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Financial Accounting and Reporting > Equity > Flashcards

Equity Flashcards

1
Q

RE is decreased for both Cash and property dividends

A

True. EQUITY WILL NOT GET IMPACTED AT ALL

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2
Q

Excercise of stock rights increases APIC and no effect on NI

A

True

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3
Q

Dividends exceed RE

A

Liquidating dividends (it will decrease both APIC and RE)

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4
Q

If using Par Value, there is no need to use APIC

A

Under Stock method (Large stock Greater than 20-25%)

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5
Q

Entry to record dividend on declaration date:

A

RE (FV) 800

   Dividends Payable (FV)          800
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6
Q

How would you record liquidating dividends on the date of declaration?

A

RE XXX
APIC XXX
Dividends Payable XXX

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7
Q

Quasi-reorganization (fresh start)

A

The BS carrying amounts are stated at FV. The deficit in RE is eliminated. Paid-in capital (par value and/or APIC) is adjusted, but not below zero.

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8
Q

Company with a deficit in RE can eliminate deficit by reorganizing as a ___________________

A

NEW COMPANY

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8
Q

Treasury Stock, PAR VALUE Method reduces the amount shown as common stock. It is not reported directly on the FS

A

True

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9
Q

Reissuance of Treasury Stock is treated as a regular issuance of common stock except that Treasury stock is credited rather than common stock

A

True

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9
Q

Treasury stock does not affect income statement accounts. It only affects _________

A

Equity accounts

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9
Q

JE when shares are retired (PAR Method)

A

Common Stock XXX
Treasury Stock XXX

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10
Q

For which purposes, retained earnings should be appropriated?

A
  1. Debt reduction
  2. Building construction
  3. Future Stock Buybacks
  4. Plant expansion
  5. Reserve against possible (not probable and estimable) lawsuits
  6. Research and development
  7. Company acquisitions
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11
Q

Previously unissued common stock

A

Re-issued shares

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12
Q

Restricting RE is done through an appropriation (i.e. a reserve).

A

True

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13
Q

Property Dividends increases/reduces ______________

A

NET INCOME (as the case may be)

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14
Q

Stock dividends will cause increase in _______________ and decrease in ____________

A

Increase in APIC (common stock)
Decrease in RE

Therefore, no change in TOTAL EQUITY or EQUITY.
STOCK dividend never affects a company’s assets or liabilities.

Note: Because the stock is usually not distributed on the date of declaration, a temp stockholder’s equity account (i.e. common stock dividends distributable) may be credited instead of common stock. On the distribution date, a second entry is made to debit common stock dividends distributable and credit common stock.

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15
Q

Scrip dividends (when company doesn’t have enough cash to distribute dividends) : A dividend issued in the form of a NOTE PAYABLE.

A

RE XXX
Note Payable XXX

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16
Q

True or False: Acquired some of its common stock - means treasury stock (which will reduce Equity and will increase book value per share)

A

True

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17
Q

Unappropriated RE

A

Dividends

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18
Q

True or False: Disclosure of EPS is required for both Basic EPS and Diluted EPS

A

True

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19
Q

All publicly held companies are required to report EPS for the following 3 income statement items:

A
  1. Income from continuing operations (in the income statement)
  2. Income from discontinued operations (either income statement or notes to financial statements)
  3. Net Income (in the income statement)
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20
Q

When the company’s intent is to hold the shares indefinitely, which method is used?

A

PAR VALUE

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21
Q

If the repurchase price is greater than than par value, debit to APIC-T/S and/or retained earnings is required.

A
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22
Q

Accrual based NI, opposite of cash flow from operating activity

A

Increase in prepaid rent +
Decrease in AR (-)
Decrease in AP +
Increase in Unearned Revenue (-)
Increase in Wages payable (-)

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23
Q

Property dividends are valued at FMV of the property at the date of declaration

A

True

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24
Q

When a company makes a liquidating dividend, it debits __________

A

APIC (Common stock cannot be debited because it is considered legal capital rather than retained earnings). Common stock cannot be debited because it is considered legal capital which is only eliminated upon the dissolution of the corporation. Liquidating dividend is a dividend paid which is considered a return of the shareholders’ investment.

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25
Q

REPURCHASING common stock affects the number of shares __________. It does not affect shares issued or shares authorized. Shares outstanding equals shares issued less treasury shares.

A

OUTSTANDING

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25
Q

Large stock dividends are recorded at par. A stock dividend of 40% of the shares outstanding is considered a large stock dividend.

A

True

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26
Q

___________ preferred stock refers to the sharing with common shareholders in dividend distribution beyond a specified level while a convertible preferred stock allows the option of exchanging for common stock.

A

PARTICIPATING- Participating preferred stock refers to the sharing with common shareholders in dividend distribution beyond a specified level.

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27
Q

Preferred stockholders have the right to be paid any dividends in arrears before the common stockholders are paid a dividend so preferred stock is ________

A

CUMULATIVE

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28
Q

A form of compensation which allows employees to receive stock or cash for the difference between the stated value and the market value is known as ____________

A

STOCK APPRECIATION RIGHTS

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29
Q

Anything above par value is _____ no matter if the value is provided in lumpsum or par value per share or above per share for calculation purpose.

A

APIC

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30
Q

Loss on sale of T stock to be deducted from ________________

A

Retained Earnings

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31
Q

Retained Earnings Formula

A

NI less Dividends = RE

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32
Q

Sale of Tstock ______________

A

Enter as positive value

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33
Q

Repurchase Tstock or Purchase Tstock : enter as ___________

A

NEGATIVE value and to be reduced from number of common stock (purchasing its own shares will reduce the total no. of shares held)

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34
Q

Declared and paid Dividends to be reduced from ______________

A

Retained Earnings balance

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35
Q

STOCKHOLDER’S EQUITY

A

Contributed (paid-in)Capital
+ Preferred Stock
+ Common Stock
_______________________________
APIC (from various sources)
=Total Paid-in Capital

NCI (if Consolidated financial Statements)

Retained Earnings
(appropriated and unappropriated)
AOCI
(-) Treasury Stock (Cost method)
__________________________________
Total stockholders’ equity

36
Q

If exercise price > Par value, always creates APIC (RE are not affected)

A

True

Cash (exercise price * No. of shares) XXXX
Common stock (par) XXXX
APIC (exercise price - par) XXXX

37
Q

Treasury stock is a company stock that is repurchased but not retired. Because a company is not allowed to report owning its common stock as an investment, T/S is recorded as a contra account (debit balance) to stockholders’ equity.

A
38
Q

Treasury Stock COST METHOD - no effect on APIC or RE. JE for cost method

A

Treasury stock (cost method) XXX

          Cash                                                  XXX
39
Q

PAR VALUE : Repurchase price > par and original issue price

A

Treasury stock (par) XXX
APIC - C/S (original amount) XXX
APIC - T/S XXX
Retained Earnings XXX
Cash XXX

40
Q

PAR VALUE: Repurchase price>par, but < original issue price

A

Treasury stock (par) XXX
APIC-C/S (original amount) XXX
Cash XXX
APIC-T/S XXX

41
Q

QUASI-REORGANIZATION - it’s purpose is to give a corporation the opportunity to ____________________

A

eliminate a deficit in RE, giving the company a fresh start.

STEPS:
1. Revalue assets and liabilities to FV, if required
2. Eliminate deficit in RE
3. Net adjustments against paid-in capital, but not below zero.

A corporation with a large deficit balance (i.e. debit) in Retained Earnings may face legal proceedings (e.g. bankruptcy) or may be forced to legally reorganize as a new entity. Although rare, GAAP does permit such a corporation to eliminate the deficit balance and restate its balance sheet to FV in a quasi-reorganization as means for a fresh start.

A quasi-reorganization should not result in a write-up of net assets (e.g. equity) and RE must be zeroed out. Once the quasi-reorganization receives shareholder approval, readjusments are made.

Because no equity account may have a debit balance after a quasi-reorganization, a corp can choose to reduce the par value of the stock first and then adjust APIC accordingly.

42
Q

A withdrawal by a partner represents a return of investment and does not impact the allocation of Net income/loss. Instead it reduced the ____________

A

partner’s capital

43
Q

Stock split does not affect APIC.

A

Total par value outstanding does not change.

44
Q

STOCK WARRANTS are issued to existing shareholders so that they can purchase additional shares of stock in order to maintain their ownership percentage.

A

True

45
Q

Dividends payable date

A

CL and CA will decrease. No impact on retained earnings on payment date.

46
Q

When detachable stock warrants are issued with preferred stock, the sale proceeds must be allocated between the warrants and the stock ____________

A

based on relative FV on the date issued

47
Q

If FV of only one instrument is known, that amount is allocated first and ____________

A

the remainder of the proceeds is assigned to the other security

48
Q

e.g. Lifepath company issued preferred stock with detachable common stock warrants. The issue price exceeded the sum of the warrants’ FV and the preferred stocks par value. The preferred stocks FV was not determinable.

A

The FV of the warrants should be assigned to the warrants outstanding.

49
Q

Stock dividends increase common stock and reduce retained earnings (both are equity accounts so total equity is unchanged).

A

Stock dividends = Total equity remains unchanged

50
Q

BONUS METHOD

  1. Excess amount paid to retiring partner over capital account
  2. Capital accounts get affected only for the REMAINING PARTNERS
  3. Impact on capital accounts - Reduced by % share of bonus based on new profit/loss ratios
A

GOODWILL METHOD

  1. Recorded as new goodwill
  2. Capital accounts get affected for all partners (inclusing retiring partner)
  3. Increased for % share of goodwill based on old profit/loss ratios
51
Q

EQUITY Method (Significant Influence)

A

Report only Net Income

51
Q

FAIR VALUE METHOD

A

DIVIDEND INCOME *% OWNERSHIP

52
Q

When management plans to disspose of long-lived assets and limited-lived intangibles, the assets shall be reported at the lower of ________

A

of CV or FV less cost to sell

53
Q

COST METHOD FOR T STOCK TRANSACTIONS

A

The APIC - treasury stock account will absorb all losses (debit) when shares are acquired and resold at a lower price (loss).

54
Q

Treasury stock REPURCHASED AND RECORDED at Cost

A

Treasury Stock (Cost ) XX
Cash XX

55
Q

Reissued at price greater than cost

A

Cash XX
Treasury stock (Cost) XXX
APIC - Treasury Stock XX

56
Q

Reissued at a price less than the cost

A

Cash XX
APIC XX
RE XX
Treasury stock (cost) XX

57
Q

Liabilities are assumed at

A

PV

57
Q

Par method and Cost Method

A
58
Q

Report assets at

A

FV

59
Q

Small stock dividends (less than 20-25%)

A

Record At Fair Value (it will affect both APIC and RE)

JE

RE (FV) XX
Common stock (Par value) XX
APIC (FV-Par) XX

60
Q

Large Stock dividends (Greater than 20-25%)

A

Record At Par Value (it will not affect APIC. It will only affect RE. APIC is not affected since large stock dividends are recorded at par value, not fair value.

JE

RE XXXX (par value)
COmmon Stock XXXX (par value)

61
Q

treasury stock distributed to officers as part of Stock Comp plan

A

Add to common stock outstanding

62
Q

Book value per share

A

Shareholder’s equity/No. of common shares

  1. Steps - reduce liquidation value of preferred stock
  2. No need to reduce dividends on preferred stock when it is noncumulative preferred stock
  3. Reduce dividends whey cumulative preferred stocks are provided in the question (Reduce dividends in arrears as well)
63
Q

Liquidating dividend (dividends paid more than RE)

A

willr educe both RE and APIC

RE will go Zero and balance will be reduced from APIC

64
Q

Warrants report at FV - allocate price per bond and warrant

A

it increases APIC

65
Q

If T stock is reissued at a price less than cost, APIC T stock is first reduced and any remaining difference is charged or debited to RE

A
66
Q

JE for conversion from preferred stock to common stock

A

Preferred stock XXXX
APIC - preferred stock XXXX
COmmon Stock XXXX
APIC common stock (plug) XXXX

67
Q

Treasury stock :no gain allowed on income statement

A

True

68
Q

Treasury stock purchased will impact RE

A

= Issue price of T-stock less Original issu price of common stock

69
Q

If T stock is reacquired at less than original issue price, the difference is recorded as Credit (Increase) to_________

A

APIC - retired stock

70
Q

If reacquired for more than the originalissue price , the difference is first recorded as a debit to any APIC existing from previous stock retirements, and if required _____________

A

RE

71
Q

Fair value of RE less Gain on increase in value of dividends from cost of shares will show __________

A

reduction in RE at year end

72
Q

Non cash asset subject to a liability (e.g. mortgage)

A

report at asset’s FV less PV of Liability

It will increase partner’s capital

73
Q

Recording a PROPERTY DIVIDEND is a 2 step process on the date of declaration:

  1. At asset’s FV
  2. If FV differs from net CV, a gain or loss is recognized.(and any gain/loss to be recognized as if the asset was sold)
A

Date of declaration, JE

  1. Asset (FV-CV) XX
    Gain on asset XX
  2. RE (FV) XX
    Dividends Payable XX
  • Date of Record - no JE

*Date of payment of property dividend
Dividends Payable (FV) XX
Asset (FV) XX

74
Q

APIC is decreased as a result of issuance and retirement of own shared.

A

True

75
Q

(Add div in arrears while calculating Preferred stock dividends payable)

A

Preferred stock

76
Q

Declaration of common stock dividend

A

JE

RE XX
COmmon Stock Distributed XX

77
Q

T stock

A

Take original issue price and not the issue price

78
Q

If mkt value is more than par value the n APIC will INCREASE when Stock Dividend is being declared

A

True

79
Q

Common stock that contains an UNCONDITIONAL REDEMPTION FEATURE should be reported on the issuer’s books as a ________ on the date of issance because there is an obligation of a cash outflow in the future that the company has no ability to prevent.

A

LIABILITY

80
Q

Credit sales less Expenses

A

= NI

81
Q

Previously unissued share will be part of ISSUED Shares for EPS or equity questions

A

TRue

82
Q

There are 2 methods used to account for T/S transactions: Cost and Par Value

A

COST: T/S is recorded at cost (i.e. purchase price), so there is NO effect on APIC or Retained Earnings.

PAR VALUE: T/S is recorded at par value and any APIC-C/S from the original issuance is removed (i.e. debited). If shares are reacquired for an amount less than the original issue price but more than par value, the difference is credited to APIC-T/S, with no effect on RETAINED EARNINGS.

83
Q

Property dividends are recorded at the FV of the property on the date of declaration. If the FV differs from the net CV, a gain or loss is recognized.

A

RE are decreased by yhe FV of the property and either increased for any gain or decreased for any loss recognized.

84
Q

WHen stock is exchanged for a noncash asset/e.g. land, the asset is recorded at its FV. If more than one class of stock is issued in exchange for that asset, the relative FV of each stock is determined using __________

A

either the proportional, relative or incremental methods.

85
Q

(1) If a co. sells T stock at a price that exceeds its cost, this excess should be

(2) If Tstock is sold at a price less than the cost, the excess should be or reacquisition price is greater than the original issue price

A

(1) Credited to APIC

2) APIC should be debited or reduced or RE is decreased or debited only if APIC is not sufficient

86
Q

Liquidating dividends on the date of declaration, RE and APIC will be debited

A

(1) Date of declaration (a liability is incurred)
RE XX
APIC XX
Dividends Payable (liability) XX

(2) Date of record - no entry (Recordkeeping function)

(3) Date of payment (liability is satisfied and removed from the books)
JE
Dividends payable XX
Cash XX

87
Q

When T stock is retired

A

Common Stock (par) XX
APIC-Common Stock XX
Cash XX
APIC-retired stock XX

88
Q

(1) T-stock is considered as issued but not ___________
(2) Convertible preferred stock is not considered outstanding until the _____________

A

(1) OUTSTANDING

(2) Conversion takes place

89
Q

When a dividend is declared, a liability is incurred. For cumulative preferred stock, any undeclared dividend in the previous year accumulates as DIVIDEND IN ARREARS. Because dividends in arrears represent undeclared dividends, they are not a liability and not accrued. However, they are _______________ in the notes to the financial statements.

A

disclosed

90
Q

Repurchased Treasury stock

JE
____________________
Treasury Stock XX
Cash XX

A

Retired
JE
________________
Common stock (par) XX
APIC - Common stock XX
Treasury Stock XX
APIC - Treasury stock XX

91
Q

Repurchased and retired T stock

C/S XX
APIC (C/S) XX
Retained Earnings XX
Cash XX

A

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