stock Dividend Journal Entry:     6/15 Dr. retained earnings $ 200,000 Cr. Common stock Cr. Paid in capital 10,000 190,000 (issued a 10% stock dividend = 10,000 shares, market price/share: $20) B. S. After Small Stock Dividend: Common stock $1 par ($500,000 shares authorized, 110,000 issued, $ 110,000 Additional paid in capital 1,090,000 Treasury stock 5,500 shares (100,000) Retained Earnings 1,000,000 Total Stockholders’ Equity 2,100,000 104,500 outstanding) Large Stock Dividend Journal Entry:    6/15 Dr. retained earnings $ 30,000 Cr. Common stock 30,000 (issued a 30% stock dividend = 30,000 shares, market price/share: $20) B. S. After Large Stock Dividend: Common stock $1 par ($500,000 shares authorized, 130,000 issued, $ 130,000 Additional paid in capital 900,000 Treasury stock 6,500 shares (100,000) Retained Earnings 1,170,000 Total Stockholders’ Equity 2,100,000 123,500 outstanding) Stock Split    Very large stock dividend No journal entry, memo entry only to note new number of shares and new par value 2 for 1 stock split, new # of shares issued = 200,000, new par value: $ .50/share Balance Sheet After Stock Split: Common stock $ .50 par (1,000,000 shares authorized, 200,000 issued, $ 100,000 Additional paid in capital 900,000 Treasury stock 10,000 shares (100,000) Retained Earnings 1,200,000 Total Stockholders’ Equity 2,100,000 190,000 outstanding) Reverse Stock Split   Market price of stock falls “too low” Companies sometimes try to improve the appearance or prevent delisting from a stock exchange by issuing a reverse split: I.e., for every 5 old shares stockholders receive 1 new share. Comprehensive Income    Items whose market value (MV) has changed and that may affect equity but have not yet been realized Realized: Cash received (promise recognized) or paid (liability recognized) i.e., earned. Change in MV: E.g., MV of stock investments has in(de)creased Included in Comprehensive Income:  Unrealized holding gains (losses) from Stock investments  Changes (amendments) of post retirement benefit plans  Foreign currency translation  Derivatives Note: All items reported net of related tax effect.  Reporting of Comprehensive Income      Two possibilities: Right after net income (Income Statement) OR: Separate section in the footnotes. Again it starts with Net Income Ends with Comprehensive income for the period Accumulated Other Comprehensive Income (AOCI)   Shown on the balance sheet (component of owners’ equity) Consists of as the heading says, all OCI (gains (losses) since company started to recognize it Quasi – Reorganization I   A reorganization of the balance sheet generally in conjunction with a court adjudicated bankruptcy (Chapter 11) Objective: Fresh start for the company   Revaluation (up or down) of assets (maybe liabilities) to market value Elimination of retained earnings deficit Quasi – Reorganization II    Revalued Assets and liabilities Zero Retained Earnings Contributed Capital adjusted to balance   This may require elimination of APIC and Reduction of common stock par value Quasi – Reorganization III Example: Before Assets 250 Liabilities 220 Common Stock 190 R/E -160 Total Equity 250 After 260 220 40 0 260

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