Equity

Question 1

Common vs Preferred Stock

Answer 1

Common stock usually has voting rights and preferred doesn’t, and preferred stock usually has dividends and dividend priority when common stock might not receive dividends.

Question 2

Stock issuance- 3 accounts hit

Answer 2

Cash for the amount of the stock issued (cash received)

Common stock (# shares * par value)

Paid-in capital excess of par (whatever is above the par value

Question 3

Stock issuance JEs

Received 10 shares of $1 par value stock for $100

Answer 3

Cash 100
Common stock 10
Additional paid-in capital 90

Question 4

Journal entry

No par stock

Answer 4

Cash 100

Common stock 100

Question 5

Preferred stock can be

Answer 5

Callable
Redeemable
Convertible

If redeemable preferred stock has a specified date at a specified price, it is usually classified as debt and associated cash dividends are reported as interest expense.

When callable or redeemable stock is called or redeemed, any dividends in arrears are paid first.

Question 6

Treasury Stock

Answer 6

When a company purchases its own stock. It doesn’t represent ownership and it lowers cash and owners’ equity.

Treasury stock is a contra- owners’ equity account.

It is not an asset or an investment, income is never affected, earnings per share is increased and retained earnings can be decreased but not increased by treasury stock

Question 7

Cost method (treasury stock)

Answer 7

This debits the treasury stock account at cost. When treasury stock is purchased, cash is credited and ‘treasury stock’ is credited for the same amount.

When company purchases 100 of its own shares for $20 per share:

Treasury stock 2,000
Cash. 2,000

If the company later reissued 20 shares for $30 per share

Cash $600
Contributed capital from treasury stock $200
Treasury stock. $400

Question 8

Par Method

Answer 8

This debits the treasury stock account at par. When treasury stock is purchased, common stock is reduced Pro rata for the # of treasury shares purchased.

Question 9

JEs for par method

ABC purchases 100 shares at $30/share of its $10 par stock that was originally issued at $20 per share.

Answer 9

Treasury stock $1,000
Contributed capital excess of par $1,000
Contributed capital from treasury stock $1,000
Cash $3,000

If treasury stock was purchased for $15 per share it would be:

Treasury stock $1,000
Contributed capital in excess of par $1,000
Contributed capital from T/S $500
Cash $1,500