Learning outcomes

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The learning outcome statements related to equity transactions are as follows:

Identify transactions that affect paid-in capital and those that affect retained earnings
Determine the effect on shareholders’ equity of large and small stock dividends, and stock splits

Paid-in capital vs. retained earnings transactions

Paid-in capital: affected by issuing new shares, share repurchases above original issue price
Retained earnings: affected by net income, dividends declared
Distinguish between capital-raising activities (paid-in capital) and profit distribution (retained earnings)

Effects of stock dividends and stock splits on shareholders’ equity

Large stock dividends (>20-25%): transfer from retained earnings to paid-in capital at par value
Small stock dividends (<20-25%): transfer from retained earnings to paid-in capital at market value
Stock splits: increase number of shares, reduce par value per share, no change in total shareholders’ equity

The learning outcome statements related to equity transactions are as follows:

Identify transactions that affect paid-in capital and those that affect retained earnings
Determine the effect on shareholders’ equity of large and small stock dividends, and stock splits

Key points

Paid-in capital vs. retained earnings transactions

Paid-in capital: affected by issuing new shares, share repurchases above original issue price
Retained earnings: affected by net income, dividends declared
Distinguish between capital-raising activities (paid-in capital) and profit distribution (retained earnings)

Effects of stock dividends and stock splits on shareholders’ equity

Large stock dividends (>20-25%): transfer from retained earnings to paid-in capital at par value
Small stock dividends (<20-25%): transfer from retained earnings to paid-in capital at market value
Stock splits: increase number of shares, reduce par value per share, no change in total shareholders’ equity