Chapter 20: Stockholder's Equity

________ _________ represents the ownership interest of shareholders (residual interest)

stockholder's equity

_______ are distinct legal entities that are separate assets from its owners

corporation

ownership interests in a corporation are easily ________

transferred

shareholders' participation in the affairs of a corporation are typically limited to _______ in shareholder meetings

voting

advantages of corporations

- facilitates raising capital

- limited liability

disadvantages of corporations

- regulation and extensive reporting requirements

- double taxation (1. pay on net income 2. pay on dividends)

amount provided by stockholders for use in the business

paid in capital

the residual interest after debt and preferred stock

common stock

the most common preference is a priority payment of dividends

preferred stock

do owners of preferred stock vote?

no

profits earned over the life of the company

retained earnings

changes in shareholders' equity that are not included in traditional net income

accumulated other comprehensive income (AOCI)

AOCI is reported on the

balance sheet

OCI is reporting on the

statement of comprehensive income

shares that have been issued, repurchased from shareholders, but not resold yet

treasury stock

treasury stock _____ the number of shares outstanding

reduces

excess over par value paid-in by stockholders

additional paid in capital (APIC)

JE to record issuance of stock with no par

Cash

common stock

JE to record issuance of stock with par

cash

(C) common stock at par

(C) APIC

two methods for allocation when issuance of multiple securities:

proportional and incremental method

when both fair values of equity are known

proportional method

when one fair value is not known

incremental method

2 step process for incremental method

1. known value is used as basis for security

2. allocate remaining proceeds to the other (unknown) security

JE to record issuance of multiple securities

cash

(C) common stock

(C) APIC - common

(C) preferred stock

(C) APIC - preferred

reasons for share buybacks

- increase EPS and return on equity

- provide tax efficient distributions of excess cash to shareholders

- acquire stock for employee stock compensation contracts

- thwart takeover attempts

shares that are reacquires and not retired are called

treasury stock

the value of the shared held as treasury stock are _______ from SE

deducted

treasury stock still counts as ______ shares, but are no longer outstanding

issued

the method of accounting for treasury stock

cost method

JE for the repurchase of shares

treasury stock

(C) cash

JE for the sale of treasury stock

cash

(C) treasury stock at cost

no ______ or _____ are recognized when treasury stock is reissued if not sold at price equal to original cost

gains or losses

a preferred stock feature that allows the issuer the option to recall (buy back) shares at a specified price

callable

a preferred stock feature that allows the stockholder the option to redeem stock (return stock to issuer for payment) at a specified price

redeemable

a preferred stock feature that is financial instruments issued in the form of shares that embody and unconditional obligation requiring the issuer to redeem the instrument by transferring its assets at a specified or determinable date or upon an event that is certain to occur

mandatory redeemable

a preferred stock feature that is a security that is convertible into another security based on a conversion rate

convertible

a preferred stock feature that requires dividends not declared in a given year to accumulate at the preference rate for the stock. the issuer must pay cumulative dividends in full before dividends can be paid on common stock. if preferred dividends are not declared in a given year, they are said to have been passed and are called dividends in arrears.

cumulative dividend preference

preferred stock is generally recognized as

equity

JE to record issuance of preferred stock

cash

(C) preferred stock at par

(C) APIC preferred stock

mandatorily redeemable preferred shares have both ____ and _____ characteristics

debt and equity

mandatorily redeemable preferred shares are classified as a

liability

distributions of retained earnings to shareholders in the form of assets or shares of the company's stock

dividends

JE on date of declaration for cash dividends:

retained earnings

(C) dividends payable

JE on ex-dividend date for cash dividends:

No JE

JE on date of record for cash dividends:

no JE

JE on date of payment for cash dividends:

dividends payable

(C) cash

stock dividends result in ______ shares being issued, no _____ is involved

shares, cash

when the stock dividend involves less than 25% of shares outstanding, the accounting is based on the

fair value

when the stock dividend involves more than 25% of shares outstanding, the accounting is based on the

par value

JE for a small stock dividend on announcement date:

retained earnings

(C) common stock - dividends distributable

(C) APIC - common

JE for a small stock dividend on issuance date:

common stock - dividends distributable

(C) common stock at par

JE for a large dividend on announcement date:

retained earnings

(C) common stock - dividends distributable

JE for a large stock dividend on issuance date:

common stock - dividends distributable

(C) common stock at par