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Worked-example setupScope and assumptions
- Cedar Trail, its charter, share classes, approvals, transfer-agent records, prices, dividends, and balances are fictional and supplied for instruction.
- Common shares have $1 par before the split; the 200,000-share issuance closes for $3.6 million and has $120,000 of qualifying direct issue costs.
- Treasury shares use the cost method; 60,000 shares are repurchased for $900,000 and 20,000 are reissued for $340,000 with $300,000 of cost released.
- The two-for-one split occurs after the other share transactions and is retroactively reflected in per-share information, but it creates no total equity.
- The $600,000 declaration first clears $120,000 of cumulative preferred arrearage, then the $120,000 current preference, and leaves $360,000 for common shareholders.
- Corporate-law validity, solvency tests, instrument classification outside supplied facts, valuation, tax, and legal advice are excluded.
- Period
- Year ended December 31, 20X6
- Units
- US dollars, shares, and one annual reporting period
- Rounding
- Retain full precision; display dollars and shares with commas and per-share amounts to two decimals
Problem
Cedar Trail's draft close shows $19.28 million of equity and 2.40 million shares outstanding. The preparer added issued shares, ignored treasury shares, expensed offering costs, treated the split as new capital, and sent the entire cash dividend to common shareholders. Rebuild the close from the charter and register outward.
Start with the legal share register
| Common-share movement | Issued | Treasury | Outstanding |
|---|---|---|---|
| Opening | 1,000,000 | 40,000 | 960,000 |
| April issuance | 200,000 | — | 200,000 |
| September repurchase | — | 60,000 | (60,000) |
| November reissue | — | (20,000) | 20,000 |
| Before split | 1,200,000 | 80,000 | 1,120,000 |
| Two-for-one split | 1,200,000 | 80,000 | 1,120,000 |
| Ending | 2,400,000 | 160,000 | 2,240,000 |
The split doubles every share count and halves par from $1 to $0.50. It does not change the $1.2 million Common stock balance or total equity. Authorized shares likewise become 10 million under the supplied split authorization.
Route each capital transaction
The April issue generates $3.48 million of net proceeds after $120,000 of qualifying direct costs. Common stock rises $200,000; APIC rises $3.28 million. The September repurchase adds $900,000 to the treasury-stock contra-equity account. The November reissue removes $300,000 of treasury cost and adds the $40,000 excess proceeds to APIC. Neither treasury transaction creates a gain or loss in income.
| Component | Opening | Activity | Ending |
|---|---|---|---|
| Preferred stock | $2,000,000 | — | $2,000,000 |
| Common stock | 1,000,000 | 200,000 | 1,200,000 |
| APIC | 4,800,000 | 3,320,000 | 8,120,000 |
| Retained earnings | 6,200,000 | 2,400,000 income − 600,000 dividends | 8,000,000 |
| AOCI | (120,000) | 80,000 OCI | (40,000) |
| Treasury stock | (520,000) | (900,000) + 300,000 | (1,120,000) |
| Total equity | $13,360,000 | $4,800,000 | $18,160,000 |
Respect the preferred dividend waterfall
Forty thousand $50-stated-value preferred shares earn a six-percent annual preference: $120,000. The class also has $120,000 of prior cumulative arrears. The $600,000 declaration therefore allocates $240,000 to preferred and $360,000 to common. Only the declaration reduces retained earnings; the arrearage before declaration is not itself a liability under the supplied facts.
Release control
The independent total-equity bridge is:
Opening total equity $13,360,000
+ net common-share proceeds 3,480,000
− treasury-share repurchase 900,000
+ treasury-share reissue proceeds 340,000
+ net income 2,400,000
+ OCI 80,000
− declared dividends 600,000
= ending total equity $18,160,000
The stock split and stock-account reclassifications contribute zero to this bridge. That zero is a control result, not an omitted transaction.
Transfer variants before changing the main file
Use these independent mini-files to test whether the route, rather than merely the arithmetic, transfers.
Bundled issue
A separate $1.8 million issue contains common shares and detachable warrants with supported fair values of $1.5 million and $500,000. Relative fair value allocates $1.35 million to common and $450,000 to warrants. The allocation precedes par and APIC posting; it does not classify the warrant or validate the valuations.
Retirement rather than treasury holding
Assume Cedar Trail formally retires 10,000 treasury shares whose cost is $150,000. The supported original issue amounts are $10,000 par and $100,000 APIC. Remove all three source amounts; the $40,000 excess cost reduces retained earnings under the supplied policy:
Common stock 10,000
APIC—original common issue 100,000
Retained earnings 40,000
Treasury stock 150,000
Issued and treasury shares both fall by 10,000, so outstanding shares do not change at retirement. Without original-issue support, stop rather than invent the APIC reduction.
Other distribution routes
| Supplied facts | Controlled consequence |
|---|---|
| Property with $260,000 carrying amount and $310,000 supported fair value is validly declared | Apply the governing property-distribution measurement route, preserve the $50,000 pre-distribution carrying-to-measurement effect, then record the supported distribution obligation and settlement; do not call the property a $260,000 cash dividend. |
| $500,000 declaration has $320,000 supported as accumulated-earnings distribution and $180,000 as return of contributed capital | Present the $320,000 ordinary and $180,000 liquidating layers; low retained earnings alone did not create the conclusion. |
| A covenant restricts $900,000 of retained earnings | Preserve the restriction and disclosure evidence; do not move cash, create a fund, or change total equity merely to make the restriction visible. |
| Preferred receives its arrearage and current priority, common receives equivalent current priority, and both then participate | Complete every priority layer before allocating the residual; the word participating does not supply the ratio or cap. |
These variants are accounting routes under supplied legal, measurement, and class-rights facts. They are not corporate-law or valuation conclusions.
Quantitative companions
Choose from 2 ways to work with this calculation.
Verified calculation · shareholders equity analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- authorized common shares
- 5,000,000
- common par or stated value per share
- 1
- declared cash dividends
- 600,000
- net income
- 2,400,000
- opening accumulated other comprehensive income
- -120,000
- opening additional paid in capital
- 4,800,000
- opening common stock
- 1,000,000
- opening issued common shares
- 1,000,000
- opening preferred dividend arrearage
- 120,000
- opening preferred stock
- 2,000,000
- opening retained earnings
- 6,200,000
- opening treasury common shares
- 40,000
- opening treasury stock cost
- 520,000
- other comprehensive income
- 80,000
- preferred annual dividend rate
- 0.06
- preferred shares outstanding
- 40,000
- preferred stated value per share
- 50
- transactions
- 4 fields
Inspect data
{
"april_issue": {
"gross_consideration": 3600000,
"issue_costs": 120000,
"kind": "issue",
"market_price_per_share": 0,
"original_apic_reduction": 0,
"shares": 200000,
"split_factor": 1,
"treasury_cost_released": 0
},
"december_split": {
"gross_consideration": 0,
"issue_costs": 0,
"kind": "stock_split",
"market_price_per_share": 0,
"original_apic_reduction": 0,
"shares": 0,
"split_factor": 2,
"treasury_cost_released": 0
},
"november_reissue": {
"gross_consideration": 340000,
"issue_costs": 0,
"kind": "reissue",
"market_price_per_share": 0,
"original_apic_reduction": 0,
"shares": 20000,
"split_factor": 1,
"treasury_cost_released": 300000
},
"september_repurchase": {
"gross_consideration": 900000,
"issue_costs": 0,
"kind": "repurchase",
"market_price_per_share": 0,
"original_apic_reduction": 0,
"shares": 60000,
"split_factor": 1,
"treasury_cost_released": 0
}
}Recomputed result
| Measure | Value |
|---|---|
| april issue net issue proceeds | 3,480,000 |
| common dividends allocated | 360,000 |
| ending accumulated other comprehensive income | -40,000 |
| ending additional paid in capital | 8,120,000 |
| ending common stock | 1,200,000 |
| ending issued common shares | 2,400,000 |
| ending outstanding common shares | 2,240,000 |
| ending par or stated value per share | 0.5 |
| ending preferred stock | 2,000,000 |
| ending retained earnings | 8,000,000 |
| ending total equity | 18,160,000 |
| ending treasury common shares | 160,000 |
| ending treasury stock cost | 1,120,000 |
| opening total equity | 13,360,000 |
| preferred dividends allocated | 240,000 |