Share splits, share repurchases, and conversion of debentures*

PSA Peugeot Citroen is one of Europe’s largest and most successful vehicle manufacturers. Net sales of its manufacturing and sales companies exceeded A50 billion in 2001, earnings per share increased almost 28% and the share price bucked the downward trend in world stock markets by rising 18%

over the year.

There were a number of transactions and events causing changes to shareholders’ equity in 2001.

Unusually, the company’s issued and outstanding shares declined over the year. Extracts from the 2001 consolidated accounts relating to shareholders’ equity are set out in Exhibit 12.6.

Required

(a) PSA split its stock in July 2001. A shareholder asks: “Why is there no entry in the accounts to record the share split? Surely this is a capitalisation of reserves and there should be a transfer from ‘Capital in excess of par value of stock’ or other reserve to ‘Common stock’.” Explain to the shareholder why ‘Common stock’ has not increased as a result of the share split.

(b) When PSA buys shares for capital reduction purposes, it records the purchase as a deduction from equity. (Shares purchased for employee stock option schemes – the other main reason the company buys back its shares – are recorded as an asset.)

(i) Reconstruct the journal entries the company made in 2001 to record the purchase and cancellation of shares as part of its capital reduction programme.

(ii) Under EU law, the company should transfer distributable reserves to ‘reserve for own shares’

when it buys back shares for cancellation. What is the amount of the transfer to ‘reserves for own shares’ the company should make in 2001 to ensure it preserves its capital? (Although there is no evidence of a transfer in 2001, PSA may have done so. ‘Retained earnings’ includes legal and statutory reserves.)

(c) Holders of PSA convertible debentures converted most of the debentures to shares in 2001. The company gives details of its convertible debentures in note 34 of the accounts:
“In March 1994, Peugeot S.A. issued convertible debentures for a total of A604 million. The four million debentures were issued at a price of A150.92 and were convertible at any time on the basis of one share per debenture.
The debentures matured on January 1, 2001. Of the 747,329 debentures outstanding as of December 31, 2000, 722,586 were converted into shares and 24,743 were redeemed for cash.”
According to the 2000 consolidated balance sheet, the carrying amount of the convertible debentures outstanding at end-2000 was A113 million. The company classifies the convertibles as straight debt in its accounts.
(i) How many shares were issued in 2001 on conversion of the debentures?
(ii) Reconstruct the journal entries the company made in 2001 to record the conversion and redemption of debentures.
* Assignment draws on material in section 2 of this chapter.AppenedixLO1

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Exhibit 12.6 PSA Peugeot Citron: extracts from accounts on stockholders' equity, 2001 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Capital In excess of Cumulative Onmons) Balance, Stockholders' Common equity stock par value Retained Treasury translation of stock earnings stock adjustment as of December 31, 2000 9,361 278 276 9,515 (507) (201) 2001 net income 1,691 1,691 Dividend (5 per 6 par value share) (217) (217) Issuance of shares 109 4 106 Purchases of treasury stock (458) (458) Cancellations of treasury stock (23) (381) (510) 914 Translation adjustment (204) (204) Balance, as of December 31, 2001 10,282 259 10,479 (51) (405) Note 29 - Stockholders' equity (extracts). Common stock, capital in excess of par value of stock. a-Common stock As of December 31, 2001, the Company's capital stock amounted to 259,109,146, represented by common shares with a par value of 1 (note 29-c), all fully paid. The shares may be held in bearer or registered form, at the choice of stockholders. Shares registered in the name of the same holder for at least four years carry double voting rights (article 38 of the bylaws). b- Changes in the number of shares Issued and outstanding (n euros) As of January 1 Cancelled shares Shares Issued on conversion of debentures 2001 278,223,630 (23,450,000) 4,335,516 259,109,146 As of December 31 c-2001 stock split On July 2, 2001, existing 6 par value shares were exchanged for new 1 par value shares, on a six-for-one basis. This stock split was authorized by stockholders at the Extraordinary Meeting of May 16, 2001. e-Capital reduction On November 23, 2001, the Company cancelled 23,450,000 new 1 par value shares under a stockholder- approved program.... The difference between the cost of the shares and their par value was charged against 'Capital in excess of par value of stock' In the amount of 381 million... and against 'Retained earnings for 510 million. J-Treasury stock Effective from December 31, 1999, treasury stock corresponds to the cost of all the Peugeot S.A. shares purchased on the open market, net of cancelled shares and shares held for allocation on exercise of management and employee stock options which are reported under 'Short-term investments" (In the balance sheet. Share and shareholder data: supplementary Information Buyback and cancellation of shares The share buyback program launched In 1999 was actively pursued in 2001 when a net total of 10,424,509 Peugeot SA shares were bought back at an average price of 46.40. Under the authorization granted at the Annual Stockholders' meeting on May 16, 2001, 23,450,000 shares representing 8.3% of shares outstanding, were cancelled as of November 23, 2001... At December 31, 2001, the Company held 2,994,287 of its shares in treasury, of which 1,940,100 were allocated to stock option plans.