Ch 14 - Corporations Flashcards
What is a stock dividend
Instead of cash dividend - more shares are distributed. Results in a decrease in retained earnings and increase in share capital, but there is no net change in total shareholder’s equity.
Stock split and purpose
Involves the issue of additional shares to shareholders according to their percentage ownership. Usually described as a 2 for 1 or 3 for 1 split.
Increases the marketability of a company’s shares by lowering the market price per share. More appealing to investors.
Why would a company reacquire shares
Increase trading of company’s shares in hope of increasing company’s fair value
Reduce # of shares issued - increasing earnings per share
Eliminate hostile shareholders by buying them out
Have more shares available for sale so they can be reissued to employees through stock compensation plans or used to acquire other companies
How to calculate average per share amount
Divide the balance in the share capital account by the number of shares issued
Steps to record reaquisition of shares
- remove the dollar amount of the shares from the capital account. Number of retired shares reacquired x average per share amount.
- Record cash paid
- record any differences between cost of shares and amount paid to require the shares in shareholders equity.
Since companies cannot realize a gain/loss from share transactions with their own shareholders, these amounts are not reported on Income Statement.
Dewberry Co. has unlimited number of Common shares authorized and a total number of 75,000 common shares issued. It has a balance in its Common Shares account of $150,000.
A) Calculate average per share amount
B) On Sept 23, Dewberry reacquired 5000 of its common shares at a market price of 1.50 per share. JE
A) $150,000 / 75,000 = $2 per share
B) since it will be a gain of .50 per share (2 - 1.5) there is an additional contribution to shareholders equity.
Common Shares (5000x $2) 10,000
Contributed surplus - reaquision of shares
(5000x.50) 2,500
Cash 7,500
Can the Contributed surplus account have a debit balance (ie if there is a loss on reaquisition)?
No. Can only have a credit balance. Any deficiency below what was credited in the Contributed surplus account must be taken from Retained Earnings.
Dewberry reacquires an additional 10,000 shares, this time for 2.75 per share. Average per share is still $2. The Contributed surplus account has a credit balance of 2,500 from previous reaquisition. Record entry.
Average per share = $2. Bought for 2.75 each for a deficiency of .75 per share occurred. 0.75 x 10,000 shares = 7,500 total deficiency.
Common shares (10,000 x 2) 20,000
Contributed surplus - re acquisition of common
shares 2,500
Retained earnings (7500-2500) 5000
Cash (10,000 x 2.75) 27,500
Dewberry reaquires an additional 2000 shares for 2.25. Average per share still $2. Journalize
Deficit of .25 per share x 2000 = 500
Common Shares 4,000
Retained earnings 500
Cash 4,500
What is Other Comprehensive Income
Who has to report this?
Gains/losses that are not included in profit but still added to (or deducted from) shareholder’s equity.
Public companies must report comprehensive income.
How to calculate comprehensive income?
What does it include?
Profit (loss)
+/- Other comprehensive Income (loss)
= comprehensive income (loss)
All changes in shareholder’s equity during a period except for changes that result from a sale or repurchase of shares/payment of dividends.
Vega Co. reported retained earnings of $5,130,000 at Dec 31, 2016. In 2017, the company earned $2 million of profit and declared and paid a $275,000 cash dividend. On Mar 7, 2017 Vega found an error made in 2016 when it purchased land; the $275,000 cost of the land was debited to Legal Expense in error. Vega’s income tax rate is 30%.
A) Prepare the je to correct the error
B) Prepare the statement of retained earnings for the year ended Dec 31, 2017
Land 275,000
Income tax payable (275,000 x 30%) 82,500
Retained earnings 192,500
Balance Jan 1, 2017 as previously reported $5,130,000
Add: Correction for overstatement of legal
expenses in 2016, net of $82,500 income tax 192,500
Balance Jan 1, 2017, as adjusted 5,322,500
Add: Profit 2,000,000
Less Cash dividend 275,000
Balance, Dec 31, 2017 $7,047,500
Discontinued operations:
A) Are reported as part of operating expenses on the income statement
B) Are reported separately on the income statement as a nonreacurring item
C) are never presented net of applicable income tax
D) Results in an entry to Retained Earnings directly
B) reported separatel on the income statement as a nonreaccuring item
Common shares are repurchased for $150,000 by a company with Contributed surplus - reacquisiion of Shares by $75,000; and retained earnings $750,000. Based on the average per share amount, the repurchaesd shares have a dollar amount of $125,000. The JE to record the repurchase:
A)debit to retained earnings of $25,000
B) credit to Contributed surplus - reaquisition of shares of $25,000
C) debit to Contributed surplus- reacquisition of shares of $25,000
D) debit to common shares of $150,000
C) debit to contributed surplus - reaquisition of shares of $25,000
A correction of a prior period error is reported:
A) in the income statement
B) directly in the shareholder’s equity section of the balance sheet
C) in either the statement of retained earnings or the statement of changes in shareholder’s equity as an adjustment to the beginning balance of retained earnings
D) in either the satement of retained earnings or statement of changes in shareholder’s equity as an adjustment to the ending balance of retained earnings
C) in either the statement of retained earnings or the statement of changes in shareholder’s equity as an adjustment to the beginning balance of retained earnings
