1.4 Statement of Changes in Equity and Equity Transactions Flashcards
Purpose of the statement of changes in equity
The statement of changes in equity reconciles the beginning balance and ending balance for each component of equity for a given reporting period.
Unless the shares are specifically restricted, a holder of common stock with a preemptive right may share proportionately in all of the following except
A. Corporate assets upon liquidation
B. The vote for directors
C. New issues of stock of the same class
D. Cumulative dividends
D. Cumulative dividends
Common stock does not have the right to accumulate unpaid dividends. This right is often attached to preferred stock
McGlinchy Company had 100,000 shares of $4 per value common stock outstanding on June 12 of the current year. On this date, McGlinchy accquired 1,000 of its own shares as treasury stock at a cost of $12 per share. The acquisition was accounted for by the cost method. As a result of this treasury stock purchase
A. Total assets, retained earnings, and total equity decreased
B. Total assets were unaffected, but retained earnings decreased
C. Total assets and total equity decreased
D. Total assets and total equity were unaffected.
C. Total assets and total equity decreased
Under the cost method, the acquisition of treasury stock is recorded to treasury stock and cash equal to the amount of the purchase price. This transaction results in a decrease in both total assets and total equity.
The purchase of treasury stock is recorded on the statement of financial position as
A. Increase in assets
B. Decrease in liabilities
C. Increase in shareholder’s equity
D. Decrease in shareholder’s equity
D. Decrease in shareholder’s equity
The purchase of treasury stock is recorded on the statement of financial position as a decrease in shareholders’ equity.
Which one of the following statements regarding dividends is correct?
A. The declaration and payment of a 10% stock dividend will result in a reduction of retained earnings at the fair market value of the stock
B. A stock dividend of 15% of the outstanding common shares results in a debit to retained earnings at the par value of the stock distributed
C. At the declaration date of 30% stock dividend, the carrying value of retained earnings will be reduced by the fair value of the stock distributed
D. The declaration of a cash dividend will have no effect on book value per share.
A. The declaration and payment of a 10% stock dividend will result in a reduction of retained earnings at the fair market value of the stock
When a small stock dividend is declared (less than 20% to 25% of the previously outstanding common shares), retained earnings is debited for the fair value of the stock.
When a large stock dividend is declared (more than 20% to 25% of the previously outstanding common shares), retained earnings is debited for the par value of the stock.
When a cash dividend is declared, a portion of retained earnings is reclassified as a current liability
The statement of shareholder’s equity shows a
A. Reconciliation of the beginning and ending balances in shareholders’ equity accounts.
B. Listing of all shareholders’ equity accounts and their corresponding dollar amounts.
C. Computation of the number of shares outstanding used for earnings per share calculations.
D. Reconciliation of net income to net operating cash flow
A. Reconciliation of the beginning and ending balances in shareholders’ equity accounts
A corporation has 10,000,000 shares of $10 par-value stock authorized, of which 2,000,000 shares are issued and outstanding. The Board of Directors declared a 2-for-1 stock split on November 30 to be issued on December 30. The stock was selling for $30 per share on the date of declaration. In addition, the Board has amended the articles of incorporation to allow for a proportional increase in the number of authorized shares. The par-value information appearing in the shareholder’s equity section of the statement of financial position at December 31 will be
A. $5
B. $10
C. $15
D. $30
A. $5
As a result of the 2-for-1 stock split, the par value of Grand’s shares is halved to $5.
On February 1, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
* Common stock, no par, $1 stated value, 10,000 shares originally issued for $15 per share
* Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share
Hyde’s February 1 statement of equity should report
- Common stock: 10,000 / 150,000
- Preferred stock: 75,000 / 30,000
- Additional Paid-in Capital: 0 / 140,000 / 185.,000 / 45,000
- Common stock: $10,000
- Preferred stock: $30,000
- Additional Paid-in Capital: $185,000
The common stock was issued for a total of $150,000. Of this amount, $10,000 (10,000 shares x $1 stated value) should be allocated to the common stock, with the remaining $140,000 ($150,000 - $10,000) credited to additional paid-in capital. The preferred stock was issued for $75,000 (3,000 shares x $25), of which $30,000 (3,000 shares x $10 par value) should be allocated to the preferred stock and $45,000 ($75,000 - $30,000) should be allocated to additional paid-in capital. In the statement of equity, Hyde therefore should report $10,000 in the common stock account, $30,000 in the preferred stock account, and $185,000 ($140,000 + $45,000) as additional paid in capital.
A company has 1,000,000 shares of common stock authorized, of which 100,000 shares are held as treasury shares; the remainder are held by the company shareholders. On November 1, the Board of Directors declared a cash dividend of $.10 per share to be paid on January 2. At the same time, the Board declared a 5% stock dividend to be issued on December 31. On the date of the declaration, the stock was selling for $10 a share, and no fractional shares were to be issued. The total amount of these declarations to be shown as current liabilities on the statement of financial position as of December 31 is
A. $540,000
B. $90,000
C. $600,000
D. $100,000
B. $90,000
Cash dividends are only paid on outstanding shares. Thus, the dividend payable at December 31 is $90,000 (900,000 x $.10). Stock dividends distributable are reported in equity, not current liabilities.
In Year 1, Company A recorded the following transactions related to the equity section of its balance sheet:
1/4/Year 1:
Issued 100,000 shares of $3 par value common stock for $500,000
3/1/Year 1:
Repurchased 50,000 shares of common stock for $4 per share
8/8/Year 1:
Reissued 50,000 shares of common stock at $6 per share
12/1/Year 1:
Declared, but did not pay, dividends of $1 per common share
12/31/Year 1:
Recorded net income of $75,000 for Year 1
Assume that at the beginning of Year 1, A’s equity consisted only of $100,000 of retained earnings. Additionally, assume that A uses the cost method of accounting for treasury stock. What is A’s Year 1 ending equity balance?
A. $575,000
B. $600,000
C. $675,000
D. $775,000
C. $675,000
Starting with an equity balance of $100,000, the issuance of common stock increases total equity to $600,000 ($100,000 + 500,000).
The repurchase of treasury stock reduces total equity by $200,000 (50,000 shares x $4).
However, the subsequent reissuance increases total equity by $300,000 (50,000 shares x $6).
Furthermore, the declaration of dividends, although not paid, reduces retained earnings by $100,000 [$1 x 100,000 shares (100,000 issued on 1/4/Year 1 - 50,000 repurchased on 3/1/Year 1 + 50,000 reissued on 8/8/Year 1).
Finally, the net income is closed out to retained earnings, thus total equity increases by $75,000.
Accordingly, the ending balance of equity is $675,000 ($100,000 + 500,000 - 200,000 + 300,000 - 100,000 + 75,000).
On December 15, a company distributed a previously declared cash dividend of $120,000 and declared a 5% stock dividend with a market value of $100,000. If the company uses U.S. GAAP, these two transactions would decrease the company’s total shareholders’ equity by
A. $0
B. $100,000
C. $220,000
D. $120,000
A. $0
The distribution of previously declared cash dividends will not have any effect on a company’s shareholder’s equity.
At the time that a dividend is declared, the amount of the dividend becomes a liability. It was at the time of declaration that the dividend reduced equity. The payment of that liability at a later date does not affect equity. The distribution of a stock dividend never affects the amount of equity since it merely represents a repackaging of the company’s equity accounts.
Rudd Corp. had 700,000 shares of common stock authorized and 300,000 shares outstanding at December 31, Year 3. The following events occurred during Year 4:
January 31
Declared 10% stock dividend
June 30
Purchased 100,000 shares
August 1
Reissued 50,000 shares
November 30
Declared 2-for-1 stock split
At December 31, Year 4, how many shares of common stock did Rudd have outstanding?
A. 560,000
B. 600,000
C. 630,000
D. 660,000
A. 560,000
Rudd had 300,000 shares outstanding before declaring the stock dividend.
When it purchased 100,000 shares and reissued 50,000 shares, 280,000 shares (300,000 + 30,000 - 100,000 - 50,000) were left outstanding. Thus, the 2-for-1 stock split increased the shares outstanding to 560,000 (280,000 x 2).
Treasury stock transactions may result in
A. Increases or decreases in the amount of net income
B. Decrease in the balance of retained earnings
C. Increases or decreases in the amount of shares authorized to be issued
D. Increases in the balance of retained earnings.
B. Decrease in the balance of retained earnings
Under the par-value method, when treasury shares are purchased for a price greater than the par value, retained earnings is debited for the excess of the purchase prices over the par value if there is no existing paid-in capital from past treasury stock transactions or if the existing credit balance is insufficient to absorb the excess. Under the cost method, if the subsequent resale price of the treasury shares is less than the original acquisition price, it may be necessary to charge retained earnings for a portion or all of the excess of the original purchase price over the sales price.
Unlike a stock split, a stock dividend requires a formal journal entry in the financial accounting records because stock
A. Dividends represent a transfer from retained earnings to capital stock
B. Dividends increase the relative book value of an individual’s stock holding
C. Splits increase the relative book value of an individual’s stock holdings.
D. Dividends are payable on the date they are declared
A. Dividends represent a transfer from retained earnings to capital stock
The purpose of a stock dividend is to provide evidence to the shareholders of their interest in accumulated earnings without distribution of cash or other property.
A chain of supermarkets specializing in gourmet food, has been using the average cost method to value its inventory. During the current year, the company changed to the first-in, first-out method of inventory valuation. The president of the company reasoned that this change was appropriate since it would more closely match the flow of physical goods. This change should be reported on the financial statements as
A. Cumulative-effect type accounting change.
B. Affecting only future periods.
C. Correction of an error.
D. Change in accounting estimate.
A. Cumulative-effect type accounting change.
The change in inventory valuation method is a change in accounting principle, which should be presented on a retrospective basis to maintain consistency and comparability.
