Chapter 15, Problem 2JC

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. 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. 2. What would be the impact on the accounts if Universal Bioenergy did not use the alternative treatment permitted for closely held entities?
3. 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 shares of Preferred Stock with a par value of $0.001 per share On September 29, 2008, the Company authorized 100,000 Series A Preferred shares and 232,080 Series B Preferred Shares of stock As of December 31, 2012, there were no Series A preferred shares issued and outstanding, and a total of 232,080 Series B preferred shares issued and outstanding.