Chapter 18, Problem 18.5BYP

Judgment Case 18–5

Treasury stock; stock split; cash dividends; Alcoa

• LO18–5 through LO18–8

Real World Financials

ALCOA ANNOUNCES 33% Increase in BASE DIVIDEND, 2-FOR-I STOCK SPLIT

PITTSBURGH—Alcoa today announced that its Board of Directors approved a base quarterly dividend increase of 33.3%.

Alcoa’s announcement indicated that the new quarterly dividend would be $0.25 per share. It also stated that the Board of Directors declared a two-for-one stock split and reaffirmed its commitment to a share repurchase program.

Required:

1. What are the two primary reporting alternatives Alcoa has in accounting for the repurchase of its shares? What would be the effect of the optional courses of action on total shareholders’ equity? Explain. What would be the effect of the optional courses of action on how stock would be presented in Alcoa’s balance sheet? If the shares are later resold for an amount greater than cost, how should Alcoa account for the sale?

2. What are the two primary courses of action Alcoa has in accounting for the stock split, and how would the choice affect Alcoa’s shareholders’ equity? Why?

3. How should Alcoa account for the cash dividend, and how would it affect Alcoa’s balance sheet? Why?

You are the newest member of the staff of Brinks & Company, a medium-size investment management firm. You are supervised by Les Kramer, an employee of two years. Les has a reputation as being technically sound but has a noticeable gap in his accounting education. Knowing you are knowledgeable about accounting issues, he requested you provide him with a synopsis of accounting for share issue costs.