Equity Flashcards
RE is decreased for both Cash and property dividends
True. EQUITY WILL NOT GET IMPACTED AT ALL
Excercise of stock rights increases APIC and no effect on NI
True
Dividends exceed RE
Liquidating dividends (it will decrease both APIC and RE)
If using Par Value, there is no need to use APIC
Under Stock method (Large stock Greater than 20-25%)
Entry to record dividend on declaration date:
RE (FV) 800
Dividends Payable (FV) 800
How would you record liquidating dividends on the date of declaration?
RE XXX
APIC XXX
Dividends Payable XXX
Quasi-reorganization (fresh start)
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.
Company with a deficit in RE can eliminate deficit by reorganizing as a ___________________
NEW COMPANY
Treasury Stock, PAR VALUE Method reduces the amount shown as common stock. It is not reported directly on the FS
True
Reissuance of Treasury Stock is treated as a regular issuance of common stock except that Treasury stock is credited rather than common stock
True
Treasury stock does not affect income statement accounts. It only affects _________
Equity accounts
JE when shares are retired (PAR Method)
Common Stock XXX
Treasury Stock XXX
For which purposes, retained earnings should be appropriated?
- Debt reduction
- Building construction
- Future Stock Buybacks
- Plant expansion
- Reserve against possible (not probable and estimable) lawsuits
- Research and development
- Company acquisitions
Previously unissued common stock
Re-issued shares
Restricting RE is done through an appropriation (i.e. a reserve).
True
Property Dividends increases/reduces ______________
NET INCOME (as the case may be)
Stock dividends will cause increase in _______________ and decrease in ____________
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.
Scrip dividends (when company doesn’t have enough cash to distribute dividends) : A dividend issued in the form of a NOTE PAYABLE.
RE XXX
Note Payable XXX
True or False: Acquired some of its common stock - means treasury stock (which will reduce Equity and will increase book value per share)
True
Unappropriated RE
Dividends
True or False: Disclosure of EPS is required for both Basic EPS and Diluted EPS
True
All publicly held companies are required to report EPS for the following 3 income statement items:
- Income from continuing operations (in the income statement)
- Income from discontinued operations (either income statement or notes to financial statements)
- Net Income (in the income statement)
When the company’s intent is to hold the shares indefinitely, which method is used?
PAR VALUE
If the repurchase price is greater than than par value, debit to APIC-T/S and/or retained earnings is required.
Accrual based NI, opposite of cash flow from operating activity
Increase in prepaid rent +
Decrease in AR (-)
Decrease in AP +
Increase in Unearned Revenue (-)
Increase in Wages payable (-)
Property dividends are valued at FMV of the property at the date of declaration
True
When a company makes a liquidating dividend, it debits __________
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.
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.
OUTSTANDING
Large stock dividends are recorded at par. A stock dividend of 40% of the shares outstanding is considered a large stock dividend.
True
___________ 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.
PARTICIPATING- Participating preferred stock refers to the sharing with common shareholders in dividend distribution beyond a specified level.
Preferred stockholders have the right to be paid any dividends in arrears before the common stockholders are paid a dividend so preferred stock is ________
CUMULATIVE
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 ____________
STOCK APPRECIATION RIGHTS
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.
APIC
Loss on sale of T stock to be deducted from ________________
Retained Earnings
Retained Earnings Formula
NI less Dividends = RE
Sale of Tstock ______________
Enter as positive value
Repurchase Tstock or Purchase Tstock : enter as ___________
NEGATIVE value and to be reduced from number of common stock (purchasing its own shares will reduce the total no. of shares held)
Declared and paid Dividends to be reduced from ______________
Retained Earnings balance
STOCKHOLDER’S EQUITY
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
If exercise price > Par value, always creates APIC (RE are not affected)
True
Cash (exercise price * No. of shares) XXXX
Common stock (par) XXXX
APIC (exercise price - par) XXXX
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.
Treasury Stock COST METHOD - no effect on APIC or RE. JE for cost method
Treasury stock (cost method) XXX
Cash XXX
PAR VALUE : Repurchase price > par and original issue price
Treasury stock (par) XXX
APIC - C/S (original amount) XXX
APIC - T/S XXX
Retained Earnings XXX
Cash XXX
PAR VALUE: Repurchase price>par, but < original issue price
Treasury stock (par) XXX
APIC-C/S (original amount) XXX
Cash XXX
APIC-T/S XXX
QUASI-REORGANIZATION - it’s purpose is to give a corporation the opportunity to ____________________
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.
A withdrawal by a partner represents a return of investment and does not impact the allocation of Net income/loss. Instead it reduced the ____________
partner’s capital
Stock split does not affect APIC.
Total par value outstanding does not change.
STOCK WARRANTS are issued to existing shareholders so that they can purchase additional shares of stock in order to maintain their ownership percentage.
True
Dividends payable date
CL and CA will decrease. No impact on retained earnings on payment date.
When detachable stock warrants are issued with preferred stock, the sale proceeds must be allocated between the warrants and the stock ____________
based on relative FV on the date issued
If FV of only one instrument is known, that amount is allocated first and ____________
the remainder of the proceeds is assigned to the other security
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.
The FV of the warrants should be assigned to the warrants outstanding.
Stock dividends increase common stock and reduce retained earnings (both are equity accounts so total equity is unchanged).
Stock dividends = Total equity remains unchanged
BONUS METHOD
- Excess amount paid to retiring partner over capital account
- Capital accounts get affected only for the REMAINING PARTNERS
- Impact on capital accounts - Reduced by % share of bonus based on new profit/loss ratios
GOODWILL METHOD
- Recorded as new goodwill
- Capital accounts get affected for all partners (inclusing retiring partner)
- Increased for % share of goodwill based on old profit/loss ratios
EQUITY Method (Significant Influence)
Report only Net Income
FAIR VALUE METHOD
DIVIDEND INCOME *% OWNERSHIP
When management plans to disspose of long-lived assets and limited-lived intangibles, the assets shall be reported at the lower of ________
of CV or FV less cost to sell
COST METHOD FOR T STOCK TRANSACTIONS
The APIC - treasury stock account will absorb all losses (debit) when shares are acquired and resold at a lower price (loss).
Treasury stock REPURCHASED AND RECORDED at Cost
Treasury Stock (Cost ) XX
Cash XX
Reissued at price greater than cost
Cash XX
Treasury stock (Cost) XXX
APIC - Treasury Stock XX
Reissued at a price less than the cost
Cash XX
APIC XX
RE XX
Treasury stock (cost) XX
Liabilities are assumed at
PV
Par method and Cost Method
Report assets at
FV
Small stock dividends (less than 20-25%)
Record At Fair Value (it will affect both APIC and RE)
JE
RE (FV) XX
Common stock (Par value) XX
APIC (FV-Par) XX
Large Stock dividends (Greater than 20-25%)
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)
treasury stock distributed to officers as part of Stock Comp plan
Add to common stock outstanding
Book value per share
Shareholder’s equity/No. of common shares
- Steps - reduce liquidation value of preferred stock
- No need to reduce dividends on preferred stock when it is noncumulative preferred stock
- Reduce dividends whey cumulative preferred stocks are provided in the question (Reduce dividends in arrears as well)
Liquidating dividend (dividends paid more than RE)
willr educe both RE and APIC
RE will go Zero and balance will be reduced from APIC
Warrants report at FV - allocate price per bond and warrant
it increases APIC
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
JE for conversion from preferred stock to common stock
Preferred stock XXXX
APIC - preferred stock XXXX
COmmon Stock XXXX
APIC common stock (plug) XXXX
Treasury stock :no gain allowed on income statement
True
Treasury stock purchased will impact RE
= Issue price of T-stock less Original issu price of common stock
If T stock is reacquired at less than original issue price, the difference is recorded as Credit (Increase) to_________
APIC - retired stock
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 _____________
RE
Fair value of RE less Gain on increase in value of dividends from cost of shares will show __________
reduction in RE at year end
Non cash asset subject to a liability (e.g. mortgage)
report at asset’s FV less PV of Liability
It will increase partner’s capital
Recording a PROPERTY DIVIDEND is a 2 step process on the date of declaration:
- At asset’s FV
- 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)
Date of declaration, JE
- Asset (FV-CV) XX
Gain on asset XX - RE (FV) XX
Dividends Payable XX
- Date of Record - no JE
*Date of payment of property dividend
Dividends Payable (FV) XX
Asset (FV) XX
APIC is decreased as a result of issuance and retirement of own shared.
True
(Add div in arrears while calculating Preferred stock dividends payable)
Preferred stock
Declaration of common stock dividend
JE
RE XX
COmmon Stock Distributed XX
T stock
Take original issue price and not the issue price
If mkt value is more than par value the n APIC will INCREASE when Stock Dividend is being declared
True
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.
LIABILITY
Credit sales less Expenses
= NI
Previously unissued share will be part of ISSUED Shares for EPS or equity questions
TRue
There are 2 methods used to account for T/S transactions: Cost and Par Value
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.
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.
RE are decreased by yhe FV of the property and either increased for any gain or decreased for any loss recognized.
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 __________
either the proportional, relative or incremental methods.
(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
(1) Credited to APIC
2) APIC should be debited or reduced or RE is decreased or debited only if APIC is not sufficient
Liquidating dividends on the date of declaration, RE and APIC will be debited
(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
When T stock is retired
Common Stock (par) XX
APIC-Common Stock XX
Cash XX
APIC-retired stock XX
(1) T-stock is considered as issued but not ___________
(2) Convertible preferred stock is not considered outstanding until the _____________
(1) OUTSTANDING
(2) Conversion takes place
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.
disclosed
Repurchased Treasury stock
JE
____________________
Treasury Stock XX
Cash XX
Retired
JE
________________
Common stock (par) XX
APIC - Common stock XX
Treasury Stock XX
APIC - Treasury stock XX
Repurchased and retired T stock
C/S XX
APIC (C/S) XX
Retained Earnings XX
Cash XX
