Equity Flashcards
Rights of shareholders
Voting, Sharing in profits (aka dividends), preemptive right (maintain ownership %), liquidation rights
redeemable preferred stock
May require redemption at specified date and specified price or at option of shareholder. Considered debt, reported at fair value and dividends recorded as interest.
Treasury stock purchase
reduces both cash and owners equity. Increases EPS. May decrease retained earnings, never increases.
Treasury stock cost method
Issued higher than bought, credit paid in capital. Issued lower than bought, debit paid in capital until exhausted, then retained earnings.
Treasury stock par method
Bought higher than issued, debit paid in capital. Bought lower than issued, credit paid in capital.
Treasury Stock - financial statements?
This doesn’t show on the income statement.
Reissuance of treasury stock
no gain
Par Value Method Stock issued > par Repurchased < issued > par Repurchased stock retired What is affect on: Net common stock, paid in capital and retained earnings
Decrease
Decrease
Decrease
There is now less common stock outstanding. It would reduced the paid in capital account since the purchase was for more than the issue price. The funds to purchase would have come from retained earnings.
Cost vs. Par method
Repurchase > par < issue
Effect on Additional Paid in Cap and Retained Earnings
Cost method uses Contra OE (treasury stock - debited for repurchase cost) account to cover the difference between issue price and repurchase price. This does not affect retained earnings or paid in cap.
Par method would debit treasury stock account at par value. Decrease paid in cap to extinguishment. Since less was paid to repurchase than original issue, the retained earnings account is unaffected.
Effect on retained earnings and net income from stock repurchases.
Retained earnings can never be increased through transactions with owners.
Additionally, net income is not effected by these purchases.
Journal entries Par Value
Stock issue, repurchase and reissue
Db Cash shares issued * iss $
Cr Common Stock (shrs * par)
Cr Add PICap (shrs (iss $-par))
Db T Stock (shrs * par)
Db Add PICap (shrs (iss $ - par))
Db Retained Ern (shrs (pur $ - iss $)
Cr Cash (shrs * pur $)
Db Cash (shrs * new iss $)
Cr T Stock (shrs * par)
Cr Add PICap (shrs (new iss $ - par))
Journal entries Cost Value
repurchase and reissue
Db T Stock (shrs * pur $) Cr Chas (shrs * pur $)
Db Cash (shrs * new iss $)
Cr T Stock (shrs * cost $)
Cr PIC T Stock (shrs *(new iss - cost)
If PIC is tapped out, then you’ll credit retained earnings for remainder.
Liquidating dividends
Return OF capital not ON capital
Reduces contributed capital instead of retained earnings
Property dividend
Market value of asset at date of declaration. Normal gain on disposal of asset.
Scrip Dividend
Note form with interest until cash is paid. Recognize accrued interest as liability until paid.
Small stock dividend effect on retained earnings
Decreases - remember, stock dividends move assets from retained earnings to paid in capital. These are capitalized at the market value of the stock on dec date.
Cash dividend effects on working capital
On dec date, retained earnings are reduced. Working capital is current assets - current liabilities. Dividends payable is a current liability. The payment of a dividend does not effect working capital, because it hit cash (current asset) and dividend payable (current liability) at the same time.
Accrued dividends
Are not recorded as a liability until declared, but they must be disclosed.
Stock dividends
Increase shares outstanding, but do not change owners equity - does reduce RE. Thus decreasing EPS but maintaining % ownership. Remember, does not cause liability or affect WC. These are not treated as revenue to receiver. Increases contributed capital by capitalizing retained earnings.
Large Stock dividends
Capitalized at par value instead of market. Greater than 20-25% of shares outstanding.
If treated as a split, Paid in Cap is credited instead of RE.
Stock splits
no journal entry
Does not affect RE or Common Stock account
Dividend order of priority for payment
- Preferred in arrears
- Preferred current
- Common = same % as preferred * shares outstanding
- Preferred additional %
- Common remaining
If there isn’t enough after the common to distribute the remainder to both common and preferred at the same % then allocate by each classes % of total par value.
Preferred not fully participating
The percentage given is a percentage of total preferred par value, not a percentage of the dividend.
Retained earnings
Income-dividends+/1 other adjustments = retained earnings
Rev-Exp + previous RE = RE (pre-tax)
Stock right issuances affect on owners equity
No effect on OE until rights are exercised. When exercised, RE not affected, but additional paid in cap will increase as long as rights’ exercise price is above par.
Use of APIC when T shares reissued/purchases:
Increase contributed cap from T stock
Par- Purchase < issue $
Cost - Reissue > cost
Use of APIC when T shares reissued/purchases:
Decrease contributed cap from T stock
Par - Purchase > issue $
Cost - Reissue < cost
Scrip Div J/E
At Dec:
Deb RE
Cr div payable
At payment:
Deb div payable
Deb interest exp
Cr Cash
Stock Right - J/Es
At issue:
no entry
At exercise: normal issue entry
If lapse - no entry
Retained earnings statement
R/E for year ending Beg RE Prior period adj +/- Change in Acct adj +/- Restated balance \+/- NI - cash & property dividends declared - stock dividends = R/E year end
Footnote to disclose appropriations/restrictions.
BV
= (Total OE - preferred stock claims)/common outstanding
= (common stock equity)/(Ending common outstanding)
Quasi Reorg
Eliminates negative RE
1) Update overstated asset values against RE
2) Use contributed cap to absorb all or part of RE deficit
3) Reduce the common stock and par value, if necessary
Zero retained earnings, reduced assets and contributed capital. Remember, this is an increase in retained earnings from negative to zero. Decreases owners equity.
Requirements of Quasi Reorg
Shareholder approval, RE balance must be zero after, no contributed cap account can have a negative balance, assets must be written down to mkt, RE must be dated 3-10 years after.
Quasi Reorg J/E
1 - Write down assets
Deb RE
Cr Operational asets
2 - Close PIC to absorb RE deficit
Db APIC
Cr RE
- Reduce common stock for the rest
Db Stock
Cr RE
New par value = new stock balance/shares outstanding
