Equity Flashcards
Quasi-Reorganization
Purpose: Eliminate deficit in Retain Earning, Giving entity a fresh start.
1-Revalue asset & liabilities to fair value
2-Eliminate deficit in retained earnings
3-Net adjustment against paid-in capital, but not below zero.
Treasury Stock
Cost Method Vs Par Method
Cost method
*Gain/loss calculated upon reissue
Vs.
Par/Stated Method
*Gain/loss calculated immediately upon repurchase
Both Methods:
-Gain/Loss are recorded as a direct adjustment to stockholder equity.
-Never included in net income.
-Held Treasury Stock is not “outstanding”.
Accumulated Other Comprehensive Income (AOCI)
“ Put CF Hedges in the C U P
OCI Not recognized on net income (income statement)
Put CF Hedges -Derivatives
in the
(C)urrency transaction adjustment
(U)nrealized gain/loss on AFS Debt-Fair Value OCI
(P)ension Adjustments
Retained Earnings Formula
Net Income /Loss
-Dividends(Cash, property, & Stock) Declared
+/- Prior Period Adjustments
+/-Accounting Changes Report Retrospectively
=Retained Earnings
Current Year Change in Retained Earnings
+Beginning Retained Earnings
=Ending Retained Earning
Stockholder’s Equity Formula
C
P
A
R
A
T
Stock Equity(SE)=Total Asset - Total Liability
SE=Paid-up capital +Retained Earning-Treasury stock
Balance sheet -stockholder equity
(C)apital Stock (preferred stock, common stock)
(P)referred Stock
(A)dditional Paid-in Capital (APIC)
(R)etained Earning
(A)ccumulated OCI
(-)(T)reasury Stock
Noncontrolling Interest
=Stockholder Equity
APIC-Retired Stock
APIC-Retired Stock account from previous transactions, debit to retained earning would have been made to that account instead.
However, greater than the balance in APIC-Retired stock, APIC-Retired stock. Would be reduced to zero, remainder would reduce retain earnings.
SCRIP Dividends GL
-Common Promissory note, entity facing temporary cashflow will give scrip. To assure investor that dividend forthcoming.
Date of Declaration:
Dr. Retained Earnings XXX
Cr. Notes Payable XXX
Date of Payment:
Dr. Note Payable XXX
Dr. Interest Expense XXX
Cr. Cash XXX
Book Value Per Common Share
(Liquidation)
(total stockholder equity) - (amount due prefer stock)
=Common Stockholder Equity
Formula:
(Common Stockholder Equity)/(Common Share outstanding)
(Issued Shares)-(Treasury Stock shares)
=Common Share outstanding
Property Dividend GL
Date of Declarations:
Dr. Assets(FV-CV) XXX
Cr. Gain on Asset XXX “Up value”
Dr. Retained Earning (FV) XXX
Cr. Dividends Payable (FV) XXX
Date of Payment:
Dr. Dividend Payable (FV) XXX
Cr. Asset (FV) XXX
Appropriating Retained Earnings
-Do not Appropriate Retained Earning for bond retirement. Use cash sinking fund instead.
-Portion of retained earnings is unavailable for dividend payments.
-Used for specific business situations only, not for actual transaction.
-Shown on stockholder equity section
-Reasons due to legal/contractual reasons/covenant
-Not allow to absorb costs or losses
GL Entry
Dr. Retained Earnings (Unappropriated) XXX
Cr. Retained Earnings (appropriate purpose) XXX
Small Vs Large Stock Dividend
Small Stock Dividend:
-Less than 20-25%
-Record at FV at declaration date
Small Stock Entry:
DR. Retained Earning (FV) XXX
CR. Common Stock(Par Value) XXX
CR. APIC (FV-PAR) XXX
**Small dividend->RE goes down and APIC goes up(contributed capital)
Large Stock Dividend:
-Greater than 20-25%
-Record at PAR value
Large Stock Entry:
Dr.Retained Earning(Par Value) XXX
Cr. Common Stock(Par Value) XXX
**Large Dividend->Par Value -> Zero Retain Earning change
->Zero Stockholder Equity
change
**no effect on total stock equity
Liquidating Dividends
When dividend declared
-Balances of retained earnings prior to declaration
-Liquidating dividend, reduces APIC
Date of Declaration:
Dr. Retained Earnings XXX
Dr.Additional Paid-in Capital XXX
Cr. Dividends Payable XXX
Date of Payment:
Dr. Dividends Payable XXX
Cr. Cash XXX
Effect of Stock transactions on Issued vs. outstanding shares of stock
Issued Stock: Outstanding Stock:
Authorized Shares N/A N/A
Issued to stockholders Increases Increases
Stock Dividends Increases Increases
Stock Split Increases Increases
Repurchased Shares N/A Decreases
(Treasury stock)
Reissued Shares N/A Increases
(Treasury stock)
Retired Shares Decreases Decreases
(other than treasury stock)
Treasury Stock: Par Method
Step1:Calculate Gain or Loss;
Selling Price (-) Repurchase Price
Step2: Reverse Original entry for shares repurchased;
Debit Treasury at Par.
Step3: Credit Cash at price paid.
***Losses Decrease Retained Earning after exhausting APIC-Treasury Stock. Gains never increases Retained Earning.
Buyback shares above issue price entry:
Dr.(1) Treasury Stock(200X$10Par) $2000
Dr.(3) APIC-C/S $1000
Dr.(1) APIC-T/S $1000
(Or Retained Earning IF APIC-T/S not available)
Cr. (2) Cash $4000
**APIC only changes, Retained Earning no changes.
Buyback below issue price
Dr.(1) Treasury Stock(200X$10Par) $2000
Dr.(4) APIC-C/S(200X$5) $1000
Cr.(2) Cash(200X$12) $2400
Cr.(3) APIC-T/S $600
Treasury Stock: Cost Method
Repurchase Stock(Record at Cost):
Dr.Treasury Stock XXX
Cr. Cash XXX
**Gain/Loss when treasury stock reissued/ or retired
**Treasury stock gain/loss never affect net income stock only impact Stock equity.
Reissued at Price Greater than Cost:
Dr. Cash XXX
Cr. Treasury Stock XXX
Cr. APIC-Treasury Stock XXX
**Treasury stock is contra equity it reduces total stockholder equity
Reissued at Price Less than Cost:
Dr. Cash XXX
Dr. APIC-Treasury Stock XXX
Dr. Retained Earning** XXX
Cr. Treasury Stock XXX
!! No Gains or Loss Recognized for treasury stock
Retired the Stock:
Dr. Common Stock XXX
Dr. APIC-Common Stock XXX
Cr. Treasury Stock XXX
Cr. APIC-Treasury Stock** XXX
**No Effect on APIC or Retained Earning
DRD Reduction
Dividend Reduction Deduction (DRD)
Pretax Book Income $100,000
Temp Difference:
+Add Actual Dividend Received $25,000
(-)Deduct Income Due by Equity Method <$35,000>
Permanent Difference
Deduct DRD Allowed ($25,000 X 65%) <$16,250>
=Taxable Income $73,750
Cash Basis Revenue to Accrual Revenue
*Add Ending Account Receivable
*Subtract Beginning Account Receivable
*Subtract Ending Unearned (Deferred) Revenue
*Add Beginning Unearned (or Deferred) Revenue
Purpose of Reporting Comprehensive Income
-Represent all changes in Stockholder Equity that are “nonowner sources”.
-Comprehensive income is “net income” plus “OCI.”
-D not include invest by stockholder or “distribution to stockholder”
FX Transaction VS. FX Translation
FX Transaction is on net income
(operating income), “not in OCI”.
FX Translation is found in “OCI” in stockholder equity section.
