Ch 15 Flashcards
For numerous reasons, a corporation may reacquire shares of its own capital stock. When a company purchases treasury stock, it has two options of how to account for the shares: the cost method and the par value method.
Compare and contrast the cost method and the par value method for each of the following:
Purchase of shares at a price less than par value
The cost method requires the shares to be recorded at cost.
The par value method records the shares at par value. The difference in the selling price and par value would be allocated to APIC. If APIC has an insufficient balance, use retained earnings.
For numerous reasons, a corporation may reacquire shares of its own capital stock. When a company purchases treasury stock, it has two options of how to account for the shares: the cost method and the par value method.
Compare and contrast the cost method and the par value method for each of the following:
Purchase of shares at a price greater than par value
The cost method requires the shares to be recorded at cost.
The par value method records the shares at par value. The difference in the selling price and par value would be allocated to APIC.
For numerous reasons, a corporation may reacquire shares of its own capital stock. When a company purchases treasury stock, it has two options of how to account for the shares: the cost method and the par value method.
Compare and contrast the cost method and the par value method for each of the following:
Effect on net income
No effect.
A firm cannot recognize a gain or loss on treasury stock transactions.
For numerous reasons, a corporation may reacquire shares of its own capital stock. When a company purchases treasury stock, it has two options of how to account for the shares: the cost method and the par value method.
Compare and contrast the cost method and the par value method for each of the following:
Subsequent resale of treasury shares at a price less than purchase price but more than par value
Cost method -cash would be debited for the sale price. The difference between the purchase price and the reissue price is allocated APIC or Retained Earnings if needed.
Par value method - cash would be debited for the purchase price. Treasury stock would be credited for par value and the difference would be allocated to APIC.
For numerous reasons, a corporation may reacquire shares of its own capital stock. When a company purchases treasury stock, it has two options of how to account for the shares: the cost method and the par value method.
Compare and contrast the cost method and the par value method for each of the following:
Subsequent resale of treasury shares at a price greater than both purchase price and par value
Cost method -cash would be debited for the sale price. The difference between the purchase price and the reissue price is allocated APIC.
Par value method - cash would be debited for the purchase price. Treasury stock would be credited for par value and the difference would be allocated to APIC.
The proprietary theory, the entity theory, and the funds theory, are three approaches to accounting for equities.
Describe the proprietary theory.
Anything earned goes directly to the owner. Any liabilities incurred go directly to the owner.
The proprietary theory, the entity theory, and the funds theory, are three approaches to accounting for equities.
Describe the entity theory.
Look at the firm as a whole. It all belongs to the firm. Creditors and owners help the firm.
The proprietary theory, the entity theory, and the funds theory, are three approaches to accounting for equities.
Describe the funds theory.
Governmental accounting.
No concept of ownership from proprietor or entity.
Focuses on the flow of assets and changes in use of assets.
The proprietary theory, the entity theory, and the funds theory, are three approaches to accounting for equities.
State your reasons for emphasizing the application of one of these theories to each of the following:
Single Proprietorship
Proprietary theory.
Do not have to distinguish between owner and business, they are one.
The proprietary theory, the entity theory, and the funds theory, are three approaches to accounting for equities.
State your reasons for emphasizing the application of one of these theories to each of the following:
Partnership
Proprietary theory.
Income, liabilities, and assets would be owned or split by the two owners.
The proprietary theory, the entity theory, and the funds theory, are three approaches to accounting for equities.
State your reasons for emphasizing the application of one of these theories to each of the following:
Financial Institution (Banks)
Entity theory.
Owners do not have much control or impact on the entity.
The proprietary theory, the entity theory, and the funds theory, are three approaches to accounting for equities.
State your reasons for emphasizing the application of one of these theories to each of the following:
Consolidated Statements
Proprietary theory.
Most consolidated statements have assets or liabilities of subsidiaries which are then all combined into the parent company.
The proprietary theory, the entity theory, and the funds theory, are three approaches to accounting for equities.
State your reasons for emphasizing the application of one of these theories to each of the following:
Estate Accounting
Funds approach.
Primarily for information regarding limitations on assets.
The total owners’ equity is usually under a number of subcaptions on the corporation’s balance sheet.
List the major subdivisions of the stockholders’ equity section of a corporate balance sheet and describe briefly the nature of the amounts that will appear in each section.
Paid in Capital
The difference in selling price and par value of common stock and preferred stock.
The total owners’ equity is usually under a number of subcaptions on the corporation’s balance sheet.
List the major subdivisions of the stockholders’ equity section of a corporate balance sheet and describe briefly the nature of the amounts that will appear in each section.
Retained Earnings
Accumulated net profits (loss) of a corporation that has not been distributed as dividends.
The total owners’ equity is usually under a number of subcaptions on the corporation’s balance sheet.
List the major subdivisions of the stockholders’ equity section of a corporate balance sheet and describe briefly the nature of the amounts that will appear in each section.
Other Comprehensive Income
Items that arise from events not connected with normal profit-directed operations of the company.
The total owners’ equity is usually under a number of subcaptions on the corporation’s balance sheet.
List the major subdivisions of the stockholders’ equity section of a corporate balance sheet and describe briefly the nature of the amounts that will appear in each section.
Treasury Stock
Repurchasing and canceling outstanding shares of stock, either to retire the stock or resell it.
The total owners’ equity is usually under a number of subcaptions on the corporation’s balance sheet.
List the major subdivisions of the stockholders’ equity section of a corporate balance sheet and describe briefly the nature of the amounts that will appear in each section.
Non-controlling Interest
Having ownership of another corporation in a business combination, but 100% ownership.
The total owners’ equity is usually under a number of subcaptions on the corporation’s balance sheet.
Explain fully the reasons for subdividing the amount of stockholders’ equity, including legal, accounting, and other considerations.
The subdivision of equity allows for disclosing the legal claims that the various ownership groups have against the assets of the corporation.
Provides information regarding the sources of capital, dividend requirements, and the relative priorities of different types of equity securities.
State laws protect legal capital.
The total owners’ equity is usually under a number of subcaptions on the corporation’s balance sheet.
Describe three kinds of transactions that will result in paid-in or permanent capital in excess of legal or stated capital.
- Issuance of shares.
- Issuing a stock dividend.
- Reissuance of treasury stock in excess of par value.
The total owners’ equity is usually under a number of subcaptions on the corporation’s balance sheet.
Various accounting authorities have recommended that the terms paid-in surplus and earned surplus not be used in published financial statements. Explain briefly the reason for this suggestion and indicate acceptable substitutes for the terms.
Paid in surplus can be misleading - the stocks total proceeds appear to be less than par value. This should be shown as APIC.
Earned surplus should not be published in financial statements because it can be misleading in that it looks like cash left over or on hand. This should be shown as Retained Earnings.
The entity theory of equity implies that there should be no need for financial statements to distinguish between debt and equity. Alternatively, proprietary theory implies that such a distinction is necessary and yields information vital to owners and potential stockholders.
Discuss the entity theory rationale for making no distinction between debt and equity.
Stockholders and creditors are contributors.
Therefore, there is no distinction made between debt and equity.
The origin of the capital does not affect how it is used.
