Acctg 211 1st Edition Lecture 12 Outline of Last Lecture I Exam study guide Outline of Current Lecture II Debit and Equity financing III Capital Stock Transactions IV Preferred Stock V Dividends VI Treasury Stock VII Stock or Split Current Lecture II III Debit Financing vs Equity Financing a Debit Financing i Liabilities ii Formal legal contract iii Fixed maturity date iv Fixed period payments v Security in case of default vi No voice in management b Equity Financing i Equity ii No legal contract iii No fixed maturity date iv Discretionary dividends v Residual asset interest vi Vote board of directors Accounting for Capital Stock Transactions a Two primary sources of stockholders equity i Contributed Capital ii Retained Earnings b Contributed Capital i Par or stated value of issued stock ii Additional paid in capital APIC in excess of par or stated value iii The APIC account is also known as paid in capital in excess of par value PICEPV These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute IV V VI VII VIII c Retained Earnings R E i Cumulative net income minus cumulative dividends ii Beg R E Net Income Dividends Ending R E Sources of Paid in Capital a Authorized A b Issued I i If I to O then treasury stock exists ii If I O then no treasury stock exists c Outstanding O d General A I O e Limit A I O Common Stock a Basic voting stock of the corporation i Ranks after preferred stock for dividend distribution and liquidation distribution ii Dividends can be paid to common shareholders with dividend rates determined by the corporations Board of Directors BOD based on the corporation s profitability b Initial Public Offering i The first time a corporation sells its common stock to the public ii Examples Facebook in May 2012 Twitter in November 2013 Par Value and its Impact on Accounting a Par Value i A nominal value per share of capital stock ii Specified in corporate charter iii Has no relation to market value iv Serves as the basis for legal capital b Legal Capital i The amount of capital that must remain invested in the business ii Therefore this capital cannot be distributed to shareholders iii Goal is to protect creditors iv Requirements vary by state of incorporation only affects the corporate form of business organization Issuance of Common Stock a When stock is issued the equity account Common Stock is increased for the par or stated value of the stock b If the stock is sold for more than its par value the additional amount is added to the equity account Additional Paid In Capital APIC which is also known as the Paid In Capital in Excess of Par Value PICEPV account Ex Issue 300 shares of 10 par common stock for 12 per share Dr Cash 3 600 300 shares x 12 Cr C S 3 000 300 shares x 10 Cr APIC C S 600 300 shares x 2 IX X XI Preferred Stock a Preferential treatment for b Dividend distribution c Liquidation distribution d Voting rights may or may not be ascribed e Usually has a fixed dividend rate that is stated as a percentage of the par value f Arguably possesses qualities of both debt and equity g Cumulative vs Non Cumulative i Cumulative preferential treatment extends to past dividends if dividends were not fully distributed to preferred shareholders in prior period s ii Non Cumulative no such extended preferential treatment exists Accounting for Cash Dividends a Dividends must be declared by the corporation s BOD i Remember corporations are not required to declare dividends ii But once they are declared dividends become a GAAP liability iii Dividends are NOT expenses iv The Dividends account is a contra Equity account v Dividends are paid to the outstanding shares only b In order to pay a cash dividend a corporation must have i Retained Earnings after all dividends are paid out of R E ii Cash hopefully obvious but necessary iii No restrictions from outsiders e g no loan covenants preventing dividends from being declared c Three dates to remember in relation to dividends i Date of Declaration ii Date of Record iii Date of Payment d Accounting impact of these three dates i Date of Declaration Dr Dividends Cr Dividends Payable ii Date of Record no journal entry iii Date of Payment Dr Dividends Payable Cr Cash e Example Per a press release dated 03 01 Death By Chocolate Corporation declares a dividend of 0 25 per share that will be paid on 03 31 to all shareholders of record as of 03 20 Suppose that 10 000 shares have been authorized 6 000 shares have been issued and 4 000 shares are outstanding i 03 01 Date of Declaration Dr Dividends 1 000 4 000 shares x 0 25 Cr Dividends Payable 1 000 note liability here ii 03 20 Date of Record No journal entry iii 03 31 Date of Payment Dr Dividends Payable 1 000 note reduce liability Cr Cash 1 000 Accounting for dividends with both preferred and common stock holders XII a Example Suppose a company has 1 000 shares of 100 par 6 cumulative preferred stock outstanding and suppose also that no dividends were declared in 2013 At the end of 2014 the company declares and pays a total of 20 000 in dividends to its preferred and common shareholders i The term cumulative means that preferential treatment extends to past dividends if dividends were not fully distributed to preferred shareholders in prior period s This is the case in 2013 1 1 000 shares x 100 par per share x 06 6 000 dividend per year for preferred shareholders but only if enough of a dividend is declared Dividends were not declared in 2013 so dividends were considered to be in arrears by 6 000 for 2013 2 But is this a GAAP liability in 2013 Answer no Recall that a GAAP liability only exists when dividends are declared 3 Preferred shareholders will get a total of 12 000 in 2014 6 000 for 2013 and 6 000 for 2014 4 Common shareholders will get the remaining 8 000 in 2014 ii But what if the preferred stock was non cumulative The term noncumulative means that preferential treatment DOES NOT extend to past dividends Thus no dividends in arrears for 2013 1 If non cumulative preferred shareholders would get a total of 6 000 in 2014 Common shareholders would get the remaining 14 000 in 2014 Treasury Stock a A corporation s own stock that was issued but has been reacquired and is still being held by the corporation i Remember once issued always issued unless cancelled ii Treasury Stock T S is a contra Equity account iii Causes a difference between Issued and Outstanding in that three ring graphic