Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for stock dividends 1 1 1

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A distribution of a corporation’s own stock Affects only stockholders’ equity accounts No effect on total stockholders’ equity No effect on assets or liabilities Stockholders receive proportionate shares Example–10% stock dividend; every stockholder receives 10% of shares distributed Total number of shares issued and outstanding increases Ownership percentages remain the same 2

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Conserve cash Continue dividends without using cash Reduce market price per share Share supply increases; market price decreases Less expensive; more attractive investment Reward investors Shareholders receive something of value 3

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Same three dates for a stock dividend Declaration date; record date; distribution date Small stock dividend Distribution is less than 20 to 25% of issued shares Debit Retained earnings for market value of shares to be distributed Credit Common stock for the par value of the stock and Credit Paid-in capital for excess of par—common 4

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Large Distribution is greater than 20% to 25% of issued shares Debit Retained earnings for par or stated value of shares Credit Common stock for par or stated value of shares Rare 5

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Equity after 5% Common Stock Dividend Equity after 50% Common Stock Dividend 6

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Compare and contrast the accounting for cash dividends and stock dividends. 1.In the space provided, insert either “Cash dividends,” “Stock dividends,” or “Both cash dividends and stock dividends” to complete each of the following statements: a. ________________decrease Retained earnings. b. ________________ has(have) no effect on a liability. 7 Both cash dividends and stock dividends Stock dividends

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. (Continued) c. ________________ increase Paid-in capital by the same amount that they decrease Retained earnings. d. ________________ decrease both total assets and total stockholders’ equity, resulting in a decrease in the size of the company. 8 Stock dividends Cash dividends

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Yummy, Inc., had 310,000 shares of $1 par common stock issued and outstanding as of December 1, The company is authorized to issue 1,400,000 common shares. On December 15, 2012, Yummy declared and distributed a 5% stock dividend when the market value for Yummy’s common stock was $3. Requirements: 1. Journalize the stock dividend. 2. How many shares of common stock are outstanding after the dividend? 9

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1.Journalize the stock dividend. 2. How many shares of common stock are outstanding after the dividend? 10 Journal Entry DATE ACCOUNTS DEBITCREDIT Dec 15 Retained earnings46,500 Common stock15,500 Paid in capital in excess of par-common31, , ,500 = 325,500

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for stock splits

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. A stock split: Cuts par value per share Increases the number of shares of stock issued and outstanding Leaves all account balances and total stockholders’ equity unchanged Balances in the accounts are unchanged Record in a memorandum entry–a journal entry without debits and credits 12

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Before split 13 After split Authorized shares should be 40,000,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Stock dividends and stock splits have similarities and differences 14 Event Common stock Paid-in capital in excess of par Retained earnings Total stockholders ’ equity Cash dividend No effect Decrease Stock dividend Increase DecreaseNo effect Stock splitNo effect

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Decorator Plus Imports recently reported the following stockholders’ equity (adapted except par value per share): Suppose Decorator Plus split its common stock 2 for 1 in order to decrease the market price per share of its stock. The company’s stock was trading at $20 per share immediately before the split. 15

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1. Prepare the stockholders’ equity section of Decorator Plus Imports’ balance sheet after the stock split. 16 Paid-in capital: Common stock, $0.50 par, 480,000,000 shares authorized, 228,000,000 shares issued$ 114,000,000 Paid-in capital in excess of par140,000,000 Total paid-in capital$ 254,000,000 Retained earnings650,000,000 Total stockholders’ equity$ 904,000,000 Authorized shares should be 960,000,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2. Were the account balances changed or unchanged after the stock split? 17 Paid-in capital: Common stock, $0.50 par, 480,000,000 shares authorized, 228,000,000 shares issued$ 114,000,000 Paid-in capital in excess of par140,000,000 Total paid-in capital$ 254,000,000 Retained earnings650,000,000 Total stockholders’ equity$ 904,000,000 Unchanged Authorized shares should be 960,000,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Account for treasury stock

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Shares that a company has issued and later reacquired Reasons corporations purchase their own stock: To increase net assets by buying low and selling high To support the company’s stock price To avoid a takeover by an outside party To reward valued employees with stock A common practice among corporations 19

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Contra equity account Debit balance Recorded at cost (not par) Reported beneath Retained earnings on the balance sheet Reduction to total stockholders’ equity Decreases outstanding shares Not eligible for dividends Not eligible to vote 20 Issued stock – Treasury stock = Outstanding stock

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Purchase of treasury stock Company debits Treasury stock and credits Cash Sale of treasury stock at cost 21

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Sale of treasury stock above cost Difference is credited to Paid-in capital from treasury stock transactions Sale of treasury stock below cost Difference is debited to Paid-in Capital from treasury stock transactions, if available Otherwise debit Retained earnings 22

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Sale of treasury stock below cost Paid-in capital from treasury stock transactions is insufficient to cover shortfall Debit Retained earnings for the difference 23

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Reported beneath Retained earnings as a reduction 24

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Discount Center Furniture, Inc., completed the following treasury stock transactions: a.Purchased 1,400 shares of the company’s $1 par common stock as treasury stock, paying cash of $5 per share. b.Sold 400 shares of the treasury stock for cash of $8 per share. Requirements 1.Journalize these transactions. Explanations are not required. 2.Show how Discount Center will report treasury stock on its December 31, 2012 balance sheet after completing the two transactions. In reporting the treasury stock, report only on the Treasury stock account. 25

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 1.Journalize these transactions. Explanations are not required. 26 Journal Entry DATEACCOUNTSDEBITCREDIT a.Treasury stock7,000 Cash7,000 Journal Entry DATEACCOUNTSDEBITCREDIT b.Cash3,200 Treasury stock2,000 Paid-in capital from treasury stock transaction 1,200

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 2. Show how Discount Center will report treasury stock on its December 31, 2012 balance sheet after completing the two transactions. In reporting the treasury stock, report only on the Treasury stock account. 27 Stockholders’ equity Treasury stock 1,000 shares at cost5,000