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Components of Stockholders’ Equity

Components of Stockholders’ Equity. Paid-in capital “ Legal” capital (par or stated value) Additional paid-in capital Accumulated other comprehensive income Retained earnings ( undistributed earnings). Issuance of Stock. Par value stock Record common stock at par value

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Components of Stockholders’ Equity

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  1. Components of Stockholders’ Equity • Paid-in capital • “Legal” capital(par or stated value) • Additional paid-in capital • Accumulated other comprehensive income • Retained earnings (undistributed earnings)

  2. Issuance of Stock • Par value stock • Record common stock at par value • No-par with stated value • Record common stock at stated value • “Pure” no-par stock • Entire sale proceeds credited to stock account

  3. Subscribed Stock • Individuals sign valid contracts for stock purchase. • Entire Paid-in Capital in Excess of Par is recorded at issuance. • Common Stock Subscribed credited. • Common Stock is recorded ONLY on full receipt of cash.

  4. Subscriptions received, $1,000 (par = $250) Cash received Issuance of stock Subs. Rec. 1000 CS Subscribed 250 APIC 750 Cash 1000 Subs. Rec. 1000 CS Subscribed 250 Com. Stock 250 Subscribed Stock - Entries Description Entry

  5. Financial Statement Presentationof Subscriptions Receivable • Deduction from stockholders’ equity [preferred method and required by SEC unless receivable collected prior to issuance of financial statements] • Asset (current if collectible within a year or operating cycle …)

  6. Financial Statement Presentation of Common Stock Subscribed • Presented in a manner similar to but separate from (below) common stock • Must be identified as subscribed stock

  7. Reasons for Treasury Stock • Increase earnings per share and return on equity • Provide tax efficient distributions of excess cash to shareholders • Provide stock for employee stock compensation contracts • Thwart takeover attempts • Create or improve the market for the stock

  8. Recording Treasury Stock • COST METHOD: • Treasury stock recorded at cost • Shown as reduction of equity in stockholders’ equity section • PAR VALUE METHOD: • Treasury stock recorded at par value • Shown as reduction of common stock in stockholders’ equity section

  9. CASE 1COST METHOD PAR VALUE METHOD Feb. 15 TS (10,000 X 15) 150,000 TS (10,000 X 10) 100,000 Cash 150,000 APIC (1/3 of 30,000) 10,000 Retained earnings 40,000 Cash 150,000Apr. 28 Cash 34,000 Cash 34,000 TS (2,000 X 15) 30,000 TS (2,000 X 15) 20,000 APIC-TS 4,000 APIC 14,000Aug. 17 Cash 27,000 Cash 27,000 APIC-TS 4,000 Retained earnings 3,000 Retained earnings 14,000 TS (3,000 X 10) 30,000 TS (3,000 X 15) 45,000

  10. CASE 2Cost MethodPar Value MethodFeb. 15 TS (10,000 X 10.50) 105,000 TS (10,000 X 10) 100,000 Cash 105,000 APIC (1/3 of 30,000) 10,000 Cash 105,000 APIC-TS 5,000Apr. 28 Cash 34,000 Cash 34,000 TS (2,000 X 10.50) 21,000 TS (2,000 X 10) 20,000 APIC-TS 13,000 APIC 14,000Aug. 17 Cash 27,000 Cash 27,000 APIC-TS 4,500 APIC-TS 3,000 TS (3,000 X 10.50) 31,500 TS (3,000 X 10) 30,000

  11. Preferred Stock Features • Preference as to dividends • Preference as to assets in the event of liquidation • Convertibility into common stock at the option of the stockholders • Callable at the option of the corporation • Nonvoting

  12. Stock Issued in Noncash Transactionswith Other than Employees • Record at FV of stock issued or FV of services or property received, whichever is more clearly determinable

  13. Net loss Prior period adjustments Cash dividends Property dividends Stock dividends Treasury stock deficiencies Net income Prior period adjustments Quasi-reorganization adjustments Retained Earnings Debit Adjustments Credit Adjustments

  14. Types Of Dividends • Cash dividends • Scrip dividends • Property dividends • Stock dividends • Liquidating dividends (return of capital)

  15. Cash Dividends - Three Important Dates Date of declaration – date dividends are declared Date of record – date list of stockholders to whom dividends are to be paid is finalized Date of payment - date dividends are paid to stockholders of record

  16. Date of Declaration Date of Record Date of Payment Retained Earnings Dividends Payable No Entry Dividends Payable Cash Cash Dividends: Journal Entries

  17. PROPERTY DIVIDENDS • Nonreciprocal transfers of nonmonetary assets to owners • Record at fair value of assets transferred (recognize gain/loss on transfer)

  18. Property Dividend:Entries • Dividend declared on Dec. 21, 2014 – to be distributed in the form of marketable securities owned by Alpha Company. • Dividend is declared on Dec. 21, 2014 and payable on Jan. 21, 2015 to stockholders of record on Jan 14, 2015. • Fair value of securities is $134,000 on Dec 21, 2014 and $ 135,900 on Jan 21, 2015. • Cost of securities is $110,000. Record the entries on the dates of declaration, record, and payment.

  19. Investments 24,000 Gain – Mkt. Sec. 24,000 Declaration Date 1 Ret. Earnings 134,000 Prop. Div. Pay. 134,000 Declaration Date 2 Prop. Div. Pay 134,000 Investments 134,000 3 Payment Date Property Dividend Entries

  20. Stock Dividends • Issuance of more-shares dividend (no cash flow is involved) • Small stock dividends involve issues of less than 20% - 25% of outstanding stock • The accounting for small stock dividends is based on the fair market value of stock issued. • The accounting for large stock dividends (more than 20%-25% of outstanding stock) is based on the par value of stock issued.

  21. Small Dividend Large dividend Less than 20 - 25% shares More than 20 - 25% shares Stock Dividends Types of Dividends Use FMV at declaration Use par value

  22. Stock Dividends: Journal Entries • Outstanding stock: 1,000 shares; $10 par • Stock dividend: 10% • FMV on date of declaration: $12

  23. Ret. Earnings 1,200 CS Distributable 1,000 APIC 200 Declaration CS Distributable 1,000 Common Stock 1,000 Distribution Small Stock Dividend Stock dividend = 10% of 1,000 shares = 100 shares

  24. Large Stock Dividends • Outstanding stock: 3,000 shares; $10 par • Stock dividend: 30% • FMV on date of declaration: $12

  25. Ret. Earnings 9,000 CS Distributable 9,000 Declaration CS Distributable 9,000 Common Stock 9,000 Distribution Large Stock Dividends Stock dividend = 30% of 3,000 shares = 900 shares

  26. STOCK SPLITS • Par value of each share decreases • Number of shares increases • Total par value is unchanged • Total stockholders’ equity is unchanged • No formal journal entry [memo entry is made]

  27. Par value of a share does not change Total number of shares increases Total stockholders’ equity does not change The composition of equity changes (less of retained earnings; more of stock) Stock dividends require journal entries Par value of a share decreases Total number of shares increases Total stockholders’ equity does not change The composition of equity does not change (same amounts of stock and RE) Stock splits do not require journal entries Stock Dividends and Stock Splits Stock Dividends Stock Splits

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