Equity Flashcards
Issued vs Outstanding vs Treasury Shares
- Go in Date Order
Stock sold on Subscription
Initial payment from Subscriber–
Dr Cash and
Dr Stock Subscription Receivable
Cr Common Stock Subscribed (PAR)
Cr APIC
Other Payments: Relieve A/R with Cr and Dr Cash
Issuance of Shares once have Final Payment -
Cr Common Stock and and Dr CS Subscribed
(Move as no longer subscribed
Account classifications – Stock subscriptions receivable: contra-common stock subscribed (contra OE). However, if the subscription is fully paid before the financial statements are issued or available to be issued, then the account is classified as an asset.
Default on Stock Subscription
Default by subscriber – If the subscriber fails to make all the payments and defaults, the journal entry to record the default depends on the contract and applicable state law.
- Possibilities include:
a. Return all payments to subscriber;
b. Issue shares in proportion to payments made;
c. The subscriber receives no refund or shares.
Additional Preferred Stock or Preferred Stock
PAR for the Preferred goes here, but the excess Paid in Capital can go to the same APIC account as that related to the common stock.
When only one of the two securities has a known market value, that value is allocated to that security and the remaining proceeds are allocated to the security without a known market value.
The market value of Cove’s stock cannot be ascertained. If the bonds were issued separately, they would have sold for $40,000 on an 8% yield to maturity basis.
They are telling you that the bonds are Worth (FV) $40k.
When is APIC recognized in Stock Subscription?
This is one of the few examples of a recognized executory contract. Given that collectability is not an issue, the recording of a stock subscription is essentially the same as the entry for issuing stock for cash, except that a receivable stands in place of cash, and common stock subscribed stands in place of common stock.
Common stock subscribed is an owners’ equity account that is replaced by common stock upon issuance. Any additional paid-in capital is recorded when the contract is signed or recorded, just as if cash were received at that point.
An individual contracts for the purchase of 200 shares of $10 par common stock at a subscription price of $15. After making payments totaling $1,200, the subscriber defaults. Shares are issued in proportion to the amount of cash paid by the investor. The summary journal entry to record the net effect of these two transactions includes:
Credit paid in capital in excess of par on common, $400
The net effect of the transactions is to receive cash of $1,200 and issue stock for that amount at $15/share; $1,200/$15 = 80 shares fully paid. Required net changes in balances are (1) common stock, 80($10) = $800, (2) PIC-CS, 80($15 - $10) = $400, (3) cash $1,200. The share purchase contract receivable account is opened and then closed for the same amount. There is no ending balance in that account.
Preferred Stock
- At redemption, any excess Credit is to Contributed Capital from retirement of Pfd. Stock. And Debit is to R/E.
- This is between the issue price and the Call Price.
- Any Dividends in Arrears must be paid first as well (Dr direct to R/E)
- Preferred Stock and Contributed Capital account must be closed out as well.
Excess Credit comes from Calling (buying back) the Pfd for LESS than issued (101 vs 103 issue price) so have a “Gain” of sorts that is the Credit to APIC-Pfd.
Cross Corp. had outstanding 2,000 shares of 11% preferred stock, $50 par. On August 8, 1992, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross’ additional paid-in capital from preferred stock totaled $30,000.
To record this transaction, Cross should debit (credit) its capital accounts as follows:
The journal entry for retirement:
Preferred stock 2,000(.25)($50) 25,000
Additional paid-in capital, preferred stock $30,000(.25) 7,500
Additional paid-in capital from retirement of preferred stock 10,000
Cash 22,500
The additional paid-in capital from retirement of preferred stock is the net difference between the other amounts in the entry.
When preferred stock is retired, the par value of the stock retired is removed from the preferred stock account, and the pro-rata share of the additional paid-in capital from original issuance is removed. If the total of these two amounts exceeds the amount paid to redeem and retire the stock, as is the case here, additional paid-in capital from retirement of preferred stock is credited. The net effect on additional paid-in capital is an increase of $2,500 ($10,000 - $7,500).
Retained earnings is unaffected.
500 shares of 6%, $100 par convertible preferred stock were issued at $103 per share. Each share is convertible into 20 shares of $5 par common stock. The journal entry to record conversion includes which of the following?
The contributed capital accounts for the preferred are closed and the total amount is transferred to the common stock accounts resulting from issuance upon conversion. The total par value of common stock is first credited to the common stock account. If there is a credit remainder, it is recorded in paid in capital in excess of par, common. If there is a debit remainder, retained earnings is debited. In this case, there is no remainder. The journal entry is:
DR: Preferred stock 500($100) 50,000
DR: PIC-preferred 500($103 - $100) 1,500
CR: Common stock 500(20)($5) 50,000
CR: PIC-common 1,500
Scrip Dividends
Retained earnings is reduced only by the amount of the dividend otherwise payable in cash, in this case $100,000. Interest on the notes is recognized as interest expense, not as a part of the dividend.
Liquidating Dividend
A liquidating dividend is paid from contributed capital, rather than from earned capital (retained earnings). It is assumed that retained earnings is used first when dividends are paid.
The fact that accumulated depletion is also $100,000 justifies the amount of the liquidating dividend. Depletion is a reduction in earnings, but it represents the recognition in expense of an investment that will not be replaced (a depletable resource is never replaced). Thus, there is no capital maintenance requirement as there would be in the case of equipment, for example, which must be replaced.
Therefore, dividends in excess of earnings, to the extent of accumulated depletion, are permissible.
Property Dividend
The gain or loss on disposal of the asset distributed in a property dividend is the same gain or loss that would be recognized had the asset been sold at the time of the dividend.
The date of declaration is the date on which the firm has made the commitment to pay the dividend. The market value on this date is the value that was considered when the board made the decision to distribute a property dividend and thus is the appropriate measure of the sacrifice to the firm.
NOTE: careful on whether question asks about Gain in Net Income or Impact to R/E as R/E is also impacted BY the property Dividend recorded at FV (DIVIDEND) and R/E also Increased by the GAIN from the I/S.
When a property dividend is distributed, any unrealized holding gain or loss on the property is first recognized. The distribution of the property is a disposal and thus calls for the recognition of any holding gain or loss in earnings.
Property Dividend vs Sale
A property dividend is recorded at fair value, in this case $78,000. That is the reduction (debit) in retained earnings recorded in the entry for the dividend. But in this entry, the gain on disposal of the securities is also recorded.
The distribution of the assets is treated as a disposal. Had the securities been sold first, and the proceeds distributed, all parties would be in the same economic position compared to the property dividend. The $18,000 gain on disposal increases income which, when closed to retained earnings, causes retained earnings to increase $18,000. The net decrease in retained earnings is $60,000 ($78,000 - $18,000).
Dividends in arrears (Cumulative Preferred)
Dividends in arrears are footnoted only. They are not recognized as a liability until they are declared.
Impact of Dividend Declaration
It is at declaration that a dividend has its effect on the value of the firm and on working capital. Retained earnings are decreased (or a holding account called Dividends, which is closed to retained earnings, may be recorded), and dividends payable are increased. Dividends payable are a current liability, causing working capital to decrease.
Dividend Declaration
A legal liability comes into existence at declaration. The firm has committed itself to paying resources to shareholders from retained earnings on that date.
