Chapter 18

Question 1

How to record the extra costs associated with an IPO?

Answer 1

Debit - Additional Paid in Capital

Credit - Cash

Question 2

How to account for the sale of stock?

Answer 2

Debit - Cash (Amount received)
Credit - Common Stock (Par Value x # of shares)
Credit - Additional Paid in Capital

Ex:
Sold for $1,000, 10 shares of $1 Par Value stock
o Dr. Cash 1,000
o Cr. Common Stock 10
o Cr. Additional Paid-In Capital 990

Question 3

How to allocate proceeds from a lump sale of preferred and common stock?

Answer 3

The relative fair market value proportional to the total amount sold.

Question 4

Any dividends not declared by the BOD and not paid to

the Preferred Shareholders are termed

Answer 4

“Dividends in Arrears” (NOT RECORDED, but must be disclosed in
the financial statements)

Question 5

When stock is issued in a non-cash transaction, the transaction
is recorded at the more clearly determinable of:

Answer 5

o Fair market value of the stock

o Fair market value of the non-cash consideration

Question 6

Convertible Preferred Stock:

Answer 6

at holder’s option, may be converted to some predetermined number of shares of Common Stock

Question 7

Callable Preferred Stock:

Answer 7

at company’s option, may call/buy back the shares of

Preferred Stock at some predetermined price

Question 8

Participating Preferred Stock:

Answer 8

may share in any profit distribution above

distribution beyond a prescribed rate

Question 9

When Treasury Stock is “resold”, there is:

Answer 9

NO gain or loss recorded in the Income Statement

Question 10

Journal Entry to record buy back of stock:

Answer 10

Debit - Treasury Stock
Credit - Cash

Ex:
Journal Entry to record buy back of stock at $25 per share
o Dr. Treasury Stock $25
o Cr. Cash $25

Question 11

How to record a sale of treasury stock above cost:

Answer 11

Debit - Cash
Credit - Treasury Stock
Credit - Treasury APIC

Example of re-sale of $30 treasury stock at cost of $25
o Dr. Cash $30
o Cr. Treasury Stock $25
o Cr. Treasury Stock - APIC $ 5

Question 12

How to record a sale of treasury stock below cost:

Answer 12

Debit - Cash
Debit - Treasury APIC
Credit - Treasury Stock

Example of re-sale of $20 treasury stock at cost of $25
o Dr. Cash $20
o Dr. Treasury Stock – APIC $ 5
o Cr. Treasury Stock $25

Question 13

ALL Dividends except ________ reduce Stockholder’s

Equity.

Answer 13

ALL Dividends except Stock Dividends reduce Stockholder’s Equity because with all of the other dividends, there is a distribution of company assets

Question 14

How to record cash dividends:

Answer 14

Debit - Dividends or Retained Earnings

Credit - Cash

Question 15

How to record stock dividends:

Answer 15

Debit - Retained Earnings

Credit - Common Stock

Question 16

What is the entry recorded on the date of declaration of dividends?

Answer 16

Debit - Dividends of Retained Earnings
Credit - Dividends Payable

Date of Declaration: dividends become a legal obligation and are
recorded by the company

Question 17

What is the entry recorded on the date of record of dividends?

Answer 17

NO ENTRY
Date of Record: no entry; companies determine who owns the shares of stock on that date and that is who will be paid dividends

Question 18

What is the entry recorded on the date of payment of dividends?

Answer 18

Debit - Dividends Payable
Credit - Cash
Date of Payment: date that the dividends are actually paid

Question 19

What is a “small” stock dividend and what price should it be recorded at?

Answer 19

• “Small” Stock Dividend is less than 25% of shares outstanding
• Record at “fair value” of shares given

Question 20

How do you record a “small” stock dividend?

Answer 20

Debit - Retained Earnings
Credit - Common Stock
Credit - Common Stock APIC

Question 21

What is a “large” stock dividend and what price should it be recorded at?

Answer 21

• “Large” Stock Dividend is greater than 25% of shares
  outstanding
• Record at “par value”

Question 22

How do you record a “large” stock dividend?

Answer 22

Debit - Retained Earnings

Credit - Common Stock

Question 23

How to record a stock split?

Answer 23

NO Journal Entry

In the Stockholders’ Ledger, adjust the following for the effect of the Stock Split.