stockholders' equity - accounting examples

Download Stockholders' Equity - Accounting Examples

Post on 14-Apr-2018

216 views

Category:

Documents

0 download

Embed Size (px)

TRANSCRIPT

  • 7/27/2019 Stockholders' Equity - Accounting Examples

    1/5

    Issuance of Common Stock example

    Let's assume that a company wants to raise $10,000 through the issuance ofcommon stock. At the time the stock is sold the market price is $50 per share.the company will, therefore, have to issue 200 shares. Let us also assume thatthe par value of the stock is $10. Here is the journal entry that the company willmake following the sale of the shares:

    Cash (200 shares x $50) 10,000Common Stock (200 shares x $10)) 2,000

    Addl Paid in Capital (10,000 - 2,000) 8,000

    The journal entry involves the following aspects:1. Cash is increased by the number of shares sold multiplied by the market price

    of the stock to reflect the receipt of the proceeds2. Stockholder's equity is increased by $10,000 to reflect the issuance of the

    stock. This total is divided between the common stock account and the

    additional paid in capital account. Both of these are stockholder's equityaccounts.

    3. The common stock account is increased by the par value multiplied by thenumber of shares sold. The par value is an arbitrary amount set by the boardof directors when the class of stock is authorized by the shareholders forissuance.

    4. The additional paid-in-capital account is increased by the excess of theproceeds from the stock sale less that portion of the proceeds credited to thecommon stock account.

    Common stock can also be authorized as no par. In this case, no par value is

    assigned to the shares. From an accounting standpoint, the only effect of thisdesignation is that the common stock account is credited for the full amount ofthe proceeds and no additional paid-in-capital account exists as follows:

    Cash (200 shares x $50) 10,000Common Stock (200 shares x $50)) 10,000

    A third form for the stock is no par with a stated value. From an accountingstandpoint, stated value is treated the same way as par value. For example,assume that the common stock in this example is no par stock with a statedvalue of $5. The journal entry for the stock issuance would be as follows:

    Cash (200 shares x $50) 10,000

    Common Stock (200 shares x $5)) 1,000Addl Paid in Capital (10,000 - 1,000) 9,000

    Stock issuance costs:When companies issue common stock, the stock is sold through brokers to theirretail or institutional clients. These brokers earn a fee for their services and theproceeds received by the company is reduced accordingly. There are two waysin which these stock issuance costs can be accounted for under GAAP.

    Copyright 2001 by Robert F. Halsey. All rights reserved.

  • 7/27/2019 Stockholders' Equity - Accounting Examples

    2/5

    1. Treat the issue costs as a reduction of the amounts paid in. The debit to cashand the credit to additional paid-in-capital are reduced accordingly. Thismethod results in a smaller increase in stockholder's equity upon issuance ofthe shares.

    2. Capitalize the amount as an organizational cost on the balance sheet and

    amortize the this intangible asset similarly to the amortization of goodwill. Thismethod results in a greater increase in stockholder's equity initially andreduced profitability in the future as the amortization expense is recorded.

    Copyright 2001 by Robert F. Halsey. All rights reserved.

  • 7/27/2019 Stockholders' Equity - Accounting Examples

    3/5

    Accounting for stock repurchases (treasury stock)

    The following example illustrates the accounting for stock repurchases (treasurystock) utilizing the cost method. This is the most common approach. Under thismethod, an account called treasury stock is debited for the cost of the shares

    repurchased. This treasury stock account is a contra-equity account. Thatmeans, it is included in stockholder's equity, but is reflected as a negativeamount (hence the use of the word "contra"). When the shares are subsequentlyre-issued, treasury stock is credited for the cost of the shares and any differencebetween the re-issue price and this cost is reflected as an adjustment toadditional paid-in-capital form treasury stock.

    Assume that a company repurchases 1,000 shares at a current market price of$25 per share. The journal entry the company will make is,

    Treasury stock (1,000 x 25) 25,000Cash 25,000

    If 500 shares are subsequently sold at a market price of $30, the journal entry toreflect this sale is as follows:

    Cash (500 x 30) 15,000Treasury stock (500 x 25) 12,500

    Additional paid-in-capital 2,500

    If the resale price is less than the original purchase price, additional paid-in-capital is debited and if there is not a sufficient balance in the additional paid-in-capital account to absorb the debit, retained earnings is debited for the excess.

    Copyright 2001 by Robert F. Halsey. All rights reserved.

  • 7/27/2019 Stockholders' Equity - Accounting Examples

    4/5

    Accounting for Stock Dividends

    The accounting for stock dividends is divided into two categories: small stockdividends (generally less than 20-25% of the outstanding shares) and large stockdividends (greater than 25% of the outstanding shares). Furthermore, two dates

    are important: the declaration date (when the dividend is declared to be paid bythe board of directors) and the date of distribution (then the chares are actuallysent to the shareholders).

    Small stock dividends.

    When a company declares a small stock dividend, retained earnings is debitedfor the market value of the shares to be distributed. Since new shares are to beissued, shareholder's equity must be increased to reflect this and the credit tocommon stock and additional paid-in-capital is the same as would be made hadthe firm sold stock. For example, assume that a company has 100,000 shares

    outstanding and declares a 10% stock dividend. The company will issue 10,000shares (100,000 shares x 10%) as a dividend to existing shareholders. Alsoassume that the market value of the stock is $20 per share and that its par valueis $5. The required journal entries are as follows:

    Declaration date

    Retained earnings (10,000 x $20) 200,000Common stock dividend distributable 50,000

    Additional paid-in-capital 150,000

    Distribution date

    Common stock dividend distributable 50,000Common stock 50,000

    Large stock dividends.

    When a company declares a large stock dividend, retained earnings is debitedfor the par value of the shares to be distributed and the additional paid-in-capitalaccount is not affected. For example, assume that the company in our previousexample declares a 50% stock dividend. The company will issue 50,000 shares(100,000 shares x 50%) as a dividend to existing shareholders. The required

    journal entries are as follows:

    Declaration date

    Retained earnings (50,000 x $5) 250,000

    Copyright 2001 by Robert F. Halsey. All rights reserved.

  • 7/27/2019 Stockholders' Equity - Accounting Examples

    5/5

    Common stock dividend distributable 250,000

    Distribution date

    Common stock dividend distributable 250,000Common stock 250,000

    Copyright 2001 by Robert F. Halsey. All rights reserved.

Recommended

View more >