FAR 1 Module 4

Stock Issued Above Par Value

Stock issued for more than its par or stated value. Cash is debited for the proceeds, capital stock is credited for par value, and additional paid-in capital is credited for the excess.

Stock Issued at Par Value

Stock issued for exactly its par or stated value. Cash is debited and capital stock is credited for the same amount, with no additional paid-in capital recorded.

Stock Issued Below Par Value

Stock issued for less than its par or stated value. Additional paid-in capital is debited for the difference, creating a potential contingent liability for the original shareholders.

Stock Subscription

A contractual agreement to sell a specified number of shares at an agreed-upon price before the shares are formally issued.

Subscriptions Receivable

The amount shareholders owe under stock-subscription agreements. It is generally reported as an asset unless collectibility is uncertain.

Capital Stock Subscribed

A temporary equity account credited for the par or stated value of shares under a stock-subscription agreement before the shares are issued.

Sale of Stock Subscriptions

Record subscriptions receivable for the total subscription price, credit capital stock subscribed for par value, and credit additional paid-in capital for the excess.

Collection of Stock Subscriptions

Debit cash and credit subscriptions receivable when payments are collected from subscribers.

Issuance of Previously Subscribed Stock

When the subscription is fully paid, debit capital stock subscribed and credit issued capital stock for the par or stated value.

Default or Forfeiture of a Stock Subscription

Failure to complete subscription payments. Depending on the contract and state law, the company may issue proportional shares, refund payments, or retain payments as liquidated damages.

Stock Rights

Rights given to existing shareholders to purchase additional shares, usually below market price, allowing them to maintain their ownership percentage.

Stock Rights Exercise Entry

Debit cash for the amount received, credit capital stock for par value, and credit additional paid-in capital for the remainder.

Stock Issued for Outside Services

Stock issued in exchange for services is recorded at the fair value of the stock, with quoted market price generally providing the best evidence of value.

Basket Sale of Securities

The sale of multiple securities together for one total price, requiring the proceeds to be allocated based on the securities’ relative fair values.

Date of Declaration

The date the board of directors formally approves a dividend. A liability is created for most dividends and retained earnings is reduced.

Date of Record

The date used to determine which shareholders are entitled to receive a declared dividend. No journal entry is made.

Date of Payment

The date the corporation distributes the dividend and settles the related liability.

Property Dividend

A distribution of noncash assets to shareholders. The asset is adjusted to fair value before distribution, and any gain or loss is recognized.

Property Dividend Accounting

Adjust the distributed property to fair value, recognize any gain or loss, debit retained earnings for fair value, and record a dividend payable.

Scrip Dividend

A dividend paid through a short-term note payable when a corporation temporarily lacks sufficient cash.

Scrip Dividend Accounting

On the declaration date, debit retained earnings and credit notes payable. Interest is recognized from declaration until payment.

Liquidating Dividend

A distribution to shareholders that exceeds retained earnings and is therefore treated as a return of contributed capital.

Liquidating Dividend Accounting

Debit retained earnings to the extent available, then debit additional paid-in capital for the portion exceeding retained earnings.

Small Stock Dividend

A stock dividend of less than approximately 20% to 25% of previously outstanding shares, recorded at the fair value of the shares issued.

Small Stock Dividend Entry

Debit retained earnings for fair value, credit common stock distributable for par value, and credit additional paid-in capital for the difference.

Large Stock Dividend

A stock dividend greater than approximately 20% to 25% of previously outstanding shares, normally recorded at par or stated value.

Large Stock Dividend Entry

Debit retained earnings for the par or stated value of the shares, credit common stock distributable at declaration, and later transfer it to common stock upon distribution.

Common Stock Distributable

A temporary equity account used between the declaration and distribution dates of a stock dividend.

Stock Dividends on Treasury Stock

Stock dividends are generally not distributed on treasury shares because treasury shares are not outstanding.

Treasury Stock Dividend Exception

A company may include treasury shares in a stock dividend to maintain a contractual treasury-stock ratio or when state law protects treasury shares from dilution.

Stock Split Accounting

A stock split changes the number of shares and par value per share proportionately but does not change total stockholders’ equity; generally, no journal entry is recorded.

Reverse Stock Split

A reduction in shares outstanding combined with a proportional increase in par or stated value per share.

Effect of a Reverse Stock Split

The number of shares decreases, par value per share increases, and total stockholders’ equity remains unchanged.

Stock Splits on Treasury Stock

Stock splits generally do not apply to treasury shares because treasury shares are not outstanding.

Treasury Stock Split Exception

Treasury shares may be adjusted in a stock split when needed to maintain a contractual treasury-share ratio or when required by state law.

Statement of Changes in Shareholders’ Equity

A financial statement that explains changes in each major equity account during the reporting period.

Purpose of the Statement of Changes in Shareholders’ Equity

To reconcile beginning and ending balances for equity accounts and report capital transactions, distributions, net income, and other comprehensive income.

Shareholders’ Equity Reconciliation

A schedule showing each equity account’s beginning balance, increases, decreases, and ending balance for the period.