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Accounting for Stock Activities


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Accounting for Stock Activities

  1. 1. Chapter 16
  2. 2. Income Statement Sections <ul><li>Continuing Operations: revenues, expenses and income generated by the company’s continuing operations. </li></ul><ul><li>Discontinued Operations: Income from operating the discontinued segment prior to its disposal and gain or loss on the sale of the net assets of the segment. </li></ul><ul><li>Extraordinary Items: A gain or loss that is unusual in nature and infrequent in occurrence. </li></ul>
  3. 3. Stock Dividends <ul><li>The corporation distributes additional shares of its own stock to its shareholders without receiving any payment in return. </li></ul><ul><li>Transfers a portion of equity from retained earnings to contributed capital (capitalizes retained earnings). The market value of the shares to be distributed is capitalized. </li></ul><ul><li>Entries—do not affect a corporation’s assets or total shareholders’ equity. </li></ul><ul><li>Why a stock dividend? </li></ul><ul><ul><li>Can be used to keep the market price on the stock affordable. </li></ul></ul><ul><ul><li>Can conserve cash for business expansion. </li></ul></ul><ul><ul><li>Can provide evidence of management’s confidence that the company is doing well. </li></ul></ul>
  4. 4. Example <ul><li>Example: X-Quest declares a 10% stock dividend on December 31 when it has 10,000 shares outstanding. The market price of X-Quest’s stock on December 31 is $15 per share. </li></ul>Retained Earnings 15,000 Common Shares Dividend Distributable 15,000 To record declaration of stock dividend of 1,000 common shares 10,000 shares * 10% = 1,000 shares 1,000 shares x $15 per share = $15,000
  5. 5. Example Continued <ul><li>On the date of distribution, X-Quest records the following entry: </li></ul> Common Shares Dividend Distributable 15,000 Common Shares 15,000 To record distribution of stock dividend of 1,000 common shares
  6. 6. Stock Splits <ul><li>A distribution of additional shares of stock to shareholders according to their percent ownership. </li></ul><ul><li>Involves calling in the outstanding shares and replacing them with more than one new share for each old share. </li></ul><ul><li>No journal entries are required with a stock split. </li></ul><ul><li>The only change to shareholders’ equity is the number of shares. </li></ul><ul><li>Reverse stock splits reduce number of shares </li></ul>
  7. 7. Repurchase of Shares <ul><li>Corporation may repurchase shares of its own outstanding share capital. Shares may then be retired or cancelled. </li></ul><ul><li>No gain is ever reported on share repurchases, however, Contributed Capital from Retirement of Common Shares may remain if shares are retired for less than the average issue price. </li></ul><ul><li>When shares are retired for more than the average issue price, Retained Earnings is debited for the excess paid over the issue price. </li></ul><ul><li>If there is a balance in Contributed Capital from Retirement of Common Shares, this account is debited first to the extent of its balance. </li></ul>
  8. 8. Earnings Per Share <ul><li>Earnings per share is one of the most widely cited items of accounting information. </li></ul><ul><li>Calculating weighted average common shares outstanding. </li></ul><ul><ul><li>Analyze for how long each group of common shares was outstanding during the year. </li></ul></ul><ul><ul><li>Multiply by the number of shares. </li></ul></ul><ul><li>Add all weighted averages together to get the weighted average for the year. </li></ul>Basic earnings per share = (Net income - Preferred dividends) Weighted-average common shares outstanding