F1 M3 Stockholders' Equity: Part 1 Flashcards
If a company wants to use $1,000,000 of its retained earnings for a capital expenditure, what should it report in its financial statements?
$1,000,000 of appropriated retained earnings
On the balance sheet parenthetically or in a separate line within retained earnings
If a company doesn’t use all of its appropriated retained earnings, how should it report the unused portion in its financial statements?
The company should release the unused portion to retained earnings when the purpose of the appropriation has been achieved.
If a company reissues treasury stock for more than it repurchased the shares, what’s the entry for the reissue under the cost method?
Dr. Cash for the reissue price
Cr. Treasury Stock for the repurchase price
Cr. APIC–Treasury Stock for the gain
Example:
Acme repurchases 100 shares at $20/share and then reissues them at $30/share. The entry for the reissue is:
Dr. Cash $3,000
Cr. Treasury Stock $2,000
Cr. APIC–Treasury Stock $1,000
If a company reissues treasury stock for less than it repurchased the shares, what’s the entry for the reissue under the cost method?
Dr. Cash for the reissue price
Dr. APIC–Treasury Stock for the loss*
Cr. Treasury Stock for the repurchase price
*If the credit balance of APIC–Treasury Stock is 0 or less than the loss, debit the balance of the loss to retained earnings.
Example:
Acme repurchases 100 shares at $20/share and then reissues them at $10/share. At the time of reissue, the credit balance of APIC–Treasury Stock is $500. The entry for the reissue is:
Dr. Cash $1,000
Dr. APIC–Treasury Stock $500
Dr. Retained Earnings $500
Cr. Treasury Stock $2,000
When should a company report dividends as a liability?
When dividends are declared but not yet paid.
Should a company report accumulated dividends on preferred stock as a liabiity before a dividend is declared?
No
Disclose them in footnotes. Report them as a liability once a dividend is declared.
How should the proceeds of a combined purchase or sale of newly issued common stock and preferred stock be allocated?
The proceeds should be allocated in proportion to the respective fair market values of the securities.
Example:
A company issues 1,000 shares of its $20 par value common stock and 2,000 shares of its $20 par value convertible preferred stock for total proceeds of $80,000. At the time, the company’s common stock was selling for $36 per share, and the convertible preferred stock was selling for $27 per share.
FMV of common stock: 1,000 shares × $36 = $36,000
FMV of preferred stock: 2,000 shares × $27 = $54,000
Total FMV: $36,000 + $54,000 = $90,000
Proceeds allocated to common: ($36,000/$90,000) × $80,000 = $32,000
Proceeds allocated to preferred: ($54,000/$90,000) × $80,000 = $48,000
If a company repurchases its common shares for less than it sold them, what’s the entry for the repurchase under the par value method?
Dr. Treasury Stock for the par value of the shares
Dr. APIC–Common Stock for the proceeds above par when the shares were issued
Cr. APIC–Treasury Stock for the difference between the issue proceeds and the repurchase amount
Cr. Cash for the repurchase price
Example:
Acme issued 100 shares of $10 par value common stock at $20/share and then repurchased them at $18/share. The entry for the repurchase is:
Dr. Treasury Stock $1,000 (100 × $10 par)
Dr. APIC–Common Stock $1,000 (100 × $20/share - $1,000)
Cr. APIC–Treasury Stock $200 ($2,000 - $1,800)
Cr. Cash $1,800 (100 × $18/share)
If a company repurchases its common shares for more than it sold them, what’s the entry for the repurchase under the par value method?
Dr. Treasury Stock for the par value of the shares
Dr. APIC–Common Stock for the proceeds above par when the shares were issued
Dr. APIC–Treasury Stock for the difference between the issue price and the repurchase price*
Cr. Cash for the repurchase price.
Original issuance is removed from Common Stock and APIC–C/S.
*Reduce APIC–Treasury Stock to 0 and debit any remainder to Retained Earnings.
Example:
Acme issued 100 shares of $10 par value common stock at $20/share and then repurchased them at $22/share (and the balance of APIC–Treasury Stock was 0). The entry for the repurchase is:
Dr. Treasury Stock $1,000
Dr. APIC–Common Stock $1,000
Dr. Retained Earnings $200
Cr. Cash $2,200
If a company repurchases its common shares, what’s the entry for the repurchase under the cost method?
Dr. Treasury Stock for the repurchase price
Cr. Cash for the repurchase price
Regardless of whether repurchase price is < or > issue price
If a company reissues treasury stock, what’s the entry for the reissue under the par value method?
Dr. Cash for the reissue price
Cr. Treasury Stock for the par value of the reissued shares
Cr. APIC–Common Stock for excess of reissue price above par value
Regardless of whether reissue price is < or > repurchase price
When a company issues shares as payment in a nonmonetary exchange, the exchange is recorded at what amount?
The market value of the newly issued shares.
Example:
A company issues 13,000 of its $1 par value common stock in exchange for land on a day when the stock’s market price is $13/share. The entry to record the exchange is:
Dr. Land $169,000 (13,000 × $13)
Cr. Common Stock $13,000 (13,000 × $1)
Cr. APIC $156,000 ($169,000 - $13,000)
When a company declares a property dividend, the dividend is recorded at what amount?
The fair value of the property to be distributed on the date the dividend is declared.
Example:
A company declares a property dividend of inventory that has a $65,000 carrying value and a $55,000 fair market value on the declaration date. The entry to record the dividend is:
Dr. Retained Earnings $55,000
Dr. Loss on Inventory $10,000
Cr. Inventory $65,000
How does an issuer record its declaration of a small stock dividend (< or = 20-25% of shares outstanding)?
On the date the dividend is declared, the issuer transfers the fair market value of the stock dividend from Retained Earnings to Common Stock and APIC.
Example:
A company declares a 10% stock dividend on its $10 par value common stock with 10,000 total shares outstanding and a fair market value of $30/share. The entry to record the dividend is:
Dr. Retained Earnings $30,000 (10% of 10,000 × $30)
Cr. Common Stock $10,000 (1,000 × $10 par)
Cr. APIC $20,000 ($30,000 - $10,000)
How does an issuer record its declaration of a large stock dividend (> 20-25% of shares outstanding)?
On the date the dividend is declared, the issuer transfers only the par value of the stock dividend from retained earnings to common stock.
Example:
A company declares a 30% stock dividend on its $10 par value common stock with 10,000 total shares outstanding. The entry to record the dividend is:
Dr. Retained Earnings $30,000 (30% of 10,000 × $10 par)
Cr. Common Stock $30,000
