distributed. The entry includes a credit to Common Stock Dividend Distributable at par value times the number of shares, with any excess credited to Paid-in Capital in Excess of Par. Common Stock Dividend Distributable is reported in the stockholders’ equity section between the declaration date and date of issuance. For example, consider the following set of facts. Vonesh Corporation, which has 50,000 shares of $10 par value common stock outstanding, declares a 10% stock dividend on December 3. On the date of declaration the stock has a fair market value of $25 per share. The following entry would be made when the stock dividend is declared: Retained Earnings (5,000 X $25) ........................... 125,000 Common Stock Dividend Distributable .................... 50,000 Paid-in Capital in Excess of Par ................................ 75,000 When the stock is issued, the entry is: Common Stock Dividend Distributable ...................... 50,000 Common Stock ............................................................. 50,000
Stock Split 30. A stock split results in an increase or decrease in the number of shares outstanding with a corresponding decrease or increase in the par or stated value per share. In general, no accounting entry is required for a stock split as the total dollar amount of all stockholders’ equity accounts remains unchanged. A stock split is usually intended to improve the marketability of the shares by reducing the market price of the stock being split. In general, the difference between a stock split and a stock dividend is based upon the size of the distribution. If the number of shares issued in a stock dividend exceeds 20 or 25% of the shares outstanding, calling it a “stock split” is warranted, and only the par value of the shares issued is transferred from retained earnings. Restrictions on Retained Earnings 31. In many corporations restrictions on retained earnings or dividends exist, but no formal journal entries are made. Such restrictions are best disclosed by note. Stockholders’ Equity 32. (S.O. 9) An example of a comprehensive stockholders’ equity section taken from a balance sheet is given in the textbook. A company should disclose the pertinent rights and privileges of the various securities outstanding. Examples of information that should be disclosed are dividend and liquidation preferences, participation rights, call prices, and dates. 33. Statements of stockholders’ equity are frequently presented in the following basic format: a. Balance at the beginning of the period. b. Additions. c. Deductions. d. Balance at the end of the period. 34. Several ratios use stockholders’ equity related amounts to evaluate a company’s profitability and long-term solvency. The following three ratios are discussed and illustrated in the chapter: (1) rate of return on common stock equity, (2) payout ratio, (3) book value per share. Rate of Return On Common Stock Equity= Net income–Preferred dividends Average common stockholders' equity Payout Ratio=
Cash dividends Net income–Preferred dividends Book Value Per Share= Common stockholders' equity Outstanding shares Dividend Preferences *35. (S.O. 10) Preferred stock generally has a preference in the receipt of dividends. Preferred stock can also carry features which require consideration at the time a dividend is declared and at the time of payment. These features are (a) the cumulative feature, and (b) the participating feature. The text material includes computational examples of these features in various combinations showing their impact on dividend distributions when both common and preferred stock are involved. When computing book value per share there are additional complications.
- Fall '09
- Dividend, .........