Chapter 15: Stockholders Equity Flashcards
ABC Corporation sells 1,000 shares of $1 par value stock at $50 per share. How does ABC Corporation record this transaction?
Dr. Cash 50,000
Cr. Common Stock, $1 par value 1,000
Cr. Paid-In Capital in Excess of Par - CS 49,000
Senior management at ABC Corporation needs some desks and other furniture for the corporate office.
However, they do not want to use cash for the acquisition. The cost of the furniture is $6,000. ABC’s head of procurement offers 100 shares of ABC stock, trading at $55 per share, in exchange for the furniture.
The furniture shop owner accepts this offer.
How does ABC Corporation record this transaction?
Dr. Office Furniture 5,500
Cr. Common Stock, $1 par value 100
Cr. Paid-In Capital in Excess of Par - CS 5,400
As time goes on, ABC Corporation decides to issue significantly more shares.
However, management can no longer manage the issuance, so they hire Bank of Owen to underwrite
the issue.
Bank of Owen assists with issuing 1,000,000 additional shares at $60 per share and charges a fee of 5%. Additionally, ABC Corporation hires Grand Avenue as transfer agent at an annual cost of $250,000.
How does ABC Corporation record these transactions?
Journal entry for the issuance of shares:
Dr. Cash 60,000,000
Cr. Common Stock, $1 par value 1,000,000
Cr. Paid-In Capital in Excess of Par - CS 59,000,000
The underwriting fee is a direct cost of underwriting and is a reduction in the paid in capital.
Dr. Paid-In Capital in Excess of Par - CS 3,000,000
Cr. Cash 3,000,000
The cost of the transfer agent is an indirect cost of issuing stock and is expensed as incurred.
Dr. Transfer Agent Expense 250,000
Cr. Cash 250,000
As still more time goes on, a group of investors approaches ABC Corporation to invest.
However, these investors want preferred treatment in the nature of their shares. What type of preferences could they demand?
Preferences/ Features of Preferred Stock:
- Cumulative Preferred Stock
- Non-cumulative Preferred Stock
- Convertible Preferred Stock
- Callable Preferred Stock
- Participating Preferred Stock
Ultimately, ABC Corporation decides to issue 1,000 cumulative preferred shares for $60 per share.
The preferred shares at 8% preferred shares with a par value of $50. How does ABC Corporation record the journal entry for the issuance?
Dr. Cash 60,000
Cr. Preferred Stock, $50 par value 50,000
Cr. APIC – Preferred Stock 10,000
Note that we maintain a separate account for preferred stock versus common stock for both the
par value and the APIC.
ABC Corporation continues its operations and becomes highly successful. Management commences a stock buyback program.
Why might the corporation engage in a stock buyback program instead of paying a dividend?
Why might a corporation engage in a stock buyback program?
- Tax-efficient distributions to shareholders
- Flexible return of capital to shareholders
- EPS management
- Employment compensation
- Set a price floor
- Merger financing needs
- Reduction in number of shareholders
ABC Corporation buys back 10,000 shares at $75 per share.
How does ABC record the journal entry for the buyback?
Dr. Treasury Stock 750,000
Cash 750,000
Treasury Stock is a contra-equity account. That is, it a subtraction to the equity, reported in the equity section of the balance sheet.
A few months after the buyback (shares bought back at $75/share), ABC Corporation sells 1,000 treasury shares for $85 per share.
How does ABC Corporation record this transaction?
Dr. Cash 85,000
Cr. Treasury Stock 75,000
Cr. Paid-in Capital from Treasury Stock 10,000
ABC Corporation sells 1,000 more treasury shares for $65 per share (shares were purchased via buyback at $75/share).
How does ABC Corporation record this transaction?
Dr. Cash 65,000
Dr. Paid-in Capital from Treasury Stock 10,000
Cr. Treasury Stock 75,000
ABC Corporation retires 1,000 shares (purchased at $75/share).
How does ABC Corporation record the transaction?
Dr. Common Stock, $1 par value 1,000
Dr. Paid-in Capital – Common Stock 74,000
Cr. Treasury Stock 75,000
What is the declaration date?
Is a journal entry made?
The date a dividend is declared.
Yes.
What is the ex dividend date?
Is a journal entry made?
The date the stock begins trading less the dividend.
No.
What is the record date?
Is a journal entry made?
The date the company determines who will be given a dividend.
No.
What is the payment date?
Is a journal entry made?
The date the company transfers funds to shareholders.
Yes.
ABC Corporation decides to pay a cash dividend of $1 per share (993,100 shares active).
How does ABC Corporation record this transaction and what dates are pertinent?
Journal entries:
Declaration Date:
Dr. Retained Earnings 993,100
Cr. Dividends Payable (L) 993,100
Ex dividend date:
No entry
Record Date:
No entry
Payment Date:
Dr. Dividends Payable (L) 993,100
Cr. Cash 993,100
