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 StockVI. Stock or Split Outline of Current Lecture II. Example Problems From Unit 6III. Stock and Financing Current LectureLecture 13 Accounting I. Recap of Unit 6: Important Itemsa. Definition of “Authorized” vs. “Issued” vs. “Outstanding”i. Can be related to Common Stock and Preferred Stockii. Accounting for the basic stock issuance transactioniii. “Common Stock” account (or “Preferred Stock”) holds only the par valueiv. “APIC” holds any “excess over par value” (a.k.a. PICEPV in podcasts)b. Three Key Dates Associated With Cash Dividendsi. 1) Declaration; 2) Record; and 3) Paymentii. 1) Dr. Dividends and Cr. Div Pay; 2) No JE; 3) Dr. Div Pay and Cr. Cashc. Cumulative Preferred Stock (P/S) vs. Common Stock (C/S) Examplei. Step 1: determine the periodic dividend paid to preferred shareholders1. (# 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 Splitsi. 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 Dividendsi. 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 (excessover 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 Problema. 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 $2,250,0002. Common stock, $2 par 400,0003. Common stock, APIC 1,020,0004. Retained Earnings 5,325,0005. Total Shareholders’ Equity $8,995,000ii. Required (C/S = Common Stock; P/S = Preferred Stock):1. C/S = 400,0002. P/S = 2,250,000iii. How many shares of C/S are currently “issued and outstanding?”1. C/S at par = $400,000a. Each share $2 par valueb. 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 = $2,250,000a. Each share $150 par value2. 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 = $400,0002. C/S, APIC = $1,020,0003. Total C/S = $1,420,000a. Divide Total C/S by 200,000 C/S shares issuedi. 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 $2,250,000ii. Common stock, $2 par, 200,000 shares outstanding 400,000iii. Common stock, APIC 1,020,000iv. Retained Earnings 5,325,000v. Total Shareholders’ Equity $8,995,000b. 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 themarket 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. Retained Earnings $100,000Cr. C/S, par $40,000Cr. C/S, APIC $60,0003. New Amounts in Account a. Preferred stock, $150 par, 6% cumulative = $2,250,000b. Common stock, $2 par, 220,000 shares outstanding 440,000c. Common stock, APIC =1,080,000d. Retained Earnings = 5,225,000e. Total Shareholders’ Equity = $8,995,000f. The effect of the journal entry on the