chapter 4

Question 1

Stockholders Equity section of the statement of financial position discloses?

Answer 1

corporate Capital according to source there are two major sources of corporate Capital

• contributed capital and
• retained earnings

Question 2

Total paid in capital represents?

Answer 2

the amount of assets contributed by stockholders to the corporation for which the stockholders received an ownership interest there are
two types of information disclosed Under Paid in capital
- first the legal capital of the corporation is disclosed legal Capital represents the minimum amount of assets that must be maintained in the corporation for the protection of creditors the
- second type of information disclosed in the paid in capital consists of those amounts paid in by stockholders above the amount designated as legal Capital before Corporation begins operations it must have its stock legally authorized in the state in which it is incorporated the authorization places a maximum on the number of shares that may be issued authorized.

Question 3

Stock May either contain a par value per share or no par depending upon?

Answer 3

the laws of the state of incorporation if state law requires a par value per share the corporate directors must select a dollar amount that will be designated par value on the face of each stock certificate when stock is issued cash is debited for the total cash received and common stock is credited for the total value of shares issued the excess over the par value is credited to paid in capital in excess of par also referred to as additional paid in capital

Question 4

the amount credited to common stock represents

Answer 4

the legal capital for stated value stock the stated value is recorded in the common stock account with the amount above stated value credited to the additional paid in capital account in those states that do not require a par value stock is authorized as no power no parking mean that all the proceeds received upon issuance of the stock are credited to the common stock account when common stock is issued for assets other than cash a problem arises concerning the values to use in recording the transaction if the fair market value of the stock is reliable record the stock at its fair market value if the fair value of the stock is not reliable use the fair market value of the assets received to record the transaction

Question 5

when common stock is issued with other Securities the issue price should be allocated to

Answer 5

• the different Securities based upon the relative fair value of each security the formula used is fair market value of the stock divided by the total fair value of both Securities X the issue price
• if the fair value of one security is not not known use the market value of the security that is known and the remainder is allocated to the other security similarly
• if stock is issued with detachable Lawrence allocate a portion of the issue price to the stock and a portion to the warrant based on the relative Fair values of the two Securities
• if stock is issued with non detachable warrants no value can be assigned to the warrants there for the entire issue price is allocated to the stock
• if stock is issued for donated assets debit the asset account and credit an account entitled donated

Question 6

treasury stock ?

Answer 6

previously issued stock that has been required by the issuing Corporation treasury stock is no longer outstanding stock treasury stock is disclosed as a contra account in the stockholders Equity section of the balance sheet

Question 7

two methods to accounting for treasury stock?

Answer 7

cost method
-cost method requires that when treasury stock is acquired it is recorded at its cost later if the treasury stock is sold for more than it was purchased the treasury stock is removed from the books at Cost however no gain or loss may be recorded from buying or selling treasury shares instead and additional paid in capital treasury stock account is used to record any economic gain if treasury stock is sold for less than its cost
-the additional paid in capital treasury stock account is reduced to 0 and any additional economic loss is debited to retained earnings if the treasury Shares are retired the accounting entries remove the stock from the equity account as if the stock had not been issued there for the treasury stock is removed it The common stock account is reduced by the par value of the common stock and the original additional paid in capital account is reduced by the amount that the account was increase when
Parr method
-that treasury stock is recorded at par at the time the treasury stock is acquired the additional paid in capital account is reduced for the original amount credited when the stock was issued any excess of acquisition cost over the original price is debited to retained earnings

Question 8

preferred stock

Answer 8

• unlike common stock the holders of preferred stock typically do not have the right to vote in corporate matters and
• sually given preference to receive dividends prior to Common shareholders
• event of liquidation preferred stockholders usually receive preference over common stockholders if any assets are left after the outside creditors are paid

Question 9

accounting for preferred stock?

Answer 9

-similar in many respects to that of common before it can be issued preferred stock must first be authorized
-will either contain a par value per share or will be no par when par value preferred stock is issued the amount credited to the preferred stock constitutes legal capital and the amount received in excess of par is credited to an account title paid in capital in excess of par value
-

Question 10

amount credited to the preferred stock constitutes

Answer 10

legal capital and the amount received in excess of par is credited to an account title paid in capital in excess of par value

Question 11

unlike common stock preferred stock

Answer 11

maybe convertible into a specified number of shares preferred stock may also be callable as the option of the issuing

Question 12

at a specified price per share preferred stock can be

Answer 12

cumulative or non-cumulative participating or non-participating if preferred stock is cumulative and a dividend is declared the preferred shareholders receive all previous unpaid dividends before Common shareholders received their portion of the dividend if preferred stock is non-cumulative when a dividend is declared preferred shareholders only received the current your dividend with non-cumulative preferred stock if a dividend is not declared in a particular year the dividend is for gone and is not paid in future years

Question 13

Equity retained

Answer 13

represents the net effect of all previous net incomes and losses prior period adjustments and dividends are primary concern with retained earnings

Question 14

Types of dividends?

Answer 14

• dividends property
• dividends
• stock dividends

Question 15

Three important dates of stock dividends ?

Answer 15

• Declaration date-for cash and property dividend the Declaration date is the date the corporation becomes legally obligated to pay the dividend unlike interest dividends do not accrue their existence depends upon action by the board of directors for cash dividends the entry made on the Declaration date is a debit to retained earnings or to a temporary account entitled dividends declared and a credit to a liability account Title Cash dividends payable………….First the property must be revalued to its fair market value at the date of Declaration this will normally result in a gane being recorded the dividend is then recorded at the fair market value of the property distributed the entry for property dividend on the Declaration date includes a debit to retained earnings or dividends declared and a credit to the account title property dividends payable for the fair market value of the property dividend the
• Record date- the date of record establishes which stockholders should receive the dividend no formal entries are recorded on the date of record
• Finally the payment date- on the date of payment the stockholders received the cash or property dividend on that date the corporation should therefore debit the liability account either cash dividends or property dividends payable and credit the asset distributed either cash or the non- cash asset

Question 16

stock dividends

Answer 16

stock dividends unlike cash and property dividends stock dividends do not require the disbursement of corporate assets a stock dividend represents a distribution of the corporation’s own stock to its stockholders stock dividends are usually stated in percentage terms at the Declaration date the accounting for a stock dividend depends upon its size

• giving it is small less than 20 to 25% of the outstanding shares the dividend should be accounted for based upon the fair market value of the stock to be distributed a company should debit retained earnings for the fair market value of the shares which constitute the stock dividend. since common stock is not issued on the Declaration date a temporary account should be credited for the par value of the shares to be issued this account is title stock dividends distributable the remaining credit should be made to the additional paid in capital account note that stock dividends distributable is not a liability account stock dividends distributable is considered an equity account. also note that the additional paid in capital account is credited when the small stock dividend is declared not when the stock is issued at the date of record the stockholders who will receive the stock dividend are determined no formal journal entries are necessary on the date of record
• finally when the stock dividend is issued the temporary account stock dividend distributable should be debited and the common stock should be credited for this amount

Question 17

If a stock dividend is larger than 25 percent of outstanding shares of stock

Answer 17

it is accounted for as a large stock dividend the amount recorded for large stock dividends is based upon the par value of the shares issued or.

Question 18

accounting for stock splits

Answer 18

like stock dividend stocks split have no effect on the total amount of stockholders Equity some stock splits are reverse split meaning that the total number of shares actually declines however most stock splits do result in the issuance of more shares in addition stock split do not require formal journal entries all that needs to be done is to adjust the par value or stated value per share either up or down in proportion to the increase or decrease in the number of shares

Question 19

Shared based payments

Answer 19

the most important issues and accounting for share base payments are went to measure the payment how to measure the payment and how to allocate the expense accounting for sure base payments depends on whether the share base payment is to employees or non-employees and whether the share base payment is classified as a liability or equity

Question 20

What value shoul share based payment be issued.

Answer 20

payment to none employees for goods or services should be measured at the fair value of the equity instruments issued or the fair value of the goods or services whichever is more reliable. a share-based payment to employees that is classified as Equity should be measured at the grant date fair value of the equity instrument the instrument should be measured at the observable market price of an option with the same or similar terms if an observable market price is not available then the fair value may be estimated using an option pricing model the option pricing model should consider the current price of the underlying stock the exercise price of the option the expected life of the option the expected volatility of the underline stock expected dividends on the stock and the risk-free interest rate during the expected option term if an estimated value cannot be determined than the intrinsic value at the end of each reporting period can be used the value of equity instrument is net any amount the employee is obligated to pay for the instrument compensation cost should be classified as equity and amortize straight line over the requisite service. The requisite service period Is the period In which employees are required to provide services.

Question 21

requisite service period Is?

Answer 21

The requisite service period Is the period In which employees are required to provide services. firms must estimate the number of forfeitures it however if the employee renders the requisite service and the shares expire or are not exercised a previously recognized compensation cost is not reversed if a sheer base payment is classified as a liability the liability is the measured at each reporting period as the fair value of the liability incurred final measurement occurs on the settlement date

Question 22

an example of a share-based payment classified as a liability is stock appreciation

Answer 22

stock appreciation rights and title the holder to receive cash for the increase in the value of the stock over a period of time there for at the end of each reporting PERIOD. The fair value of the liability owed to employees is measured compensation cost is based upon the change in Fair Value in each reporting PERIOD If the requisite service PERIOD Has not been completed the compensation cost recognized is equal to a percentage of the requisite sevice that has been rendered as of that date

Question 23

earnings-per-share

Answer 23

earnings per common share is a required disclosure on the face of the income statement it provides users with information needed to assess the profitability of the firm if the earnings-per-share figure is divided into the market price of the stock the price earnings ratio results this price earnings ratio allows users to assess the relative risk associated with the stocks present market value

is required to be disclosed on the face of the income statement by companies whose stock is publicly traded on the income statement earnings per share is required to be disclosed for income or loss from continuing operations and for net income. if a company has discontinued operations or extraordinary items earnings per share amounts on each of these items may be disclosed either on the face of the income statement or in the footnotes the calculation of earnings per share depends principally upon the corporation’s capital structure

Question 24

two kinds of capital structures for earnings-per-share

Answer 24

simple and complex a simple capital structure is one that contains no potentially diluted Securities such as convertible bonds convertible preferred stock stock options and warrants and contingent share agreements the presence of these Securities and agreements could dilute or reduce earnings per common share when these Securities are not part of the capital structure earnings per share for a period Is based solely upon common shares outstanding during the period This is called basic earnings per share regardless of whether the capital structure is simple or complex all earnings-per-share computations take the same basic form that is the numerator consists of a dollar amount from the income statement such as net income and the denominator consists of a weighted average number of common shares outstanding when the capital structure is complexed additional adjustments are made to this basic formula

Question 25

basic earnings per share Formula

Answer 25

the formula for basic earnings per share is net income available to Common shareholders divided by the weighted average common shares outstanding the numerator for the basic earnings per share calculation is net income available to Common shareholders less preferred dividends that must be paid Special Care should be taken here with preferred dividends current your preferred Dividends are subtracted if they are cumulative because they must eventually be paid however for non cumulative preferred stock the dividend is only subtracted if the dividend was declared the denominator is the weighted average number of shares of common stock outstanding during the time. It is important to note that for earnings-per-share purposes if the common shares on which a stock dividend or split or base or outstanding the entire year this year’s issued in the stock dividend or split are also considered outstanding for the entire year on the other hand if additional common Shares are issued for cash sometime after the beginning of the year any stock dividend or split shares would be weighted from the time the additional shares were issued 1 additional Point needs to be made concerning stock dividends and splits earnings per share disclosures from previous periods should be retroactive Lee adjusted for the stock dividend or stock split shares

Question 26

additional point when you are required to disclose additional earnings-per-share

Answer 26

figures for discontinued operations or extraordinary items the same number of weighted average shares are used in each calculation in addition the adjustment for preferred dividends if any is made for income from continuing operations income Next door night and net income next we turn our attention to a complex capital structure remember a

Question 27

complex capital structure remember a capital structure is complex if it contains any of the following types of Securities

Answer 27

• convertible bonds
• convertible preferred stock
• stock options
• warrants or contingent share agreements

Question 28

Securities and agreements on earnings per share may be diluted

Answer 28

hat is earnings per share based upon the weighted average number of common shares outstanding may be reduced this is called diluted earnings per share

Question 29

when earnings per share is diluted because of stock options warrants convertible Securities and other diluted Securities a

Answer 29

dual presentation of earnings per share is required on the face of the income statement this do a presentation consists of reporting basic earnings per share and diluted earnings per share diluted earnings per share is computed by incorporating the effects of all potentially diluted Securities in the basic computation if basic earnings per share is decreased when the effects of potentially diluted Securities are Incorporated the potentially deleted Securities are actually diluted and a dual presentation of earnings per share is required on the face of the income statement

Question 30

If the diluted shares increase.

Answer 30

the other hand with basic earnings per share is increased when the effects of potentially diluted Securities are Incorporated the potentially diluted Securities are anti diluted and a dual presentation of earnings per share is not reported on the face of the income statement

Question 31

in calculating diluted earnings per share stock options rights and warrants use ?

Answer 31

the treasury stock method this assumes the exercise of all options rights and warrants then it is assumed that the proceeds from the exercise of these Securities are used to reacquire treasury stock at the current Year’s average market price for the stock in other words you add the number of shares of stock that would be issued if the options were exercised and you subtract the number of shares that you could hypothetically repurchase

Question 32

proceeds a second important calculation for diluted earnings per share is for the conversion of preferred stock for convertible preferred stock?

Answer 32

the IF converted method is used if the preferred stock is convertible then preferred dividend should not be subtracted from the numerator because the preferred shareholders are theoretically common shareholders

Question 33

The weighted average shares issued

Answer 33

assumes conversion occurred at the beginning of the year or at the issue date of the preferred stock if the stock was issued during the year