ACCTG 211 1st Edition Lecture 13 Outline of Last Lecture I Debit and Equity financing II Capital Stock Transactions III Preferred Stock IV Dividends V Treasury Stock VI Stock or Split Outline of Current Lecture II Example Problems From Unit 6 III Stock and Financing Current Lecture Lecture 13 Accounting I Recap of Unit 6 Important Items a Definition of Authorized vs Issued vs Outstanding i Can be related to Common Stock and Preferred Stock ii Accounting for the basic stock issuance transaction iii Common Stock account or Preferred Stock holds only the par value iv APIC holds any excess over par value a k a PICEPV in podcasts b Three Key Dates Associated With Cash Dividends i 1 Declaration 2 Record and 3 Payment ii 1 Dr Dividends and Cr Div Pay 2 No JE 3 Dr Div Pay and Cr Cash c Cumulative Preferred Stock P S vs Common Stock C S Example i Step 1 determine the periodic dividend paid to preferred shareholders 1 P S shares outstanding x par value per share x dividend ii Step 2 if cumulative P S and if no periodic dividends declared Step 1 results is in arrears for each year where no dividends were declared 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 iii Step 3 if dividends are declared in the future first pay P S holders the in arrears amount from prior period s Then pay the P S holders their current period dividends Any remaining dividends go to C S holders d Treasury Stock T S i Existence of T S causes difference in Issued vs Outstanding I O ii T S is accounted for using the Cost Method iii Buy T S Debit T S Credit Cash Cash paid becomes cost basis for T S iv Sell T S at cost Debit Cash Credit T S v Sell T S above cost Debit cash Credit T S cost Credit T S APIC excess over cost e Stock Splits i No journal entry and no effect on Equity at the time of the split ii No change in any given shareholder s ownership percentage at the time of the split Shareholder owns the same percent before and after the split iii Cosmetic effect only par value changes number of shares change iv We will only study forward splits in our class e g a 2 for 1 or 2 1 split v A forward split results in more shares after the split In a 2 1 split twice as many shares exist after the split as compared to before the split vi There is such a thing as a reverse split where the split results in less shares after the split f Stock Dividends i An option for companies that do not have cash available for dividends ii No change in any given shareholder s ownership percentage Shareholder owns the same percent of the company before and after the dividend iii Key point A journal entry is created in a stock dividend iv New common stock is issued v Total issued shares increase while total authorized shares remain the same vi No change in Total Shareholders Equity Instead a portion of Retained Earnings is reclassified as Common Stock vii Stock dividends are issued at the current market price of the stock viii Journal Entry Debit Retained Earnings Credit C S par Credit C S APIC excess over par Note the reclassification of Retained Earnings as Common Stock ix With respect to Stock Dividends I have seen both Dividends and Retained Earnings debited in practice when journalizing the transaction Our textbook debits Retained Earnings here so we will do the same II Unit 6 Example Problem a How many shares and at what Average price i Abby Music Company had the following stockholders equity section on its December 31 2011 balance sheet 1 Preferred stock 150 par 6 cumulative 2 250 000 2 Common stock 2 par 400 000 3 Common stock APIC 1 020 000 4 Retained Earnings 5 325 000 5 Total Shareholders Equity 8 995 000 ii Required C S Common Stock P S Preferred Stock 1 C S 400 000 2 P S 2 250 000 iii How many shares of C S are currently issued and outstanding 1 C S at par 400 000 a Each share 2 par value b So there are 200 000 shares issued i No treasury stock T S exists so the number of issued shares is equal to the number of outstanding shares iv How many shares of P S are currently issued and outstanding 1 P S at par 2 250 000 a Each share 150 par value 2 So there are 15 000 shares issued and outstanding v What was the average selling price of a share of C S 1 C S at par 400 000 2 C S APIC 1 020 000 3 Total C S 1 420 000 a Divide Total C S by 200 000 C S shares issued i Each share must have sold for an average of 7 10 III Unit 6 Example Problem a Abby Music Company had the following stockholders equity section on its December 31 2011 balance sheet i Preferred stock 150 par 6 cumulative 2 250 000 ii Common stock 2 par 200 000 shares outstanding 400 000 iii Common stock APIC 1 020 000 iv Retained Earnings 5 325 000 v Total Shareholders Equity 8 995 000 b On January 1 2012 Abby initiated a 2 1 2 for 1 stock split on its common stock i Assuming no other changes to equity what does the new equity section look like on January 1 1 For a stock split the only effect is a cosmetic change to the par value and the number of shares authorized issued and outstanding of common stock a After the split twice as many shares are outstanding with each share being valued at half the original par value c On January 1 2012 Abby declared and paid a 10 common stock dividend when the market value of each share of common stock was 5 Note paid issued here i Assuming no other changes to equity what does the new equity section look like on January 1 1 A stock dividend issues new shares at the current market price 20 000 new shares were issued 200 000 shares x 10 at 5 each 2 Journal entry for the stock dividend a Dr Cr Cr Retained Earnings C S par C S APIC 100 000 40 000 60 000 3 New Amounts in Account a Preferred stock 150 par 6 cumulative 2 250 000 b Common stock 2 par 220 000 shares outstanding 440 000 c Common stock APIC 1 080 000 d Retained Earnings 5 225 000 e Total Shareholders Equity 8 995 000 f The effect of the journal entry on the Equity section is to reclassify a portion of retained earnings to common stock and APIC i Note that Total Equity remains the same before and after the stock dividend …