1.Overview of Corporation (General)2.Cash and Property dividends3.Stock dividends and Stock splits4.Treasury Stock transactions5.Stock rights and warrants6.Financial Statement Presentation
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Board of directors appoint officers.
Articles of incorporationare filed with the state.
Board of directors elected by
shareholders.Shares of
stock issued.
State issues a corporate charter.
CorporateCharter
• Nature and location of business activities.• Number and classes of shares authorized.• Number and classes of shares authorized.
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Rightto vote.
Right to sharein distribution of
assets if companyis liquidated.
Right to sharein profits whendividends are
declared.
Preemptiveright to maintain
percentageownership
(proportional interest)
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Issued shares are authorized shares of stock that have been
sold.
Unissued shares are authorized shares of stock that have never been sold.
AuthorizedShares
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UnissuedShares
TreasuryShares
OutstandingShares
Treasury shares are issued shares that have been reacquired by the
corporation.
IssuedShares
Outstanding shares are issued shares that are
owned by shareholders.Authorized
Shares
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UnissuedShares
RetiredShares
OutstandingShares
Retired shares assume the same status as
authorized but unissued shares.
Outstanding shares are issued shares that are
owned by stockholders.Authorized
Shares
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Par value stock
*Designated dollar amount per share stated in the corporate charter.
*Par value has no relationship to market value.
Par value stock
*Designated dollar amount per share stated in the corporate charter.
*Par value has no relationship to market value.
No-par stock*Dollar amount per share
not designated in corporate charter.
*Corporations can assign a stated value per share (treated as if par value).
No-par stock*Dollar amount per share
not designated in corporate charter.
*Corporations can assign a stated value per share (treated as if par value).
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Common stock is the basic voting stock of the corporation. It ranks after preferred stock for dividend and liquidation distribution. Dividends are determined by the board of
directors.
Dividend and liquidation preference overcommon stock.
Generally does nothave voting rights.
Usually has apar or stated value.
May be convertible,callable, and/or
redeemable.
PreferredStock
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Rights given up by preferred stockholders:1.Voting rights (No)
2.Sharing in success- Cash dividends received by Preferred Stockholders are usually fixed in amount.
E.g. Co issued 5,000 preferred shares of 7%, $100 par value
(each $100 share pays a $7.00 dividends (100 x .07)
Rights enjoyed by preferred stockholders:1.Cash dividend preference-
2.Liquidation preference-
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Unpaid dividends must be paid in full beforeany distributions to common stock.
Dividends in arrears are not liabilities, but the pershare and aggregate amounts must be disclosed.
• Are usually stated as a percentage of the par or stated value.
• May be cumulative or noncumulative.
• May be partially participating, fully participating, or nonparticipating.
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Callable issuing companyto redeem the preferred stock.
Redeemableholder to redeem The stock—usually with somerestrictions.
Convertibleexchangepreferred stock for common stock.
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Shareholders’ Equity
Paid-in Capital(Capital Stock)
Retained Earnings
Amounts earnedby corporation
Amounts investedby shareholders
Accumulated OtherComprehensive Income
Other gains and losses not
included in comprehensive
net income
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Net holding gains (losses)
on investments.
Net holding gains (losses)
on investments.
Deferred gains (losses) from derivatives.
Deferred gains (losses) from derivatives.
Net unrecognized
loss on pensions.
Net unrecognized
loss on pensions.
Gains (losses) from foreign
currency translations.
Gains (losses) from foreign
currency translations.
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Balance Sheet Reporting
The accumulated amount of comprehensive income is reflected in the Equity section of the balance sheet in two ways:
• Net income (less dividends) is cumulated in retained earnings.
• Other comprehensive income is cumulated in accumulated other comprehensive income.
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*Issuing Stock for Noncash AssetsIssuing Stock for Noncash Assets
Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly evident.
If market values cannot be determined, use appraised values.
Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly evident.
If market values cannot be determined, use appraised values.
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*Share Issue CostsShare Issue Costs
Share issue costs reduce net proceeds- resulting in a lower paid-in capital.
• Registration fees• Underwriter commissions• Printing and clerical costs• Legal and accounting fees• Promotional costs
ABC Issued 100 shares $1 par at 1.50 with issue cost $10
Dr. Cash 140 (150-10) cr. C Stock 100 (100 x 1) cr. PIC –CS 40 {(100x.50)-10}
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Property Dividends
Dividends payable in assets other than cash.
Restate at fair value the property it will distribute, recognizing any gain or loss.
Property Dividends (2)Property Dividends (2)
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Types of DividendsTypes of Dividends
Less than 20 - 25% shares
More than20 - 25% shares
Use FMVat declaration
Use FMVat declaration
Use parvalue
Use parvalue
Small Dividend Large dividend
Stock dividends result in more shares being issued as dividend (no assets are involved)
Distribution of corporate earnings
At FMV
ARB 43: Transfer from RE/PIC
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Stock splits change the par value per share and the number of shares outstanding, but the total par value is unchanged, and no
journal entry is required.
Assume that a corporation had 3,000shares of $2 par value common stock outstanding
before a 2–for–1 stock split.
Increase
Decrease
No Change
Before Split
After Split
Common Stock Shares 3,000 6,000
Par Value per Share 2.00$ 1.00$
Total Par Value 6,000$ 6,000$
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1) Par value of a share does not change
2) Total number of shares increases
3) Total stockholders’ equity does not change
4) The composition of equity changes (less of retained earnings; more of stock)
5) Stock dividends require journal entries
1) Par value of a share decreases
2) Total number of shares increases
3) Total stockholders’ equity does not change
4) The composition of equity does not change (same amounts of stock and RE)
5) Stock splits do not require journal entries
Stock Dividends Stock Splits
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Matrix, Inc. declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend.
The company has 1,000,000, $1 par value common stock outstanding. The stock is trading in the open
market for $14 per share. The per share par value of the shares is not to be changed.
Matrix, Inc. declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend.
The company has 1,000,000, $1 par value common stock outstanding. The stock is trading in the open
market for $14 per share. The per share par value of the shares is not to be changed.
Paid-in capital – excess of par common ….1,000,000 Common stock ……………..……………… 1,000,000
Retained Earnings …................. 1,000,000 Common stock ……………..…………………1,000,000To record declaration and distribution of 2-for-1 stocksplit effected in the form of a 100% stock dividend.
or
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*Share BuybacksShare Buybacks
A corporation might reacquire shares of its stock to . . . • support the market price.
• increase earnings per share.
• distribute in stock option plans.
• issue as a stock dividend.
• use in mergers and acquisitions.
• avoid takeover attempts.
A corporation might reacquire shares of its stock to . . . • support the market price.
• increase earnings per share.
• distribute in stock option plans.
• issue as a stock dividend.
• use in mergers and acquisitions.
• avoid takeover attempts.
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account for the reacquired shares by
1.Retiring
2. Treasury shares (to reissue).
Shares reacquired & formally retired:-reduce the proportionate originally capital
created- Any difference in PIC –repurchase
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Steps in treasury stock transactions: Initially, corporations issue stock from authorized
stock
Treasury stock: repurchase stock (from issued/outstanding)
T/Stock may be retired or reissued
Treasury Stock :CONTRA EQUITY ACCOUNT
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Presentation and Analysis of Stockholders’ EquityPresentation and Analysis of Stockholders’ Equity
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*Overview of Corporation
*Structure of shareholders’ equity
*Type of stock
*Issue of shares: cash/non-cash
*Dividends: cash/stock/property
*Retirement of stock
*Repurchase of stock: Treasury stock
*Presentation