Module 4: Stockholders' Equity: Part 2

Question 1

Date of declaration

Answer 1

The date the board of directors formally approves a dividend. A liability is created (dividends payable) and retained earnings is reduced (debited)

Question 2

Liquidating Dividend

Answer 2

Amount in excess of retained earnings balance.
*Example:
-Retained Earnings: 300,000
-Cash dividend: 400,000
Liquidating dividend = 100,000
100,000 is taken out of APIC and this effectively returns part of the shareholders’ initial investment (kind of like canceling the investment) The decrease in APIC is recorded at declaration

Question 3

Stock dividend (less than 20-25% of the stock outstanding)

Answer 3

transfers the FMV of the stock dividend at declaration date from retained earnings to capital stock and paid-in capital. There is no effect on total stockholders’ equity because all transfers take place within stockholders’ equity.

Question 4

Stock splits

Answer 4

increases the number of shares. reduces par value per share to get to the par total that we had before the split. Only the number of shares changes. APIC and RE do not change

Question 5

Steps for property dividend

Answer 5

Step 1: Adjust asset to fair value
Step 2: Recognize gain or loss in income
Step 3: Reduce retained earnings by the asset’s fair value.