The following is a press release from Tiger Corporation: Tiger Corporation ANNOU
ID: 2564223 • 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: 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? 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? How should Tiger account for the cash dividend, and how would it affect Tiger’s balance sheet? Why?
Explanation / Answer
PART 1 : Primary reporting alternatives :
When the shares are repurchased, following are the two alternatives available for reporting such repurchase and its its effect on shareholders equity:
If, the repurchased shares are written off, the share capital of the company reduces to that extent and the bank account is credited for the payments to be made. Also, such purchase of shares can be at premium or at discount. If the shares are repurchased at a premium, such premium is to be paid out of the free reserves of the company, and in case any discount is received, such discount will be transferred to capital reserve account. Since the shareholders' equity reduces, the underlying share value and future earnings per share also increases.
If the repurchased shares are held as "treasury stock", then the company holds on to it as if it is an investment and may sell them off in future. Here, the shareholders' equity remains as it is. The company may either sell off such repurchased shares or write them off at any time in future.
PART 2 : PRESENTATION IN BALANCE SHEET :
IF the repurchased shares are written off, shareholders' equity is debited and bank accounts credited. Premium paid is debited to free reserves or additional paid in capital and any discount received is credited to such capital reserves. This effects in reduction of shareholder's equity, as if these shares were never issued.
if the repurchased shares are held as treasury stock, even then it will be deducted from the shareholder's equity, but in effect, since this shares are still in existence, the total equity does not change. They exist, but are not a part of the freely held equity by the shareholders.
PART 3 :REPURCHASES SHARES LATER SOLD AT PREMIUM :
When the repurchased shares are later on sold, bank accounts are debited and treasury stock credited with at par share value. The premium is credited to additional paid in capital or free reserves or share premium account.
PART 4: ACCOUNTING FOR SHARE SPLIT :
When a single share is split into 2, the total value of the shareholders' equity does not change. Only the par value of a share may change, as the number of shares contributing to total equity increases.
As a result only a memo note is required to be made mentioning the change in the number of shares contributing to the total shareholders' equity.
When the dividend is paid in cash, cash account/bank account is debited to the dividend payable account created from free reserves/retained earnings. This leads to decrease in cash balances as the cash is paid for the dividends and the dividend payable account becomes nil.
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