Definition
Donated stock refers to fully paid capital stock of a corporation that is contributed without consideration to the same issuing corporation. This means that the stocks are given back to the corporation by the shareholders without any payment or exchange. Donated stock generally impacts the corporation’s equity and is treated differently from stock issued for cash or other considerations.
Examples
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Re-Gifted Shares: Suppose Corporation XYZ issued shares to various shareholders. A shareholder decides to return or gift some of these shares back to Corporation XYZ without any compensation or monetary exchange. These shares are termed as donated stock.
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Non-Profit Initiative: In an effort to support a corporate social responsibility initiative, shareholders of Corporation ABC may decide to donate their shares back to the company for use in philanthropic activities or other internal projects.
Frequently Asked Questions (FAQs)
What happens to donated stock after it is given back to the issuing corporation?
Upon receiving donated stock, the corporation typically holds these shares as treasury stock, decides whether to reissue them to new investors, or retires them, affecting the equity structure and outstanding shares in the process.
Does donating stock to a corporation provide any tax benefits to the shareholder?
Depending on the jurisdiction, donating stocks back to the issuing corporation may provide tax benefits to the shareholder, such as charitable deductions if the corporation has a charitable framework.
How is donated stock reported on financial statements?
Donated stock is usually recorded at its fair market value at the time of donation and can be reflected in the “Treasury Stock” section of the balance sheet or as an addition to the stockholders’ equity.
Can a corporation donate its own stocks?
A corporation cannot typically “donate” its own stocks. Donating stock refers specifically to individual shareholders contributing stock back to the issuing corporation.
What are the effects of donated stock on stockholders’ equity?
When stock is donated back to the issuing corporation, it usually increases the treasury stock, which may reduce outstanding shares and potentially increase the market value of the remaining shares by increasing demand.
Capital Stock
Capital stock is the total amount of stock authorized for issuance by a corporation, representing the equity or ownership claimed by shareholders.
Consideration
Consideration in legal terms refers to the benefit that each party gets or expects to get when entering into a contract. In the context of donated stock, there is no consideration involved.
Treasury Stock
Treasury stock includes shares that were once part of the outstanding shares but were later reacquired by the issuing company, held in the company’s treasury, and can be reissued or retired.
Online References
Suggested Books for Further Studies
- “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Corporate Finance: The Core” by Jonathan Berk and Peter DeMarzo
- “Accounting Principles” by Weygandt, Kimmel, and Kieso
- “Essentials of Treasury Management” by Jim Washam and Matthew Boswell
Fundamentals of Donated Stock: Accounting Basics Quiz
### What is donated stock?
- [x] Fully paid capital stock contributed without consideration to the same issuing corporation.
- [ ] Stock issued in exchange for property or services.
- [ ] Stock bought back by the corporation from the open market.
- [ ] Newly issued shares available for purchase.
> **Explanation:** Donated stock is fully paid capital stock that a shareholder contributes back to the issuing corporation without any form of consideration or monetary payment.
### How is donated stock generally recorded on the financial statements of a corporation?
- [ ] As a liability.
- [ ] As revenue.
- [x] In the Treasury Stock section.
- [ ] As a long-term asset.
> **Explanation:** Donated stock is recorded in the Treasury Stock section of the balance sheet, reflecting shares held by the corporation itself after being donated back by shareholders.
### Can donated stock impact the total outstanding shares of a corporation?
- [x] Yes, donated stock typically becomes treasury stock and reduces the total outstanding shares.
- [ ] No, donated stock does not affect the outstanding shares.
- [ ] Only if the corporation decides to sell the donated stock.
- [ ] Donated stock never affects equity structures.
> **Explanation:** Donated stock, when contributed back to the issuing corporation, usually reduces the total outstanding shares as these shares are moved to the treasury stock category.
### Why might shareholders decide to donate their shares back to the issuing corporation?
- [ ] To receive dividends from the corporation.
- [x] To support corporate initiatives or special projects.
- [ ] To demand a higher market value for their shares.
- [ ] To engage in frequent trading.
> **Explanation:** Shareholders might donate their shares back to support the corporation’s special projects, philanthropic initiatives, or other corporate programs requiring additional support.
### What is one possible benefit of donating stocks for shareholders?
- [x] Potential tax benefits.
- [ ] Increased voting rights.
- [ ] Regular dividend payments.
- [ ] Access to premium club memberships.
> **Explanation:** Depending on local tax regulations, shareholders who donate stocks could receive tax benefits, such as charitable deductions or other tax relief programs.
### In what jurisdictions might donated stocks offer tax benefits?
- [ ] In all jurisdictions worldwide.
- [ ] Only in jurisdictions without income tax.
- [ ] Primarily in jurisdictions with specific tax deduction policies for charitable contributions.
- [x] In jurisdictions with charitable deduction provisions.
> **Explanation:** Donated stocks may offer tax benefits primarily in jurisdictions which have explicit provisions for charitable contributions or other related tax deductions.
### What typically happens to the market value of remaining shares when stocks are donated?
- [ ] Market value significantly drops.
- [ ] It remains unchanged.
- [x] Market value potentially increases due to reduced outstanding shares.
- [ ] Market value becomes volatile.
> **Explanation:** When stocks are donated and reclassified as treasury stock, it reduces the total outstanding shares, potentially increasing demand for the remaining shares and driving up market value.
### What is the key difference between donated stock and stock repurchase?
- [x] Donated stock is contributed without consideration while repurchase is bought back by the corporation.
- [ ] Donated stock involves monetary exchange; repurchase does not.
- [ ] Repurchase includes stock dividends.
- [ ] The key difference lies in regulatory compliance.
> **Explanation:** The primary difference is that donated stock involves no monetary consideration, while in a stock repurchase, the corporation buys back shares from the market at a price.
### What financial term specifies the shares once part of the outstanding shares but are reacquired by the corporation?
- [ ] Capital stock.
- [x] Treasury stock.
- [ ] Preferred stock.
- [ ] Common stock.
> **Explanation:** Treasury stock refers to previously outstanding shares that have been reacquired by the issuing corporation and are now held within the company’s treasury.
### If a shareholder donates stock worth $10,000 to a corporation, how would the donated stock be classified?
- [x] As part of the treasury stock in the equity section.
- [ ] As a company liability.
- [ ] As immediate revenue.
- [ ] As an operational expense.
> **Explanation:** The stock would be classified as part of the treasury stock within the equity section of the corporation's balance sheet, not recorded as a liability, immediate revenue, or an operational expense.
Thank you for exploring the concept of donated stock and attempting these quiz questions! Keep advancing your knowledge in financial and corporate accounting!
