Equity

Question 1

Quasi Reorganization

Answer 1

• Modification of capital structure of a corporation to eliminate a retained earnings deficit without the need for formal bankruptcy proceedings
  ○ Any overvalued assets or understated liabilities are adjusted against retained earnings
  ○ Debit Balance in RE is eliminated against additional paid in capital and/or by reducing the par or stated value of the stock with a corresponding increase in Retained Earnings
  If APIC is insufficient to absorb the deficit, the Par value of capital stock is reduced with a corresponding increase in APIC (to avoid debit balance in APIC)

Question 2

Treasury Shares - Reissued

Answer 2

• This would increase outstanding shares, as they are resold and become common stock
  When they are repurchased, then outstanding shares would decrease because TS in the corporation is never considered Outstanding

Question 3

Issuance of Stock Rights

Answer 3

• Without consideration = no asset can be debited - so a memo entry only
  
  • When recipients exercise rights at a later date, cash is increased as well as CS and APIC
    ○ D Cash
    § C APIC
    C CS

Question 4

Treasury Stock

Answer 4

• Issued, but not outstanding
  
  • Company’s own stock that was issued and later reacquired in the open market by the issuing corporation and still held by issuing corporation
  • Not an asset, does not affect income
  • It is a contra (negative) element of stockholder’s equity - decreases total equity
  • May increase contributed capital, and may decrease retained earnings
  • Only affect the number of shares outstanding, not the number of shares issued since they are always issued
    An increase (repurchase) of treasury stock would affect only decrease the number of shares outstanding, but have no effect on overall issued shares

Question 5

Stock Dividend

Answer 5

• Number of shares issued and outstanding is increased
  
  • Reclassifying a portion of retained earnings as contributed capital
    They do not reduce assets or increase liabilities, so overall Stock Equity is not changed when a stock dividend is declared

Question 6

Small Stock Dividend

Answer 6

• Fair Value basis of shares issued in form of stock dividend
  
  • Ex: 10% div declared, FV is 23 $ per share, 1000 shares outstanding of 10 par CS
  • Declaration Date:
    ○ D Retained earnings (100 * 23) 2300
    § C Stock Div Dist (100 X 10) 1000
    § C PIC - Stock Div 1300
  • Payment Date:
    ○ D Stock Div Distributable 1000
    § C Common Stock 1000
  • Stock Dividends distributable should be shown in the capital stock section of the balance sheet
    Not as a liability

Question 7

Large Stock Dividends

Answer 7

• Accounted for on the basis of par of stated value of stock, not fair value
  
  • Ex - 1000 shares of 10$ Par CS. 40% stock dividend declared
    ○ D Retained earnings (400 * 10$) Par 4000
    C Stock Dividends Distributable 4000

Question 8

Detachable warrants - equity

Answer 8

• Proceeds from bond issue must be allocated between the bonds and the warrants on basis of FMV
  
  • D Cash (500 * 1.03) 515.000
  • D Discount (560 - 515) 45,000
    ○ C Stock Warrants OS (500 X 30 X 4) 60,000
    ○ C Bonds Payable 500,000/1000 = 500 500,000
  • The balance 60k in Stocks Warrants outstanding would be classified under stockholder’s equity in the balance sheet
    Upon exercise, balance would be transferred into the appropriate capital stock and APIC accounts

Question 9

Liquidating Dividend

Answer 9

• Portion of the cash dividend that exceeds the balance in retained earnings because other equity accounts must be debited
  
  • Ex: Cash Div paid = 400, Retained Earnings Balance = 300
    ○ Liquidating dividend would be 100,000
  • Liquidating dividends are a return of investment rather than a return on investment
    Occurs when corporation uses paid in capital, rather than retained earnings, as a basis for dividends