ACTG 3120 Chapter Notes - Chapter 14: Issued Shares, Share Capital, Liquidating Distribution

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31 Mar 2017

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Private company have a limited number of shareholders and shares are not traded on a public market. Therefore, the shareholders agreement outlines rules, laws and methods for transferring shares and the logistics of the shares. Public companies are ones whose securities are traded on stock exchanges, debt or equity. They follow ifrs standards as well as the stock exchanges" reporting requirements as well. Represented by a share certificate and they represent ownership in a corporation. A corporation is allowed to issue different classes of shares, each with different rights and dividend and voting entitlements. Preferred shares: they have preferences over common shares; they may also be called class a shares. Have a priority claim over dividends at a stated rate or amount. However they have limited or no voting rights. Cumulative dividends: some preferred shares have the right to receive past unpaid dividends dividends in arrears in the current year before common shareholders are paid.

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Oakwood Inc. is a public enterprise whose shares are traded inthe over-the-counter market. At December 31, 2015, Oakwood had6,000,000 authorized shares of $10 par value common stock, of which2,000,000 shares were issued and outstanding. The shareholders'equity accounts at December 31, 2015, had the followingbalances:

Common stock		$20,000,000
Additional paid-in capital on common stock		7,500,000
Retained earnings		6,470,000

Transactions during 2016 and other information relating to theshareholders' equity accounts were as follows:

On January 5, 2016, Oakwood issued at $54 per share, 100,000shares of $50 par value, 9%, cumulative convertible preferredstock. Each share of preferred stock is convertible, at the optionof the holder, into 2 shares of common stock. Oakwood had 600,000authorized shares of preferred stock.

On February 2, 2016, Oakwood reacquired 20,000 shares of itscommon stock for $16 per share. Oakwood uses the cost method toaccount for treasury stock.

On April 27, 2016, Oakwood sold 500,000 shares (previouslyunissued) of $10 par value common stock to the public at $17 pershare.

On June 18, 2016, Oakwood declared a cash dividend of $1 pershare of common stock, payable on July 13, 2016, to shareholders ofrecord on July 2, 2016.

On November 9, 2016, Oakwood sold 10,000 shares of treasurystock for $21 per share.

On December 14, 2016, Oakwood declared the yearly cash dividendon preferred stock, payable on January 14, 2017, to shareholders ofrecord on December 31, 2016.

On January 18, 2017, before the books were closed for 2016,Oakwood became aware that the ending inventories at December 31,2015, were understated by $300,000 (the after-tax effect on 2015net income was $210,000). The appropriate correcting entry wasrecorded the same day.

After correcting the beginning inventory, net income for 2016was $4,500,000.

Required:

1. Prepare a statement of retained earnings for Oakwood for theyear ended December 31, 2016. Assume that only single-periodfinancial statements for 2016 are presented.

2. Prepare the shareholders' equity section of Oakwood's balancesheet at December 31, 2016.

coralseal860

Trask Corporation, a public company whose shares are traded in the over-the-counter market, had the following shareholders' equity account balances at December 31, 2016:

Common stock $7,875,000

Additional paid-in capital (including stock options) $16,050,000

Retained earnings $16,445,000

Treasury common stock $750,000

Transactions during 2017 and other information relating to the shareholders' equity accounts follow:

As of January 1, 2017, Trask had 4,000,000 authorized shares of $5 par-value common stock; it had issued 1,575,000 shares of which 75,000 were held in treasury.

On January 21, 2017, Trask issued 50,000 shares of $100 par value, 6% cumulative preferred stock at par in exchange for all of Rover Company's assets and liabilities. On that date, the net carrying amount of Rover's assets and liabilities equaled their fair values.

On January 22, 2017, Rover distributed the Trask shares to its stockholders in a complete liquidation and dissolution of Rover. Trask had 150,000 authorized shares of preferred stock.

On February 17, 2017, Trask formally retired 25,000 of 75,000 treasury common stock shares. The shares were originally issued at $15 per share and had been acquired on September 25, 2016, for $10 per share.

Trask owned 15,000 shares of Harbor Inc. common stock purchased in 2016 for $600,000. The Harbor stock shares are carried t fair value with price changes included in net income. On March 5, 2017, Trask declared a property dividend of one share of Harbor common stock for every 100 shares of Trask common stock held by a shareholder of record on April 16, 2017. Harbor stock's market price on March 5, 2017, was $60 per share. The property dividend was distributed on April 29, 2017.

On January 2, 2012, Trask granted stock options to employees to purchase 200,000 shares of the company's common stock at $12 per share, which was also the market price on that date. The options had a grant date fair value of $1.50 per share and are exercisable within a three-year period, beginning January 2, 2017. On June 1, 2017, employees exercised 150,000 options when the stock's market value was $25 per share. Trask issued new shares to settle the transaction.

On December 12, 2017, Trask declared the yearly cash dividend on preferred stock, payable on January 11, 2018, to shareholder of record on December 31, 2017.

On January 16, 2018, before the accounting records were closed for 2017, Trask learned that depreciation expense had been understated by $350,000 for the year ended December 31, 2016. The after-tax effect on 2016 net income was $245,000. The appropriate correcting entry to adjust January 1, 2017 retained earnings was recorded on the same day.

Net income for 2017 was $2,400,000.

Required:

Prepare a schedule to show how Trask's retained earnings changed from January 1, 2017, to December 31, 2017.

Prepare the shareholders' equity section of Trask's balance sheet at December 31, 2017.

Compute the book value per share of common stock at December 31, 2017

peachjackal674

Do you agree or disagree with the following post belowfrom a classmate? Please exaplain with cited sources in the bodytexts and reference. Thank you!

Issuing common stock helps a corporation raise money. Thatcapital can then be used in a number of ways to help the businessgrow, such as to acquire another company, pay debts or to simplyhave access to more cash for general corporate reasons. Companiesmust decide, however, whether issuing common stock is really worthit. Issuing additional shares into the financial markets dilutesthe holding of existing shareholders and reduce their ownership inthe corporation.

Pros

Issuing common stock in the financial markets is an alternativeto issuing debt. Rather than adding more debt to a company'sbalance sheet, which is a financial statement, and budgeting forthe servicing of debt, a company can take a less expensive routeand issue common stock. With stock, an organization does not needto make obligatory interest payments to investor and instead canmake discretionary dividend payments when it has extra cash.

Cons

By selling additional common shares into the financial markets,a company is increasing the number of outstanding shares. When thenew shares enter the market, they dilute the ownership of existingshareholders, according to " The Global issues blog and FinancialAccounting book 9th ed, Pearson." One of the perks of being acommon shareholder is the right to vote on important companydevelopments. Once a greater number of common stocks are sold inthe market, an existing shareholder's ownership stake and votinginfluence diminish. Companies sometimes avoid issuing more commonstock as a courtesy to existing shareholders.

Reference:

The GlobalIssuesBlog,8 Big Advantages and Disadvantages ofcommon Stocks, retrieved 03 April 2017 fromhttp://connectusfund.org/8-big-advantages-and-disadvantages-of-common-stocks

Harrison, W. T.,Horngren, C. T. & Thomas, C. W. (2013).Financial Accounting (9^th ed.) Upper Saddle River, NJ:Pearson Education, In

ACTG 3120 Chapter Notes - Chapter 14: Issued Shares, Share Capital, Liquidating Distribution

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