F1-M3 SHE Part 1

Question 1

Each of the following transactions will cause a decrease in stockholder’s equity, except:

Answer 1

The sale of T-stock at LESS THAN COST.

The sale of T-stock at less than cost will result in a net increase in stockholder’s equity.

The original cost of the T-stock is credited; any APIC-T-stock is debited; and any excess over the APIC would reduce RE.

However the net impact to stockholder’s equity would still be positive as long as cash is received from the sale of the T-stock.

Question 2

Which of the following is a false statement regarding the cost method versus legal (par/stated value) method when accounting for T-stock transactions?

Answer 2

Answer: Gains or losses from T-stock transactions affect RE under the legal method.

Under the legal method, the APIC account is debited for losses when the T-stock is repurchased;

However, when the APIC account does not have enough of a balance to absorb a loss, RE is further reduced.

For all transaction gains, the APIC account (not RE) is credited.

Question 3

12/31/Year 1 BS, should report as APIC?

1/2/Year 1 30k authorized shars of $10 par common stock
1/5 Issued 20k shares at $15/share
7/14 Purchased 5k shares at $17/share
12/27 Reissued 5k shares held in treasury at $20/share

Answer 3

DR CR 1/5 20k ISSUED, $10 par at $15
300,000 Cash ($15/share * 20k)
200,000 C/S (plug)
100,000 APIC ($5/share * 20k)

DR CR 7/14 Purchase of T-Stock
50,000 T-Stock ($10par *5k)
25,000 APIC ($5 orig APIC/share * 5k)
10,000 RE ($85k-$50k-$25k)
85,000 Cash (5k shares at $17)

DR CR 12/27 T-Stock REISSUANCE
100,000 Cash (5k shares at $20)
50,000 T-Stock ($10 par *5k shares)
50,000 APIC (5k shares * ($20/share - $10 par)

ANSWER: APIC: $100,000 - $25,000 + $50,000 = $125,000