CHAPTER 15
STOCKHOLDERS' EQUITY
Nature of SE
- Residual interest - derived from the accounting equation
- 2 primary sources of equity
- Contributed capital - stockholders' investments
- Retained earnings - earned capital
- Corporate form
- primary forms of business - proprietorship, partnership and corporation
- Corporation classification
- public sector
- private sector - nonstock or stock (closed or open)
- Capital stock system - each share represents an ownership right with privileges
- share proportionately in profits or losses
- vote
- share proportionately in assets upon liquidation
- preemptive right
- Variety of ownership interests
- Common stock - bears ultimate risk and receives benefits
- Preferred stock - exchanges some voting rights in order to receive preferential earnings treatment
- Limited liability
- Formality of profit distribution
- in compliance with state law
- distributions formally approved by the BOD
- dividends in full agreement with contracts re: preference and participation
Accounting for Stock Issuance
- Par-value stock - any premium paid for stock (amount > par value) is credited to the Paid in capital (PIC) account
- ex: 100 shares of $1 par value stock is sold for $10/ share
- dr. Cash 1000
- cr. C.S. 100
- cr. PIC 900
- No-par stock - sometimes given a stated value which is treated just like a par value. If not, then CS account is credited for the amount of proceeds
- Noncash stock transactions - when stock is issued for services or property other than cash
- when stock is issued for services or property other than cash
- value the property or services at either their fair value or the fair value of the stock, whichever is more clearly determinable
Other Stock Items:
- Lump Sum Sales - when common and preferred stock are issued simultaneously for one amount
- proportional method - if FMV of both stocks is known - then allocate based on proportion of FMV each represents
- incremental method - if FMV of only one stock is known - then allocate proceeds to it first, remainder to other stock
- Costs of issuing stock - 2 methods
- reduction of amounts paid in - write-off against PIC
- organization costs - capitalize and amortize against future earnings
- Treasury Stock
- Corporation repurchases its stock - stock was outstanding, has been reacquired and is not retired
- TS IS NOT AN ASSET!!! - Corporation can't own part of itself. TS is a contra-equity account
- 2 acceptable methods for accounting for TS transactions
- Cost method -
- when reacquired, TS is recorded at its reacquisition price
- when reissued at a price > reacquisition price, TS is credited for the reacquisition price and premium is credited to PIC - TS
- when reissued at a price < reacquisition price, TS is credited for the reacquisition price and the discount is debited first to PIC-TS then to RE
- Par Value method -
- when reacquired, TS is recorded at its par value and any premium related to the original issuance is removed from the accounts (debit PIC),
- when reissued, accounting treatment is the same as for an original issuance of stock
- Financial statement presentation
- Cost - cost of TS is shown in the BS as a deduction from the total of all equity accounts
- Par - total par value of TS is shown as a deduction from the class of stock to which the TS relates
Retained Earnings
- Excess of all operating net income over operating net losses minus dividends distributed to stockholders
- Accumulation of all the earnings a corporation has acquired since its inception less losses and dividends
Cash Dividends
- Liability is recognized when dividends are declared
- Three dates of interest - date of declaration, date of record, and date of payment
- Date of declaration - dr. RE, cr. Dividends Payable
- Date of record - no journal entry
- Date of payment - dr. Dividends Payable, cr. Cash
- Dividends are not paid on treasury stock
Property Dividends
- Distributions of corporate assets other than cash
- Record transaction at the fair value of assets given
- Often involves a write-up and recognition of gain on appreciation
Stock Dividends
- Capitalization of retained earnings (transfer from re to cs)
- Afterwards, all shareholders retain same proportionate share of ownership
- Small stock dividend (<20-25% of CS outstanding)
- transfer the market value of the stock issued to retained earnings\
- Large stock dividend (> 20-25% of CS outstanding)
- transfer the par value of the stock issued to retained earnings
Stock Splits
- Results in an increase or decrease in the number of shares outstanding
- Corresponding decrease or increase in the par value per share
- No accounting entry is required because the total dollar amount of equity accounts remains the same
Other types of dividends
- Scrip - special form of notes payable - corporation will pay dividend at a later time
- Liquidating dividend - dividends not based on earnings are liquidating dividends which reduce paid-in capital
Dividend preferences
- Cumulative preferred stock - preferred stockholders' dividends accumulate when unpaid (dividends in arrears). All dividends in arrears must be paid to preferred stockholders before common stockholders receive dividends
- Participating preferred stock - preferred stockholders also share in a portion of the dividend remaining after their dividend is paid
Appropriations of Retained Earnings
- Reclassification of RE for a specific purpose - costs and losses cannot be charged to these appropriations
- Appropriations for self-insurance - 2 acceptable methods of acctg
- charge losses when incurred
- appropriate RE annually and when losses occur, charge losses against revenue and reverse appropriation
Back to
Intermediate 2 Daily Schedule
Back to
Intermediate 2 Home Page