Equity

Question 1

Define stockholder’s equity.

Answer 1

It is the excess of total assets over total liabilities of a corporation. It represents the sources of the net assets of the corp.

Question 2

Name the 9 major categories of equity.

Answer 2

1. Paid in capital - capital stock, at par or stated value
2. Additional paid-in capital: capital in excess of par
3. Other Additional paid in capital
4. Donated capital
5. Retained earnings: appropriated
6. Retained earnings: unappropriated
7. unrealized capital
8. accumulated other comprehensive income
9. Treasury stock (less)

Question 3

What does capital stock include?

Answer 3

It includes the par or stated value of preferred and common stock. It is sometime referred to as legal capital

Question 4

What does additional paid in capital represent?

Answer 4

It represents increases in capital (net assets) in excess of par or stated value arising from transactions involving the enterprise’s own stock.

Question 5

When does donated capital arise?

Answer 5

It arises from gifts or donations of assets to the corporation.

Question 6

Define retained earnings

Answer 6

It is the increase in net assets arising from operations that have been retained in the business. Restrictions on the use of RE are sometimes formally acknowledged by an appropriation of retained earnings. All restrictions on RE should be disclosed whether formally appropriated or not

Question 7

What results in unrealized capital?

Answer 7

Unrealized capital results from the write-up of assets above cost. Except in limited situations, such write ups are not in accordance with GAAP.

Question 8

What does accumulated other comprehensive income represent?

Answer 8

It represent the accumulated balance of other comprehensive income recognized over the years (since the beginning). This is the accumulated balance of changes in net assets that have not been included in net income and do not represent transactions with owners as owners

Question 9

What does treasury stock reflect?

Answer 9

It reflects the reduction in total stockholders’ equity resulting from the corporation reacquiring its own shares of stock

Question 10

What is capital stock?

Answer 10

Generally considered to be either preferred stock or common stock

Question 11

What are the characteristics of preferred stock?

Answer 11

It is designated because it has a preference or priority over common stock in one or more areas. Most commonly is dividends and participation in the distribution of assets on liquidation of the corporation

Question 12

What are the characteristics of common stock?

Answer 12

It is a residual equity security. Common stockholders have the right to vote in certain corporate matters whereas preferred SH usually do not

Question 13

What is par value?

Answer 13

It is a fixed per-share amount printed on each stock certificate of par value stock. Traditionally, it represents the amount of capital that must be retained in the corp

Question 14

Do most states allow the issuance of no-par stock?

Answer 14

Yes. However, many states either authorize or require that a stated value be assigned to the stock.

Question 15

What stocks may be par-value?

Answer 15

preferred stock

Question 16

What stocks may be no-par value?

Answer 16

Preferred and common

Question 17

May stocks be sold on a subscription basis?

Answer 17

Yes. Shares of stock are not issued until the full subscription price is received. However, the subscriber usually has all the rights and privileges unless the subscription contract says otherwise

Question 18

Where do the Stock Subscriptions Receivable and Common Stock Subscribed included on the balance sheet?

Answer 18

Stock subscriptions receivable may be included in the current assets section. Common Stock Subscribed is included in the paid-in capital section in a similar manner to common stock.

Question 19

If a stock subscriber defaults on the subscription contract after paying a portion of the subscription price, what 3 possible actions can be taken if applicable state laws allow?

Answer 19

1. the stock is forfeited; subscriber receives nothing
2. Amount previously paid is returned to subscriber
3. The subscribed shares are sold to others. The amount previously paid by subscribers is returned less the excess of subscription price over the price at which the shares were subsequently sold

Question 20

What are the 2 methods used to account for treasury stock?

Answer 20

1. cost method
2. par value method.
   Both are considered to be GAAP

Question 21

What is the primary difference in the cost method and the par value method in accounting for treasury stock?

Answer 21

The cost method subscribes to a single transaction concept whereas the par value method adheres to a “two transaction” concept.

Question 22

Explain the cost method view for accounting for treasury stock.

Answer 22

The reacquisition of the outstanding shares and their subsequent sale is viewed as a single transaction.

Question 23

Explain the par value method view for accounting for treasury stock.

Answer 23

It views the reacquisition of the shares and their subsequent sale as two separate transactions. The reacquired shares are accounted for in much the same manner as retired shares. The subsequent sale of the shares is accounted for essentially as if the shares were unissued shares.

Question 24

What are the 3 most important dated as they relate to dividends?

Answer 24

1. date of declaration
2. date of record
3. date of payment

Question 25

What is the dividend “date of declaration”?

Answer 25

it is the date the dividend is declared by the board of directors and becomes a liability, if other than a stock dividend

Question 26

What is the dividend “date of record”?

Answer 26

It is the date on which the stockholders whose names appear on the corporation’s records are entitle to receive dividends

Question 27

What is the dividend “date of payment”?

Answer 27

It is the date the dividend is paid or issued

Question 28

What are the 5 forms a dividend may take?

Answer 28

1. cash dividend
2. property dividend
3. scrip dividend
4. liquidating dividend
5. stock dividend

Question 29

Explain cash dividends

Answer 29

They are declared on the basis of a specified amount for each share of outstanding stock.

Question 30

Explain property dividends.

Answer 30

These are rare. They are paid in the form of some noncash asset, such as merchandise, investments or fixed assets. It is a nonreciprocal transfer of nonmonetary assets to the owners. Accordingly, it should be accounted for on the basis of the FV of the assets transferred, with unrealized gain/loss recognized.

Question 31

What are scrip dividends?

Answer 31

They occur when a corporation declares a dividend, but because it is unable to pay the dividend now, obligates itself to pay the dividend at a later dater. It is a special form of liability

Question 32

Explain liquidating dividends.

Answer 32

They occur when the corporation uses paid-in capital, rather than retained earnings, as a basis for dividends. They are a returns of capital rather than returns on capital.

Question 33

What are stock dividends?

Answer 33

They occur when a corporation issues shares of its own stock in the form of a dividend.

Question 34

What does a stock dividend do to equity?

Answer 34

It changes neither the par value of the stock nor the total stockholder’s equity. The number of shares issued and outstanding is increased.

Question 35

What does a stock split do to equity?

Answer 35

It involves the increase in the number of shares issued and outstanding. It also involves a change in the par or stated value of the stock.

Question 36

Accounting for stock dividends depends on whether it is considered to be a small or large stock dividend. What are the percentages for small and large stock dividends?

Answer 36

20%-25% are presumed to be small stock dividends

More than 20% - 25% are presumed to be large stock dividends

Question 37

How are small stock dividends accounted for?

Answer 37

They are accounted for on the basis of fair value of the shares issued in the form of a stock dividend. Stock dividends distributable should be shown in the capital stock section of the BS and not a liability

Question 38

How are large stock dividends accounted for?

Answer 38

They are usually accounted for on the basis of the par or stated value of the stock rather than on the basis of FV.

Question 39

What does stock splits involve?

Answer 39

An increase in the number of shares outstanding and a corresponding decrease in the par or stated value of each share. They have no impact on retained earnings or total stockholders’ equity. No entry is required for a stock split. Although a formality entry might be used to acknowledge a stock split.

Question 40

Preferred stock may be participating or nonparticipating. What is participating preferred stock?

Answer 40

Participating preferred stock participates with common stock in dividend distributions in excess of specified amounts for preferred and common

Question 41

What is the method to determine participation amounts?

Answer 41

(Total par value of preferred/ Total par value of preferred and common) X Participation amount.

Question 42

When only one class of stock is outstanding, book value per share of common stock is determined how?

Answer 42

Book value per share = (Total stockholder’s equity/common shares outstanding)

Question 43

If both preferred stock and commons stock are outstanding, how is book value calculated?

Answer 43

The computation of book value per share requires that the amount of total stockholders’ equity applicable to each class of stock first be determined.

Question 44

How is the conversion of convertible preferred tock into common stock recorded?

Answer 44

It is recorded on the basis of the book value of the convertible preferred.

Question 45

The FASB ASC glossary defines securities how?

Answer 45

As the evidence of debt or ownership of a related right

Question 46

An entity shall explain, in summary form within its financial statements, the pertinent rights and privileges of the various securities outstanding. List 7 examples of this type of information.

Answer 46

1. dividend and liquidation preferences
2. participation rights
3. call prices and dates
4. conversion or exercise prices or rates and pertinent dates
5. sinking-fund requirements
6. unusual voting rights
7. significant terms of contracts to issue additional shares

Question 47

An enterprise must “disclose within its financial statements the number…

Answer 47

of shares issued upon conversion, exercise or satisfaction of required conditions during at least the most recent annual fiscal period and any subsequent interim period presented

Question 48

What disclosure must be made if an enterprise issues preferred stock (or other senior stock) that has a preference in involuntary liquidation significantly in excess of the par or stated value of the shares?

Answer 48

It must disclose the liquidation preference of the stock. That disclosure must be made in the equity section of the balance sheet in the aggregate, either parenthetically or “in short”. Disclosure on a per-share basis or through disclosure in the notes will not satisfy this requirement.

Question 49

What 2 things must an enterprise disclose within its financial statements (either on the face of the BS or in the notes)?

Answer 49

1. the aggregate or per-share amounts at which preferred stock may be called or is subject to redemption through sinking fund operations or otherwise
2. the aggregate and per-share amounts of arrearages in cumulative preferred stock dividends

Question 50

What must be disclosed regarding issues of redeemable stock?

Answer 50

It must disclose the amount of redemption requirements, separately by issue or combined, for all issues of capital stock that are redeemable at fixed or determinable prices on fixed or determinable dates in each of the 5 years following the date of the latest BS presented