Question

50. How is the issuance of stock accounted for?

1. When issuing common stock at par value, the journal entry would be to debit __________ and credit __________________.   
   
   

50. How is treasury stock accounted for?

1. What is treasury stock?
   
2. Why might a company later reacquire some of its own stock as treasury stock?
   
3. ABC company recently repurchased some of its own stock as treasury stock for $1,000. The company is now selling the treasury stock for $1,100. The journal entry would be:

Date	Accounts and Explanation	Debit	Credit

50. How are dividends and stock splits accounted for?

1. Journalize for the 1) declaration of cash dividend of $1,000 and 2) payment of cash dividend:
   

Date	Accounts and Explanation	Debit	Credit
1)
2)

2. Why might some companies issue stock dividends instead of cash dividends?
   
   
3. ABC Company currently has 100,000 shares of common stock with a par value of $2 before a 2-for-1 split. What is the number of shares and par value after the split?

50. How is the complete corporate income statement prepared?

1. What may appear on a corporation’s income statement that generally does not appear for smaller business?

50. How is equity reported for a corporation?

1. What is included on the statement of retained earnings?

2. The statement of stockholder’s equity reports the changes in all ___________ accounts.

50. How do we use stockholders’ equity ratios to evaluate business performance?
    1. Use the following information for ABC Company to calculate the EPS, price/earnings ratio, and return on common stockholders’ equity:

               Net Income = $10,000
               Preferred Dividends = $2,000
               Average Common Stockholders’ Equity = $300,000
               Number of Common Shares Outstanding = 20,000 shares

1. What is earnings per share?

2. What is price/earnings ratio assuming the market price is $2 per share?

3. What is rate of return on common stockholders’ equity (take percentage to 2 decimal places)?

Answer 1

SOLUTION :

AX.

a.

When issuing common stock at par value, the journal entry would be to debit CASH and credit COMMON STOCK.

AX.

a.

A corporation may issue its stock with a view to raise capital, which will be held by public, its staff or by both. But many times, the corporation itself will purchase those stocks WHICH ARE ALREADY ISSUED, for different purposes like raise in share price. Such category of shares or stocks which are purchased by the company from the existing holders, are known as TREASURY STOCK. It is shown as a negative item in the company's Balance Sheet, on the Equity & Liability side, under Stockholders' Equity.

b.

As mentioned in the above answer, a company's prime motive behind the purchase of its own stock is to increase the stock value in the market by decreasing the number of stock outstanding. The bought back stock will not have any value neither any voting rights. The 'behind-the scene' activity is that earnings of a company and its ownership pattern remains intact with this purchase and Earnings Per Share increases. Therefore it is a direct alternative for a cash dividend. The stocks can be decommissioned, possessed or issued at a later date, for a higher price due to the now increased value.

c.

Date	Accounts and Explanations	Debit ($)	Credit ($)
	Cash	1100.00
	Treasury Stock		1000.00
	Additional Paid In Capital		100.00
	(Treasury stock which was purchased for $ 1000, sold at $ 1100)

AX.

a.

Date	Accounts and Explanations	Debit ($)	Credit ($)
1)	Retained Earnings	1000.00
	Dividends Payable		1000.00
	(Cash Dividend declared for the year)
2)	Dividends Payable	1000.00
	Cash		1000.00
	(Dividend declared is paid)

b.

A company might issue stock dividend instead of cash dividend if it is struggling for its working capital and does not wish to pay out whatever liquid cash available in the for of dividend. Another important reason behind declaring stock dividend is that it increases the capital of company by converting a portion of its retained earnings in to stock. A third reason will be found in the case of a corporation where it regards stockholders' welfare important. It is that the stockholders generally need not pay taxes on stock dividend acquired.

c.

The number of shares after a '2 for 1 split' would be 200000 (100000 X 2). Par value after the split would be $ 1 per share (Value before split = 100000 X 2 = 200000; Per Share Par Value After Split = 200000/200000 = 1)

AX.

a.

Earnings Per Share (EPS) is one item that will appear on an income statement of a corporation that generally does not appears that of a small business. The reason is that the owners of a corporation are called stock holders who hold shares of the company and EPS is an index of the rewards for the risk undertaken by them. This is calculated by apportioning the net income on the basis of total number of shares. In case of a small business, the whole of net income is attributable to the sole proprietor/partners.

AX.

a.

A Statement of Retained Earnings is composed of items which has changed the retained earnings of a company during the accounting period. It reconciles the opening and closing balance of retained earnings by the common format that is, "Beginning Balance + Net Income - Dividend Declared = Closing Balance". In many companies, this statement also includes an item-wise classification of common stock, additional paid in capital, treasury stock etc.

b.

The statement of stockholder’s equity reports the changes in all STOCK accounts.

AX.

(i)

Earnings Per Share = (Net Income - Preferred Dividends) / Number of Common Shares Outstanding =

10000 - 2000 / 20000 = $ 0.4

It means that every common stockholder of the company will earn $ 0.4 per share.

(ii)

Price Earning Ratio = Market Price of Share / EPS = $ 2 / $ 0.4 = 5

It means that stock holders are willing to pay $ 5 for every dollar of the company's earnings.

(iii)

Rate of Return on Common Stockholders’ Equity = Net Income / Average Common Stockholders’ Equity =

$ 10000 / $ 300000 = $ .03

It means that the company will generate $ .03 for every $ 1 of Common Stockholders’ Equity.