F1-M3 Stockholder's Equity: Part 1

Question 1

Define common stock and list the basic properties

Answer 1

Common stock: Residual ownership interest

Basic rights include:
1. Voting Rights
2. Dividend Rights
3. Rights to share in distribution of assets if corporation is liquidated, after satisfaction of creditor and preferred stockholder’s claims

Question 2

List some common properties of preferred stock

Answer 2

Preferred stock is:
1. convertible, callable
2. redeemable
3. dividends can be cumulative and/or participating

Question 3

What are the two alternative methods of accounting for treasury stock?

Answer 3

Cost method: Treasury stock is debited at cost of shares repurchased

Legal (par value method/stated value method): Treasury stock is debited at par value of share repurchased

*Remember, no gains/losses are recognized on the income statement; income and retained earnings may never increase by the transaction; Additional paid-in-capital-treasury stock account used to record “gains” and absorb “losses”.

Treasury stock is not an asset; cash and property dividends are not paid on treasury stock; stock dividends may be paid on treasury stock.

Question 4

Summarize the cost method of accounting for treasury stock

Answer 4

Under the cost method of accounting, treasury stock is:

1. recorded, carried and reissued at reacquisition cost
2. Any “gain” is credited to paid-in- capital-treasury stock
3. Any “loss” is charged against previous “gains”, then retain earnings
4. Reported as a deduction from total stockholders’ equity

Question 5

Summarize the par value method of accounting for treasury stock

Answer 5

Under the Par Value Method of accounting, treasury stock is:

1. Recorded at par value with cost of stock that is in excess of par value recorded as a deduction to Paid-in-Capital-Treasury Stock and then from retained earnings after Paid-in-Capital-Treasury Stock is depleted.
2. Reported as a deduction from capital stock