Lecture Notes: Raising Funds and Stock Transactions

Introduction

• Companies can raise funds by issuing stock.
• Investors become stockholders by subscribing to stocks.

Common Stock Issuance

• Journal Entry:
  • Debit: Cash
  • Credit: Common Stock
• Example: $30,000 cash for 30,000 shares.
• Par Value: Legal capital of stock.
  • Example: 1,000 shares at 1 cent par value, issued at $30/share results in:
    • $30,000 cash received.
    • Common Stock credited for $10 (1 cent/share).
    • Remaining $29,990 goes into Additional Paid-in Capital (APIC).

Preferred Stock

• Issued in addition to common stock.
• Preferred stockholders have first rights to dividends and asset distribution.
• No voting rights.
• Similar journal entries as common stock.
  • Example: Cash $30,000, Preferred Stock $10, APIC $29,990.

Treasury Stock

• Reasons for Buyback:
  • Increase underpriced stock price.
  • Boost earnings per share (EPS).
  • Provide employee stock options.
• Shares Outstanding: Shares issued minus treasury stock.
• Journal Entry for Buyback:
  • Debit: Treasury Stock
  • Credit: Cash
• Sale of Treasury Stock:
  • Debit: Cash
  • Credit: Treasury Stock
  • Credit: APIC for price difference.

Dividends

Cash Dividends

• Declaration Date:
  • Debit: Dividends
  • Credit: Dividends Payable
• Date of Record: No journal entry.
• Payment Date:
  • Debit: Dividends Payable
  • Credit: Cash
• Year End: Dividends account closed to Retained Earnings.

Stock Dividends

• Large Stock Dividends: 25% or more.
  • Example: 30% stock dividend.
• Small Stock Dividends: Less than 25%.
  • Valued at market value.
• Journal Entry for Small Stock Dividends:
  • Debit: Stock Dividends
  • Credit: Common Stock
  • Credit: APIC

Stock Splits

• Definition: Increase number of shares by splitting existing shares.
• Examples: 2:1, 3:1, 3:2.
• Effect on Par Value:
  • Par value decreases (e.g., $1 to $0.50 in 2:1 split).
• No Journal Entry Required.
• Difference from Stock Dividends:
  • Stock dividends increase common stock.
  • Stock splits affect par value, not retained earnings.

Summary

• Stock splits and dividends have different effects on stockholders' equity and retained earnings.
• Important to understand the accounting treatment and strategic reasons behind each action.