As required by GAAP [FASB ASC 320, previously SFAS No. 115], Microsoft Corporati
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As required by GAAP [FASB ASC 320, previously SFAS No. 115], Microsoft Corporation reports its investments available-for-sale at the fair value of the investment securities. The net unrealized holding gain is not reported in the income statement. Instead, it's reported as part of Other comprehensive income and added to Accumulated other comprehensive income in shareholders' equity. Comprehensive income is a broader view of the change in shareholders' equity than traditional net income, encompassing all changes in equity from non-owner transactions. Microsoft chose to report its Other comprehensive income as a separate statement in a disclosure note in its annual report: MSFT Annual Report 2011 What does Microsoft mean by the termExplanation / Answer
stock dividend distribution of additional shares of stock to current shareholders of the corporation. is the distribution of additional shares of stock to current shareholders of the corporation. Be sure to note the contrast between a stock dividend and either a cash or property dividend. A stock dividend affects neither the assets nor the liabilities of the firm. Also, because each shareholder receives the same percentage increase in shares, shareholders' proportional interest in (percentage ownership of) the firm remains unchanged. LO8 The prescribed accounting treatment of a stock dividend requires that shareholders' equity items be reclassified by reducing one or more shareholders' equity accounts and simultaneously increasing one or more paid-in capital accounts. The amount reclassified depends on the size of the stock dividend. For a small stock dividend, typically less than 25%, the fair market value of the additional shares distributed is transferred from retained earnings to paid-in capital as demonstrated in Illustration 18-9.20 p. 1034 ILLUSTRATION 18-9 Stock Dividend A small stock dividend requires reclassification to paid-in capital of retained earnings equal to the fair value of the additional shares distributed. Craft declares and distributes a 10% common stock dividend (10 million shares) when the market value of the $1 par common stock is $12 per share. ADDITIONAL CONSIDERATION The entry above is recorded on the declaration date. Since the additional shares are not yet issued, some accountants would prefer to credit “common stock dividends issuable” at this point, instead of common stock. In that case, when the shares are issued, common stock dividends issuable is debited and common stock credited. The choice really is inconsequential; either way the $10 million amount would be reported as part of paid-in capital on a balance sheet prepared between the declaration and distribution of the shares. STOCK MARKET REACTION TO STOCK DISTRIBUTIONS. As a Craft shareholder owning 10 shares at the time of the 10% stock dividend, you would receive an 11th share. Since each is worth $12, would you benefit by $12 when you receive the additional share from Craft? Of course not. If the value of each share were to remain $12 when the 10 million new shares are distributed, the total market value of the company would grow by $120 million (10 million shares × $12 per share). A corporation cannot increase its market value simply by distributing additional stock certificates. Because all shareholders receive the same percentage increase in their respective holdings, you, and all other shareholders, still would own the same percentage of the company as before the distribution. Accordingly, the per share value of your shares should decline from $12 to $10.91 so that your 11 shares would be worth $120—precisely what your 10 shares were worth prior to the stock dividend. Any failure of the stock price to actually adjust in proportion to the additional shares issued probably would be due to information other than the distribution reaching shareholders at the same time. Then, what justification is there for recording the additional shares at market value? In 1941 (and reaffirmed in 1953), accounting rule-makers felt that many shareholders are deceived by small stock dividends, believing they benefit by the market value of their additional shares. Furthermore they erroneously felt that these individual beliefs are collectively reflected in the stock market by per share prices that remain unchanged by stock dividends. Consequently, their prescribed accounting treatment is to reduce retained earnings by the same amount as if cash dividends were paid equal to the market value of the shares issued.21 This obsolete reasoning is inconsistent with our earlier conclusion that the market price per share will decline in approximate proportion to the increase in the number of shares distributed. Our intuitive conclusion is supported also by formal research.22 Besides being based on fallacious reasoning, accounting for stock dividends by artificially reclassifying “earned” capital as “invested” capital conflicts with the reporting objective of reporting shareholders' equity by source. Despite these limitations, this outdated accounting standard still applies. The market price per share will decline in proportion to the increase in the number of shares distributed in a stock dividend. Early rule-makers felt that per share market prices do not adjust in response to an increase in the number of shares. Capitalizing retained earnings for a stock dividend artificially reclassifies earned capital as invested capital. p. 1035 REASONS FOR STOCK DIVIDENDS. Since neither the corporation nor its shareholders apparently benefits from stock dividends, why do companies declare them?23 Occasionally, a company tries to give shareholders the illusion that they are receiving a real dividend. Another reason is merely to enable the corporation to take advantage of the accepted accounting practice of capitalizing retained earnings. Specifically, a company might wish to reduce an existing balance in retained earnings—otherwise available for cash dividends—so it can reinvest the earned assets represented by that balance without carrying a large balance in retained earnings. Companies sometimes declare a stock dividend in lieu of a real dividend. Companies sometimes declare a stock dividend so they can capitalize retained earnings. Stock Splits A frequent reason for issuing a stock dividend is actually to induce the per share market price decline that follows. For instance, after a company declares a 100% stock dividend on 100 million shares of common stock, with a per share market price of $12, it then has 200 million shares, each with an approximate market value of $6. The motivation for reducing the per share market price is to increase the stock's marketability by making it attractive to a larger number of potential investors. FINANCIAL Reporting Case Q4, p.1007 ADDITIONAL CONSIDERATION No cash dividends are paid on treasury shares. Usually stock dividends aren't paid on treasury shares either. Treasury shares are essentially equivalent to shares that never have been issued. In some circumstances, though, the intended use of the repurchased shares will give reason for the treasury shares to participate in a stock dividend. For instance, if the treasury shares have been specifically designated for issuance to executives in a stock option plan or stock award plan it would be appropriate to adjust the number of shares by the stock distribution. A stock distribution of 25% or higher can be accounted for in one of two ways: (1) as a “large” stock dividend or (2) as a stock split stock distribution of 25% or higher, sometimes called a large stock dividend..24 Thus, a 100% stock dividend could be labeled a 2-for-1 stock split and accounted for as such. Conceptually, the proper accounting treatment of a stock distribution is to make no journal entry. This, in fact, is the prescribed accounting treatment for a stock split. Since the same common stock account balance (total par) represents twice as many shares in a 2-for-1 stock split, the par value per share will be reduced by one-half. In the previous example, if the par were $1 per share before the stock distribution, then after the 2-for-1 stock split, the par would be $.50 per share. As you might expect, having the par value per share change in this way is cumbersome and expensive. All records, printed or electronic, that refer to the previous amount must be changed to reflect the new amount. The practical solution is to account for the large stock distribution as a stock dividend rather than a stock split. A large stock dividend is known as a stock split. Following on the heels of an enormous run up in price in shares, Apple Computer announced Friday a two-for-one stock split. Each share held on Feb. 18 gets an additional share. The company plans to start trading on a split-adjusted basis at the end of February. “It potentially makes it more attractive to individual investors,” said Steve Lidberg, an analyst at Pacific Crest Securities, who doesn't own shares of Apple. “Outside of that, it doesn't impact at all the way I think of the company.”25 Stock Splits Effected in the Form of Stock Dividends (Large Stock Dividends) To avoid changing the per share par value of the shares, the stock distribution is referred to as a stock split effected in the form of a stock dividend, or simply a stock dividend. In that case, a journal entry increases the common stock account by the par value of the additional shares. To avoid reducing retained earnings in these instances, most companies reduce (debit) paid-in capital—excess of par to offset the credit to common stock (Illustration 18-10). p. 1036 ILLUSTRATION 18-10 Stock Split Effected in the Form of a Stock Dividend If a stock split is effected in the form of a stock dividend, a journal entry prevents the par per share from changing. Craft declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend (100 million shares) when the market value of the $1 par common stock is $12 per share: Notice that this entry does not reclassify earned capital as invested capital. Some companies, though, choose to debit retained earnings instead.26 Some companies capitalize retained earnings when recording a stock split effected in the form of a stock dividend. Nike, Inc. described a stock split in its disclosure notes as shown in Graphic 18-7. GRAPHIC 18-7 Stock Split Disclosure—Nike, Inc. Real World Financials Note 1—Summary of Significant Accounting Policies Stock Split On February 15the Board of Directors declared a two-for-one stock split of the Company's Class A and Class B common shares, which was effected in the form of a 100% common stock dividend distributed on April 2. All references to share and per share amounts in the consolidated financial statements and accompanying notes to the consolidated financial statements have been retroactively restated to reflect the two-for-one stock split. ADDITIONAL CONSIDERATION A company choosing to capitalize retained earnings when recording a stock split effected in the form of a stock dividend may elect to capitalize an amount other than par value. Accounting guidelines are vague in this regard, stating only that legal amounts are minimum requirements and do not prevent the capitalization of a larger amount per share. Source: FASB ASC 505–20–30–4: Equity–Stock Dividends and Stock Splits
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