Stockholders Equity

Question 1

Journal entry for issuance of Common Stock

Answer 1

Debit Cash for the proceeds collected from the Stockholders
Credit Common Stock account.
Stock issuance is done at Part value (Cost per share / stock) or at market value ( with premium)
Debit Cash collected
Credit Common Stock (at par)
Credit APIC (premium - par value)

Question 2

What is Treasury Stock? What Journal entry to record when a company re-purchase treasury stock?

Answer 2

Treasury Stocks are the Common Stocks issued by the Company to stockholders are subsequently re-purchased by the Company.

JE when Treasury Stocks are purchased -
Treasury Stock account debit (reduction to Common Stock and Equity)
Cash account credit (money goes out to Stockholders as proceed of buy-back)

this is also known as Cost Method

Question 3

When treasury is reissued?

Answer 3

Debit Cash for the amount collected on re-issuance
Credit Treasury Stock with the original amount of re-purchase price
Credit APIC - the excess received over original re-purchase price of Treasury Stock

Question 4

What are two methods of accounting for Treasury Stocks

Answer 4

1) Cost Method
2) Legal (Par) Method

Most commonly used method is Cost Method.
Under Cost Method accounting Treasury Stocks are recorded at re-purchased / re-acquired price
Under Legal (Par) Method Treasury Stock re-purchased is record at par value of the common stock and any differential paid to stockholders (difference between re-purchase price and par value) is recorded in APIC account.
If APIC account does not have sufficient balance to absorb repurchase of treasury stock, the difference is recorded to Retained Earnings. Similar accounting treatment is done when treasure stocks are re-issued by the company.

Question 5

What are different forms of distributions to stockholders?

Answer 5

1. Cash Dividend
2. Property (in-kind) dividend
3. Scrip Dividend
4. Liquidating Dividend
5. Stock Dividend
6. Stock Splits

Question 6

When Stock Dividends are considered as Small vs Large? What is the accounting treatment and impact on financial statements?

Answer 6

Stock dividends can Small and Large depending on the percentages of the distribution declared by the company.

Stock dividends are considered as small when percentage declared is less than 20-25%. Issuance of such stock dividend is not expected to affect the market price of the stock.
The accounting journal entry to record Small Stock Dividend -

Retained Earnings - Debit (at Fair Value/Market Value of the Stock)
Common Stock - Credit (at Par or State value of the Stock)
APIC - Credit (to balance JE)

Small Stock dividends affects ONLY on Retained Earnings (RE decreases)

Stock dividends considered as Large when the declared % is more than 20-25%. Large stock dividends are expected to reduce market value of the stock.

The journal entry to record large stock dividend -

Retained Earnings - Debit (par / stated value of the stock and declared %)
Common Stock - Credit (at par / stated value)

Decreases RE - Increases Common Stock