F1-M4 Stockholders' Equity: Part 2

Question 1

What items effect retained earnings?

Answer 1

1. Income
2. Cash Dividends
3. Property Dividends (deducted at market value on the date of declaration; subtract market value but add/subtract gain or loss on disposition)

Question 2

What is a liquidating dividend?

Answer 2

The liquidating dividend is the amount in excess of the retained earnings balance.

Question 3

How are stock dividends reported as income?

Answer 3

Stock dividends are NOT recorded as income on the books of the recipient. It increases the number of shares held and decreases the cost basis per share.

Question 4

How do stock dividends paid affect the balance sheet?

Answer 4

Stock dividend (less than 20-25% of the stock outstanding) transfers the FMV of the stock dividend at declaration date from retained earnings to capital stock and paid-in capital. There is no effect on total stockholders’ equity because all transfers take place within stockholders’ equity.

Question 5

What is the journal entry for stock dividends paid?

Answer 5

The FAIR VALUE of the stock on the date of declaration is transferred from retained earnings TO common stock and additional paid-in-capital (common stock and APIC INCREASES).

Question 6

Under what circumstances is treasury stock affected by a stock split?

Answer 6

Treasury stock is also affected by the stock split assuming it is held to satisfy stock option commitments.

Question 7

What are the rules pertaining to stock rights being issue?

Answer 7

When stock rights are “issued” without consideration, no entry (only disclosure) is made by either the “issuer” or the “recipient.”

At the time the rights are “exercised” (and the corporation receives a cash inflow), additional paid-in capital would be credited if the purchase price of the stock exceeded the par value (which is usually the case). Retained earnings is not affected because this is a “capital” transaction, not an “operations” transaction.