Judgment Case 2: Impact of Judgment in Accounting for Stock Dividends
On June 6, 2012. Universal Bioenergy, Inc. declared a 20% stock dividend. Because it is a 20% dividend, it had the flexibility to account for this as a small or large stock dividend. Its common stock was trading at $0.01 per share at that time. Excerpts from its 10-K follow the questions.
- 1. What
journal entry did Universal Bioenergy record on June 6? What journal entry did it record on July 20? Did Universal Bioenergy account for this stock dividend as a small or large stock dividend? You may find ASC 505-20-30-5 helpful in understanding this entity’s approach. - 2. What would be the impact on the accounts if Universal Bioenergy did not use the alternative treatment permitted for closely held entities?
- 3. What would be the impact on the accounts if Universal Bioenergy did not use the alternative treatment permitted for closely held entities and chose a different basic treatment? That is, if the company recorded it as a small stock dividend, how would the accounts change?
Discussion of the stock dividend included in ITEM 1 in the 10-K
Approval of Stock Dividend
Universal Bioenergy uses the phrase “10 for 2 basis” in its financial statements when describing the stock dividend —that is, the company issued 2 shares for every 10 shares held.
On June 6, 2012, our Board of Directors passed a resolution and declared a stock dividend to distribute to all registered shareholders of record on or before July 13, 2012, on a 10 for 2 basis. On July 20, 2012, our transfer agent issued 78,161,209 shares of common stock to all registered shareholders of record in accordance with the resolution and declaration.
Excerpts from financial statements
UNIVERSAL BIOENERGY, INC. CONSOLIDATED BALANCE SHEETS | ||
Assets: | December 31, 2012 | December 31, 2011 |
Current Assets: | ||
Cash | $ 2,274 | $ 3,706 |
Accounts receivable | 4,800,967 | 10,004,123 |
Other loans | 600 | — |
Total current assets | 4,803,841 | 10,007829 |
Property and Equipment - net | 6,989 | 8,951 |
UNIVERSAL BIOENERGY, INC. CONSOLIDATED BALANCE SHEETS | |||||
Assets: | December 31, 2012 |
December 31, 2011 | |||
Other Assets: Accounts receivable - other |
10,050 | 10,050 | |||
Investments | 2,919,500 | 889,500 | |||
Intangible assets | 250,000 | 250,000 | |||
Deposit | 7,453 | 46,516 | |||
Total other assets | 3,187,7003 | 1,196,066 | |||
Total Assets | $7,997,833 | $11,212,846 | |||
Liabilities and Stockholder’s Equity (Deficit): | |||||
Current Liabilities | |||||
Accounts payable | $ 4,983,318 | $ 10,099,502 | |||
Other accounts payable and accrued expenses | 185,422 | 208,848 | |||
Accrued interest payable | 468,572 | 101,860 | |||
Line of credit | 7,942 | 7,850 | |||
Current portion of long-term debt | 248,395 | 172,560 | |||
Derivative liability | 350,237 | – | |||
Advances from affiliates | 4,250 | 4,250 | |||
Total current liabilities | 6.248,136 | 10,594,870 | |||
Long-term Debt | |||||
Notes payable | $ 2,261,406 | $ 131,086 | |||
Notes payable- related parties | 934,729 | 191,000 | |||
Total Long-term Debt | 3,196,135 | 322,086 | |||
Total Liabilities | 9,444,270 | 10,916,956 | |||
Preferred stock. $.001 par value. 10,000,000 shares authorized. Preferred stock Series A, zero issued and outstanding shares | – | – | |||
December 31. 2012 and December 31. 2011, respectively | |||||
Preferred stock Series B, 232,080 issued and outstanding shares December 31, 2012 and December 31, 2011, respectively | 232 | 232 | |||
Common stock. $.001 par value. 3,000,000.000 shares authorized; 673,521,813 and 199,969,927 issued and outstanding as of December 31, 2012 and December 31, 2011, respectively | 673,522 | 199.970 | |||
Additional paid-in capital | 20,546,023 | 19,111,601 | |||
Noncontrolling interest | (263,836) | (125,543) | |||
Accumulated deficit | (22,402,379) | (18,890,370) | |||
Total stockholders’ equity (deficit) | (1,466,438) | 295,890 | |||
Total Liabilities and Stockholders’ Equity | $ 7,997,832 | $ 11,212,846 |
Excerpt from the notes to the financial statements follow:
NOTE 4 Equity
On December 26, 2012, the Company amended its Articles of Incorporation, and increased the authorized shares of common stock from 1,000,000,000 to 3,000,000,000 shares at $. 001 par value. There are 673,521,813 shares of common stock issued and outstanding as of December 30, 2012.
On June 6, 2012, our Board of Directors passed a resolution and declared a stock dividend to distribute to all registered shareholders of record on, or before, July 13, 2012, on a 10 for 2 basis. On July 20, 2012, our transfer agent issued 78,161,209 shares of common stock to all registered shareholders of record in accordance with the resolution and declaration.
The Company has authorized a total of 10,000,000
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