Module 9: Stockholders’ EquityModule 9: Stockholders’ Equity

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2. TS Example -Journal Entries2. TS Example -Journal EntriesFeb: repurchase 10,000 sh. @ $7 =

$70,000.

July: reissue 2,000 sh @ $ 8 = $16,000

(cost = 2,000 @ $7 = 14,000)

TS 70,000Cash 70,000

Cash 16,000TS 14,000APIC - TS 2,000

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2. TS Example -Journal Entries2. TS Example -Journal EntriesDec: reissue 8,000 sh. @ $ 6 = $48,000

(cost = 8,000 sh.@ $7 = 56,000)

Now we need to debit one or more accounts to compensate for the difference.

(1) debit APIC-TS (but lower limit is to -0-).(2) debit RE if necessary for any remaining

balance (this is only necessary when we are decreasing equity).

Cash 48,000APIC-TS (1) 2,000RE (2) 6,000

TS 56,000

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3. Stock Options - Illustration 13. Stock Options - Illustration 1 Basically, the pricing model assumes a number

of factors which could affect the growth in the price of the stock, and also incorporates probabilities for the number of employees that would actually exercise the option.

Since total compensation expense = $200,000, we will recognize it over the life of the option (200,000/2 = $100,000 per year).

The journal entries in Illustration 1 are required with SFAS No. 123R.

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3. Stock Options - Illustration 13. Stock Options - Illustration 1(SFAS 123R: required journal entries)(SFAS 123R: required journal entries)

For 2005: Compensation expense 100,000

APIC - stock options 100,000For 2006:Compensation expense 100,000

APIC - stock options 100,000Jan. 2, 2007:Cash ($40 x 30,000) 1,200,000APIC - stock options 200,000

Common stock ($10 x 30,000) 300,000APIC - common stock (plug) 1,100,000

Note that, even though the market price of the stock at 1/2/07 is $80 per share, the transaction is recorded at the PV of the estimated future price at the date of exercise ($46.67 per share). The company never recognizes the additional “value” that it has given to the employees.

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3.Restricted Stock-Illustration 23.Restricted Stock-Illustration 2Given the following information: Que Company adopted a stock compensation plan that issued 10,000 shares of restricted stock to employees at January 2, 2005. The par value of the common stock was $10, and the stock was trading at $15 per share at the issue date. The vesting period was 2 years; after that time the stock would be unrestricted. The journal entry at the time of issue (1/2/05) would be (10,000 sh. x $15 = $150,000):Deferred comp. expense 150,000

CS (Restricted) 100,000APIC - CS 50,000

(Note: Deferred Comp. is part of Other Comprehensive Income, until it is transferred to Income Statement over the 2 year vesting period.)

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3. Restricted Stock- Illustration 23. Restricted Stock- Illustration 2

For 2005: Compensation expense 75,000

Deferred comp. expense 75,000For 2006:Compensation expense 75,000

Deferred comp. expense 75,000

Jan. 2, 2007 (If separate account is used for restricted stock - transfer par value): CS (Restricted) 100,000

CS 100,000(Otherwise, no journal entry required; the restriction is released and the shares are no longer restricted.)

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8. Comprehensive Class Problem - 8. Comprehensive Class Problem - Stockholders’ EquityStockholders’ Equity

Given the following SE balances for Company G at 1/1/08:Common stock, $10 par, 50,000 shares authorized, 20,000 shares issued and outstanding $200,000APIC on common stock 400,000Retained earnings 400,000During 2008, Company G had the following activity:1. Net income for the year was $250,000.2. Cash dividends of $2 per share were declared and paid on

February 1.3. On June 1, Company G repurchased 2,000 shares of its

own stock at $20 per share (using the cost method).4. On December 1, Company G reissued 500 shares of

treasury stock at $18 per share.5. On December 15, Company G declared a 100% stock

dividend, to be distributed to all of its shareholders (including treasury), on Jan. 15, 2009.

6. At Dec. 31, Company G recorded an AJE to revalue its available for sale investments from $20,000 to $32,000.

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Comprehensive Class Problem - Comprehensive Class Problem - Stockholders’ Equity (continued)Stockholders’ Equity (continued)

Required:A.Prepare journal entries for items 2 through 6

(item 1 would require detail information for revenues and expenses to prepare - just know that the credit is to retained earnings for $250,000).

B.Prepare the Statement of Stockholders’ Equity for Company G for 2008.

C.Prepare the stockholders’ equity section of the balance sheet for Company G for 2008, including the appropriate description for the common stock.

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Comprehensive Class Problem - SolutionComprehensive Class Problem - Solution

A.Journal entries1.No entry required.2.Calc: 20,000 x $2 = 40,000

 

3. Calc: 2,000 shares x $20 = $40,000

Cash Dividends (RE) 40,000Dividends Payable 40,000

Dividends Payable 40,000Cash 40,000

Treasury Stock 40,000Cash 40,000  

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Comprehensive Class Problem - SolutionComprehensive Class Problem - SolutionPart A: Journal EntriesPart A: Journal Entries

4.Calc: 500 shares x $18 market = $9,000 500 shares x $20 cost = $10,000

5.Calc: 20,000 new shares x $10 par = $200,000  

Note: in Item 5, the stock has not yet been distributed, so we cannot credit common stock, or show it issued yet. This “Stock Dividends Distributable” account is a related equity account, and indicates that there are shares of stock to be distributed in the future.

Cash 9,000 marketRetained Earnings 1,000 plug

Treasury Stock 10,000 cost

Stock Dividend (RE) 200,000Stock Div. Distributable 200,000

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Comprehensive Class Problem - SolutionComprehensive Class Problem - SolutionPart A: Journal EntriesPart A: Journal Entries

6. Calc: value up $12,000

 

Note that the Unrealized Gain account is part of stockholders’ equity (not the income statement), and it is located as a separate column called Other Comprehensive Income (OCI) in the Statement of Stockholders’ Equity .

AFS Investment 12,000Unrealized Gain on AFS 12,000