Stockholders’ Equity
Key Things to Know
Intermediate Accounting 2
Key Things To Know
Corporations issue stock to investors who become owners of the business.
Stockholders:
Elect the Board of Directors (BOD) and vote on important issues of the Company
BOD – makes major decisions, hires management of the Company
Do not participate in the day to day operations of the business
Common Stockholder rights:
Attend all stockholder meetings, vote for board of directors
Share in dividends declared
Share in the proceeds of any liquidation
Can sell their investment in shares at any time
Preemptive Right – right to maintain a share of ownership
Preferred Stockholder rights:
Preference for receiving dividends (before common)
No voting rights
Dividends are stated as a percentage of total par value
Callable Preferred Stock:
Company may buy it back at a set price according to stated terms
Convertible Preferred Stock:
Holder may exchange preferred for common at a set ratio
Journal entry to convert:
| Preferred Stock (par x # preferred shares) Common Stock (par x # common shares) Paid In Capital (plug to balance entery) |
Dividends:
The board of directors must declare dividends before they can be paid
Reduces retained earnings when declared
The following terms are associated with preferred dividends:
Noncumulative:
If not declared this year, the shareholder cannot receive the dividends in the future
Cumulative:
If not declared this year, the board may declare in the future and the shareholders will receive the dividend if declared in the future
Dividends in Arrears:
Cumulative dividends not paid to preferred shareholders in a year must be paid before common shareholders receive their dividends.
The balance sheet:
| Preferred Stock: $ = shares issued x par value Common Stock: $ = shares issued x par value Paid in Capital $ = amounts received over par value Retained Earnings $ = cumulative net profits/losses less cumulative dividends paid less losses on stock transactions – Treasury Stock $ = cash paid for their own stock Treasury Stock PIC $ = gains on treasury stock transactions Other Comprehensive Income Total Stockholder’s Equity |
Preferred / Common Stock:
Changes only when:
Issue Stock (increase)
Retire Stock (decrease)
Always debit or credit value:
the number of shares x $par value per share
Paid In Capital:
Increases when:
Issue shares or have gains on equity transactions
Decreases when:
Retire shares
Journal Entries: Common Stock & Paid In Capital
Issue Stock
Cash
Common Stock
Paid in Capital
Cash amount = FMV x # Shares issues
Common stock amount = Par value x # shares
Paid in Capital is a plug to balance the entry
If issue for stock for an asset other than cash:
The stock issued is recorded at the FMV of the asset received or the FMV of the stock – whichever is the most readily determinable
Retire Stock
| Common Stock (Par value x # shares retired) Paid-in-Capital at average – see below Cash FMV – what is paid to purchase |
Then Plug to Balance:
Debit “retained earnings” or credit “paid-in capital–retired stock”
Do not credit retained earnings or record a gain or loss
Compute paid in capital average value:
Total Paid-in-capital – common stock
/ # shares issued less retired shares
= average PIC per share
x # shares retired
= amount to debit “Paid in Capital–Common Stock”
Retained Earnings:
Increases:
Net Income
Decreases:
Dividend is declared
Net Loss
Loss on treasury stock transactions (see treasury stock)
Retire common shares at a loss
Dividends:
Distribution of assets to shareholders, can be cash, assets, or stock
Declaration date:
Debit retained earnings and credit dividend payable
Record Date:
No journal entry
Pay Date:
Debit dividend payable, credit what is given up
Stock Dividend:
| Large > 25% Debit R.E. for Par value of stock x # shares Small < 25 % Debit R.E. for Fair Market value of stock x # shares |
Credit: Common stock and Paid In Capital (small only)
Treasury Stock:
The company invests in its own stock
Viewed as a temporary reduction in stockholder’s equity.
Increases: Purchase (reacquire) own stock
Decreases: Sell it back to market (reissue)
Purchase TS: Record at cost
Treasury Stock
Cash
Sell treasury stock – reissue:
| Cash (FMV x # shares) Treasury Stock (at original cost x # shares) |
Then plug to PIC – TS if you need a credit to balance.
Debit PIC-TS until the balance is 0 then use Retained Earnings if you need more
Retirement of Treasury Stock:
Follow the same procedures for retiring common stock, except replace cash with treasury stock at the original cost of the treasury stock you are retiring
Stock Issue Costs:
Reduce “Contributed Capital” and do not expense
Examples: legal, accounting, administrative, promotional costs of issuing stock
Stock Split: No Journal Entry:
Divide the par value by the given ratio
Multiply by the number of issued shares by the given ratio
Total par value does not change
(number of shares x par value)
Stock Split in the Form of a Stock Dividend:
Account for as a stock dividend