Acctg 211 1st Edition Lecture 12 Outline of Last Lecture I. Exam study guideOutline of Current Lecture II. Debit and Equity financing III. Capital Stock Transactions IV. Preferred Stock V. Dividends VI. Treasury StockVII. Stock or Split Current LectureII. Debit Financing vs. Equity Financinga. Debit Financingi. Liabilitiesii. Formal legal contractiii. Fixed maturity dateiv. Fixed period paymentsv. Security in case of default vi. No voice in managementb. Equity Financing i. Equityii. No legal contractiii. No fixed maturity dateiv. Discretionary dividendsv. Residual asset interestvi. Vote board of directorsIII. Accounting for Capital Stock Transactionsa. Two primary sources of stockholders’ equityi. Contributed Capitalii. Retained Earningsb. Contributed Capitali. Par or stated value of issued stockii. Additional paid-in capital (APIC) in excess of par or stated valueiii. 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.c. Retained Earnings (R/E)i. Cumulative net income minus cumulative dividendsii. Beg R/E + Net Income – Dividends = Ending R/EIV. Sources of Paid in Capital a. Authorized (A)b. Issued (I) i. If I > to O then treasury stock existsii. If I = O then no treasury stock existsc. Outstanding (O)d. General: A ≥ I ≥ Oe. Limit: A = I = OV. Common Stocka. Basic voting stock of the corporationi. Ranks after preferred stock for dividend distribution and liquidation distributionii. Dividends can be paid to common shareholders, with dividend rates determined by the corporations’ Board of Directors (BOD) based on the corporation’s profitabilityb. Initial Public Offeringi. The first time a corporation sells its common stock to the publicii. Examples: Facebook in May 2012, Twitter in November 2013VI. Par Value and its Impact on Accountinga. Par Valuei. A nominal value per share of capital stockii. Specified in corporate charteriii. Has no relation to market valueiv. Serves as the basis for “legal capital”b. Legal Capitali. The amount of capital that must remain invested in the businessii. Therefore, this capital cannot be distributed to shareholdersiii. Goal is to protect creditorsiv. Requirements vary by state of incorporation, only affects the corporate form of business organizationVII. 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.VIII. Ex: Issue 300 shares of $10 par common stock for $12 per shareDr. 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. Preferred Stock a. Preferential treatment for:b. Dividend distributionc. Liquidation distributiond. Voting rights may or may not be ascribede. Usually has a fixed dividend rate that is stated as a percentage of the par valuef. Arguably possesses qualities of both debt and equityg. 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 existsX. Accounting for Cash Dividends a. Dividends must be declared by the corporation’s BODi. Remember: corporations are not required to declare dividendsii. But once they are declared, dividends become a GAAP liabilityiii. Dividends are NOT expensesiv. The Dividends account is a contra-Equity accountv. Dividends are paid to the “outstanding” shares onlyb. In order to pay a cash dividend, a corporation must have:i. Retained Earnings – after all, dividends are paid out of R/Eii. Cash – hopefully obvious, but necessaryiii. 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 Declarationii. Date of Recordiii. Date of Paymentd. Accounting impact of these three dates:i. Date of Declaration – Dr. Dividends; Cr. Dividends Payableii. Date of Record – no journal entryiii. Date of Payment – Dr. Dividends Payable; Cr. Cashe. 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 entryiii. 03/31 (Date of Payment):Dr. Dividends Payable $1,000 (note: reduce liability)Cr. Cash $1,000XI. Accounting for dividends with both preferred and common stock holdersa. 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 pastdividends if dividends were not fully distributed to preferred shareholdersin 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 “non-cumulative” 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.XII. Treasury Stocka. A