Chapter 14 Flashcards
What is the difference between an S corp and a C corp
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
What are the advantages of Corporations
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
What are disadvantages of a corporation
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
What are the characteristics of common stock
- Voting rights
-Residual claim
-preemptive right
- term: does not have a maturity date
- dividends
what does residual claim mean
owners are paid with assets that remain after other claims (liabilities) have been paid off
what does preemptive rights mean
stockholders have the right to aquire proportionate shares so they can keep the same percentage of the company if the issue more stocks
What is the proportional method
FV of common + FV of preferred
this gives you your percentage and you multiply that by your actual lump sum amount
What are the two methods to allocating proceeds when stocks are sold in a lump sum
1.) Proportional method
2.) Incremental method
what is the incremental method?
allocate the cash to the known value FV and then back into other stock
What is the general rule for stock issued in a non-cash transaction
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
What are cost incurred of issuing stock
direct costs incurred to sell the stock
-underwriting cost
-printing cost
- taxes
how does the cost of issuing a stock look in a journal entry
offsets
cash
pic
common
pic
cash
What are the characteristics of preferred stock
- dividends
-non-voting
-liquidation: claim on companies asset first
-term: no maturity
What does it mean if a preferred stock is cumulutive
-if dividends fail to be payed to shareholders then they need to be made up in future years before common stocks
What does it mean if a preferred stock is participating
share ratably with the common shareholders
in any profit distributions beyond the prescribed rate.
what does it mean if preferred stock is convertible
it means that preferred can be exchanged to common stock
What does it mean if preferred stock is callable
allows corporations to buy back its stock
what does it mean if common stock is redeemable
stock holders can redeem at any time
What account is treasury stock
contra equity account -debit
what cannot be done with the purchase of treasury stock
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.
Why do corps buyback their stock
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
How do you account for purchase of treasury stock
Cost method:
Treasury stock
cash
Sale of treasury stock above cost
Cash
PIC
treasury
Sale of treasury above cost
Cash
PIC
(could be retained earnings if you run out of PIC)
Treasury stock
What happens if a company retires treasury stock
the treasury stock is cancelled and there is a reduction to the number of stock shares issued
What is the journal entry for retirement of treasury stock
Common stock
PIC - Common
Retained earnings (PLUG)
Treasury stock
When should a company pay a dividend
When both the present and future financial position warrant the distribution
What are the three types of dividends
1.) Cash dividends
2.) Property dividends
3.) Liquidating dividends
what effect do dividends (except stock dividends) have on stockholders equity
reduce it
What are the three dates in terms of dividends and what are the entries
Date of declaration:
Retained Earning
Dividend payable
Date of record:
none
Date of Payment
Dividend payable
Cash
When calculating cash dividends what do you multiple by
outstanding shares not issued because companies do not pay cash dividends on treasury stock
For a property dividend how is it recorded on declaration and payment date (giving stockholders an equity investment)
equity investment
gain on equity investment
retained earnings
property dividend payable
property dividend payable
equity investment
What are liquidating dividends
- dividends not based on earnings
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
Retained Earnings (900000)
PIC (300000) -liquidating
Dividend Payable
What is a stock dividend?
Issuance by a company of its own stock to stockholders on a pro- rate basis
when is a stock dividend used
when a company wants to captialize part of its earnings
what is a small stock dividend
when a company stock dividend is less than 25%
What value does company transfer for a small stock dividend
Fair market value
How do you journalize a small stock split?
Retained earnings
Common stock distributal
PIC- common
What value does a company transfer for a large stock dividend
par value
how do you journalize a large stock dividend
R.E
Common stock distributal
What do stock splits do
reduce the par value and increase the number of share
do you make a journal entry for a stock split
no
