The following is a press release from Tiger Corporation: Tiger Corporation ANNOU
ID: 2562697 • Letter: T
Question
The following is a press release from Tiger Corporation: Tiger Corporation ANNOUNCES 33% INCREASE IN BASE DIVIDEND, 2-FOR-I STOCK SPLIT Los Angeles—Tiger Corporation today announced that its Board of Directors approved a base quarterly dividend increase of 33.3%. Tiger Corporation 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: 1. What are the two primary reporting alternatives does Tiger Corporation 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 Tiger’s balance sheet? If the shares are later resold for an amount greater than cost, how should Tiger account for the sale? 2. What are the two primary courses of action does Tiger has in accounting for the stock split, and how would the choice affect Tiger’s shareholders’ equity? Why? 3. How should Tiger account for the cash dividend, and how would it affect Tiger’s balance sheet? Why?
Explanation / Answer
Answer: Required: 1. What are the two primary reporting alternatives does Tiger Corporation has in accounting for the repurchase of its shares?
Response: The two alternative method for accounting for the repurchase of stock are a) The Cost Method & b) Constructive Retirement Method
What would be the effect of the optional courses of action on total shareholders’ equity?
Response: Under the cost method, the company has a choice of either selling the shares to investors again, or of permanently retiring the shares. The equity will increase if the company resells the shares at a higher price and it will decrease if the board may elect to retire the shares.
However, under Constructive Retirement Method, which is used under the assumption that repurchased stock will not be reissued in the future. Under this approach, you are essentially reversing the amount of the original price at which the stock was sold. The remainder of the purchase price is debited to the retained earnings account. hence this will always result in decrease in Equity.
Explain. What would be the effect of the optional courses of action on how stock would be presented in Tiger’s balance sheet?
Response: Under the cost method, the treasury stock will be valued at a price at which the Company originally sold it, whereas under Constructive Retirement Method, the shares will be valued at par value.
If the shares are later resold for an amount greater than cost, how should Tiger account for the sale?
Response: The excess of sale price over cost will be recognised as additional paid up capital.
Answer 2:What are the two primary courses of action does Tiger has in accounting for the stock split, and how would the choice affect Tiger’s shareholders’ equity?
Response: The total par value of shares outstanding is not affected by a stock split (i.e., the number of shares times par value per share does not change). Therefore, no journal entry is needed to account for a stock split. A memorandum notation in the accounting records indicates the decreased par value and increased number of shares.Hence, no impact on shareholders’ equity
Answer 3. How should Tiger account for the cash dividend, and how would it affect Tiger’s balance sheet? Why?
Response: The first entry occurs on the date that the board of directors declares the dividend. In this entry the account Retained Earnings is debited and Dividends Payable is credited for the amount of the dividend that will be paid. Retained Earnings is a stockholders' equity account and Dividends Payable is a current liability account. S
The second entry occurs on the date of the payment to the stockholders. On that date the current liability account Dividends Payable is debited and the asset account Cash is credited.
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