Chapter 11 Flashcards
What are the two forms of instalment payments?
(1) Fixed principal payments plus interest
(2) Blended principal and interest payments
If you deposit $100 on January 1, 2022, in your bank and how much
money do you get with the interest on December 31, 2024? Assume that interest rate is 7% (Interest is compounded annually).
100* (1.07)^2
What is the present value on January 1, 2022 when you expect to have
$114.49 on December 31, 2024 in the bank account?
Assume that interest rate is 7%.
114.49/(1.07)^2
Basic set of rights for common shares?
(1) Voting right
(2) Dividend right
(3) Right to share in the distribution of assets upon liquidation
(4) Pre-emptive rights to purchase new stock issued by the corporation
When there is an increase in share price in the srock market, does it increase the equity section of B/S?
No. We use historical cost principle, so there is no change in equity even when the shar eprice in the stock market changes because there is no change in the real economic resouorces, or assets, in the firm
Why do firms issue dual or multiple classes of common chares?
Company insiders do not want to dilute their ownership interests so that they can keep controlling the firm
Is there any stock without voting power?
Yes
Is there any common stock without voting power?
Yes
What are authorized shares?
The total number of shares that can be issued by a company.
What are authorized shares the sum of?
(1) Issued shares
(2) Unissued shares
What makes up issued shares?
(1) Outstanding shares traded in the market
(2) Treasury shares from stock repurchases
Which of the dollaw amount is shown under the common share section of equity?
Outstanding shares
What is a reason to reacquire shares?
Stock repurchase reduces the number of shares outstanding in the market so it increases earnings per share (EPS)
In Canada, repurchased shares are immediately cancelled in Canada, what is the impack on Balance Sheet Equation?
Assets decrease and shareholders’ equity decreases
Journla entry to record stock issuance
(Dr) Cash
Cr) Common shares (# shares * price per share
Journal entry for stock repurchase and retirement when stock repurchase is below cost?
(Dr) Common shares
(Cr) Cash (using same equation for common shares but with the price at this point in time), Contributed surplus
Journal entry for stock repurchase and retirement when stock repurchase is above cost
(Dr) Common shares, Contributed surplus, Retained earnings
(Cr) Cash
Can the corporation recognize a gain from stock repurchases?
No
Difference between common and preferred shares?
Common shares generally have voting power with no fixed dividend rights whilst preferred shares have non-voting power with fixed dividend rights
When are preferred shareholders paid before common shareholders?
If dividends are paid in a year
What happens if dividends are not declared in a year on cumulative dividends preferred shares?
The dividends owed to preferred shareholders will accumulate and be paid in the future.
What are dividends in arrears?
dividends that are owed to the preferred shareholder, but have not been declared or paid
Are dividend in arrears the liability account?
No
What is the impact of redeemable preferred shares on B/S equation?
Decrease in assets and decrease in equity
When can a company issue shares?
(1) At inception (incorporation)
(2) When going public
(3) To raide additional funds
What are dividends?
A corporation’s distribution of cash or stock to its shareholders on a proportional basis (cash, stock, property, etc)
Important dates for cash dividends?
(1) Dividend declaration
(2) Date of record
(3) Date of payment
Which is a non accounting event among the important dates for cash dividends?
Dare of record
Journal entry for date of declaration?
(Dr) Retained earnings
(Cr) Dividend payable
Journal entry for date of payment?
(Dr) Dividend payable
(Cr) Cash
What does issuance of additional shares of stock on a proportional basis to existing shareholders do?
Retained earnings decrease and common shares increase (just a reclassification within equity)
Suppose that a stock price is $1 per share and there are 1,000 shares outstanding in the market. You own 100 shares of this company, leading to 10% ownership. When a company issues
a 10% stock dividend, what happens to your ownership
percentage?
No impact
Journal entry for declaration of stock dividend?
(Dr) Retained earnings
(Cr) Stock dividend issuable
Journal entry for issuance date for stock dividend?
(Dr) Stock dividend issuable
(Cr) Common shares
What is the impact of stock dividend on shareholder’s equity?
No impact
Does the total shareholder’s equity of a company change with stock split?
No
Is there an accounting entry for stock split?
No
What is the reason for stock split?
The number of outstanding shares increases and stock price per share decreases, inducing more investors
