Equity Flashcards
Preferred stock -rights
stock with two preferred rights over common stockholders
- dividend preference
- liquidation preference
Preferred stock - types
cumulative: dividends accumulate whether paid or not
- divs in arrears must be disclosed in FNs but not a liability until delcared
participating: get the preferred divs. after c-stock gets divs, the excess is split between the two based on their pro-rata share of equity
convertible: comes with an option to convert to c-stock at a pre-set ratio
preference with warrants: warrants can be converted to c-stock at pre-set price. so end up with p and c stock.
callable: entity has right to repurchase p-stock at pre-set price
Preferred stock - redeemable & irredeemable
irredeemable preferred stock is equity
redeemable preferred stock is a liability (it’s debt that gets repaid)
Stock subscriptions
Used when it is unknown what the market demand for the shares will be. Test out different prices using subscriptions to judge the demand.
requires good-faith payment up front, with remaining amount payable
Stock subscriptions - entries
common stock
1) When subscription is made:
e.g. 10 shares, par 1
DR cash 5
DR subscription receivable 15
CR c-stock subscription 10
CR c-stock APIC 10
1A) when cash balance received:
DR cash 15
DR c-stock subscription 10
CR sub receivable 15
CR common stock 10
1B) if stock issued cancelled & refund issued:
DR c-stock subscriptions 10
DR c-stock APIC 10
CR subscription receivable 15
CR cash 5
1C) if buyer breaches & balance forfeited
DR c-stock subscriptions 10
DR APIC 10
CR subscription receivable 15
CR subscription forfeited 5
Types of APIC
APIC-common: balance over par
APIC-preferred: balance over par
APIC-retired: when stock is repurchased from owners and retired at less than the original price
APIC-treasury
- cost method: repurchased stock sold for more than the repurchase price
- par value method: stocks are repurchased at less than original issue price
APIC-warrants: value allotted to detachable warrants issued with bods or preferred stock
Dividend dates
date of declaration: BOD declare dividend. accrue liability
DR RE; CR div payable
date of record: shareholders on this date get the div
date of payment: div is paid out
DR div payable; CR cash
Property dividends
recorded at FV as of the declaration date. difference between book and fair value is treated as gain or loss.
changes in FV after the declaration date and the payment date are not considered.
Liquidating dividends
dividends that are a return of capital. i.e., the capital in the company is being liquidated and return to the owners. APIC is debited. (Only ever DR c-stock on complete dissolution).
declaration date:
DR retained earnings (DIVS ON EARNINGS)
DR APIC (THIS IS THE LIQUIDATING PORTION)
CR dividends payable
payment date:
DR div payable
CR cash
Scrip dividends
promise to pay money in the future to the stockholders. not payable now; may or may not include interest when paid. this is a long-term liability (promise to pay)
declaration date:
DR RE
CR scrip div payable
payment date:
DR scrip div payable
DR interest expense (if any)
CR cash
used if a company doesn’t have the cash to pay out the div now, but plans to pay in the future (this is optics for the market)
Stock dividends
instead of paying cash, company issues more dividends. no liability when declared, because no change in cash/assets or in the ownership interests.
basically, this is a transfer from RE to c-stock and APIC
can be ordinary or large stock dividend
Stock dividends - ordinary
small stock dividends; usually less than 20-25% of the total stock. (e.g. 1000 shares, stock div of 100 shs declared)
recorded at the stock’s FV on the declaration date.
DR retained earnings (FV of stock)
CR common stock (par)
CR APIC (excess over par)
Stock dividends - large
basically this is a stock split disguised as a dividend
usually more than 20-25% of the total stock.
record at par value. transfer from RE to common stock.
DR retained earnings
CR common stock
Stock splits
used to increase trade-ability of shares. if share price is too high, it is difficult to trade.
1 share is split into 2 shares, etc etc etc.
only adjustment is record memo entry that par value was divided.
Appropriation of retained earnings
done when a portion of RE is appropriated to meet certain contingent liabilities that may require large payments in the future.
total RE is unchanged, but the portion available for dividends is decreased.
DR retained earnings - unappropriated
CR retained earnings - appropriated
Quasi reorganization
internal restructuring of the company. requires shareholder approval. accounts are restated as if they had reorg’d; retained earnings is set back to -0-.
steps:
adjust assets to FV
adjust common stock to new (decreased) stated amount
plug for APIC
Quasi reorganization - example
company has the following amounts:
FROM TO
asset 1400 1000
liabilities 600 600
c-stock 1600 320
APIC 1000 80 PLUG
RE (1800) -0-
shareholders approve quasi-reorg. par value of c-stock is reduced from 10 to 2. assets reduced to FV of 1000
DR common stock 1280
DR APIC 920 PLUG
CR assets 400
CR retained earnings 1800
Accumulated other comprehensive income
this is like RE for other comprehensive income
it is the accumulated account for changes in OCI. it is a separate component of stockholder’s equity.
Treasury stock
stocks that were repurchased from shareholders but have not been retired
reduces number of outstanding stock
participates in stock dividends and splits
methods of accounting: cost method, par method
Treasury stock - cost method
use this method if the company plans to resell the shares
t-stock reported separately on the balance sheet.
- deduction to stockholders equity
- account at repurchase cost
Treasury stock - par value method
use this method if the company plans to hold the shares indefinitely.
Treasury stock - cost method - example
issue:
100,000 shares $10 par, issued @ $18
DR cash 1,800,000
CR c-stock 1,000,000
CR APIC 800,000
repurchase: 50,000 shs @ $15
**DO NOT DEBIT C-STOCK OR APIC **
DR t-stock 750,000
CR cash 750,000
*why? because you are going to sell them again. saves mess. no gain or loss recog until re-issue/retirement.
re-issue: 10,000 shs @ $17
DR cash 170,000
CR t-stock 150,000 (10k shs @ 15)
CR t-APIC 20,000 (10k shs @ 17-15)
re-issue: 30,000 shs @ 14
LOSS ON REISSUE: first utilize any t-APIC. balance to RE
DR cash 420,000 (30k shs @ 14)
DR t-APIC 20,000 (30k shs @ -1; UP TO 20k)
DR RE 10,000
CR t-stock 500,000 (30k shs @ 15)
retirement: 10,000 shs remaining in t-stock acct
NOW you have to remove these from c-stock and c-APIC
DR c-stock 100,000 (10k @ 10par)
DR APIC 80,000 (10k @ 8 over par)
CR t-APIC 30,000 (10k @ 18-15)
CR t-stock 150,000 (10k @ 15)
Treasury stock - par value method - example
issue:
plan to retire shares, so book back using par
100,000 shares $10 par, issued @ $18
DR cash 1,800,000
CR c-stock 1,000,000
CR APIC 800,000
repurchase: 50,000 shs @ $15
DR t-stock 500,000
DR c-APIC 400,000 (50k shs @ 8 apic)
DR t-APIC 150,000
CR cash 750,000
remove the APIC for the shares “retire-able”
re-issue: 10,000 shs @ $17
DR cash 170,000
CR t-stock 100,000 (10k shs @ 10)
CR c-APIC 70,000 (10k shs @ 17-10)
re-issue: 30,000 shs @ 14
DR cash 420,000 (30k shs @ 14)
CR t-stock 300,000 (30k shs @ 10)
CR c-APIC 120,000 30k shs @ 14-10)
retirement: 10,000 shs remaining in t-stock acct
DR c-stock 100,000 (10k @ 10par)
CR t-stock 100,000 (10k @ 10)
Stock appreciation right
entitles an employee to receive stock/cash if the entity’s stock price rises above a certain level.
payout to the employee will be the appreciation $ multiplied by X number of stocks.
compensation recognized if stock price increases (liability for appreciation rights)
