1.40 Statement of Change in Equity

Question 1

What does the Statement of Changes in Equity and Equity Transactions demonstrate or is used for?

Who uses it?

1.4 Statement of Changes in Equity and Equity Transactions

Answer 1

reconciliation for the accounting period of the beginning balance for each component of equity to the ending balance.

Question 2

On the financial statements, where will you find Net Income, Net Loss, and Distributions to Owners?,

Answer 2

Statement of Changes in Equity

Question 3

How do you record the issuance of Treasury Stock above part on a Cost Method and Par Value Method?

Answer 3

The cost method uses the value paid by the company during the repurchase of the shares and ignores their par value; under this method, the cost of the treasury stock is included within the stockholders’ equity portion of the balance sheet.

The Par Value accounting method, you would debit cash for the purchase price of the Treasury Stock and credit capital in excess (PIC) of par for any excess paid above par.

1.4

Question 4

Treasury stock is a contra account to which line item and on what statement?

Answer 4

Changes to stockholder’s equity are recorded as a contra account to common stock.

Question 5

What does OCI mean?

Answer 5

Other Comprehensive Income

Question 6

When a company repurchases treasury stock does that increase or decrease stockholder’s equity?

Answer 6

Reduces total stockholders’ equity

Question 7

A statement of retained earnings reconciles the beginning and ending balances of the account. This statement is reported as part of the statement of changes in equity in a separate column.

What 3 line items will you find on this statement?

Answer 7

Retained earnings beginning balance
+ Net income (loss) for the period
– Dividends distributed during the period
+ Positive (negative) prior-period adjustments
Retained earnings ending balance

1.4

Question 8

What would prior period adjustments (2) include as changes to the Statement of Stockholder’s Equity?

Answer 8

1. Changes in accounting principle (e.g., change in inventory valuation method)
2. Corrections of prior-period financial statement errors

Question 9

Changes in accounting principles (e.g., change in inventory valuation method)

Are these recorded as Retrospective or Prospective adjustments and name 3 line items.

Answer 9

1.Changes in Accounting Principle (LIFO/FIFO) (retrospective)
2. Corrections to prior-period financial statement errors, (retrospective)
3. Changes in Accounting Estimates (remaining life of a depreciable asset.) (prospective application)

Question 10

What is retrospective and prospective in accounting?

Answer 10

In other words, retrospective will effect presentation of financial statements for previous periods.

While prospective means implementation new accounting policies for transaction, event, or other circumstances after new accounting policies or estimation has been

Question 11

What are liquidating distributions and what rights do Common shareholders have?

Answer 11

1. Common shareholders are entitled to receive liquidating distributions only after all other claims have been satisfied, including those of preferred shareholders.

Question 12

What are preemptive rights as it relates to common shareholders?

Answer 12

1. Preemptive rights give current common shareholders the right to purchase any additional stock issuances in proportion to their ownership percentages.

This way the preemptive rights safeguard a common shareholder’s proportionate interest in the firm.

Question 13

Do preferred stockholders have voting rights?

Answer 13

Generally, no

Question 14

Are preferred stockholders paid before common stockholders and how much?

Answer 14

Yes, fixed charge. Can vary but if it’s % or $ they receive not more than that.

Accumulates unpaid dividends (dividends in arrears)

Question 15

What are dividends in arrears?

Answer 15

The annual amount preferred stockholders are owed even if not yet paid. They will be paid before

Question 16

Name some characteristics of preferred stock

Answer 16

*fixed charge dividends are cumulative
*No voting rights (typically)
*Right to receive
—before common shareholders
—after creditors (liquidation)
*Cumulative unpaid dividends
*right to convert to another class. Typically common stock

Question 17

What is a cumulative preferred stock?

Answer 17

Cumulative preferred stock accumulates unpaid dividends (called dividends in arrears). Dividends in arrears must be paid before any common dividends can be paid.

Question 18

What are dividends in arrears?

Answer 18

Cumulative preferred stock accumulates unpaid dividends (called dividends in arrears). Dividends in arrears must be paid before any common dividends can be paid.

Question 19

How do you record the company issuing authorized stock (not treasury stock)

A=OE + OE

Answer 19

Assets = Liabilities + Stockholders’ Equity

Cash $850,000 = ↑Common stock $50,000 ↑
+ Additional paid-in capital $800,000 ↑

Question 20

What are the transactions are recorded for the sale of Treasury Stock on the cost method?

Answer 20

1. Under the cost method, treasury stock is recorded at the cost of the purchase.
2. Treasury stock is treated as a reduction to total stockholders’ equity.

Question 21

What are the transactions are recorded for the sale of Treasury Stock on the par method

Answer 21

Under the par value method, treasury stock is recorded for the par value of the stock.
1. Treasury stock reduces total stockholders’ equity.
2. Additional paid-in capital is reduced.
3. Retained earnings is decreased if the acquisition price is greater than the original issue price.

Question 22

In the three steps of declaring dividends, Declaration date, Record date, payment of dividends, which are recorded on the book and how?

Answer 22

Declaration
Dividends payable $120,000 ↑
Retained earnings $120,000 ↓

Record date
Nothing

Payment
Cash $120,000 ↓
Dividends payable $120,000 ↓

Question 23

When a property dividend is declared, what adjustments to the book value are made?

Answer 23

-Assess the fair market value
-Record a gain or loss on the statement of income
retained earnings is decreased for the Fair value
-Property distributed as dividend (sold and paid out)

Question 24

On a declaration of stock dividend coming from the issued bucket, what equity accounts are impacted and how?

Answer 24

Common stock $4,500 ↑
APIC $63,000 ↑
Retained earnings $67,500 ↓

Question 25

For a stock dividend that is accounted for as a stock split in the form of a dividend, the par value of the additional shares issued is reclassified from where?

Answer 25

The par value of the additional shares issued is reclassified from retained earnings to common stock.

Common stock $18,000 ↑
Retained earnings $18,000 ↓