Stockholders' Equity Pt. 2 Flashcards
What is a stock subscription?
frequently, a corporation sells its capital stock by subscription; this means that a contractual agreement to sell a specified number of shares at an agreed upon price on credit is entered into; upon full payment of the subscription, a stock certificate evidencing ownership in the corporation is used
What are stock rights?
it provides an existing shareholder with the opportunity to buy additional shares; the right usually carries a price below the stock’s market price on the date the rights are granted; the issuance of stock rights requires a memorandum entry only
it is possible that the rights may subsequently be redeemed by the company, which will cause a decrease in stockholders’ equity in the amount of the redemption price
What is another stock value issue?
stock issued for outside services should be recorded at the FMV of the stock and the trading price of the stock is the best evidence of fair value
stock issued in a basket sale with other securities (ex. bonds) should be allocated a portion of the sales proceeds based on the relative FMV of the different securities
What is a dividend?
it is a pro rata distribution by a corporation based on the shares of a particular class of stock and usually represents a distribution of earnings; cash dividends are the most common type of dividend distribution, although there are many other types; preferred stock usually pays a fixed dividend, expressed in dollars or as a percentage
date of declaration - the date the board of directors formally approves a dividend; on the declaration date, a liability is created (dividends payable) and retained earnings is reduced (debited)
date of record - the date the board of directors specifies as the date the names of the shareholders to receive the dividend are determined
date of payment - the date on which the dividend is actually disbursed by the corporation or its paying agent
What are cash dividends?
they distribute cash to shareholders and may be declared on common or preferred stock; they are paid from retaining earnings; dividends are paid only on authorized, issued, and outstanding shares; they are not paid or declared on treasury stock
What are property/in-kind dividends?
they distribute noncash assets (inventory, investment securities, etc.) to shareholders; they are nonreciprocal transfers of nonmonetary assets from the company to its shareholders; on the date of declaration the property to be distributed should be restated to fair value and any gain or loss should be recognized in income; the dividend liability and related debit to retained earnings should be recorded at the fair value of the assets transferred
What are scrip dividends?
they are simply a special form of notes payable whereby a corporation commits to paying a dividend at some later date; they may be used when there is a cash shortage; on the date of declaration, retained earnings is debited and notes payable (instead of dividends payable) is credited; some scrip dividends even bear interest from the declaration date to the date of payment (and thus require accrual)
What are liquidating dividends?
they occur when dividends to shareholders exceed retained earnings; dividends in excess of retained earnings would be charged (debited) first to APIC and then to common or preferred stock (as appropriate); liquidating dividends reduce total paid in capital
What are stock dividends?
they distribute additional shares of a company’s own stock to its shareholders; the treatment of stock dividends depends on the size (percentage) of the dividend in proportion to the total shares outstanding before the dividend
treatment of a small stock dividend (< 20-25%): when less than 20-25% of the shares previously outstanding are distributed, the dividend is treated as a small stock dividend because the issuance is not expected to affect the market price of the stock; the FMV of the stock divided at the date of declaration is transferred from retained earnings to capital stock and APIC; there is no effect on total shareholders’ equity, as APIC is substituted for retained earnings
treatment of a large stock dividend(> 20-25%): when more than 20-25% of the previously issued shares outstanding are distributed, the dividend is treated as a large stock dividend, as it may be expected to reduce the market price of the stock (similar to a stock split); the par/stated value of the stock dividend is normally transferred from retained earnings to capital stock to meet legal requirements; the amount transferred is the number o shares issued multiplied by the par/stated value of the stock
stock dividends are generally not distributed on treasury stock because such stock is not considered outstanding; however, an exception is made when the company is maintaining a ratio of treasury shares to shares outstanding in order to meet stock option or other contractual commitments or state law requires that treasury stock be protected from dilution
What are stock splits?
they occur when a corporation issues additional shares of its own stock (without charge) to current shareholders and reduces the part/stated value per share proportionately; there is no change in the total book value of the shares outstanding; thus, the memo entry to acknowledge a stock split is merely a formality
a reverse stock split would involve reducing the numbers of shares outstanding and increasing the par/stated value proportionately; one way to reduce the amount of outstanding shares is to recall outstanding stock certificates and issue new certificates
stock splits are usually not applied to treasury stock because such stock is not considered outstanding; however, an exception is made when the company is maintaining a ratio of treasury shares to shares outstanding in order to meet stock option or other contractual commitments or state law requires that treasury stock be protected from dilution
