Equity

Question 1

Preferred stock -rights

Answer 1

stock with two preferred rights over common stockholders

• dividend preference
• liquidation preference

Question 2

Preferred stock - types

Answer 2

cumulative: dividends accumulate whether paid or not
- divs in arrears must be disclosed in FNs but not a liability until delcared

participating: get the preferred divs. after c-stock gets divs, the excess is split between the two based on their pro-rata share of equity
convertible: comes with an option to convert to c-stock at a pre-set ratio

preference with warrants: warrants can be converted to c-stock at pre-set price. so end up with p and c stock.

callable: entity has right to repurchase p-stock at pre-set price

Question 3

Preferred stock - redeemable & irredeemable

Answer 3

irredeemable preferred stock is equity

redeemable preferred stock is a liability (it’s debt that gets repaid)

Question 4

Stock subscriptions

Answer 4

Used when it is unknown what the market demand for the shares will be. Test out different prices using subscriptions to judge the demand.
requires good-faith payment up front, with remaining amount payable

Question 5

Stock subscriptions - entries

common stock

Answer 5

1) When subscription is made:
e.g. 10 shares, par 1
DR cash 5
DR subscription receivable 15
CR c-stock subscription 10
CR c-stock APIC 10

1A) when cash balance received:
DR cash 15
DR c-stock subscription 10
CR sub receivable 15
CR common stock 10

1B) if stock issued cancelled & refund issued:
DR c-stock subscriptions 10
DR c-stock APIC 10
CR subscription receivable 15
CR cash 5

1C) if buyer breaches & balance forfeited
DR c-stock subscriptions 10
DR APIC 10
CR subscription receivable 15
CR subscription forfeited 5

Question 6

Types of APIC

Answer 6

APIC-common: balance over par
APIC-preferred: balance over par

APIC-retired: when stock is repurchased from owners and retired at less than the original price

APIC-treasury

• cost method: repurchased stock sold for more than the repurchase price
• par value method: stocks are repurchased at less than original issue price

APIC-warrants: value allotted to detachable warrants issued with bods or preferred stock

Question 7

Dividend dates

Answer 7

date of declaration: BOD declare dividend. accrue liability
DR RE; CR div payable

date of record: shareholders on this date get the div

date of payment: div is paid out
DR div payable; CR cash

Question 8

Property dividends

Answer 8

recorded at FV as of the declaration date. difference between book and fair value is treated as gain or loss.

changes in FV after the declaration date and the payment date are not considered.

Question 9

Liquidating dividends

Answer 9

dividends that are a return of capital. i.e., the capital in the company is being liquidated and return to the owners. APIC is debited. (Only ever DR c-stock on complete dissolution).

declaration date:
DR retained earnings (DIVS ON EARNINGS)
DR APIC (THIS IS THE LIQUIDATING PORTION)
CR dividends payable

payment date:
DR div payable
CR cash

Question 10

Scrip dividends

Answer 10

promise to pay money in the future to the stockholders. not payable now; may or may not include interest when paid. this is a long-term liability (promise to pay)

declaration date:
DR RE
CR scrip div payable

payment date:
DR scrip div payable
DR interest expense (if any)
CR cash

used if a company doesn’t have the cash to pay out the div now, but plans to pay in the future (this is optics for the market)

Question 11

Stock dividends

Answer 11

instead of paying cash, company issues more dividends. no liability when declared, because no change in cash/assets or in the ownership interests.

basically, this is a transfer from RE to c-stock and APIC

can be ordinary or large stock dividend

Question 12

Stock dividends - ordinary

Answer 12

small stock dividends; usually less than 20-25% of the total stock. (e.g. 1000 shares, stock div of 100 shs declared)

recorded at the stock’s FV on the declaration date.
DR retained earnings (FV of stock)
CR common stock (par)
CR APIC (excess over par)

Question 13

Stock dividends - large

Answer 13

basically this is a stock split disguised as a dividend
usually more than 20-25% of the total stock.

record at par value. transfer from RE to common stock.
DR retained earnings
CR common stock

Question 14

Stock splits

Answer 14

used to increase trade-ability of shares. if share price is too high, it is difficult to trade.

1 share is split into 2 shares, etc etc etc.

only adjustment is record memo entry that par value was divided.

Question 15

Appropriation of retained earnings

Answer 15

done when a portion of RE is appropriated to meet certain contingent liabilities that may require large payments in the future.
total RE is unchanged, but the portion available for dividends is decreased.
DR retained earnings - unappropriated
CR retained earnings - appropriated

Question 16

Quasi reorganization

Answer 16

internal restructuring of the company. requires shareholder approval. accounts are restated as if they had reorg’d; retained earnings is set back to -0-.

steps:
adjust assets to FV
adjust common stock to new (decreased) stated amount
plug for APIC

Question 17

Quasi reorganization - example

Answer 17

company has the following amounts:
FROM TO
asset 1400 1000
liabilities 600 600
c-stock 1600 320
APIC 1000 80 PLUG
RE (1800) -0-

shareholders approve quasi-reorg. par value of c-stock is reduced from 10 to 2. assets reduced to FV of 1000

DR common stock 1280
DR APIC 920 PLUG
CR assets 400
CR retained earnings 1800

Question 18

Accumulated other comprehensive income

Answer 18

this is like RE for other comprehensive income

it is the accumulated account for changes in OCI. it is a separate component of stockholder’s equity.

Question 19

Treasury stock

Answer 19

stocks that were repurchased from shareholders but have not been retired

reduces number of outstanding stock
participates in stock dividends and splits

methods of accounting: cost method, par method

Question 20

Treasury stock - cost method

Answer 20

use this method if the company plans to resell the shares

t-stock reported separately on the balance sheet.

• deduction to stockholders equity
• account at repurchase cost

Question 21

Treasury stock - par value method

Answer 21

use this method if the company plans to hold the shares indefinitely.

Question 22

Treasury stock - cost method - example

Answer 22

issue:
100,000 shares $10 par, issued @ $18
DR cash 1,800,000
    CR c-stock   1,000,000
    CR APIC          800,000

repurchase: 50,000 shs @ $15
**DO NOT DEBIT C-STOCK OR APIC **
DR t-stock 750,000
CR cash 750,000
*why? because you are going to sell them again. saves mess. no gain or loss recog until re-issue/retirement.

re-issue: 10,000 shs @ $17
DR cash 170,000
CR t-stock 150,000 (10k shs @ 15)
CR t-APIC 20,000 (10k shs @ 17-15)

re-issue: 30,000 shs @ 14
LOSS ON REISSUE: first utilize any t-APIC. balance to RE
DR cash 420,000 (30k shs @ 14)
DR t-APIC 20,000 (30k shs @ -1; UP TO 20k)
DR RE 10,000
CR t-stock 500,000 (30k shs @ 15)

retirement: 10,000 shs remaining in t-stock acct
NOW you have to remove these from c-stock and c-APIC
DR c-stock 100,000 (10k @ 10par)
DR APIC 80,000 (10k @ 8 over par)
CR t-APIC 30,000 (10k @ 18-15)
CR t-stock 150,000 (10k @ 15)

Question 23

Treasury stock - par value method - example

Answer 23

issue:
plan to retire shares, so book back using par

100,000 shares $10 par, issued @ $18
DR cash 1,800,000
CR c-stock 1,000,000
CR APIC 800,000

repurchase: 50,000 shs @ $15
DR t-stock 500,000
DR c-APIC 400,000 (50k shs @ 8 apic)
DR t-APIC 150,000
CR cash 750,000
remove the APIC for the shares “retire-able”

re-issue: 10,000 shs @ $17
DR cash 170,000
CR t-stock 100,000 (10k shs @ 10)
CR c-APIC 70,000 (10k shs @ 17-10)

re-issue: 30,000 shs @ 14
DR cash 420,000 (30k shs @ 14)
CR t-stock 300,000 (30k shs @ 10)
CR c-APIC 120,000 30k shs @ 14-10)

retirement: 10,000 shs remaining in t-stock acct
DR c-stock 100,000 (10k @ 10par)
CR t-stock 100,000 (10k @ 10)

Question 24

Stock appreciation right

Answer 24

entitles an employee to receive stock/cash if the entity’s stock price rises above a certain level.

payout to the employee will be the appreciation $ multiplied by X number of stocks.

compensation recognized if stock price increases (liability for appreciation rights)