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Stockholders' Equity (ASC 505

1. Contributed capital •Capital stock •Additional paid-in capital (APIC) (also called Capital in excess of par or Paid-in capital in excess of par) •Treasury stock 2. Reinvested (or Retained) earnings 3. Other comprehensive income items (ASC 220) •Unrealized gains and losses on investments (will discuss under investments) •Unrealized gains and losses on cash flow hedges (will discuss under derivatives) •Excess of additional pension liability over unrecognized prior service cost (will discuss under pensions) •Unrealized foreign currency gains and losses (discussed in advanced accounting) Important Point - Accounting for stockholders' equity always follows the provisions of corporate law in the company's state of incorporation. These laws vary from state to state, and it is always good practice to consult with an attorney regarding specific questions in this area. I - Stock Issuance Question? At what value is newly issued stock recorded? Journal entry when stock is issued:

Costs incurred in issuing stock •Simply treat as a reduction of the amounts recorded in Contributed Capital •of APIC, if par value stock •of common stock, if the stock is no-par stock •Note: Companies used to have the option to treat these expenditures as an organization cost, and amortize them over a period not to exceed 40 years Stock issued on a subscription basis Subscriptions receivable Common (or preferred) stock subscribed APIC Question? What type of account is Subscriptions Receivable?
Intermediate Accounting - Professor deVidal Stockholders' Equity - Page 1


Preferred stock XXX Common stock XXX APIC .generally stated as a percentage of par •Very often the dividends are cumulative •Much less frequently.Professor deVidal Stockholders' Equity .Types of Stock •Common •Voting •Classes •Preemptive right •Par •No par •Stated value •Authorized •Issued •Outstanding •Preferred •Preference with respect to dividends and in liquidation in the case of bankruptcy •Is generally nonvoting •Generally no preemptive right •Often convertible .the book value (of the preferred stock) method is used to record the conversion Preferred stock XXX APIC .When cash is received Cash Subscription receivable When the stock is completely paid Common stock subscribed Common stock II .Common stock XXX •May be callable •Dividends .Page 2 XXX XXX XXX XXX . they may be participating Intermediate Accounting .

and $23. •Partially participating .Professor deVidal Stockholders' Equity . $10 par value preferred stock. •Participating preferred stock (This is much less common) . Dividends not paid become dividends in arrears.May be one of two varieties: •Fully participating .Preferred stockholder's share proportionately (with the common stockholders) in any distributions beyond the stated preferred dividend rate if the total dividend package is large enough so that common stockholders also receive the preference rate.000. and dividends in arrears must be paid before any dividends can be distributed to common stockholders. Except for stock dividends. The capital stock outstanding consisted of $70.Similar to fully participating.Dividends Dividends are proportionate (according to the class of stock) distributions to stockholder's of the following items. Example 1 Windal Corporation indicated that the following dollar amounts would be available for dividends during four successive years: $1. However. the distribution results in a reduction of stockholders' equity. but the participation is limited by a ceiling (a percentage cap on the participation).000. Dates •Cash •Declaration •Property •Script (IOU's) •Record •Liquidating •Stock •Payment Journal entry ∂ Dividends declared Dividends payable XXX XXX • Dividends payable Cash XXX XXX Question? What is the effect of the dividend declaration on the Statement of Cash Flows? Date of payment? Preferred stock dividends •Cumulative preferred stock . most preferred stock is cumulative.000.000 of common stock (par value: $20 per share) and $30.000. any skipped dividends are lost. Case I .000 of 5%. $2. $1.Page 3 .III .Preferred is noncumulative and nonparticipating Preferred Stock Year 1 Year 2 Year 3 Year 4 Common Stock Intermediate Accounting .If preferred stock is not cumulative.

500 + 600 = 2.500 + 1.Preferred is cumulative and nonparticipating Preferred Stock Year 1 Year 2 Year 3 Year 4 Common Stock Case III .500 500 Year 3 1.$2.000 Case II .250 Case V .Professor deVidal Stockholders' Equity .250 = 15.750 7.Preferred is cumulative and fully participating Preferred Stock Common Stock Year 1 1.400 + 16.500 + 5.$1.Preferred is noncumulative and fully participating Preferred Stock Common Stock Year 1 Year 2 Year 3 Year 4 Case IV .250 = 3.$1.000.$23.000 Year 2 1.000. Year 4 . Year 2 . Year 3 .Preferred is noncumulative and partially participating (up to an additional 2%) Preferred Stock Common Stock Year 1 1.000.100 3.Dividends: Year 1 .000 Year 3 1.500 + 12.000 Year 4 500 + 1.Page 4 .000 = 20.900 Intermediate Accounting .000 Year 4 1.500 = 2.000 Year 2 500 + 1.

SEC uses 25%). but the accounting treatment also depends on state law. •Adjust the par value downward or upward depending on the direction of the split •The number of shares outstanding also increases or decreases depending on the direction of the split. then GAAP does not either.Page 5 . Stock splits ." Consequently.General rule (textbook treatment) is that no journal entry is required. •Capitalize retained earnings. you frequently observe the following entry in practice (allowed in about 2/3 of the states): APIC (at par value) Common stock Question: What does a stock split signal to the market place? Question: What does a stock dividend signal to the market place? Question: What is the effect of either of these transactions on the SCF? XXX XXX Intermediate Accounting . but do it at par value Retained earnings (stock dividends declared) Common stock XXX XXX ASC 505-20-30-6 states that retained earnings need to be capitalized only "to the extent occasioned by legal requirements.Stock dividends (a capitalization of reinvested earnings) .Stock dividends come in two varieties: •Small stock dividends (< 20 .Professor deVidal Stockholders' Equity . The accounting treatment also depends on state law. •Capitalize retained earnings and do at market value Retained earnings (stock dividends declared) Common stock APIC XXX XXX XXX •Large stock dividends (> 20 . if the applicable state laws do not require the capitalization of retained earnings. The par value remains the same but the number of shares outstanding increases. Note: For large stock dividends and stock splits.25%) The par value remains the same but the number of shares outstanding increases.25%.

All net income per common share and dividends per share have been adjusted. 2010. a one-for-three reverse split of the Company's common stock. 2010 Common stock $38.6 $880.Example 2 .000 of retained earnings.Small stock dividend Outdoor Equipment Suppliers. January 1.9 797. the Company declared a 10 percent stock dividend to shareholders of record on November 1. Inc. 2008 Stock options exercised Treasury stock purchased Balance. If this proposed split is approved by the shareholders on May 12.8 78.3 9.Stock split Post Oak Company 2010 Financial Statement Note 7 (in Part): Common stock and other capital.7 $77. which served to capitalize approximately $5.1 38.4 Capital in excess of par value $63.Professor deVidal Stockholders' Equity .4 86. December 31.4 81.3 83.6 710.7) $60.25.1 38. Additionally. 2010. to give retroactive effect to this split.9 Intermediate Accounting .523. Example 5 . The stated par value per share of common stock was not changed from $. the Board of Directors authorized. Accordingly.8 8. 2010. 2010 Financial Statements Dividends: On October 22. 2008 Stock options exercised Treasury stock purchases Balance. December 31. December 31. Example 3 . 2010. 2009 Stock options exercised Two-for-one stock split Treasury stock purchased Balance. All share and per share amounts have been restated to retroactively reflect the stock split.Large stock dividend William Horton Corporation 2010 Financial Statements Note L: Stockholders' Equity The company effected a two-for-one stock split in the form of a 100% stock dividend on May 29.Stock split Western Furniture. 2010. Example 4 .6 38.30 per share. shareholders approved an increase in the authorized shares of common stock from 165 million to 330 million and approved a two-for-one stock split to shareholders of record on December 4. (in millions) Balance.1 (38. 2010. the number of common shares outstanding will decrease by two-thirds and per share data for all periods presented will increase accordingly. 2010 Financial Statements Note 16: On March 2.6 . the par value of the common stock will increase to $0. subject to shareholder approval. On December 3. the fair market value of the stock dividend determined as of the declaration date was transferred from retained earnings to common stock and additional paid-in capital.5 72. as applicable.5 . 2010. Inc.Page 6 .2 17.2 Treasury stock $631.

Authorized -. 7.000 shares.IV .624 123.470 (121. $.Professor deVidal Stockholders' Equity .None Common stock. except per share amounts) June 29 2010 Shareholders' equity (Notes 3 and 6): Preferred stock. $.Treasury Stock Journal entry Treasury stock Cash Question? What type of account is treasury stock? Question? Where do you find treasury stock disclosed on the financial statements? Question? Why do companies buy back their own stock? XXX XXX Question? Is a company legally obligated to buy back its shares after it announces its intentions to do so? Example 6 In June of 2008.576 (10.822) 473.Page 7 .000 shares. Eastern Digital Corp. said publicly that it would repurchase as much as 10% of its common stock on the open market in the next year.10 par value.5. Outstanding -.892 5.417) 453. Eastern Digital Corporation 2010 Consolidated Balance Sheet (in part) (in thousands.50. The maker of computer disk drives said it would use the repurchased shares for its employee-benefit plans.426 Intermediate Accounting .095 shares in 2010 and 805 shares in 2009 Total shareholders' equity July 1 2009 5.666 shares in 2010 and 50.066 349.95. Authorized -.10 par value.482 shares in 2009 Additional paid-in capital Retained earnings Treasury stock-common shares at cost.048 355.773 220. Issued -.

Purchase of treasury stock Balance at July 1.417) APIC 50.. The treasury stock account is debited for the cost of the shares acquired and is credited upon reissuance for the same cost.482 184 50.....114) 12...822) (132.095) Amount Amount -0(10... Two methods •Cost method . Note: Most states view the cost of treasury shares as a restriction on retained earnings..666 18 (309) Treasury stock accounting .Professor deVidal Stockholders' Equity .686 (121.833 8. 2009 Purchase of treasury stock Exercise of stock options ESPP shares issued Balance at June 29.. First.This is the most frequently used method. 2010 Treasury Stock Shares -0(805) (805) (7.720) 784 646 (7.. Differences between reacquisition price and any subsequent sale price affect APIC (and possibly retained earnings). 2008 .. Journal entry for the purchase of treasury stock Treasury stock Cash Journal entry for the resale of treasury stock (and the selling price > cost) XXX XXX Journal entry for the resale of treasury stock (and the selling price < cost) •Par (or stated) value method .. the purchase of the shares is viewed as constructive retirement of those shares.Gains or losses are never recognized as a result of treasury stock transactions. Note that the price originally received upon issuance of the stock does not affect these entries.This method views the process as a two-step transaction and focuses on the stock's par value...822) (10. Intermediate Accounting ..Page 8 ..Eastern Digital Corporation 2010 Statement of Shareholders' Equity (in part) (in thousands) Common Stock Shares Balance at June 30... this transaction is treated like the sale of a new security. If the shares are then resold..