ACCT 201 Lecture Notes - Lecture 10: Treasury Stock, Preferred Stock, Stock Split

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21 Jun 2018

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ACCT 201 – Lecture 12 – Chapter 10

Chapter 10 – Stockholder’s Equity

Components of Stockholder’s Equity

oTreasury Stock – our own stock bought back from the marketplace

Paid-In Capital

oReview

i.e. we sell a share for $10

oPAR value = Money ($) on certificate

PAR value is a legal concept

Represents capital to be kept in business as final liquidating amount

i.e. Sell $10 PAR Share for $12

Since the stock is worth $10, but the company sells it for more,

the difference between what the stock was sold and what the PAR

value is will be the “additional paid-in capital”

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oTypes of Stock

“Bucket” example

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Document Summary

Acct 201 lecture 12 chapter 10. Components of stockholder"s equity: treasury stock our own stock bought back from the marketplace. Paid-in capital: review i. e. we sell a share for , par value = money ($) on certificate. Represents capital to be kept in business as final liquidating amount i. e. sell par share for . Since the stock is worth , but the company sells it for more, the difference between what the stock was sold and what the par value is will be the additional paid-in capital : types of stock. Example question for the bucket example: the corporate charter of. Gigantic corporation allows the issuance of a maximum of 2,500 shares of par common stock. It later acquired 20 of these shares as treasure stock. Authorized is 2,500 as the company allowed that many to be available. Issued is 1,200 because that is how many had been currently sold.

Related Questions

Match the items below by entering the appropriate answer letter choice from the column provided on the right.

	1.Net income retained in the corporation.
	2. Creditors cannot go after stockholderâs personal assets to satisfy their claims.
	3. Retained earnings currently unavailable for dividends.
	4. A corporationâs own stock that has been reacquired by the corporation.
	5. Responsible to stockholders for corporate activity.
	6. The amount assigned to each share of stock in the corporate charter.
.	7. The date the board of directors formally declares the dividend and announces it to stockholders.
	8. A debit balance in retained earnings.
	9. Capital contributed by stockholders.
	10. The death of a stockholder or employee does not affect the going concern of the corporation.
	11. The company determines ownership of the outstanding shares for dividend purposes.
	12. Unit of ownership in a corporation.
-	13. This type of dividend for the stockholder results in more shares of stock, but no change in ownership interest.
	14. The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share. This stock transaction does not require an accounting entry.
	15. The acts of the owners (stockholders) do not bind the corporation.

A.	Par value
B.	Record date
C.	Retained Earnings
D.	Indefinite life
E.	Treasury stock
F.	Stock split
G.	Declaration date
H.	Retained Earnings restrictions
I.	Stock dividend
J.	Capital stock
K.	Deficit
L.	Paid-in capital
M.	Cash dividend
N.	Board of directors
O.	Separate legal entity
P.	Limited liability

lilachorse885

Task Corporation had the following stockholdersâ equity accountbalances at December 31, 20x4:

CommonStock $ 7,875,000

Paid-in Capital in Excess ofPar 15,750,000

Paid-in Capital Employee StockOptions 400,000

RetainedEarnings 16,445,000

TreasuryStock 750,000

Transactions and other information related to stockholdersâequity accounts were as follows:

As of December 31, 20x4, Trask had 4,000,000 authorized sharesof $5 par value common stock â 1,575,000 shares had been issued, ofthis 75,000 were held in the treasury. The treasury shares wereaccounted for using the cost method.

On January 1, 20x5, Trask issued 5,000 shares of $100 par value,6% cumulative preferred stock at par in exchange for legal feesvalued at $522,000.

On March 1, 20x5, Task formally retired 25,000 of the treasuryshares. The shares were originally issued for $15 per share and hadbeen reacquired on September 25, 2004 for $10 per share.

Trask owned shares of Harbor, Inc. common stock that waspurchased during 20x4 for $600,000. On March 5, 20x5, Traskdeclared a property dividend to distribute all of the Harbor sharesto common stockholders of record on April 16, 20x5. The marketvalue of the Harbor stock on March 5, 20x5 was $764,000. Theproperty dividend was distributed on April 29, 20x5.

On January 2, 20x3, Trask granted stock options to employees topurchase 200,000 shares of the companyâs common stock at $12 pershare, which was the market price on that date. The market price ofthe options on the grant date was $2 per option.The options areexercisable within a three year period, beginning January 1, 20x5.On July 1, 20x5, employees exercised 150,000 options when themarket value of the stock was $25 per share.

On October 27, 20x5, Trask declared a two-for-one stock split onits common stock and reduced the per share par value accordingly.Trask stockholders of record received one additional share for eachshare owned.

On December 12, 20x5, Trask declared the yearly cash dividend onpreferred stock, payable on January 11, 20x6.

On January 16, 20x6 before the accounting records are closed for20x5, Trask became aware of the fact that depreciation wasunderstated by $350,000 for the year ended December 31, 20x4. Theafter tax effect on net income was $245,000.

Net income for 20x5 was $2,400,000.

The average price of a share of Trask common stock was $22 pershare.

The price of a share of Trask common stock was $24 at yearend.

Required:

Prepare all journal entries required to record the aboveinformation during 20x5.

Prepare Traskâs statement of retained earnings for the yearended December 31, 20x5.

Prepare the stockholdersâ equity section of Traskâs balancesheet at December 31, 20x5.

Compute earnings per share for the year 20x5.

indigokoala400

1 - What is economic cost?

A) The opportunity cost less the explicit costs

B) The same as opportunity cost

C) The total of all explicit and implicit costs

D) The total revenue less total costs

2- Why is equity capital generally more expensive than debtfinancing?

A) Dividends fluctuate more than interest rates.

B) Interest on bonds is a legal obligation.

C) Investors expect to be paid more for exposure to higherrisk.

D) Investors have a greater demand for equity investments thanfor debt investments.

3 - An appropriate level of working capital is determined by

A) Balancing the probability of insolvency against theprofitability of current assets and liabilities.

B) Evaluating the capital structure and dividend policy.

C) Evaluating the capital leases used to finance fixedassets.

D) Minimizing long-term debt because it is more expensive thanshort-term debt.

4 - Which of the following objectives is consistent with anoptimal capital structure?

A) Maximize earnings per share

B) Maximize the total value of the entity

C) Minimize the cost of debt

D) Minimize the cost of equity

5 - Lemur Companyâs $10 par value common stock currently sellsat $100 per share. Lemur has retained earnings of $100,000; oncethis is exhausted, Lemur will raise any more necessary equitycapital through a stock issue. Lemur can raise cash by sellingcommon stock at a $2 per share discount with a $3 per sharefloatation cost. Annual cash dividends are $7 per share and are notexpected to change. The estimated after-tax cost of funds raised bylong-term bonds is 5%. The estimated cost of funds raised bypreferred stock is 6%. Lemurâs preferred capital structure is 30%long-term debt, 20% preferred stock, and 50% common stock. Notcounting the $100,000 of retained earnings, the current capitalstructure is Lemurâs preferred structure. What would be Lemurâscost of funds from a common stock sale?

A) 7.00%

B) 7.14%

C) 7.22%

D) 7.37%

6 - Aardvark Companyâs beta coefficient is 1.2. The currentrates for U.S. treasury bonds and expected corporate returns are 7%and 12%, respectively. What is Aardvarkâs approximate expected rateof return using the capital asset pricing model (CAPM)?

A) 8.4%

B) 10.6%

C) 13.0%

D) 14.4%

7- Controllable revenues would be included in the performancereports of which of the following types of responsibilitycenters?

Cost centers ,Investment centers

A) Yes, No

B) Yes, Yes

C) No, No

D) No, Yes

8 - In which of the following situations would there beinelastic demand?

A) A 5 percent price increase results in a 3 percent decrease inthe quantity demanded.

B) A 4 percent price increase results in a 6 percent decrease inthe quantity demanded.

C) A 4 percent price increase results in a 4 percent decrease inthe quantity demanded.

D) A 3 percent price decrease results in a 5 percent increase inthe quantity demanded.

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ACCT 201 Lecture Notes - Lecture 10: Treasury Stock, Preferred Stock, Stock Split

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