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Intermediate Accounting > Chapter 14 > Flashcards

Chapter 14 Flashcards

1
Q

What is the difference between an S corp and a C corp

A

S Corp - doesn’t pay tax but stakeholders are

only an issue to 100 stockholders

C Corp: both corp and stakeholders are taxed

unlimited stockholders

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2
Q

What are the advantages of Corporations

A

Limited Liability: the most you can lose is your investment

Separate Legal entity: separation from stockholders and corporation

Ease of capital formation: if the company needs to raise capital it can issue more shares

unlimited life: don’t have to worry about transfer of ownership and losing shares

Transferability: easy to transfer of shares

Professional management: shareholders don’t have to be involved with organization

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3
Q

What are disadvantages of a corporation

A

Taxation: get double-taxed

formation: hard to form a c corporation

Regulation: heavily regulated by the government

separation from management: shareholders can’t really do anything about questionable management

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4
Q

What are the characteristics of common stock

A
  • Voting rights

-Residual claim

-preemptive right

  • term: does not have a maturity date
  • dividends
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5
Q

what does residual claim mean

A

owners are paid with assets that remain after other claims (liabilities) have been paid off

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6
Q

what does preemptive rights mean

A

stockholders have the right to aquire proportionate shares so they can keep the same percentage of the company if the issue more stocks

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7
Q

What is the proportional method

A

FV of common + FV of preferred

this gives you your percentage and you multiply that by your actual lump sum amount

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7
Q

What are the two methods to allocating proceeds when stocks are sold in a lump sum

A

1.) Proportional method

2.) Incremental method

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8
Q

what is the incremental method?

A

allocate the cash to the known value FV and then back into other stock

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9
Q

What is the general rule for stock issued in a non-cash transaction

A

companies should record stock issued at the

-FV of stock issued or if that is not apparent the FV of the non cash consideration received

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10
Q

What are cost incurred of issuing stock

A

direct costs incurred to sell the stock
-underwriting cost
-printing cost
- taxes

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11
Q

how does the cost of issuing a stock look in a journal entry

A

offsets

cash
pic
common

pic
cash

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12
Q

What are the characteristics of preferred stock

A
  • dividends

-non-voting

-liquidation: claim on companies asset first

-term: no maturity

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13
Q

What does it mean if a preferred stock is cumulutive

A

-if dividends fail to be payed to shareholders then they need to be made up in future years before common stocks

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14
Q

What does it mean if a preferred stock is participating

A

share ratably with the common shareholders
in any profit distributions beyond the prescribed rate.

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15
Q

what does it mean if preferred stock is convertible

A

it means that preferred can be exchanged to common stock

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16
Q

What does it mean if preferred stock is callable

A

allows corporations to buy back its stock

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17
Q

what does it mean if common stock is redeemable

A

stock holders can redeem at any time

18
Q

What account is treasury stock

A

contra equity account -debit

19
Q

what cannot be done with the purchase of treasury stock

A

treasury stock does not give the
corporation the right to vote, to exercise preemptive rights
as a stockholder, to receive cash dividends, or to receive
assets upon corporate liquidation.

20
Q

Why do corps buyback their stock

A

1.) Their stock is undervalued - wanna buy back and sell for more
2.) Dividend commitment - allows shareholders to get more dividends
3.) Dilution issues
4.) maintain control
5.) change performance metrics

21
Q

How do you account for purchase of treasury stock

A

Cost method:

Treasury stock
cash

22
Q

Sale of treasury stock above cost

A

Cash
PIC
treasury

23
Q

Sale of treasury above cost

A

Cash
PIC
(could be retained earnings if you run out of PIC)
Treasury stock

24
Q

What happens if a company retires treasury stock

A

the treasury stock is cancelled and there is a reduction to the number of stock shares issued

25
Q

What is the journal entry for retirement of treasury stock

A

Common stock
PIC - Common
Retained earnings (PLUG)
Treasury stock

26
Q

When should a company pay a dividend

A

When both the present and future financial position warrant the distribution

27
Q

What are the three types of dividends

A

1.) Cash dividends
2.) Property dividends
3.) Liquidating dividends

28
Q

what effect do dividends (except stock dividends) have on stockholders equity

A

reduce it

29
Q

What are the three dates in terms of dividends and what are the entries

A

Date of declaration:

Retained Earning
Dividend payable

Date of record:
none

Date of Payment
Dividend payable
Cash

30
Q

When calculating cash dividends what do you multiple by

A

outstanding shares not issued because companies do not pay cash dividends on treasury stock

31
Q

For a property dividend how is it recorded on declaration and payment date (giving stockholders an equity investment)

A

equity investment
gain on equity investment

retained earnings
property dividend payable

property dividend payable
equity investment

32
Q

What are liquidating dividends

A
  • dividends not based on earnings
33
Q

How would you journalize this…

a company issues a dividend to its stockholders of 1,200,000. 900000 is considered income and the remained is return of captial

A

Retained Earnings (900000)
PIC (300000) -liquidating
Dividend Payable

34
Q

What is a stock dividend?

A

Issuance by a company of its own stock to stockholders on a pro- rate basis

35
Q

when is a stock dividend used

A

when a company wants to captialize part of its earnings

36
Q

what is a small stock dividend

A

when a company stock dividend is less than 25%

37
Q

What value does company transfer for a small stock dividend

A

Fair market value

38
Q

How do you journalize a small stock split?

A

Retained earnings
Common stock distributal
PIC- common

39
Q

What value does a company transfer for a large stock dividend

A

par value

40
Q

how do you journalize a large stock dividend

A

R.E
Common stock distributal

41
Q

What do stock splits do

A

reduce the par value and increase the number of share

42
Q

do you make a journal entry for a stock split

A

no

Intermediate Accounting (11 decks)

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