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Stockholders' Equity(ASC 505)

1. Contributed capital

•Capital stock •Additional paid-in capital (APIC) (also called Capital in excess of par or Paid-in capital inexcess of par)

•Treasury stock

2. Reinvested (or Retained) earnings

3. Other comprehensive income items (ASC 220)•Unrealized gains and losses on investments (will discuss under investments)•Unrealized gains and losses on cash flow hedges (will discuss under derivatives)•Excess of additional pension liability over unrecognized prior service cost (will discuss under

pensions)•Unrealized foreign currency gains and losses (discussed in advanced accounting)

Important Point - Accounting for stockholders' equity always follows the provisions of corporate lawin the company's state of incorporation. These laws vary from state to state, and it is always good practice to consult with an attorney regarding specific questions in this area.

I - Stock Issuance

Question? At what value is newly issued stock recorded?

Journal entry when stock is issued:

Costs incurred in issuing stock •Simply treat as a reduction of the amounts recorded in Contributed Capital

•of APIC, if par value stock •of common stock, if the stock is no-par stock

•Note: Companies used to have the option to treat these expenditures as an organization cost, andamortize them over a period not to exceed 40 years

Stock issued on a subscription basis

Subscriptions receivable XXXCommon (or preferred) stock subscribed XXXAPIC XXX

Question? What type of account is Subscriptions Receivable?Intermediate Accounting - Professor deVidal

Stockholders' Equity -

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When cash is received

Cash XXXSubscription receivable XXX

When the stock is completely paid

Common stock subscribed XXXCommon stock XXX

II - Types of Stock

•Common

•Voting

•Classes•Preemptive right

•Par •No par •Stated value

•Authorized•Issued•Outstanding

•Preferred

•Preference with respect to dividends and in liquidation in the case of bankruptcy

•Is generally nonvoting

•Generally no preemptive right

•Often convertible - the book value (of the preferred stock) method is used to record the conversion

Preferred stock XXXAPIC - Preferred stock XXX

Common stock XXXAPIC - Common stock XXX

•May be callable

•Dividends - generally stated as a percentage of par •Very often the dividends are cumulative•Much less frequently, they may be participating

Intermediate Accounting - Professor deVidalStockholders' Equity -

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III - Dividends

Dividends are proportionate (according to the class of stock) distributions to stockholder's of thefollowing items. Except for stock dividends, the distribution results in a reduction of stockholders'equity.

Dates•Cash •Declaration•Property•Script (IOU's) •Record•Liquidating•Stock •Payment

Journal entry

∂ Dividends declared XXX • Dividends payable XXXDividends payable XXX Cash XXX

Question? What is the effect of the dividend declaration on the Statement of Cash Flows? Date of payment?

Preferred stock dividends

•Cumulative preferred stock - If preferred stock is not cumulative, any skipped dividends are lost.However, most preferred stock is cumulative. Dividends not paid become dividends in arrears, anddividends in arrears must be paid before any dividends can be distributed to common stockholders.

•Participating preferred stock (This is much less common) - May be one of two varieties:

•Fully participating - Preferred stockholder's share proportionately (with the common

stockholders) in any distributions beyond the stated preferred dividend rate if the total dividend package is large enough so that common stockholders also receive the preference rate.

•Partially participating - Similar to fully participating, but the participation is limited by a ceiling(a percentage cap on the participation).

Example 1

Windal Corporation indicated that the following dollar amounts would be available for dividends duringfour successive years: $1,000, $2,000, $1,000, and $23,000. The capital stock outstanding consisted of $70,000 of common stock (par value: $20 per share) and $30,000 of 5%, $10 par value preferred stock.

Case I - Preferred is noncumulative and nonparticipatingPreferred Stock Common Stock

Year 1

Year 2

Year 3

Year 4


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Dividends: Year 1 - $1,000; Year 2 - $2,000; Year 3 - $1,000; Year 4 - $23,000

Case II - Preferred is cumulative and nonparticipating

Preferred Stock Common Stock

Year 1Year 2

Year 3

Year 4

Case III - Preferred is noncumulative and fully participating


Year 1

Year 2

Year 3

Year 4

Case IV - Preferred is cumulative and fully participating


Year 1 1,000 -

Year 2 500 + 1,500 = 2,000 -

Year 3 1,000 -

Year 4 500 + 1,500 + 5,250 =7,250

3,500 + 12,250 = 15,750

Case V - Preferred is noncumulative and partially participating (up to an additional 2%)


Year 1 1,000 -

Year 2 1,500 500

Year 3 1,000 -

Year 4 1,500 + 600 = 2,100 3,500 + 1,400 + 16,000 =

20,900


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Stock dividends (a capitalization of reinvested earnings) - Stock dividends come in two varieties:

•Small stock dividends (< 20 - 25%. SEC uses 25%). The par value remains the same but thenumber of shares outstanding increases.

•Capitalize retained earnings and do at market value

Retained earnings (stock dividends declared) XXXCommon stock XXXAPIC XXX

•Large stock dividends (> 20 - 25%) The par value remains the same but the number of sharesoutstanding increases. The accounting treatment also depends on state law.

•Capitalize retained earnings, but do it at par value

Retained earnings (stock dividends declared) XXXCommon stock XXX

ASC 505-20-30-6 states that retained earnings need to be capitalized only "to the extentoccasioned by legal requirements." Consequently, if the applicable state laws do not require thecapitalization of retained earnings, then GAAP does not either.

Stock splits - General rule (textbook treatment) is that no journal entry is required, but the accountingtreatment also depends on state law.

•Adjust the par value downward or upward depending on the direction of the split•The number of shares outstanding also increases or decreases depending on the direction of thesplit.

Note: For large stock dividends and stock splits, you frequently observe the following entry in practice(allowed in about 2/3 of the states):

APIC (at par value) XXXCommon stock XXX

Question: What does a stock split signal to the market place?

Question: What does a stock dividend signal to the market place?

Question: What is the effect of either of these transactions on the SCF?


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Example 2 - Small stock dividend

Outdoor Equipment Suppliers, Inc. 2010 Financial Statements

Dividends:On October 22, 2010, the Company declared a 10 percent stock dividend to shareholders of record on November 1, 2010. Accordingly, the fair market value of the stock dividend determined as of thedeclaration date was transferred from retained earnings to common stock and additional paid-in capital.

Example 3 - Large stock dividend

William Horton Corporation 2010 Financial Statements

Note L: Stockholders' EquityThe company effected a two-for-one stock split in the form of a 100% stock dividend on May 29, 2010,which served to capitalize approximately $5,523,000 of retained earnings. All net income per commonshare and dividends per share have been adjusted, as applicable, to give retroactive effect to this split.

Example 4 - Stock split

Western Furniture, Inc. 2010 Financial Statements

Note 16:On March 2, 2010, the Board of Directors authorized, subject to shareholder approval, a one-for-threereverse split of the Company's common stock. If this proposed split is approved by the shareholders onMay 12, 2010, the par value of the common stock will increase to $0.30 per share. Additionally, thenumber of common shares outstanding will decrease by two-thirds and per share data for all periods presented will increase accordingly.

Example 5 - Stock split

Post Oak Company 2010 Financial Statement Note 7 (in Part): Common stock and other capital.On December 3, 2010, shareholders approved an increase in the authorized shares of common stock from 165 million to 330million and approved a two-for-one stock split to shareholders of record on December 4, 2010. The stated par value per shareof common stock was not changed from $.25. All share and per share amounts have been restated to retroactively reflect thestock split.

Capital in excess(in millions) Common stock of par value Treasury stock Balance, January 1, 2008 $38.5 $63.3 $631.8Stock options exercised .1 9.5Treasury stock purchases 78.6Balance, December 31, 2008 38.6 72.8 710.4

Stock options exercised 8.4Treasury stock purchased 86.9Balance, December 31, 2009 38.6 81.2 797.3Stock options exercised .1 17.1Two-for-one stock split 38.7 (38.7)Treasury stock purchased 83.6Balance, December 31, 2010 $77.4 $60.2 $880.9


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IV - Treasury Stock

Journal entry

Treasury stock XXX

Cash XXX

Question? What type of account is treasury stock?

Question? Where do you find treasury stock disclosed on the financial statements?

Question? Why do companies buy back their own stock?

Question? Is a company legally obligated to buy back its shares after it announces its intentions to doso?

Example 6

In June of 2008, Eastern Digital Corp. said publicly that it would repurchase as much as 10% of itscommon stock on the open market in the next year. The maker of computer disk drives said it woulduse the repurchased shares for its employee-benefit plans.

Eastern Digital Corporation 2010 Consolidated Balance Sheet (in part)(in thousands, except per share amounts)

June 29 July 12010 2009

Shareholders' equity (Notes 3 and 6):Preferred stock, $.10 par value; Authorized -- 5,000 shares;

Outstanding -- None

Common stock, $.10 par value; Authorized -- 95,000 shares; 5,066 5,048Issued -- 50,666 shares in 2010 and 50,482 shares in 2009

Additional paid-in capital 349,773 355,624Retained earnings 220,470 123,576Treasury stock-common shares at cost; (121,417) (10,822)

7,095 shares in 2010 and 805 shares in 2009Total shareholders' equity 453,892 473,426


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Eastern Digital Corporation 2010 Statement of Shareholders' Equity (in part)(in thousands)

Common TreasuryStock Stock Shares Amount Shares Amount APIC

Balance at June 30, 2008 -0- -0-......................Purchase of treasury stock (805 ) (10,822 )Balance at July 1, 2009 50,482 (805) (10,822)Purchase of treasury stock (7,720) (132,114)Exercise of stock options 184 18 784 12,833ESPP shares issued 646 8,686 (309)Balance at June 29, 2010 50,666 (7,095) (121,417)

Treasury stock accounting - Gains or losses are never recognized as a result of treasury stock transactions.

Two methods

•Cost method - This is the most frequently used method. The treasury stock account is debited for thecost of the shares acquired and is credited upon reissuance for the same cost. Note that the priceoriginally received upon issuance of the stock does not affect these entries. Differences betweenreacquisition price and any subsequent sale price affect APIC (and possibly retained earnings).

Journal entry for the purchase of treasury stock

Treasury stock XXXCash XXX

Journal entry for the resale of treasury stock (and the selling price > cost)

Journal entry for the resale of treasury stock (and the selling price < cost)

•Par (or stated) value method - This method views the process as a two-step transaction and focuses onthe stock's par value. First, the purchase of the shares is viewed as constructive retirement of thoseshares. If the shares are then resold, this transaction is treated like the sale of a new security.

Note: Most states view the cost of treasury shares as a restriction on retained earnings.Intermediate Accounting - Professor deVidal

Stockholders' Equity -

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