Components of Stockholders’ Equity

Paid-in capital• “Legal” capital (par or stated value)• Additional paid-in capital

Accumulated other comprehensive income

Retained earnings (undistributed earnings)

Par value stock• Record common stock at par value

No-par with stated value• Record common stock at stated value

“Pure” no-par stock• Entire sale proceeds credited to stock account

Issuance of Stock

Subscribed Stock

Individuals sign valid contracts for stock purchase.

Entire Paid-in Capital in Excess of Par is recorded at issuance.

Common Stock Subscribed credited. Common Stock is recorded ONLY on full

receipt of cash.

Subscribed Stock - Entries

Subscriptions received, $1,000(par = $250)

Cash received

Issuance of stock

Subs. Rec. 1000 CS Subscribed 250

APIC 750

Cash 1000Subs. Rec.

1000CS Subscribed 250

Com. Stock 250

Description Entry

Financial Statement Presentationof Subscriptions Receivable

Deduction from stockholders’ equity [preferred method and required by SEC unless receivable collected prior to issuance of financial statements]

Asset (current if collectible within a year or operating cycle …)

Financial Statement Presentation of Common Stock Subscribed

Presented in a manner similar to but separate from (below) common stock

Must be identified as subscribed stock

Reasons for Treasury Stock• Increase earnings per share and return on equity• Provide tax efficient distributions of excess cash to

shareholders• Provide stock for employee stock compensation

contracts • Thwart takeover attempts• Create or improve the market for the stock

Recording Treasury Stock

COST METHOD: Treasury stock recorded at cost Shown as reduction of equity in stockholders’

equity section PAR VALUE METHOD:

Treasury stock recorded at par value Shown as reduction of common stock in

stockholders’ equity section

CASE 1 

COST METHOD PAR VALUE METHOD Feb. 15 TS (10,000 X 15) 150,000 TS (10,000 X 10) 100,000

Cash 150,000 APIC (1/3 of 30,000) 10,000Retained earnings 40,000

Cash 150,000

Apr. 28 Cash 34,000 Cash 34,000TS (2,000 X 15) 30,000 TS (2,000 X 15) 20,000APIC-TS 4,000 APIC 14,000

Aug. 17 Cash 27,000 Cash 27,000APIC-TS 4,000 Retained earnings 3,000Retained earnings 14,000 TS (3,000 X 10) 30,000

TS (3,000 X 15) 45,000   

CASE 2

Cost Method Par Value Method Feb. 15 TS (10,000 X 10.50) 105,000 TS (10,000 X 10) 100,000

Cash 105,000 APIC (1/3 of 30,000) 10,000Cash 105,000APIC-TS 5,000

Apr. 28 Cash 34,000 Cash 34,000TS (2,000 X 10.50) 21,000 TS (2,000 X 10) 20,000APIC-TS 13,000 APIC 14,000

Aug. 17 Cash 27,000 Cash 27,000APIC-TS 4,500 APIC-TS 3,000

TS (3,000 X 10.50) 31,500 TS (3,000 X 10) 30,000

Preferred Stock Features

Preference as to dividendsPreference as to assets in the event of

liquidationConvertibility into common stock at the

option of the stockholdersCallable at the option of the corporationNonvoting

Stock Issued in Noncash Transactionswith Other than Employees

Record at FV of stock issued or FV of services or property received, whichever is more clearly determinable

Retained Earnings

• Net loss• Prior period adjustments• Cash dividends• Property dividends• Stock dividends• Treasury stock deficiencies

• Net income• Prior period adjustments• Quasi-reorganization adjustments

Debit Adjustments Credit Adjustments

Types Of Dividends

Cash dividends Scrip dividends Property dividends Stock dividends Liquidating dividends (return of capital)

Cash Dividends - Three Important Dates

Date of declaration – date dividends are declared

Date of record – date list of stockholders to whom dividends are to be paid is finalized

Date of payment - date dividends are paid to stockholders of record

Cash Dividends: Journal Entries

Date of Declaration Date of Record

Date of Payment

Retained Earnings Dividends Payable

No Entry

Dividends PayableCash

PROPERTY DIVIDENDS

Nonreciprocal transfers of nonmonetary assets to owners

Record at fair value of assets transferred (recognize gain/loss on transfer)

Property Dividend:Entries Dividend declared on Dec. 21, 2014 – to be

distributed in the form of marketable securities owned by Alpha Company.

Dividend is declared on Dec. 21, 2014 and payable on Jan. 21, 2015 to stockholders of record on Jan 14, 2015.

Fair value of securities is $134,000 on Dec 21, 2014 and $ 135,900 on Jan 21, 2015.

Cost of securities is $110,000.Record the entries on the dates of declaration, record, and payment.

Property Dividend Entries

1 Declaration DateInvestments 24,000 Gain – Mkt. Sec. 24,000

2 Declaration DateRet. Earnings 134,000 Prop. Div. Pay. 134,000

3 Payment DateProp. Div. Pay 134,000 Investments 134,000

Stock Dividends Issuance of more-shares dividend (no cash flow is

involved) Small stock dividends involve issues of less than

20% - 25% of outstanding stock The accounting for small stock dividends is based

on the fair market value of stock issued. The accounting for large stock dividends (more

than 20%-25% of outstanding stock) is based on the par value of stock issued.

Stock Dividends

Types of Dividends

Less than 20 - 25% shares

More than20 - 25% shares

Use FMVat declaration

Use parvalue

Small Dividend Large dividend

Stock Dividends: Journal Entries

• Outstanding stock: 1,000 shares; $10 par• Stock dividend: 10%• FMV on date of declaration: $12

Small Stock Dividend

Declaration Ret. Earnings 1,200 CS Distributable 1,000 APIC 200

Distribution CS Distributable 1,000 Common Stock 1,000

Stock dividend = 10% of 1,000 shares = 100 shares

Large Stock Dividends

• Outstanding stock: 3,000 shares; $10 par• Stock dividend: 30%• FMV on date of declaration: $12

Large Stock Dividends

Declaration Ret. Earnings 9,000 CS Distributable 9,000

Distribution CS Distributable 9,000 Common Stock 9,000

Stock dividend = 30% of 3,000 shares = 900 shares

STOCK SPLITS

Par value of each share decreases Number of shares increases Total par value is unchanged Total stockholders’ equity is unchanged No formal journal entry [memo entry is made]

Stock Dividends and Stock Splits

• Par value of a share does not change

• Total number of shares increases

• Total stockholders’ equity does not change

• The composition of equity changes (less of retained earnings; more of stock)

• Stock dividends require journal entries

• Par value of a share decreases

• Total number of shares increases

• Total stockholders’ equity does not change

• The composition of equity does not change (same amounts of stock and RE)

• Stock splits do not require journal entries

Stock Dividends Stock Splits