Question

Judgment Case 18–5 Treasury stock; stock split; cash dividends; Alcoa
LO18–5 through LO18–8

Alcoa is the world’s leading producer of primary aluminum, fabricated aluminum, and alumina. The following is a press release from the company:

ALCOA ANNOUNCES 33% INCREASE IN BASE DIVIDEND, 2-FOR-I STOCK SPLIT

PITTSBURGH—Alcoa today announced that its Board of Directors approved a base quarterly dividend increase of 33.3%.
Real World Financials

Alcoa’s announcement indicated that the new quarterly dividend would be $0.25 per share. It also stated that the Board of Directors declared a two-for-one stock split and reaffirmed its commitment to a share repurchase program.
Required:

    What are the two primary reporting alternatives Alcoa has in accounting for the repurchase of its shares? What would be the effect of the optional courses of action on total shareholders’ equity? Explain. What would be the effect of the optional courses of action on how stock would be presented in Alcoa’s balance sheet? If the shares are later resold for an amount greater than cost, how should Alcoa account for the sale?

    What are the two primary courses of action Alcoa has in accounting for the stock split, and how would the choice affect Alcoa’s shareholders’ equity? Why?

    How should Alcoa account for the cash dividend, and how would it affect Alcoa’s balance sheet? Why?

Answer 1

1) Alcoa's have two options for accounting for repurchase of shares

1) The shares can be held as Treasury stock

2) The shares can be retired

In both the above cases the total shareholder's equity would be same. Cash is used to repurchase the equity hence there would be reduction of asset and liability in both the method. This choice will impact how the shareholders equity will be reported in the balance Sheet

When the share purchase is accounted as treasury stock - The repurchase cost would be reduced from the shareholder's equity and separate account would be created as an unallocated reduction of shareholders equity. The entry would be debited the shareholder's equity account and crediting the cash account. The shares would be considered as issue but not part of shareholder's equity. If subsequently these shares are sold, than Alcoa would record the entry for cash on sale as debit and credit the treasury account. The excess of cost over selling price would be credited to additional paid-in capital.

When the shares are retired : In case of retiring of shares you will have to debit the face value of stock and additional amount received over the face value is debited to additional paid in capital and total amount is credited to a treasury stock. If these shares are resold Alcoa would account for the same as sale of new shares

2) Stock Spilt

The two options for stock Spilt is either not to make any journal entry for the spilt or to affect the spilt In the form of a stock dividend where Alcoa would record the entry by debiting the paid up capital by the par value of share multiplied by the shares which are distributed and credit the common stock for the same amount

3) If Alcoa makes cash dividend than the it would be accounted by debiting the retained earnings and crediting the cash for dividend to be paid.

With cash dividend the cash balance on the asset side would reduce and the retained earnings on liability side would reduce. Overall there would be Nil impact as there is decrease in both the side of the balance sheet.