chapter 14 part 2 dividends Flashcards
what is the definition of a dividend
a distribution of earnings to shareholders in the form of assets or shares
- typically credit the account that represents the item distributed (cash, non-cash asset, or share capital) and debit to retained earnings
under the Canada business corporations act, a liquidity test must also be met
- dividends may not be declared or paid if corporation:
a. became unable to meet its liabilities as they came due,
b. or if the dividend resulted in the realizable value of assets being less than liabilities plus stated capital
dividends may not be paid from
legal capital (usually represented in share capital accounts) without permission form creditors
what is the declaration date
the date the corporation’s board of directors formally announces the dividend declaration
- Dividends recorded as payable in accounting records
what is the record date
the date on which the list of shareholders of record is prepared
- individuals holding shares at this date, receive the dividend, regardless of sales or purchases of shares after this date
what is ex-dividend date
the day following the date of record
what is payment date
the actual day of the payment of the dividend
- the date of payment typically follows the declaration date by four to 6 weeks
- dividends recorded as paid in accounting records
What is cumulative preferred shares
provide that dividends not declared in a given year accumulate at the specified rate
- accumulated amount must be paid in full if an when dividends are declared in a later year before any dividends can be paid on the common
- dividends in arrears when not declared in a year
- disclose dividends in arrears for cumulative preference shares
what are participating preferred shares
provide that the preferred shareholders participate above the stated preferential rate on a pro rated basis in dividned declarations with the common shareholders
- preferred shareholders receive their preference rate
- common shareholders receives a specified matching dividend
- if the total declared dividend is larger than these two amounts, the excess is divided on a pro rated basis between the two share classes
- pro rata based on number of shares or total capital balances
what are partially participating
participating is capped at a certain level for the preferred shares
what is fully participating shares
share in full extent with no limit
what are property dividends
when a corporation pays dividends with non-cash assets
- also called dividends in kind
how are property dividends recorded
at fair value of the assets distributed
- corporations recognize a gain or a loss on disposal of the assets as of the declaration date
what are the journal entries for property dividends on date of declaration
a, to record revaluation or the property
DR investment in equity securities
CR gain on disposal of security investment
b, to record the dividend
DR retained earnings
CR property dividend payable
c. at the distribution date
DR property dividend payable
CR investment in equity security
what could payment of a dividend with non cash asset may be
- investments in the securities of other companies held by the corporation
- real estate
- merchandise
- other non-cash assets designated by BOD
When does liquidating dividends occur
when the dividend is paid out of equity other than retained earnings
- need to inform shareholders of the portion of any dividend that represents a return of capital
how do you account for liquidating a dividend
the DR might go to retained earnings, and share capital might be DR
when do script dividends arise
when a corporation declares dividends and issues promissory notes (script dividends) to the shareholders
script dividends are also called
a liability dividend
what are stock dividends
entail a proportional distribution to shareholders of additional common or preferred shares of the corporation.
- they increase the number of shares outstanding but have no effect on total shareholders’ equity
reasons for issuing stock dividends
add
what are some accounting issues related to stock dividends
- the value that should be recognized
- the shares issued could for the dividend could be recorded at fair value, stated (or par value) or some other value
what are the 3 alternatives for recording stock dividends
- Fair value method
- stated value method
- memo entry
CBCA requires shares to be issued at what value (or method)
Fair value
With regards to the fair value method of recording stock dividends, what would be required
capitalization of the current fair value of the additional shares issued
- the fair value should be measured at the market price per share on the declaration date
What is the timing / recording for stock dividends
stock dividend is recorded as a DR to retained earnings and a CR to share capital issued
however unlike a cash dividend, a stock dividend can be
revoked prior to the issuance date.
Recognition of the dividend could be at declaration or at issue date.
the difference is trivial
- disclosure would accompany both alternatives
what are special stock dividends
when a stock dividend is of the same class as that held by the recipients, it is called an ordinary stock dividend.
- if it is a class of share capital other than the one held, it is called a special stock dividend.
- use Fair value
what are fractional share rights
when a small stock dividend is issued, not all shareholders will own exactly the number of shares needed to receive whole shares.
- fractional share rights for portions of shares may be issued or a cash distribution can be made.
fractional shares will expire if a group does not come together to combine them as a whole share
fractional share example
instead of issuing 10,000 shares, the corporation issued 8,000 shares and enough fractional share rights for the remaining 2,000 shares. how many rights are issued?
b. if the market value of one share is $8, then the market value of 10 rights must be
c. record the issuance of 8,000 shares and 20,000 share rights
2,000 shares x 10 rights each = 20, 000 rights
$8
therefore, $8/10 rights = $.80 is the value of one right
c.
retained earnings or stock dividends DR 80,000
common shares CR 64,000
common shares fractional CR 16,000
to record 10% stock dividends for 10,000 shares - 8,000 shares issued plus 20,000 share rights for the remaining 2,000
what is a stock split
is a change in the number of shares outstanding with no change in the recorded capital accounts.
- no capitalization of retained earnings
what is the main purpose for a stock split
to increase the number of shares, reduce the market price per share, and improve the marketability of the stock
a stock split is similar to a stock dividend in that
additional shares of stock are distributed
- no accounting entry is needed, only a memo
what is a reverse split (stocks)
decreases the number of shares
- results in a proportional reduction in the number of shares issued and outstanding and an increase in the average book value per share
how do you account for a stock split
a memo entry is recorded
- no consideration has been received by the corporation for the issued shares
in a stock split, the following amounts are NOT changed
- share capital accounts
- additional contributed capital accounts
- retained earnings
- total shareholders’ equity
What are the adjustments required for stock splits
- the company must recalculate all prior years’ per-share amounts so that they will be comparable to post-split per-share amounts
- EPS and dividends per share must be restated
how is a stock split implemented
it is implemented either by
- calling in all of the old shares and concurrently issuing the split shares, or, more commonly
- issuing the additional split shares with notification to shareholders of the change in outstanding shares
Contributed capital is decreased by (Debits)
- retirement of shares at a price greater than average issue price to date, when previous contributed capital has been recorded.
- a financial restructuring
- treasury stock transactions, shares issued below cost, when previous contributed capital has been recorded
contributed capital is increased by (Credit)
- receipt of a donation of assets (donated capital)
- retirement of shares at a price less than average issue price to date
- issue of par value shares at a price or assigned value higher than par
- stock option transactions
- treasury stock transactions, shares reissued above cost
reserves are caused by
unrealized gains and losses that are part of comprehensive income but not part of earnings.
- they are part of shareholder’s equity
- the reserve reflects the cumulative amounts of the items that are added to or subtract form earnings to arrive at comprehensive income
what is an ordinary stock dividend
a stock dividend is of the same class as that held by the recipients
what does DRIP stand for
dividend reinvestment plan
what is a DRIP
allow shareholders to choose to receive shares equal to the cash dividend declared
what are the other comprehensive income items (reserves)
- gains and losses on FVTOCI financial instruments
- revaluation surpluses arising on revaluation of property, plant and equipment
- gains and losses on certain hedging instruments
- actuarial gains and losses related defined pension obligations
- translation gains and losses on foreign operations whose functional currency is different form parent’s functional currency
Statement of changes in equity shows
statement showing each of the components of equity
- must reconcile opening and closing balances
what is the cumulative foreign currency translation account
- equity reserve
- represents unrealized gains and losses on certain types of foreign currency exposure
- when consolidating, the foreign operation’s foreign currency f.s. must be translated into the same currency as the parent’s presentation currency , this will create an overall exchange gain or loss
when would all exchange gains and losses flow through other comprehensive income (OCI)
if the foreign operation is autonomous and transactions are in foreign currency
- all exchange gains and losses flow through OCI
- the cumulative amount is the reserve
- if the foreign subsidiary’s cash flows are dominated by sales and expenses that are NOT in the subsidiary’s dominated currency, then remeasurement is required and exchange gains and losses are part of earnings
what must be disclosed regarding shares
items and conditions of ALL share classes
- the changes in their accounts, either in the statement of changes in equity accounts, either in the statement of changes in equity or in the notes
- it is possible to show only a single line for equity in the SFP, with a break-down shown in the notes or on the statement of changes in equity
Explain the statement of changes in equity
starts with the opening dollar balances, and has a line item for each source of change to an account, resulting in the end of year balance
- comprehensive income affects retained earnings (for the amount of earnings) and a reserve (for the unrealized amounts that are part of comprehensive income but not earnings)
- some companies will include extra columns to include the number of shares in addition to the dollar amount
What other disclosure is required on the statement of changes in equity (SCE)
for each class of share capital, the legal rights, preferences and restriction must be described in the disclosure notes
- the # of shares issued, repurchased and retired during the year must also be disclosed
- companies must disclose their objectives, policies and processes for MANAGING CAPITAL
What transactions affecting equity accounts must be reflected on ______.
non-cash transactions are _______
the SCF
excluded from the SCF and separately listed in the disclosure notes
what are some common items on SCF
- net earnings
- dividends are a cash outflow and may be classified as financing or operation
- stock dividends and stock splits are non-cash transactions
- shares issued for cash are listed as an inflow in financing activities
- cash collected on subscriptions receivable are listed in financing activities
- purchase and sale of treasury stocks creates cash flow under financing activities
ASPE and equity
do private companies need to follow the same rules as public with regards to share retirement and treasury stock transactions
does IASB have any standards regarding this?
yes
no
for private companies, shares issued for non-cash consideration are valued at
IASB - rules
fair value of the shares given up, unless the valuation is problematic
- if the fair value of the assets is more clearly determinable, ten this value is used
- IASB rules require the fair value of the assets received be used to value the transaction
is there comprehensive income with ASPE
no
no OCI in ASPE
in ASPE how do you classify foreign subsidiaries
ASPE requires them to be classified as self-sustaining or integrated, depending on the nature and extent of a parent’s relations and transactions
- self-sustaining subsidiaries cause unrealized exchange gains and losses in equity, while integrated operations cause exchange gains and losses to be recorded in earnings
are private companies required to prepare a comprehensive statement of changes in equity
no
