EQUITY

Question 1

List the requirements for a quasi-reorganization.

Answer 1

1. Shareholder and creditor approval; 2. Retained earnings balance must be zero immediately afterwards; 3. No contributed capital account can have a negative balance afterwards; 4. Assets must be written down to market value; 5. Retained earnings must be dated for 3-10 years afterwards.

Question 2

List the accounting steps in a quasi-reorganization.

Answer 2

1. Write assets to market value, further reducing retained earnings; 2. Reduce contributed capital to absorb earnings deficit; 3. If needed, change par value or number of shares of common stock to absorb remaining deficit.

Question 3

Define “book value per share”.

Answer 3

Common stockholders’ equity per share of outstanding common stock at the end of the period.

Question 4

Define “common stockholders’ equity”.

Answer 4

Total Owner’s Equity after preferred dividend claims are removed.

Question 5

What is the effect of a quasi-reorganization on total owners’ equity?

Answer 5

Decrease in total owners’ equity.

Question 6

What is the effect of a quasi-reorganization on retained earnings?

Answer 6

Increase in retained earnings.

Question 7

What is the effect on book value per share of a transaction that increases earning?

Answer 7

Increase in book value per share.

Question 8

What is the effect of dividends in arrears on book value per share?

Answer 8

Decrease on book value per share.

Question 9

Is there any additional participation to preferred stock if total dividends are not sufficient to provide common stock with dividends based on the fully participating preferred percentage?

Answer 9

There is no additional participation.

Question 10

List the order of dividend payment if nonparticipating preferred stock is outstanding.

Answer 10

1. Preferred: dividends in arrears (if cumulative); 2. Preferred: current period dividend; 3. Common: remainder.

Question 11

List the order of payment for partially participating stocks.

Answer 11

1. Dividends in arrears; 2. Current p/s dividend; 3. Preferred stock receives up to an additional percentage.

Question 12

List the order of dividend payment when partially participating preferred stock is outstanding.

Answer 12

1. Preferred: Any dividends in arrears; 2. Preferred: Current period dividends; 3. Common: Preferred percentage x total par outstanding; 4. Preferred: Additional percentage; 5. Common: Remainder.

Question 13

What dividends are paid before any other dividends are paid?

Answer 13

Preferred stock dividends in arrears.

Question 14

Is there any additional participation to preferred stock if total dividends are not sufficient to provide the partially participating preferred percentage to both common stock and preferred stock?

Answer 14

The remainder of dividends after the basic preferred percentage is provided to common, is multiplied by the ratio: total preferred par value to total par value of both classes of stock.

Question 15

List the two main Owners’ Equity categories.

Answer 15

1. Earned; 2. Contributed.

Question 16

Define “dividends in arrears.”

Answer 16

Unpaid dividends for a particular year on cumulative preferred stock.

Question 17

What does Owner’s Equity represent.

Answer 17

Represents the residual interest in the net assets of an entity that remains after deducting its liabilities.

Question 18

List the major Owners’ Equity accounts for a corporation

Answer 18

1. Preferred stock; 2. Common stock; 3. Additional paid-in capital, preferred; 4. Additional paid-in capital, common; 5. Retained earnings; 6. Treasury stock.

Question 19

Define “authorized shares.”

Answer 19

The total number of shares that may be issued.

Question 20

List the types of common stock rights.

Answer 20

1. Voting; 2. Dividend; 3. Preemptive.

Question 21

What is the number of common shares issued?

Answer 21

The number of shares ever issued by the firm but not retired = # of outstanding shares + # treasury shares.

Question 22

How is the number of shares in the Treasury determined?

Answer 22

The number of shares purchased by the issuing firm and not yet reissued.

Question 23

What is the primary measurement basis for contributed capital?

Answer 23

The historical value of direct investments made in the firm by investors.

Question 24

Define “legal capital.”

Answer 24

The par value of the stock or the stated value of the stock issued.

Question 25

List the main types of ownerships in business organizations.

Answer 25

1. Sole proprietorship; 2. Partnership; 3. Corporation.

Question 26

What purpose does legal capital serve?

Answer 26

1. Establishes minimum investment; 2. Provides protection for creditors (dividends may not be paid from legal capital).

Question 27

List the types of preferred stock rights.

Answer 27

1. Nonvoting; 2. Dividend preferences; 3. Liquidation preferences.

Question 28

How is the number of shares outstanding determined?

Answer 28

The number of shares currently held by stockholders.

Question 29

Under what condition is retained earnings debited on conversion of preferred stock to common stock?

Answer 29

Total recorded value of preferred is less than par value of common on conversion.

Question 30

What is the accounting treatment for the conversion of preferred stock?

Answer 30

1. Preferred stock accounts are transferred to common stock accounts; 2. If total preferred stock value is less than common stock par value, debit retained earnings.

Question 31

What is the accounting treatment for the retirement of preferred stock?

Answer 31

1. All related Owner’s Equity accounts are removed; 2. Debit differences go to retained earnings; 3. Credit differences go to contributed capital.

Question 32

For what amount is Preferred Stock Additional Paid in Capital debited when called or redeemed?

Answer 32

Amount recorded from original issuance.

Question 33

What is the date used to establish market price for small stock dividends?

Answer 33

Declaration date.

Question 34

How is a small stock dividend accounted for?

Answer 34

Capitalize retained earnings at market price.

Question 35

What is a small stock dividend?

Answer 35

Percent of dividend is less than 20-25%.

Question 36

Define “stock dividend”.

Answer 36

A distribution by a firm of its stock to its shareholders in proportion to their existing holdings.

Question 37

How is a large stock dividend accounted for?

Answer 37

Capitalize retained earnings at par value.

Question 38

How is a stock split accounted for?

Answer 38

No accounting entry needed.

Question 39

What is a large stock dividend?

Answer 39

Percent of dividend is greater than 20-25%.

Question 40

What is the basis of allocation for stock basket sale proceeds?

Answer 40

Fair value of individual stocks in the basket.

Question 41

Describe the journal entry to record initial payment of stocks sold on subscriptions.

Answer 41

DR: Cash DR: Subscription Receivable CR: Common Stock Subscriptions CR: Additional Paid in Capital (contract price-par).

Question 42

What value is added to the contributed capital account when a no par stock has a stated value?

Answer 42

Contributed capital in excess of stated value (common).

Question 43

What is the classification of the stock subscriptions receivable account?

Answer 43

Contra owners’ equity (contra common stock subscribed).

Question 44

List the requirements for stock sold on a subscription basis.

Answer 44

Contract stating: 1. Specifying share price; 2. Number of shares; 3. Payment dates.

Question 45

Define “par value”.

Answer 45

The minimum legal issue price for capital stock in most states and appears on the stock certificate.

Question 46

Describe the journal entry for subsequent payments on stock sold on subscriptions.

Answer 46

DR: Cash CR: Subscriptions Receivable

Question 47

How is stock issued for nonmonetary consideration valued?

Answer 47

Fair value of stock or consideration, whichever is more reliable.

Question 48

List the alternatives to par value when a stock does not have such value.

Answer 48

1. Stated Value; 2. No Par Value.

Question 49

Define “restrictions on retained earnings”.

Answer 49

An external constraint placed on a certain portion of retained earnings by an external party.

Question 50

Describe the accounting entry to record stock rights issued to outside parties for service at issuance.

Answer 50

Record an expense and an owners’ equity account equal to the difference between the market price and exercise price, times the number of shares under option.

Question 51

Define “retained earnings appropriation”.

Answer 51

Management’s formal communication that a portion of retained earnings has been declared off-limits for dividends.

Question 52

How should restrictions and appropriations on retained earnings be reported?

Answer 52

Disclosed in footnotes.

Question 53

What is often used to convey preemptive rights regarding stocks?

Answer 53

Stock rights.

Question 54

What is the effect of retained earnings appropriations on assets?

Answer 54

No effect on assets.

Question 55

List the reasons for appropriating retained earnings.

Answer 55

1. Financial planning; 2. Legal requirement; 3. Contractual obligation.

Question 56

Describe the accounting entry to record stock rights issued to outside parties for services at exercise of rights.

Answer 56

Record the stock issuance at the exercise price and remove the OE account credited at issuance of the rights.

Question 57

Under the cost method of accounting for treasury stock, how is treasury stock presented on the balance sheet?

Answer 57

Treasury stock is subtracted from very bottom of Owners’ Equity section of the balance sheet.

Question 58

What is the relationship of total owners’ equity for cost and par method?

Answer 58

They are equal, although certain components of owners’ equity would show different balances.

Question 59

Describe the cost method for accounting for treasury stock.

Answer 59

1. Purchases are debited at cost; 2. Reissuances debit cash, credit treasury stock at cost, and contributed capital is plugged.

Question 60

What is the effect of treasury stock transactions on earnings?

Answer 60

There is no effect.

Question 61

How is treasury stock presented on the balance sheet under the par value method?

Answer 61

Reported as a subtraction from the common stock account in the balance sheet.

Question 62

When is paid in capital from treasury stock decreased under the cost method?

Answer 62

When treasury stock is reissued for less than cost.

Question 63

What is the effect on the treasury stock account under the cost method when donated stock is received?

Answer 63

Effect on the treasury stock account is an increase for the fair value of the stock received.

Question 64

What is the effect on the treasury stock account under the par method when donated stock is received?

Answer 64

Effect on the treasury stock account is an increase for the par value of the stock received.

Question 65

List the methods for accounting for treasury stock.

Answer 65

1. Cost Method; 2. Par Value Method.

Question 66

What is the effect on owners’ equity when treasury stock is purchased and subsequently reissued at a price in excess of cost (using the cost method)?

Answer 66

Increase owners’ equity by the difference in purchase cost and reissuance price.

Question 67

How can retained earnings be affected by treasury stock transactions?

Answer 67

Decreased (as a last resort) but never increased.

Question 68

Describe the accounting treatment of purchases of stock under the par value method.

Answer 68

1. Treasury stock is debited at par; 2. Additional Paid in Capital (APIC) is debited by amount credited when stock was originally issued; 3. Cash is credited.

Question 69

When is paid in capital from treasury stock increased under the par method?

Answer 69

When treasury stock is purchased for less than original issue price.

Question 70

Describe the accounting treatment of reissuance of stock under the par value method.

Answer 70

1. Treasury stock is credited at par; 2. Remainder of entry is treated like stock issuance.

Question 71

What accounts may reflect different balances under the cost and par method for the same firm?

Answer 71

Treasury stock, paid in capital in excess of par-common, paid in capital from treasury stock, retained earnings.