Chapter 18 Shareholders Equity Part 2: Additional Issues Intermediate Accounting II Dr. Chula King Student Learning Outcomes Distinguish between accounting for retired shares and for treasury shares Describe retained earnings and distinguish it from paid-in capital Explain the basis of corporate dividends, including the similarities and differences between cash and property dividends Explain stock dividends and stock splits and how they are accounted for. Share 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 stock dividend Use in mergers and acquisitions Thwart takeover attempts Can be accounted for as retirement or treasury shares 1
Accounting for Retired Shares On formal retirement, reduce the same capital accounts that were increased when the shares were issued. Price paid is less than issue price: 5,000 shares of $2 par stock that were issued for $20/share are reacquired for $17/share and retired. Common stock (@$2) 10,000 PIC in excess of par (@$18) 90,000 Cash (@$17) 85,000 PIC from share repurchase (@$3) 15,000 Accounting for Retired Shares Price paid is more than issue price: 5,000 shares of $2 par stock that were issued for $20/share are reacquired for $25/share and retired. Common stock (@$2) 10,000 PIC in excess of par (@$18) 90,000 Retained Earnings (@$5)* 25,000 Cash (@$25) 125,000 *If Paid-in capital from share repurchase exists, debit that account before debiting retained earnings Treasury Stock Issued, but reacquired and not retired Not an asset, but rather a component of shareholders equity Recorded at cost (DR) Resale Treasury stock credited for cost Difference between cost and issue price If a credit: Paid-in capital from treasury stock If a debit: Paid-in capital from treasury stock or share repurchase if possible; otherwise, retained earnings. 2
For Example On 5/1/13, corporation reacquires 3,000 shares of its stock for $50/share. On 12/1/13, it reissued 1,000 shares of treasury stock for $75/share. 5/1 Treasury stock (3,000 x $50) 150,000 000 Cash 150,000 12/1 Cash (1,000 x $75) 75,000 Treasury stock (1,000 x $50) 50,000 PIC from treasury stock 25,000 Retained Earnings Undistributed earnings of company since its inception Balance, January 1 $100,000 Add: Net income 50,000000 Deduct: Dividends (10,000) Balance, December 31 $140,000 Prior period adjustments Restrictions on retained earnings Cash Dividends Declared by the Board of Directors No legal obligation to declare dividend Once declared, there is a legal obligation to pay the dividend Declaration date Ex-dividend date Record date Payment date 3
Property Dividends Distributions of non-cash assets Recorded at fair market value of the property as of the date of declaration Gain or loss recognized for the difference between the book value and the fair market value Stock Dividend Distribution of additional shares of stock to owners All shareholders retain same % ownership No change in total shareholders equity No change in par value Small (<25%): Record at fair market value of stock on declaration date Large ( 25%): Record at par value of stock For Example Corporation declares and distributes a 20% stock dividend on 100,000 shares of $1 par common stock. On the date of declaration, the market value of the stock is $10 per share. 20% x 100,000 shares = 20,000 shares Retained Earnings (@$10) 200,000 Common stock (@$1) 20,000 PIC in excess of par (@$9) 180,000 4
Stock Split Change the par value per share and the number of shares outstanding. Total par value is unchanged No journal entry is required For Example Corporation has 3,000 shares of $2 par common stock outstanding before 2-for-1 stock split Before After Common shares 3,000 6,000 Par value $2 $1 Total par value $6,000 $6,000 Stock Split versus Large Stock Dividend 100% stock dividend may be called a 2-for-1 stock split Reduce paid-in capital in excess of par to offset the credit to common stock for the par value of shares distributed Reduce retained earnings to offset the credit to common stock for the par value of the shares distributed. 5
The Next Step Exercises 1, 4, 5, 7, 10, 12, 13, 14, 18, 19 Problems 1, 3, 4, 5, 8, 9 6