15 Equity

Question 1

How is basic earnings per share calculated if common stock and nonconvertible preferred stock are outstanding?

Answer 1

(Net income – Preferred dividends) / (Weighted average common shares outstanding)

Question 2

What is often used to convey preemptive rights regarding stocks?

Answer 2

Stock rights

Question 3

List the types of common stock rights.

Answer 3

Voting
Dividend
Preemptive

Question 4

What amount of preferred dividends is subtracted for noncumulative preferred stock?

Answer 4

Amount declared

Question 5

List the book value per preferred share ratio formula.

Answer 5

Preferred shareholders’ equity (including dividends in arrears) / Number of outstanding preferred stocks

Question 6

What dividends are paid before any other dividends are paid?

Answer 6

Preferred stock dividends in arrears

Question 7

Is there any additional participation to preferred stock if total dividends are not sufficient to provide common stock with dividends based on the fully participating preferred percentage?

Answer 7

There is no additional participation.

Question 8

List the order of payment for partially participating stocks.

Answer 8

Dividends in arrears
Current p/s dividend
Preferred stock receives up to an additional percentage

Question 9

List the order of dividend payment if nonparticipating preferred stock is outstanding.

Answer 9

Preferred: Dividends in arrears (if cumulative)
Preferred: Current-period dividend
Common: Remainder

Question 10

Describe the accounting treatment of purchases of stock under the par value method.

Answer 10

Treasury stock is debited at par;
Additional Paid in Capital (APIC) is debited by amount credited when stock was originally issued;
Cash is credited.

Question 11

For what amount is Preferred Stock Additional Paid-in Capital debited when called or redeemed?

Answer 11

Amount recorded from original issuance.

Question 12

What is the date used to establish market price for small stock dividends?

Answer 12

Declaration date

Question 13

List the journal entry to record a declaration of property dividends (assuming asset fair value exceeds book value).

Answer 13

DR: Retained Earnings (at FV at declaration date) DR: Asset (FV – Book value) CR: Dividends Payable (FV) CR: Gain on Disposal (FV – Book value)

Question 14

On what date are dividend liabilities established?

Answer 14

Declaration date

Question 15

List the order of dividend payment when partially participating preferred stock is outstanding.

Answer 15

1. Preferred: Any dividends in arrears
2. Preferred: Current-period dividends
3. Common: Preferred percentage × Total par outstanding
4. Preferred: Additional percentage
5. Common: Remainder

Question 16

How is a large stock dividend accounted for?

Answer 16

Capitalize retained earnings or paid-in capital at par value.

Question 17

What is a large stock dividend?

Answer 17

Percentage of dividend is greater than 20% to 25%

Question 18

How is a small stock dividend accounted for?

Answer 18

Capitalize retained earnings at market price.

Question 19

What is a small stock dividend?

Answer 19

Percentage of dividend is less than 20% to25%

Question 20

List the entry to record a scrip dividend payment.

Answer 20

DR: Scrip dividend payable
DR: Interest expense
CR: Cash

Question 21

Define “liquidating dividends.”

Answer 21

A return of capital rather than a return on capital
Reduces contributed capital account instead of retained earnings

Question 22

List the journal entry to record a scrip dividend declaration.

Answer 22

DR: Retained earnings
CR: Scrip dividend payable

Question 23

List the journal entry to record payment of property dividend.

Answer 23

DR: Dividends Payable
CR: Cash or Asset

Question 24

List the journal entries to record cash dividend declaration and payment.

Answer 24

DR: Retained Earnings (or Dividends)
CR: Dividends Payable

DR: Dividends Payable
CR: Cash

Question 25

What is the accounting treatment by an investor when a stock split occurs?

Answer 25

The investor adjusts the per share cost, not the total cost. Original cost is divided by the new total number of share (after the split) to get the new per share cost.

Question 26

How is a stock split accounted for?

Answer 26

No accounting entry is needed.

Question 27

What is the effect on the treasury stock account under the par method when donated stock is received?

Answer 27

The effect on the treasury stock account is an increase for the par value of the stock received.

Question 28

What is the effect on the treasury stock account under the cost method when donated stock is received?

Answer 28

The effect on the treasury stock account is an increase for the fair value of the stock received.

Question 29

When is paid in capital from treasury stock increased under the par method?

Answer 29

When treasury stock is purchased for less than the original issue price

Question 30

What accounts may reflect different balances under the cost and par method for the same firm?

Answer 30

Treasury stock
Paid-in capital in excess of par-common
Paid-in capital from treasury stock
Retained earnings

Question 31

When is paid in capital from treasury stock decreased under the cost method?

Answer 31

When treasury stock is reissued for less than cost

Question 32

How can retained earnings be affected by treasury stock transactions?

Answer 32

Retained earnings can be decreased (as a last resort) but never increased.

Question 33

What is the effect of treasury stock transactions on earnings?

Answer 33

There is no effect.

Question 34

What is the effect on owners’ equity when treasury stock is purchased and subsequently reissued at a price in excess of cost (using the cost method)?

Answer 34

Owners’ equity is increased by the difference in purchase cost and reissuance price.

Question 35

How is treasury stock presented on the balance sheet under the par value method?

Answer 35

It is reported as a subtraction from the common stock account, at par, in the balance sheet.

Question 36

Under the cost method of accounting for treasury stock, how is treasury stock presented on the balance sheet?

Answer 36

Treasury stock is subtracted at the very bottom of the owners’ equity section of the balance sheet.

Question 37

Describe the accounting treatment of reissuance of stock under the par value method.

Answer 37

Treasury stock is credited at par.
The remainder of the entry is treated like a stock issuance.

Question 38

Describe the cost method for accounting for treasury stock.

Answer 38

Purchases are debited at cost
Reissuances debit cash, credit treasury stock at cost, and contributed capital from treasury stock is plugged.

Question 39

List the methods for accounting for treasury stock.

Answer 39

Cost method
Par value method

Question 40

What is a quasi-reorganization?

Answer 40

The elimination of a deficit in retained earnings accomplished by writing down assets and reducing APIC and common stock, giving a corporation a “fresh start.”

Question 41

Describe the exact method for accounting for a new partner’s admission to a partnership.

Answer 41

Upon admission of a new partner, new partner’s capital is equal to amount contributed to the partnership with no bonus or goodwill recorded.

Question 42

List the steps in calculating goodwill recognized by existing partners when a new partner is admitted to a partnership under the goodwill method.

Answer 42

1 Determine the implied BV of the partnership
New partner’s contribution / New partner’s ownership %
2 Determine the old partner’s share of implied BV
Implied BV of partnership × Old partners’ % ownership
3 Calculate goodwill
Old partners’ share of implied value - Old partners’ capital account balances
Goodwill is allocated to old partners using their profit/loss ratio.

Question 43

When the bonus method is used for accounting for the admission of a new partner to a partnership, what capital accounts are impacted?

Answer 43

New and old partners’ capital accounts are impacted as a reallocation of both the new and old partners’ capital accounts is required.

The equity is allocated such that the new partner’s equity is equal to that partner’s ownership percentage of the unadjusted total partnership equity.

Question 44

Describe the treatment of assets, noncash assets subject to liabilities and liabilitIes assumed in the formation of a partnership.

Answer 44

Assets are recorded at fair value and increase partner’s capital
Noncash assets subject to liabilities are recorded at fair value less the present value of the liability and increase partner’s capital
Liabilities assumed by the partnership are recorded at fair value and increase partnership liabilities