F1 M4 Stockholders' Equity: Part 2 Flashcards
A company issues a share of no-par common stock for $10. The share has a stated value of $1. How does the company record the issuance in its financial statements?
Dr. Cash $10
Cr. Common Stock $1
Cr. APIC $9
Identical to issuing a share of $1 par value common stock.
A company issues a share of $1 par value preferred stock for $20. How does the company record the issuance in its financial statements?
Dr. Cash $20
Cr. Preferred Stock $1
Cr. APIC $19
Similar to issuing a share of $1 par value common stock.
What is a liquidating dividend and how is it recorded?
A liquidating dividend exceeds the balance of retained earnings. It is recorded on the date it is declared by credting dividends payable for the total amount of the dividend, debiting Retained Earnings to zero, and debiting the excess first to APIC and then to Common Stock or Preferred Stock.
A company with 100,000 shares outstanding declares a 2-for-1 stock split. How many shares outstanding does it have after the split?
200,000
Company A buys 10,000 shares (2% ownership) of Company B for $10/share. Company B pays Company A a stock dividend of 2,000 shares. How does Company A record the stock dividend?
Company A does not not recognize any income or make any journal entry for the stock dividend received. The stock dividend increases the number of shares held to 12,000 and reduces the per-share carrying amount from $10/share to $8.33/share. But it does not affect the total investment balance, which remains $100,000.
What’s the difference between shares issued and shares outstanding?
Shares issued includes treasury stock and all shares held by shareholders and insiders. Shares outstanding includes only shares held by shareholders and insiders and does not include treasury stock.
How does a stock split affect treasury stock?
The number of shares of treasury stock changes in proportion to the stock split. The total cost basis of the treasury stock does not change, but the cost per share changes proportionally. No journal entry is required.
Example:
Acme has 1,000 shares of stock issued, 100 shares of which are held as treasury stock. Acme purchased the treasury stock for $10/share. Therefore, the balance of the Treasury Stock account is $1,000.
Acme declares a 2-for-1 stock split, after which it has 2,000 shares issued, 200 of which are held as treasury stock. The balance of the Treasury Stock account is still $1,000, but the cost basis is now $5/share.
How does a stock dividend affect treasury stock?
A stock dividend has no effect on treasury stock because dividends are paid on shares outstanding. Treasury stock is issued but not outstanding.
Example:
Acme has 1,000 shares issued, 100 of which are held as treasury stock and 900 of which are outstanding. Acme declares a 10% stock dividend. Therefore, the company issues 90 new shares to the owners of the 900 shares outstanding. Treasury stock remains unchanged.
How does a company record the declaration of a stock dividend?
Debit Retained Earnings for the fair market value of the dividend, credit Common Stock for the par value of the dividend, and credit APIC for the remainder.
Example:
Acme issues a 2% stock dividend on its $2 par common stock when its outstanding shares is 30 million and its share price is $10.50/share. The entry to record the stock dividend is:
Dr. Retained Earnings $6,300,000 (2% × 30,000,000 × $10.50)
Cr. Common Stock $1,200,000 (2% × 30,000,000 × $2.00)
Cr. APIC $5,1000,000 ($6,300,000 - $1,200,000)
