Pearson Began 2012 With 30,000 Common Shares Issued

Pearson Began 2012 With 30000 1 Common Shares Issued And Outstanding

Pearson Wood Supplies commenced the year 2012 with an initial issuance of 30,000 common shares, each with a par value of $1. The company's financial foundations included paid-in capital in excess of par valued at $25,000 and retained earnings totaling $175,000. During 2012, the company engaged in a series of transactions that affected its share structure and capital accounts, including issuing new shares, declaring dividends, stock splits, stock dividends, and treasury stock transactions. This paper provides a comprehensive analysis of these transactions and their impact on Pearson’s overall financial statements and equity structure.

Introduction

Understanding the intricacies of corporate equity transactions is essential for analyzing a company's financial health and governance. Pearson Wood Supplies provides a practical case study of such activities in 2012, a year marked by significant changes to its equity structure. The company's activities included issuing new common shares, declaring dividends on preferred and common stock, executing a stock split and stock dividend, and engaging in treasury stock transactions. Each event not only affects the company's financial position but also reflects strategic decisions aimed at shareholder value maximization and capital management.

Initial Share Structure and Equity Position

At the beginning of 2012, Pearson had a basic equity setup with 30,000 issued common shares with a $1 par value, along with $25,000 in paid-in capital in excess of par and retained earnings of $175,000. The initial total equity can be summarized as follows:

• Common Shares Outstanding: 30,000 shares
• Par value of common stock: $1 per share
• Paid-in Capital in Excess of Par: $25,000
• Retained Earnings: $175,000

This foundation set the stage for the subsequent transactions undertaken during the year, which impacted both the number of shares outstanding and the equity composition.

Issuance of Additional Shares

On January 2, 2012, Pearson issued 10,000 new common shares at $10 per share. The par value remained at $1, with the remaining amount ($9 per share) recorded as paid-in capital in excess of par. This issuance increased the total common shares outstanding to 40,000 and augmented the paid-in capital account. The journal entry for this transaction would be:

Debit Cash: 100,000
Credit Common Stock ($1 par x 10,000): 10,000
Credit Paid-in Capital in Excess of Par: 90,000

By issuing shares at a premium, the company effectively raised additional capital, which could be utilized for operations or expansion.

Dividends Declared and Paid

Later in the year, Pearson declared dividends on both preferred and common stock, reflecting its commitment to returning value to shareholders. On January 6, 2012, a dividend was declared on 5,000 preferred shares with a 5% dividend rate of $4 par, amounting to $0.20 per share, and on 40,000 common shares, with a dividend rate of $0.20 per share. The total dividends payable were scheduled with a record date of January 15 and payment date of January 20.

These dividend declarations would reduce retained earnings and create dividend payable accounts until payment. For the preferred stock dividend:

5,000 shares x $0.20 = $1,000

For the common stock dividend, assuming an initial distribution (before stock split adjustments):

40,000 shares x $0.20 = $8,000

The payment of these dividends decreases retained earnings and reflects a company’s cash flow obligations.

Stock Splits and Their Impact

On March 15, 2012, Pearson declared a 2-for-1 stock split. This action effectively doubled the number of shares outstanding from 40,000 to 80,000, while halving the par value to $0.50 per share. Stock splits do not affect total shareholders’ equity but have implications for per-share metrics, making shares more accessible to investors and potentially boosting market liquidity.

The journal entry for a stock split is typically not recorded as a formal accounting transaction; instead, the par value per share and the number of shares are adjusted directly on the books. Post-split, the company's equity accounts remained unchanged, but the per-share data was adjusted accordingly.

Stock Dividends and Their Effects

On April 10, 2012, Pearson declared a 10% stock dividend. When distributed, this dividend meant shareholders received additional shares equivalent to 10% of their holdings, with the shares distributed at a market value of $12 per share. Stock dividends are generally capitalized from retained earnings, transferring amounts from retained earnings to common stock and additional paid-in capital.

To account for the 10% stock dividend, the number of shares increased by 8,000 (10% of 80,000), resulting in total shares of 88,000. The journal entry involves transferring the fair market value of the dividend to the common stock accounts, which can be broken down as:

Fair value of stock dividend = 8,000 shares x $12 = $96,000
Debit Retained Earnings: $96,000
Credit Common Stock ($0.50 par x 8,000): $4,000
Credit Paid-in Capital in Excess of Par: $92,000

This action increases the number of shares outstanding while preserving total stockholders' equity but reallocating retained earnings into equity accounts.

Treasury Stock Transactions

On June 14, 2012, Pearson repurchased 1,000 shares of its common stock at $13 per share, recorded as treasury stock, which is a contra-equity account. The transaction decreases total equity and cash reserves. The journal entry is:

Debit Treasury Stock: $13,000
Credit Cash: $13,000

Later, on December 22, 2012, Pearson resold 500 treasury shares at $15 per share, generating a cash inflow that exceeds the original repurchase cost. The journal entry for resale is:

Debit Cash: $7,500
Credit Treasury Stock: $6,500
Credit Paid-in Capital from Treasury Stock: $1,000

This transaction results in an increase in cash and a reduction in treasury stock, with excess over repurchase price credited to additional paid-in capital from treasury stock transactions.

Overall Impact on Financial Statements

These transactions collectively affected Pearson’s financial position significantly. Share issuance and stock dividends increased common stock and equity, while treasury activities impacted overall capital structure and cash flows. Dividends reduced retained earnings but signaled the company's profitability and commitment to shareholder returns. Stock splits and dividends resulted in more liquid shares and potentially increased market appeal, influencing investor perception and valuation.

Understanding these dynamics is vital for investors, creditors, and financial analysts when assessing the company's financial stability and strategic growth trajectory.

Conclusion

Throughout 2012, Pearson effectively managed its equity through multiple key transactions that altered its capital structure. The issuance of new shares and dividends, coupled with stock splits and treasury stock activities, demonstrated strategic financial management aimed at balancing growth and shareholder value. These actions are in line with corporate finance principles that advocate for capital flexibility and investor engagement. Analyzing these transactions highlights the importance of understanding how corporate activities influence financial statements, stockholder wealth, and overall corporate health.

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