Equity

Question 1

What is the journal entry when redeemable preferred stocks are retired for 1) more than the par value and 2) for less than par value?

Answer 1

1). When MV > Par Value
Dr: (a)Preferred Stock (# * par)
Dr: (b)Additional PIC - Preferred (Issue price - par)
Dr: RE (Plug)
Cr: Cash (Call Price * # called)

2) When MV < Par Value
Dr: Preferred Stock (# * par)
Dr: Additional Paid in Capital - Preferred(Issue P - Par)
Cr: Add. PIC from retirement of Pref Stock(plug)
Cr: Cash (Call Price * # called)

Question 2

What is the affect of retirement of callable or redeemable preferred stock on Owner’s equity?

Answer 2

It is decreased because cash is paid to retire the preferred stocks

Question 3

What is the affect of retirement of callable or redeemable preferred stock on Owner’s Equity?

Answer 3

It is decreased when PS are called or redeemed at price that exceeds the par value.

Question 4

What is the journal entry for converting preferred stock into common stock?

Answer 4

Dr: Preferred Stock
Dr: Add PIC - Preferred
OR Dr: RE (Plug for Debit balance )
        Cr: Common Stock
        OR Cr: Add PIC - Common ( plug for credit balance)

Question 5

What is a treasury stock?

Answer 5

When a firm purchases it’s own shares in the market it is called the treasury stock.

TS account is a contra account to Owner’s equity account.

They are not owned by anybody. They are simply shares taken our of circulation.

They do not receive cash dividends

TS are neither an asset nor an investment

TS does not vote

It is not included in EPS calculation (NI over #of shares o/s)

Included in the calculation of issued stock but not outstanding.

Question 6

What is the effect of re-issuance of treasury stock?

Answer 6

It is the opposite of purchasing of treasury stock

Firm gets larger

OE and Cash are increased

There are more shares outstanding in the market.

Question 7

What is the effect of purchasing of treasury stock?

Answer 7

Firm is smaller after purchase of treasury stock.

Both cash and OE are reduced

There are fewer shares outstanding in the market

EPS is increased because of fewer shares O/S.(NI/# of shares outstanding)

Question 8

What is the effect of treasury stock on Income and RE?

Answer 8

Income is never affected because treasury stock transactions are between a firm and it’s owners

RE can be decreased but not increased

Question 9

What is the effect on common stock of TS purchased and reissued and retired?

Answer 9

Purchased: No effect
Reissue: No effect
Retired: CS Debited

Question 10

What constitutes CS?

Answer 10

CS = # of Shares outstanding + TS