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