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Acct 302 > Chapter 15 > Flashcards

Chapter 15 Flashcards

1
Q

The special characteristics of the corporate form that affect accounting include

A
  1. Influence of state corporate law
  2. Use of capital stock or share system
  3. Development of a variety of ownership interests
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2
Q

Anyone who wishes to establish a corporation must submit what?

A

Articles of incorporation to the state in which incorporation is desired

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3
Q

A state issued a corporate charter after requirements are fulfilled, then the company is

A

A legal entity that is subject to state law

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4
Q

In absence of restrictive provisions each share carries the following rights

A
  1. To share proportionately in profits and losses
  2. To share proportionately in management (right to vote for directors)
  3. To share proportionately in corporate assets upon liquidation
  4. To share proportionately in any new issues of stock of the same class called pre-emptive right
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5
Q

The last right ( pre emptive right) is used to protect what?

A

Each stockholder proportional interest in the company

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6
Q

The preemptive right protects an existing stockholder from ?

A

Involuntary dilution of ownership interest

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7
Q

Many corporations have eliminated preemptive right because

A

It makes it inconvenient for corporations to issue large amounts of additional stock as they frequently do in acquiring other companies

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8
Q

Share system easily allows what?

A

One individual to transfer interest in an company to another investor

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9
Q

Corporations often use registrars and transfer agents for what?

A

Who special in providing services for recording and transferring stock

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10
Q

Common stock

A

Is the residual corporate interest that beats the ultimate risk of loss and recieves benefits of success

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11
Q

Common stock holders are not gurenteed what?

A

Dividends or assets upon dissolution.

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12
Q

Common stock holders generally control what?

A

Management of corporation and ten to profit most of the company is successful

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13
Q

Stockholder may sacrifice certain of these rights in return for other special right and privileges which are usually called

A

Preferred stock

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14
Q

Preferred stockholder always sacrificed some of inherent rights of common stock ownership

A

True

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15
Q

A common type of preference is to give preferred shareholders a priority to what?

A

Claim on earnings

Corporation assures a dividend usually at a stated rate before they distribute any to common stockholders

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16
Q

Capital stock and additional paid in capital constitute?

A

Contributed paid in capital a

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17
Q

Retained earnings

A

Represent earned capital of company

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18
Q

Contributed paid in capital

A

Total amount paid in on capital stock the amount provided by stockholders to the corporation for use in business

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19
Q

Contributed capital includes what items?

A

Par value of all outstanding stock and premiums less discount on issuance

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20
Q

Earned capital

A

Is the capital that develops from profitable operations.

It consists of all undistributed income that remains invested in company

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21
Q

Stockholders owner equity

A

Is the cumulative net contributions by stockholders plus retained earnings

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22
Q

Stockholder equity is not a claim to specific assets but a claim against what?

A

Portion of total assets

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23
Q

Par value has no relationship to what?

A

Fair value

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24
Q

Preferred or common stock reflect The

A

Par value of corporation issued shares.

/amounts are credited when it originally issued the shares

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25
Q

Paid in capital excess of par (also known as APIC)

A

Amount indicates any excess over par value paid in by stockholders in return for shares issued to them.

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26
Q

No par stock

A

With out par value

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27
Q

What are the reasons for issuing at no par value

A

Issuance of no par stock avoids contingent liability that might occur if corporation issued par value stock at discount

Some confusion exists over relationship between par value and fair value

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28
Q

What is a major disadvantage of no par value stock

A

Some states levy a high tax on these issues

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29
Q

True no par stock should be carried in accounts at issue price without

A

Any APIC OR DISCOUNT REPORTED

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30
Q

Stated value

A

Is a minimum value below which a company cannot issue it.

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31
Q

Instead of being no par stock, stated value stock becomes a stock with

A

Very low par value

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32
Q

Corporations generally sell classes of stock

A

Separately to track proceeds relative to each class

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33
Q

The accounting problem in lump sum sales is how to

A

Allocate proceeds among several classes of securities

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34
Q

Two methods are used to allocate proceeds among several classes of securities

A

Proportional method

Incremental method

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35
Q

Proportional method (p. 781)

A

If fair value or other sound basis for determining relationship value is available for each class of security, the company allocates the lump sum received among classes of securities on a proportional basis

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36
Q

Incremental method (p. 781)

A

Where a company cannot determine fair value of all classes securities, incremental method is used.

It uses fair value of securities as a basis for those classes it knows and allocates remainder of lump sum to the class for which it does not know fair value

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37
Q

If company cannot determine fair value for any of the classes of stock involved in lump sum exchange, other approaches must be used

A

True

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38
Q

Accounting for issuance of shares of stock for property or services involves an issue of valuation. The rule for this is?

A

Companies should record stock issued for services or property other than cash at either fair value of stock issued or the fair value of the non cash consideration recieved, whichever is more clearly determinable

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39
Q

If company can determine both and the transaction results from arm length exchange, there will be

A

A little difference in fair value .

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40
Q

Issuance of stock for property or services has resulted in cases of?

A

Overstated corporate capital through intentional overvaluation of property or services received.

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41
Q

The overvaluation of stockholder equity resulting from inflated asset value creates what type of stock?

A

Watered stock

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42
Q

How do corporations eliminate “water” stock?

A

Write down the overvalued assets

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43
Q

When a corporation undervalues recorded assets, what is created?

A

Secret reserves

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44
Q

An understated corporate structure (secrets reserve) can result from ?

A

Excessive depreciation or amortization charges, expensing capital expenditures, excessive write downs of inventories or receivables or any other understatement of assets or overstatement of liabilities

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45
Q

An example of ovetstament of liabilities is an excessive provision for estimated product warranties that ultimately results in

A

Understatement of owner equity thereby creating a secrete reserve

46
Q

Preferred stock features

A
  1. Preference as to dividends
  2. Preference as to assets in event of liquidations
  3. Convertible to common stock
  4. Callable at the option of corporation
  5. No voting
47
Q

Companies usually issue preferred stock with a par value, expressing dividend preference as what?

A

A percentage of par value

48
Q

A preference as to dividends does not assure payment of dividends but it assures that the corporation must:

A

Pay stated dividend rate or amount applicable to preferred stock before paying any dividends on common stock

49
Q

Company often issues preferred stock instead of debt because

A

Of a high debt to equity ratio

50
Q

Cumulative preferred stock

A

Requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders

51
Q

Dividend in arrears

A

Any passed dividend on cumulative preferred stock

If a director fails to declare a dividend at the normal date for dividend action, the dividend is said to have been passed

52
Q

No liability exists until board of directors declares

A

A dividend, a corp does not record a dividend in arrears as a liability but discloses in notes of financial statements

53
Q

Participating preferred stock

A

Holders share ratably with common stockholders in any profit distributions beyond prescribed rate

54
Q

Convertible preferred stock

A

Allows stockholders at their option to exchange preferred shares for common stock at a predetermined ratio

55
Q

Callable preferred stock

A

Permits the corporation at its option to call or redeem the outstanding preferred shares at a specified future dates and at stipulated prices

56
Q

Many type of preferred issues are what?

A

Callable

57
Q

The call or redemption price is slightly above original issuance price

A

True

58
Q

When a preferred stock is redeemed, what must be paid?

A

Any dividends in arrears

59
Q

Redeemable preferred stock

A

Has a mandatory redemption period or a redemption feature that the issuer cannot control

60
Q

FASB requires debt like securities such as redeemable preferred stock to be classified as ?

A

Liabilities and be measured and accounted for similar to liabilities

61
Q

Convertible bonds are recorded as

A

Liability on date of issue

62
Q

Preferred stock generally has no what?

A

Maturity date

63
Q

Preferred stock is recorded at

A

Par value as part of stockholder equity section

64
Q

Dividends on preferred stock are considered a

A

Distribution of income not an expense

65
Q

Corporations purchase their outstanding stock for several reasons

A
  1. To provide tax efficient distributions of excess cash to shareholders
  2. Increase earnings per share and return on equity
  3. To provide stock for employee stock compensation contracts or to meet potential so merger needs
  4. To thwart takeover attempts or to reduce # of stockholder
  5. To make a market in the stock
66
Q

Many public held corporations have gone private because

A

They want to eliminate public outside ownership by entirely purchasing all of outstanding stock

67
Q

They accomplish this by doing a leverage buyout which is

A

The company borrows money to finance stock repurchases

68
Q

After reacquiring shares, what can the company do with them?

A
  1. Retire

2. Or hold them in the treasury for reissue

69
Q

Treasury stock

A

If not retired such shares are referred as treasury stock

Is a corporations own stock reacquired after having being issued and fully paid

70
Q

TREASURY STOCK IS NOT A WHAT?

A

Asset

71
Q

When treasury stock is purchased, what is reduced?

A

Assets and stockholders equity

72
Q

Possession of treasury stock does not give corporation THE right to what?

A

vote, exercise preemptive rights as stockholder, to receive cash dividends or to receive asets upon corporate liquidation.

73
Q

Treasury stock is the same as?

A

Unissued capital stock

74
Q

What two methods are used when handling treasury stock?

A

Cost method

And

Par (stated) value method

75
Q

Cost method results in

A

Debiting treasuring stock for reacquisition and reporting this account as deduction from total paid in capital and retained earnings on balance sheet

76
Q

Par value stated method

A

Records all transactions in treasury shares at their par value and reports the treasury stock as a deduction from capital stock ONLY

77
Q

Which method is generally used to account for treasury stock?

A

Cost method

78
Q

Outstanding stock

A

Means the number of shares of issued stock that stockholders own

79
Q

If selling price of treasury stock equal its cost, what would the company record?l

A

Debit cash and credit treasury stock

80
Q

When selling price of shares of treasury stock exceed its cost, what happens?

A

A company credits the difference to paid in capital from treasury stock

81
Q

When a treasury stock is sold below its cost

A

Debits the excess of cost over selling price to paid in capital from treasury stock

82
Q

The accounting effects are similar to sale of treasury stock except that corporations debit what

A

Paid in capital accounts applicable to retired shares instead of cash

83
Q

Companies paying dividends are extremely reluctant to reduce or eliminate their dividend because they fear

A

That the securities market might negatively view this action

84
Q

Very few companies pay dividends in amounts equal to their legally available retained earnings. The major reasons are as follows

A

P. 791

85
Q

Before declaring a dividend, what must management do?

A

Must consider the availability of funds to pay dividends

86
Q

SEC encourages companies to disclose their dividend policy in annual report because

A
  1. Especially those that have earnings but fail to pay dividends
  2. Do not expect to pay dividends in foreseeable future
87
Q

ALL dividends reduce total stockholder equity in the corporation except for what?

A

Stock dividends

88
Q

When declaring a stock dividend, the corporation does not pay out assets or incur a liability, it issued

A

Additional shares of stock to each stockholder and nothing more

89
Q

Cash dividend

A

Board of directors voted on declaration of cash dividends

90
Q

A declared cash dividend is a

A

Liability because payment is generally required very soon, it is usually a current liability

91
Q

A company must declare dividends as either a

A

Certain % of par or as an amount per share

92
Q

Companies do not declare or pay cash dividends on treasury stock

A

True

93
Q

Property dividends

A

Dividends payable in assets of corporation other than cash

94
Q

When declaring property a dividend

A

The corporation should restate at fair value the property will distribute, recognizing any gain or loss as the diff between property fair value and carrying value at date of declaration

95
Q

Liquidating dividends

A

Dividend based on other than retained earnings are sometimes called liquidating dividends

96
Q

Any dividend not based on earnings reduces corporate paid in capital and to that extent it is a what type of dividend?

A

Liquidating

97
Q

If management wishes to “capitalize” part of earnings and this retain earnings in business on a permanent basis it may issue what type of dividend?

A

Stock dividend

98
Q

Stock dividend

A

Is the issuance by a corporation of its own stock to its stockholders on a pro rata basis without receiving any consideration

99
Q

Small ordinary stock dividends

A

Less than 20-25 %

At the time of dividend declaration, company must transfer fair value of stock issued from retained earnings

100
Q

To reduce market price of shares, a common device is used called

A

Stock split

101
Q

Stock split require no

A

Entry

102
Q

Stock split does what?

A

Increases # of shares outstanding

Decrease par or stated value per share

103
Q

Stock dividend does what

A

Increase # of shares outstanding

Does not decrease par value, it increase total par value of outstanding shares

104
Q

Why would someone issue a stock dividend?

A
  • can be a public gesture
  • may want to retain profit in business by capitalizing retained earnings
    ( in such situation, it makes s transfer on declaration of stock dividend from earned capital to contributed capital)
  • to increase profitability of stock, even though it’s a secondary consideration
105
Q

When corporation issue additional shares for the purpose of reducing unit market price, the distribution more closely resembles a stock split than a stock dividend, this results only if

A

of shares issued is more than 20-25 percent of the number of shares previously outstanding g

106
Q

Large stock dividend

A

A stock dividend of more than 20-25 % of number of shares previously outstanding

107
Q

Statement of stockholder equity is presented in following basis format

A

1 balance at beg of period

  1. Additions
  2. Deductions
  3. Balance at end of period
108
Q

Return on common stockholder equity

A

Measures profitability from common stockholder viewpoint

Shows how many dollars of net income the company earned for each dollar invested by owners

109
Q

Trading on equity

A

Describes the practice of using borrowed money or issuing preferred stock in hopes of obtaining a higher rate of return of money used

110
Q

Book value per share

A

Of stock is the amount each share would receive if the company were liquidated on the basis of amounts reported on balance sheet

Acct 302 (7 decks)

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