Entering stock transactions

[Charles Day]

On Mon, Sep 8, 2008 at 10:00 AM, Fred Bone <Fred.Bone at dial.pipex.com> wrote:

> On 08 September 2008 at 9:37, Charles Day said:
>
> > On Mon, Sep 8, 2008 at 1:20 AM, Fred Bone <Fred.Bone at dial.pipex.com>
> > wrote:
> >
> > > I'm struggling to work out how to enter some complex stock
> transactions.
> > > Can anyone help? Note that I'm not looking for "accountancy" or "tax"
> > > advice; I'm trying to work out how to satisfy the balancing rules (and
> > > so prevent spurious trial-balance errors).
> > >
> > > This example is probably as good as any:
> > >
> > > I bought 225 UU for 1473.59 plus 19.87 total dealing costs. So far so
> > > good.
> > >
> > > Subsequently there was a capital reorganisation.
> > > 17 new "A" shares for every 22 old, plus a 1-for-1 issue of "B" shares,
> > > redeemable at 1.70 each. So I received 173 (= 225*17/22) new "A"
> shares,
> > > plus 6.13 in cash for the odd 19/22 of a share, plus 382.50 (=
> 225*1.70)
> > > in cash on redeeming the "B" shares.
> > >
> > > (There are no dealing costs).
> > >
> >
> >
> > >
> > > I initially entered this transaction using the "Stock Split" Wizard,
> and
> > > it shows as a "Split" of -52 shares, with two "Sell" splits, one of
> > > 382.50 and the other of 6.13, and one "Buy" split of 388.63 Capital
> > > Gains.
> > >
> > > Is this "the GnuCash way" to do it? Or should I work out the implied
> > > value of a share (given that 19/22 was worth 6.13, that's 7.098 per
> > > share) and treat it as two transactions: a sale of the original 225
> (for
> > > 225*7.098 = 1597.05) and a purchase of 173 (for 1597.05 - 388.63 =
> > > 1208.42, implying a price of 6.9851)? In the latter case would it be
> > > better to close off the register and start another with the "second
> >
> > half"?
> > >
> > >
> > It seems like you have two steps here:
> > 1. 225 share UU -----> 173 "A" + 225 "B" + 6.13 cash
> > 2. Sell 225 "B" @ 1.70 per share
> >
> > However, the stock split druid doesn't know how to handle situations
> where
> > one share of old stock gets split into two different new stocks. So I'm
> > not sure the stock split druid is much help.
> >
> > Did you receive any information about the reorganisation telling you
> about
> > treatment of basis, cash, or capital gains?  What portion of the basis
> > (1473.59 plus 19.87) goes to "A" shares and what portion goes to "B"
> > shares? You need to know the basis of the "B" shares to figure the
> capital
> > gains on redeeming them. Is any of the cash considered a return of
> capital
> > rather than a capital gain?
>
> Thanks for your response.
>
> The announced purpose was to return cash to the shareholders.
> Consequently, I suppose the redemption of "B" shares constitutes return
> of capital (though I'm a bit hazy on the terminology). I've currently
> recorded it as capital gain, but I suspect this is wrong; however, where
> else could I put it?
>

> BTW, and if it matters, there are no tax implications because the holding
> is in a tax-exempt wrapper. What I'm trying to do is eliminate an
> imbalance in the Trial Balance - this is only one of several roughly
> similar issues which I hope account between them for all the imbalance.
>
>
No tax implications may make it simpler. But you need to know how your
capital got split between "A" and "B" shares in the transaction. Without
that, you don't know how much capital is in the "A" stock account. If you
don't know how much your "A" shares cost you, then how will you know how
much you make when they go up in price?

You started with 1473.59 in capital (in the form of UU shares).  As you
said, at the time of the transaction, "B" was priced at 1.70 per share. "A"
was priced at 6.13 per 19/22 share = 6.13 * (22/19) per share (about 7.098).
So you got a total of (173 * 6.13 * (22/19)) + (225 * 1.70) + 6.13 = 1227.94
+ 382.50 + 6.13 = 1616.57 in exchange for your UU shares.

Since the tax man is not involved, let's try allocating the capital as we
please. Let's say the 6.13 in cash is a return of capital, and split the
rest (1473.59 - 6.13 = 1467.46) in proportion to the share value received.
So your 173 "A" shares cost you 1467.46 * (1227.94/(1227.94+382.50)) =
1118.92. Your "B" shares cost you 1467.46 * (382.50/(1227.94+382.50)) =
348.54, making a capital gain of 382.50 - 348.54 = 33.96.

The splits needed to enter this in the stock account's register are shown
below. I simplified this somewhat by only mentioning "B" stock in the notes
instead of creating a "B" stock account, (Hopefully you are viewing this
with a fixed-width font.)

Notes                        Account               Shares  Price     Buy
Sell
                             My Investments:Stock     -52
Cash In Lieu                 My Investments                         6.13
Redemption of "B" shares     My Investments                       382.50
Return of capital            My Investments:Stock
6.13
Capital gains on "B" shares  Income:Capital Gains
33.96
Cost of "B" shares           My Investments:Stock
348.54

The trial balance looks like this. Note that I only entered two transactions
in a fresh set of books: the original purchase of UU shares and the
transaction shown above.

Trial Balance 12/31/2008

Account Name       Debit     Credit
Income
Capital Gains                $33.96
My Investments            $1,084.96
Stock          $1,118.92
               $1,118.92  $1,118.92

The balance sheet using "average cost" price source shows the correct amount
of capital remaining in the stock account (1118.92).

Balance Sheet 12/31/2008

Assets
My Investments                  $(1,084.96)
       Stock            173 UU    $1,118.92
Total Assets                                 $33.96

Liabilities
Total Liabilities                             $0.00

Equity
Retained Earnings                            $33.96
Unrealized Gains                              $0.00
Total Equity                                 $33.96

Total Liabilities & Equity                   $33.96

Cheers,
Charles