Corporate Equity Accounting: Stock, Repurchases, Options, & Dividends

Posted on Jul 5, 2025 in Accounting and Finance

Equity Financing: Paid-in Capital

Common Stock Fundamentals

When a corporation is formed, a single class of stock, known as common stock, is usually issued.

Common Stock Rights

  • Voting rights
  • Share in profits when dividends are declared
  • Share in the distribution of assets if the company is liquidated

Preferred Stock Fundamentals

Corporations may later find that there are advantages to issuing one or more additional classes of stock with varying rights and priorities. Stock with certain preferences (rights) over common stock is called preferred stock.

Preferred Stock Characteristics

  • No voting rights
  • Dividends preference
  • Preferred stock is usually issued with par value, and the dividend is stated in terms of a percentage. When preferred stock has no par value, the dividend is stated in terms of dollars and cents.
  • Liquidation preference

Accounting for Capital Stock Issuance

Issuance for Cash

Example: The company issued 10,000 shares of $1 par common stock for cash at $40 per share. Make the necessary journal entry.

(Dr) Cash (10,000 shares × $40) $400,000
(Cr) Common Stock, $1 par (10,000 shares × $1) 10,000
(Cr) Paid-In Capital in Excess of Par 390,000

Issuance for Non-Cash Consideration

The transaction should be recorded at the fair value of either the shares or the non-cash consideration, whichever is more objectively determinable.

Example: Houston Chemicals issues 1 million of its common shares, $1 par per share, in exchange for land. The current market price of Houston Chemicals’ stock is $10 per share.

Case A: Quoted Market Price of Houston Chemicals is Available ($ in millions)
(Dr) Land (1 million shares at $10) 10
(Cr) Common Stock (1 million shares at $1 par) 1
(Cr) Paid-in Capital – Excess of Par (remainder) 9
Case B: Land has a Readily Determinable Market Price of $12 million, but Houston Chemicals’ Common Stock has no Established Fair Market Value ($ in millions)
(Dr) Land 12
(Cr) Common Stock (1 million shares at $1 par) 1
(Cr) Paid-in Capital – Excess of Par (remainder) 11

Stock Repurchase Purposes

  • Provides shares for incentive compensation and employee savings plans or to satisfy requests by holders of convertible securities.
  • Invest excess cash temporarily.
  • Remove some shares from the open market to protect against hostile takeover.
  • Improve earnings per share.
  • Display confidence that the stock is currently undervalued.

Treasury Stock Definition & Principles

Treasury Stock: Stock that is reacquired and held in the name of the company rather than formally retired immediately.

  • Should not be viewed as an asset: It should be reported as a reduction in total owners’ equity.
  • There is no income or loss on the reacquisition, reissuance, or retirement of treasury stock.
  • Retained earnings can be decreased by treasury stock transactions but are never increased by such transactions.

Treasury Stock Accounting Methods

  • Cost Method: Treasury stock is recorded in a special equity account until the shares are retired.
  • Par Value Method: The purchase of treasury stock is accounted for as if the shares were being retired. (Used by less than 10% of large U.S. companies)

Stock Repurchases: Cost Method

United Technologies’ balance sheet included the following:

Stockholders’ Equity ($ in millions)
Common Stock, 100 million shares at $1 par $ 100
Paid-in Capital – Excess of Par 900
Paid-in Capital from Treasury Stock 2
Retained Earnings 2,000
Reacquired 1 million shares at $13 per share
Dr. Treasury Stock 13
Cr. Cash 13
Balance Sheet Presentation: Stockholders’ Equity ($ in millions)
Paid-in Capital:
Common Stock, 100 million shares at $1 par $ 100
Paid-in Capital – Excess of Par 900
Paid-in Capital from Treasury Stock 2
Retained Earnings 2,000
Less: Treasury Stock, 1 million shares (at cost) (13)
Total Stockholders’ Equity $2,989

Sale of Treasury Stock

Case A: Sold 1 million treasury shares at $14 per share
Cash 14
Treasury Stock (cost) 13
PIC from Treasury Stock 1
Case B: Sold 1 million treasury shares at $10 per share
Cash 10
Retained Earnings (balance) 1
PIC from Treasury Stock 2*
Treasury Stock (cost) 13

*Because there is a $2 million credit balance, and we assume that $2 million was generated from the transaction of the same class of stock.

Notes: If treasury stock is sold for less than cost, you can debit the PIC account first and then retained earnings for the remaining part. Alternatively, you can debit retained earnings for the entire balance.

Cash 10
Retained Earnings (balance) 3
Treasury Stock (cost) 13

For more detailed stock repurchase transactions, please read “Note for Stock Repurchase.”

Retirement of Treasury Stock

(Dr) Common Stock 1
(Dr) Paid-in Capital in Excess of Par 9
(Dr) Retained Earnings 3
(Cr) Treasury Stock (cost) 13

Alternatively, the entire $12 million difference between common stock and the cost of treasury stock can be debited to retained earnings:

(Dr) Common Stock 1
(Dr) Retained Earnings 12
(Cr) Treasury Stock (cost) 13

Share-Based Compensation: Stock Options

Share-based compensation refers to rights granted to officers or employees, usually as part of a compensation plan. After a long debate between FASB and business communities, share-based compensation is recorded as an expense (SFAS 123 (revised) – FASB ASC Topic 718), which is a good example of convergence of U.S. GAAP and IFRS.

Types of share-based compensation plans:

  • Basic Stock Option Plan
  • Performance-Based Stock Option Plans: The plan terms are dependent on how well the individual or company performs after the date the options are granted.
  • Awards that call for cash settlement: Instead of granting stock options, a company may grant an equal number of stock appreciation rights (SARs).

Basic Stock Option Plans

On January 1, 2011, the board of directors of Neff Company authorized the grant of 10,000 stock options to supplement the salaries of certain employees. Each stock option permits the purchase of one share of Neff common stock at a price of $50 per share; the market price of the stock on January 1, 2011, is also $50 per share. The options vest, or become exercisable, beginning on January 1, 2014, and only if the employees stay with the company for the entire three-year vesting period. The options expire on December 31, 2014. Assume that an option pricing formula is used to estimate a grant value of $10 for each of the employee stock options.

Record Compensation Expense for 2011
Dec. 31 (Dr) Compensation Expense ($100,000/3 yrs) 33,333
           (Cr) PIC from Stock Option 33,333

Notes: The same journal entry is made for years 2012 and 2013.

Exercise of Stock Option in 2014
Dec. 31 (Dr) Cash (10,000 × $50) 500,000
           (Dr) PIC from Stock Option 100,000
           (Cr) Common Stock 600,000
Expired Stock Option in 2014
Dec. 31 (Dr) PIC from Stock Options 100,000
           (Cr) PIC from Expired Stock Option 100,000

Performance-Based Stock Option Plans

Continuing on Neff’s previous share-based compensation plan, the number of options granted is contingent on Neff’s level of sales for 2013:

  • Sales < $50 million: Only 10,000 options will vest.
  • $50 million ≤ Sales ≤ $80 million: An additional 2,000 options will vest.
  • Sales > $80 million: A total of 15,000 options will vest.

As of Dec. 31, 2011, Neff expects 2013 sales to be $60 million.

Record Compensation Expense for 2011

Sales forecast $60 million: 12,000 options

Total compensation expense: 12,000 × $10 (fair value of option) = $120,000

Dec. 31 (Dr) Compensation Expense ($120,000/3 yrs) 40,000
           (Cr) PIC from Stock Option 40,000

As of Dec. 31, 2012, Neff expects 2013 sales to be $40 million.

Record Compensation Expense for 2012

Sales forecast $40 million: 10,000 options

Total compensation expense: 10,000 × $10 (fair value of option) = $100,000

Estimated compensation expense up to 2012: $100,000 × 2/3 yrs = $66,667

Dec. 31 (Dr) Compensation Expense ($66,667 – 40,000) 26,667
           (Cr) PIC from Stock Option 26,667

Actual sales of Neff are $85 million: 15,000 options

Total compensation expense: 15,000 × $10 (fair value of option) = $150,000

Record Compensation Expense for 2013
Dec. 31 (Dr) Compensation Expense ($150,000 – 66,667) 83,333
           (Cr) PIC from Stock Option 83,333
Exercise of Stock Option in 2014
Dec. 31 (Dr) Cash (15,000 × $50) 750,000
           (Dr) PIC from Stock Option 150,000
           (Cr) Common Stock 900,000

Cash-Settled Awards: Stock Appreciation Rights (SARs)

Neff has decided that instead of granting its employees 10,000 options, it will grant an equal number of Stock Appreciation Rights (SARs).

Neff promises that after January 1, 2014, it will pay an amount equal to the excess of the share price on the exercise date over the $50 threshold price.

Assume the following information regarding the fair value of SAR:

  • Jan. 1, 2011: $10
  • Dec. 31, 2011: $6
  • Dec. 31, 2012: $7
  • Dec. 31, 2013: $9
Record Compensation Expense for 2011

Estimated compensation expense: 10,000 × $6 = $60,000

Dec. 31 (Dr) Compensation Expense (60,000/3 yrs) 20,000
           (Cr) Share-Based Compensation Liability 20,000
Record Compensation Expense for 2012

Estimated compensation expense: 10,000 × $7 = $70,000

Estimated compensation expense up to 2012: $70,000 × 2/3 yrs = $46,667

Dec. 31 (Dr) Compensation Expense ($46,667 – 20,000) 26,667
           (Cr) Share-Based Compensation Liability 26,667
Record Compensation Expense for 2013

Estimated compensation expense: 10,000 × $9 = $90,000

Dec. 31 (Dr) Compensation Expense ($90,000 – 46,667) 43,333
           (Cr) Share-Based Compensation Liability 43,333
Record Compensation Expense for 2014

Between the time the cash SARs vest and the time they are exercised, the company’s stock price can still move. Assume the stock price on Dec. 31, 2014, is $61.

Dec. 31 (Dr) Compensation Expense (10,000 * ($61-59)) 20,000
           (Cr) Share-Based Compensation Liability 20,000

Notes: Record the stock appreciation until exercise.

Exercise of SARs in 2014
Dec. 31 (Dr) Share-Based Compensation Liability 110,000
           (Cr) Cash 110,000

Note: If the exercise period extended beyond 2014 and if cash SARs remained outstanding, an entry would be made at the end of each year to revise the estimated amount of cash SAR liability.

Equity Items Reported as Liabilities

  • Mandatorily Redeemable Preferred Stock: Preferred stock that is redeemable at the option of the stockholder or upon other conditions not within the control of the issuer. FASB currently requires disclosure of the extent of redemption requirements for all issues of preferred stock that are redeemable at fixed or determinable prices on fixed or determinable dates. Mandatorily redeemable preferred stock is reported as a liability instead of as equity in the balance sheet.
  • Written Put Options: Give the right to sell shares back to the issuer. Historically, the fair value of such obligation was recorded as equity, but FASB now instructs companies to record it as a liability.
  • Obligation to Issue Shares of a Certain Dollar Value: Delivering shares of a company’s own stock instead of paying cash.
    • Promise to deliver a fixed number of shares: Equity
    • Promise to deliver shares equivalent to a certain cash value: Liability

Noncontrolling Interest

  • Minority interest in a consolidated company.
  • FASB uses it to replace “minority interest.”
  • Presented as part of equity, but clearly separate from the parent’s equity.

Retained Earnings

Factors affecting retained earnings:

  • Increase: Net income, error corrections, and some changes in accounting principles.
  • Decrease: Net loss, dividends, error corrections, and some changes in accounting principles.

Restrictions reduce the amount of retained earnings available for dividends. If the restrictions are material, they should be disclosed as a note to the financial statements. A debit balance in retained earnings is considered a deficit.

Dividend Recognition and Payment

In setting dividend policy, the board of directors must answer two questions:

  • Do we have the legal right to declare a dividend?
  • Is a dividend distribution financially advisable?

Three dates are essential in the recognition and payment of dividends:

  • Date of declaration
  • Date of record
  • Date of payment

Dividends are payable to stockholders of record as of a date following the date of declaration and preceding the date of payment.

Cash Dividends

  1. Registered owners on the date of record are entitled to dividends.

At date of declaration:

(Dr) Dividends (or Retained Earnings) XXX
(Cr) Dividends Payable XXX

At date of payment:

(Dr) Dividends Payable XXX
(Cr) Cash XXX
No dividends are declared and paid on treasury stock.
Cash Dividend Example

On June 1, the board of directors of Craft Industries declares a cash dividend of $2 per share on its 100 million shares, to be paid July 1: ($ in millions)

June 1 – Date of Declaration

Retained Earnings 200
Cash Dividends Payable (100 million shares at $2/share) 200

July 1 – Date of Payment

Cash Dividends Payable 200
Cash 200

Property Dividends

A property dividend is a distribution to stockholders that is payable in some asset other than cash. Typically, the securities of other companies owned by the corporation are distributed.

Recognition: Use fair market value of assets transferred to record dividend and to recognize a gain/loss relative to the assets’ carrying value. If market value is not determinable, use assets’ carrying value to record dividend.

Property Dividend Example

Bigler Corporation owns 100,000 shares in Tri-State Oil Co., carrying value $2,700,000, current market value $3,000,000, or $30 per share. There are 1,000,000 shares of Bigler stock outstanding. Bigler Corporation declares a property dividend of 100,000 shares of Tri-State Oil Co.

Declaration of Dividend:

(Dr) Dividends (or Retained Earnings) $3,000,000
(Cr) Property Dividends Payable $2,700,000
(Cr) Gain on Distribution of Property Dividends $300,000

Payment of Dividend:

(Dr) Property Dividends Payable $2,700,000
(Cr) Investment in Tri-State Oil Co. Stock $2,700,000

Stock Dividends

From the shareholders’ point of view, these are an economic non-event.

  • Small Stock Dividend (less than 20%-25%): The fair value of the additional shares distributed is transferred from retained earnings to paid-in capital.
  • Large Stock Dividend (> 20%-25%): The par value of the additional shares distributed is transferred from either retained earnings or common paid-in capital in excess of par to common stock.
Small Stock Dividends

The stockholders’ equity section for the Fuji Company on July 1 is as follows:

Common Stock, $1 par, 100,000 shares outstanding $100,000
Paid-In Capital in Excess of Par $1,100,000
Retained Earnings $750,000

The company declares a 10% stock dividend. Before the stock dividend, the stock is selling for $22 per share. After the stock dividend, each original share sells for $20.

Declaration of Dividend:

(Dr) Retained Earnings $200,000 ($20 × 10% × 100,000 shares)
(Cr) Stock Dividends Distributable $10,000
(Cr) Paid-In Capital in Excess of Par $190,000

Payment of Dividend:

(Dr) Stock Dividends Distributable $10,000
(Cr) Common Stock, $1 par $10,000
Large Stock Dividends

The company declares a 50% stock dividend. Before the stock dividend, the stock is selling for $22 per share.

Declaration of Dividend:

(Dr) Retained Earnings 50,000 ($1 × 50% × 100,000 shares)
(Cr) Stock Dividends Distributable 50,000

OR

(Dr) Paid-In Capital in Excess of Par 50,000
(Cr) Stock Dividends Distributable 50,000

Payment of Dividend:

(Dr) Stock Dividends Distributable 50,000
(Cr) Common Stock, $1 par 50,000

Stock Splits

In a stock split, the number of shares is increased, and the par value of stock is proportionally reduced accordingly. Stock splits require no journal entry. From an investors’ viewpoint, a stock split and stock dividend have the same effects: they are both economic non-events.

Stock Split vs. Stock Dividend Comparison

Stockholders’ Equity (Before)

Paid-in Capital:
Common Stock, 50,000 shares at $5 par $250,000
Paid-in Capital – Excess of Par 400,000
Retained Earnings 300,000
Total Stockholders’ Equity $950,000

After 100% Stock Dividends

Paid-in Capital:
Common Stock, 100,000 shares at $5 par $500,000
Paid-in Capital – Excess of Par 400,000
Retained Earnings 50,000
Total Stockholders’ Equity $950,000

After 2-for-1 Stock Split

Paid-in Capital:
Common Stock, 100,000 shares at $2.5 par $250,000
Paid-in Capital – Excess of Par 400,000
Retained Earnings 300,000
Total Stockholders’ Equity $950,000

Financial Statement Presentation & Disclosure

Shareholders’ Equity Section in Balance Sheet

  • Paid-In Capital
  • Retained Earnings
  • Treasury Stock
  • Accumulated Other Comprehensive Income (AOCI): Items that bypass the income statement and are reported in the equity section of the balance sheet as part of accumulated other comprehensive income.
    • Foreign currency translation adjustment
    • Unrealized gains and losses on available-for-sale securities
    • Unrealized gains and losses on derivatives

AOCI items may be reported individually net of tax or reported gross with overall tax impact from all items reported separately as a single line item.

Statement of Stockholders’ Equity

Changes in each equity line item (columnar format) – including capital stock, paid-in capital, retained earnings, and accumulated other comprehensive income:

  • Beginning Balance
  • Additions
  • Deductions
  • Ending Balance

Required Equity Disclosures

  1. Dividend and Liquidation Preferences on Preferred Stock
  2. Call and Conversion Information on Preferred Stock
  3. Preferred Dividends in Arrears
  4. Restrictions on Retained Earnings