Accounting, large stock dividend/stock split transaction, 13.3
Accounting, large stock dividend/stock split transaction, 13.3 BUS 20
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This page Class Notes was uploaded by Brenda Chung on Saturday November 7, 2015. The Class Notes belongs to BUS 20 at San Jose State University taught by in Fall 2015. Since its upload, it has received 20 views. For similar materials see FINANCIAL ACCOUNTING in Accounting at San Jose State University.
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Date Created: 11/07/15
133 Saturday April 11 2015 726 PM Net Sales less Cost of Goods Sold Gross Pro t less Operating Expenses Operating Income Plus Other RevenuesGains Less Other ExpensesLosses Income before taxes The normal balance of the Retaine balance however it is possible fo end up with a debit balancethis i The TOTAL Stockholders39 Equity m capital requirement XX 41quot XX L XX XX XX XX Net Income these are securities which in their present form are NOT shares of common stock but which can be exchanged for shares of common stock These are securities which in their present form are NOT shares of common stock but which can be exchanged for shares of common stock Asset being distributed to the shareholders is cash Distribution to shareholders the corporation is quotdeclaringquot that a cash dividend will be paid The record date specifies the day on which a shareholder must be the owner of recor the stock in order to receive the dividend Portion of total corporate assets belonging to the shareholders that came as th result of return on investment That is the corporation took the assets invested by the shareholder and used them to generate additional assetsthat is to generate net income 0 These transactions are recorded in the appropriate revenue gain expense and loss account which are retained earningstype accounts Net income attributable to common DIVIDED by the shares of common stock d Earnings account is a credit rthe Retained Earnings account to is referred to as a ust be at least equato the legal 39d of outstanding How much of the net income is attributable to the common shareholdersAll of it if there is no preferred stock outstanding But if there is preferred stock outstanding then the net income attributable to the common shareholders is the net income less the annual preferred dividend fthe numberof shares of common stock outstanding has changed during the year then we ofthe shares outstandingfor the year include stock rights stock warrants stock options convertible preferred sto and convertible debt fthese securities ARE converted the number ofshares of common stock outstanding will increase fthe same net income is spread over more shares then the EPS will DECREASEwe refer to this as h For example on its 2011 financial statements IBM Corporation reported total stockholders39 equi1 the beginning of the year of 23172 million and total stockholders39 equity at the end of the year 20236 million They issued additional stock totaling 2394 million bought back a net of 1485 million in treasury shares declared cash dividends of 3473 million and had other stockholder related transactions of 289 million 0 23172 beginning balance 2394 issued additional stock 14859 purchase oftreasury shares 3473 cash dividends declared 289 other 7523 0 Remember the ending balance was 20236 so the rest ofthe change in stockholders39 equi 20236 7523 12713 Comprehensive Income which includes the quotregularquot net incor and these other nonowner sourced transactions IBM disclosed their 2011 comprehensive income using option 1 Net Income 15855 USE ck y at of W ne EXAMPLE 1CASH DIVIDENDS Lee Corporation has the following stockholders equity information available on December 31 2012 Common Stock 500000 shares authorized 200000 shares issued and outstanding 8par value 1600000 APICExcess of Par Value 3300000 Total PaidIn Capital 4900000 Retained Earnings 12800000 Total Stockholders39 Equity 17700000 On December31 2012 Lee Corporation declared a 150 pershare cash dividend payable on January 31 2013 to shareholders of record of January 10 2013The market price per share on December31 2012 was 150 pershare 0 Let39s first identify the three dividend dates 1 is December 31 2012 2 isJanuary 102013 3 is January312013 39 This is the OWNER WITHDRAWAL TRANSACTION Cash decrease thereby decreasing total assets Retained Earnings decrease thereby decreasing total stockholders39 equity 0 Decrease in retained earnings will take place on the O a H alb is r liability is paid off on the distribution payment date 0 The decrease in retained earnings ANDthe decrease in cash are NOT goingto happen on the same date JOURNAL ENTRIES FORA CASH DIVIDEND GENERAL JOURNAL 213 123112 I talned Earn n 94 or Dividends 200000shares utstanxsuo rshm 13113 300 000 mm No journal entry is required on the date of recordthis date simply determines which specific shareholders will receive the dividend checks On the date of pavment the cash is now paid and the current liability Dividends Payable is now paid off On the December 31 2012 Balance Sheet Common Stock APICExcess of Pat Value Total PaidIn Capital Retained Earnings Total Stockholders39 Equity EXAMPLE 2SMAL STOCK DIVIDENDS The same three dates that we looked at for the cash dividend still apply to the stock dividend 1 Declaration date 2 Date of record 3 Distribution date CORPORATIONS RETAINED EARNINGS EXANIPLE 2 SMALL STOCK DIVIDENDS Lee Corporation has the following stockholders39 equity information available on December 31 2012 Common Stock 500000 shares authorized 200000 shares issued and outstanding SSpar value APICExcess of Pa Value 1 600000 3300000 4900000 Total PaidIn Capital 1 1e dollar amount of the vidend is determined by ultiplying the shares as of the declaration t 39 I l rquot A Total Stockhold39 Equity 17 700 000 A On December31 2012 Lee Corporation declared a 12 stock dividend glistributable It means that Lee Corporation is going to increase the current number of shares outstanding 12 So Lee Corporation is going to distribute 12 x 200000 shares 24000 additional shares on January 31 2013 to shareholders of record of January 10 2013 The market price per shar 31 2012 was 150 pershare 0 Let39s first identify the three dividend dates 1 is December 31 2012 2 isJanuary 102013 0 On the declaration date we must immediately record the decrease effect on Retail the increase effect on PaidIn Capital 3 is January 31 2013 0 Lee Corporation is going to increase the current number ofshares 200000 0 So Lee Corporation is going to distribute 12 x 200000 shares 24000 additional share ifthestock dividend rate is LESS THAN 25 If Lee Corporation is going to issue an additional 24000 shares of stock we know that Paidn increase but total stockholders39equity remain the same 0 A small stock dividend transaction quottransformsquot retained earnings into paidin capital Anotherway of looking at this is it39s as if we gave the shareholders a cash dividend of 3600 used the cash to buy 24000 additional shares of stock The dollar amount to be taken from R should be equal to this quotbenefitquot The decrease or debit to Retained Earnings will be made fort the shares JOURNAL ENTRIES FOR A SMALL STOCK DIVIDEND GENERAL JOURNAL I I39 etalned Earnin 24 000 shares 1 SlSO market rice I Common Stock Div Distributable 24 000 shares x ss at APICExcess of Par Value 24000 shares x 142 I I I I 13113 Common Stock Div Distiibutabie g g 200000 shares by of common stock e on December ned Earnings and shares by 12 sof common stock Zapital is going to 00 and theythen etained Earnings he market price of CR 1 5 O 8 1 42 192 000 3408000 Just as when we issued shares for cash we must separately record the legal capital from any ar of legal capital On the Demmber 31 2012 Balance Sheet Common Stock plus Common Stock Div Distributable Total PaidIn Capital Retained Earnings Total Stockholders39 Equity The e ect on total stockholders39 equity of the small stock dividend has been NO e ect The total Capital Stock and the a total increase in PaidIn Capital of 3600000 The Retained Earnings has decreased by 3600000 The current market price of 150 is presumed to be unchanged after the declaration of the dividend 200000 shares of stock are still outstanding with 24000 TO BE distributed as a dividend On the distribution date January 31 2013 the balance of the Common Stock Dividend Distributable account will be transferred to the Common Stock accountthe total Capital Stock will remain at 1792000 and the total number of shares outstandin will be 224000 shares 0 Before the dividend you had 100 shares of Lee Corporation stock worth 150 per share lt 15000 0 You would receive 12x 100 shares 12 additional shares of stock 0 So after the dividend you now have 112 shares of Lee Corporation stock worth 150 per value of 16800yourvalue has increased by the 150 market value ofthe 12 shares 1 This increase in value came at no additional cost to you LARGE STOCK DIVIDEND 0 quotLargequot refers tothis time we will be issuing enough shares such that the market price 0 stock will decrease 0 In a large stock dividend we are going to take some ofthe unissued shares offthe shelf issue them to the current shareholdersthe number of shares outstanding of the existing will increase nounts in excess Jr a total value of 39 share or a total 1800 fthe and stock CORPORATIONS RETAINED EARNINGS EXAMPLE 3 LARGE STOCK DIVIDENDS Lee Corporation has the following stockholders39 equity information available on December 31 2012 Common Stock 500000 shares authorized 200000 shares issued and outstanding SSpar value 1600000 APICExcess of Par Value 3300000 Total PaidIn Capital 4900000 Retained Earnings 12800000 Total Stockholdets39 Equity 17700000 On December31 2012 Lee Corporation declared a stock dividend distributable on J 2013 to shareholders of record ofJanuary 10 2013The market price pershare on Decemb was 150 pershare Let sfirst identify the three dividend dates 1 Date ofdeclaration is December 31 2012 2 The date of record isJanuary 102013 3 The date ofdistribution isJanuary312013 0 Lee Corporation is going to increase the current number ofshares outstanding 20000 0 So Lee Corporation is going to distribute x200000 shares 200000 additional sl common stock 25 guideline as our quotrulequot The 100 rate is greater than our 25 guideline so this is a quotlargequot stock dividend We are doubling the number ofshares or increasing the shares by a factor of 2200000 sha currently outstandingx 2 400000 shares outstanding afterthe dividend 0 The market price is going to decrease by the same factor150pershare market price per share market price after the dividend 0 Debit or decrease to Retained Earnings will be made forthe par value of the shares JOURNAL ENTRIES FOR A LARGE STOCK DIVIDEND GENERAL JOURNAL te eoount Titles 123112 retained E u 200000 shares 1 38 o ar quot200000sharesquot anuary 31 er312012 DO shares by hares of res 75 13113ICommon Stock Div Distributable I Common Stock On the December 31 2012 Balance Sheet BEFORE DIVIDEND Common Stock 1600000 plus Common Stock Div Distributable 0 APICExcess of Par Value 3300000 Total Stockholders39 Equity 17 700 000 17 700 000 The e ect on total stockholders39 equity of the large stock dividend has been N0 e ect The total Capital Stock and the APIC is unchanged a total The The current market price of 150 is presumed to have decreased to 75 after the declaration of the dividend There are 200000 shares of stock currently outstanding with 200000 shares TO BE issued 0n the distribution date January 31 2013 the balance of the Common Stock Dividend Distributable account will be transferred to the Common Stock accountthe total Capital Stock will remain at 3200000 Before the dividend you had 100 shares of Lee Corporation stock worth 150 per sha total value of15000 You would receive 100x 100 shares 100 additional shares So after the dividend you now have 200 shares of Lee Corporation stock But now your shares are worth only 75 per share fora total value of 15000 There has been no increase in yourtotal value CORPORATIONSRETAINED EARNINGS EXANIPLE 4 STOCK SPLITS Lee Corporation has the following stockholders39 equity information available on December 31 2012 Common Stock 500000 shares authorized 200000 shares issued and outstanding SSpar value 1600000 APICExoess of Par Value 3300000 Total PaidIn Capital 4900000 39eora stock Retained Earnings Total Stockholders39 Equity On December 31 2012 Lee Corporation declared a 2 for 1 stock split e ective on December 31 2012 There are currently 200000 shares of total legal capital requirement 1600000 0 In a 2 for 1 split each one of the existing 200000 shares of8parvaue common stot now going to count as two shares 0 Again picture the shareholders ripping their 200000 stock certificates into two piece There a re n 4 LCM LIInight shares of stock outsta nd ingin splitting the stock 0 PAR VALUE M USTSPLIT ALSO when you rip the stock certificate into two pieces half the par value goes with each piece 0 The par value ofthe shares is now 4 per share and the total legal capital requiremen u nchanged at 1600000 t4LMIMIfig ftjlftil 13h15511131521X4 par value per share No journal entries are necessary to record a stock split The old shares have been transformed into new shares The balance sheet of Lee Corporation on December 31 2012 would simply be shown as follows Common Stock 1000000 shares authorized 400000 shares issued and outstanding 34par value 1600000 APICExoess of Par Value 3300000 Total PaidIn Capital 4900000 Retained Earnings 12800000 Total Stockholders39 Equity 17700000 The shares increased by a factor of 2 200000 x2 so the market price would decrease by a factorc to 75 per share 1502 If you owned 100 shares of Lee Corporation stock what is the effect of the stock split on you 0 Before the stock split you owned 100 shares of worth per share a total value of 15000 Afterthe split you own 200 shares of 4parvalue stock worth 75 per sha total value of15000 200 shares x75 per share Yourtotal value is unchanged but you sr now find it easier to sell your shares tis f2 Ire a IOUId WHICH ONE TO CHOOSE LARC STOCK DIVIDEND TRANSACTION OR STOCK SPLIT TRANSACTION If a corporation has a large amount Ifthere are no unissued ofunissuedshares available then a shares of stock then the large stock dividend is probably the corporation has no choice most convenient way to achieve the but to declare a stock split quotstock splitquot LARGE STOCK DIVIDEND VS STOCK SPLIT 0 A 100 large stock dividend is equivalent to a 2 for 1 stock split 0 A 200 large stock dividend is equivalent to a 3 for 1 stock split 0 A 300 large stock dividend is equivalent to a 4for 1 stock split and so on The though is that if the error affected one ofthe 2012 revenue or expense accoun1 accounts have been closed to the Income Summary account which was then closed to Retaine Earnings at the end of 2012 Thismeansthatthezon Remember the 2012 ending retained earnings balance became the 2013 Beginning Reta Earnings balance These corrections of errors from past accounting periods are called In a corp oration a tatetnan t of Raining ti Rantings reconciles the beginning balance of Retained Earnings to the ending balance of Retained Earnings Beginning Retained Earnings plusminus Prior Period Adjustments plusminus Cumulative E ect of Change in Accounting Principle Corrected Beginning Retained Earnings lus Net Income ts those d ined Net Loss Treasury Stock Losses Preferred Stock Redemption Losses Cash Dividends Declared owner withdrawal Small Stock Dividends Declared Large Stock Dividends Declared Ending Retained Earnings a note regarding any restriction to be included with the nancial statements The ending balances ofthe and the ending balance of the are reported on the balance sheet INCLUDES the statement of retained earnings I includes a reconciliation from the beginning balance to the ending balance of all ofthe other stockholders39 ecluitv accounts the paidin capital accounts and the Treasurv Stock account ut also
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