F1 M3

Question 1

retained earnings formula

Answer 1

Net income/loss
- dividends (cash, property, stock) declared
+/- prior period adjustments
+/- accounting changes reported retrospectively
= RE

Question 2

when retained earnings are appropriated

Answer 2

when the company has purposely set aside money from retained earnings to either meet legal or contractual obligations, or contingency purposes like plant expansion. Must be explicitly stated that money is set aside for purpose.

Question 3

when retained earnings are not appropriated

Answer 3

when purpose of appropriation has been achieved or if not specifically mentioned whether amt is appropriated or not.

Question 4

what is the cost method?

Answer 4

-treasury shares recorded at reacquired cost
-APIC-T/S credited for gains and debited for losses when T/S reissued
-losses can decrease RE if APIC-T/S not have enough balance to cover loss
-net income or RE never increased by T/S transactions

Question 5

what is the par/legal method?

Answer 5

-treasure shares recorded at par value
-APIC-C/S recorded at number of shares at original sale price less par value
-APIC-T/S credited for gains and debited for losses when T/S repurchased at price different from original sale price

Question 6

buy back shares above issue price (cost method) JE

Answer 6

Dr. T/S (number of shares * repurchase price (cost))
Cr. Cash

Question 7

reissue shares above cost (cost method) JE

Answer 7

Dr. Cash (number of shares * reissue price)
Cr. T/S (number of shares * original cost)
Cr. APIC-T/S (residual)

Question 8

reissue shares below cost (cost method) JE

Answer 8

Dr. Cash (number of shares * reissue price)
Dr. APIC-T/S (number of shares * resale price - cost)
Dr. RE (residual)
Cr. T/S (number of shares * cost)

Question 9

buy back shares above issue price (par method) JE

Answer 9

Dr. T/S (number of shares * par value)
Dr. APIC-C/S (number of shares * cost - issue price)
Dr. RE (residual)
Cr. Cash (number of shares * repurchase price)

Question 10

buy back shares below issue price (par method) JE

Answer 10

Dr. T/S (number of shares * par value)
Dr. APIC-C/S (number of shares * original cost - issue price)
Cr. Cash (number of shares * repurchase price)
Cr. APIC-T/S (residual)

Question 11

reissue shares above cost (par method) JE

Answer 11

Dr. Cash (number of shares * resale price)
Cr. T/S (number of shares * par value)
Cr. APIC-C/S (residual)

Question 12

reissue shares below cost (par method) JE

Answer 12

Dr. Cash (number of shares * resale price)
Cr. T/S (number of shares * par value)
Cr. APIC-C/S (residual)

Question 13

retirement of T/S (cost method) JE

Answer 13

Dr. C/S (number of shares * par value)
Dr. APIC-C/S (number of shares * repurchase price - issue price)
Dr. RE (residual)
Cr. T/S (number of shares * cost)

Question 14

retirement of T/S (par method) JE

Answer 14

Dr. C/S (number of shares * par value)
Cr. T/S

Question 15

what is donated stock?

Answer 15

-a company’s own stock received as a donation from a shareholder
-no change in total shareholder’s equity as a result of donation but outstanding shares decrease, resulting in higher book value per share

Question 16

donated stock received JE

Answer 16

Dr. Donated T/S (at fair market value)
Cr. APIC

Question 17

donated stock sold JE

Answer 17

Dr. Cash (at sales price)
Dr. APIC (if SP >original FMV)
Cr. APIC (if SP < original FMV)
Cr. Donated T/S (at book value or original FMV)