F1M3&4

Question 1

Book Value per common share formula

Answer 1

common shareholders’ equity / common shares outstanding

Question 2

Common shareholders’ equity formula

Answer 2

total shareholders equity - preferred stock outstanding (at great of call price or par value) - cumulative preferred dividends in arrears.

Question 3

With participating cumulative preferred stock, before any proration of dividends may exist, the common shareholders must receive an …..

Answer 3

equal divided as the preferred shareholders. So fully participating 8% cumulative preferred shareholders get 8% of the dividend first, then common shareholders get their 8%, then its shared pro rata based on par values.

Question 4

Retained Earnings Formula

Answer 4

Net income (loss) – Dividends (cash, property, stock) declared +/- prior period adjustments +/- Accounting changes reported retrospectively.

Question 5

Journal entry for when RE is to be appropriated

Answer 5

Debit: Retained Earning (unappropriated)
Credit: RE appropriated for [purpose]

Reverse this when the appropriation has occurred.

Question 6

Treasury stock: Cost Method general information

Answer 6

Treasury shares are recorded and carried at their reacquisition cost. A gain or loss will be determined when treasury stock is reissued or retired. “APIC treasury stock” is credited for gains and debited for losses. Losses could potentially decrease retained earnings if APIC treasury stock account is not large enough to offset the loss. Net income or retained earnings will never be increased through treasury stock transactions.

Question 7

Cost Method: Treasury Stock

Journal entry to repurchase shares at a greater price than issued

Answer 7

Debit Treasury Stock (repurchase price per share * # of shares)
Credit Cash

Question 8

Cost Method: Treasury Stock

Journal entry to reissue (sell) treasury stock for more than it was repurchased for aka “above cost”

Answer 8

Debit Cash (resale price per share * # of shares)
Credit Treasury Stock (number of shares sold * price it was repurchased at)
Credit APIC Treasury stock (# of shares sold * (price treasury stock was resold for - price treasury stock was repurchased for)

Question 9

Cost Method: Treasury Stock

Journal entry to reissue (sell) treasury stock for less than it was repurchased for aka “below cost”

Answer 9

Debit Cash (resale price * number of shares)
Debit APIC TS (to reduce the balance of it as much as possible from the loss for selling below cost)
Debit Retained Earnings (if the balance of APIC TS was not large enough to cover loss)
Credit Treasury stock (price stock was repurchased for * number of shares)

Question 10

Par Method: Treasury Stock

General information

Answer 10

Treasury shares are recorded by reducing the amounts of par value and APIC received at the time of the original sale. “APIC treasury stock” is credited for gains and debited for losses. Losses could potentially decrease retained earnings if APIC treasury stock account is not large enough to offset the loss. The sources of capital associated with the original issue are maintained.

Question 11

Par Method: Treasury Stock

Journal entry to repurchase common stock at a greater price than its issue price

Answer 11

Debit Treasury Stock (Par price common stock was originally sold for * number of shares repurchased)
Debit APIC Common Stock (original issuance gain per share * number of shares repurchased)
Debit Retained Earnings if APIC TS account has not been established yet (number of shares repurchased * (repurchase price – original Sale price))
Credit Cash (number of shares sold * repurchase price per share)

Question 12

Par Method: Treasury Stock

Journal entry to repurchase common stock at a lower price than its issue price

Answer 12

Debit Treasury stock (number of shares repurchased * par price common stock was originally sold for)
Debit APIC Common Stock (number of shares repurchased * gain per share for the original issuance)
Credit Cash (number of shares repurchased * repurchase price)
Credit APIC Treasury Stock (number of shares repurchased * (price per share originally sold for – repurchase price per share))

Question 13

Par Method: Treasury Stock

Journal Entry to reissue shares for more than repurchase price

Answer 13

Debit Cash (number of shares * resale price)
Credit Treasury Stock (number of shares * original par value at issuance)
Credit: APIC Common Stock (number of shares * (reissue price – original par value)

Question 14

Par Method: Treasury Stock

Journal Entry to reissue shares for less than repurchase price

Answer 14

Debit Cash (number of shares * resale price)
Credit Treasury Stock (number of shares * original par value at issuance)
Credit APIC common stock (number of shares * (reissue price – original par value)

Question 15

Treasury Stock: key reminder

Answer 15

par method: anytime the treasury stock account is touched it will always use the par value of the original issuance

Question 16

Retirement of treasury stock

Journal entry for shares reacquired to retire at a greater value than it was originally sold for (cost method)

Answer 16

Debit Common Stock (number of shares * original par value)
Debit APIC Common Stock (number of shares * gain on original issuance)
Debit Retained Earnings (number of shares * (repurchase price – original sale price)
Credit Treasury stock (number of shares * repurchase price)

Question 17

Retirement of treasury stock

Journal entry for shares repurchased to retire at a greater value than it was originally sold for (par method)

Answer 17

Debit Common stock (number of shares * original par value)
Credit treasury stock (number of shares * original par value)

Question 18

Donated Treasury Stock
Journal entry to record donated stock at fmv

Answer 18

Debit Donated Treasury stock (at FMV)
Credit Additional paid-in capital (at FMV)

Question 19

Donated treasury stock
Journal entry if the donated stock is sold

Answer 19

Debit Cash (sales price)
Debit APIC if sales price is less than FMV, Credit if sales price is greater
Credit donated treasury stock (at book value, or original FMV)

Question 20

Stock Subscriptions to nonemployees

Journal entry for sale of subscription

Answer 20

Debit Subscriptions receivable (number of shares * sales price)
Credit Common stock subscribed (number of shares * par value)
Credit Additional paid in capital (number of shares * difference in sales price and par value)

Question 21

Stock Subscriptions to nonemployees

Collection of subscriptions

Answer 21

When the subscription is paid, cash is collected and the subscriptions receivable is reduced.

Question 22

Stock Subscriptions to nonemployees

Journal entry: Issuance of stock previously subscribed. So the subscription is satisfied and the stock needs to be issued and given

Answer 22

Debit Common stock subscribed (number of shares * par value)
Credit Common Stock (issued)

Question 23

Stock Subscriptions to nonemployees

Default/forfeiture of a subscription

Answer 23

The terms of the subscription will identify the steps to move forward if not all subscription amounts have been received. Generally, the original entry is partially reversed and either: issue stock in proportion to the amount paid, refund the partial payment, or retain partial payment (as liquidated damaged for breach of contract) by a credit to APIC.

Question 24

Stock Rights

Journal entry for the exercise of stock rights.

Answer 24

Debit Cash (amount received)
Credit Common Stock (par value)
Credit Additional paid in capital (residual value)

Question 25

Distributions to shareholders

Date of declaration

Answer 25

the date the BOD formally approves a dividend. On this date, a liability is created (dividends payable) and retained earnings is reduced (debited)

Question 26

Distributions to shareholders

Date of record

Answer 26

the date the BOD specifies as the date the names of the shareholders to receive the dividend are determined.

Question 27

Distributions to shareholders

Date of payment

Answer 27

the date on which the dividend is actually disbursed by the corporation or its paying agent.

Question 28

Types of dividends:

Answer 28

o Cash dividends are paid from retained earnings and paid only on authorized, issued, and outstanding shares. Not paid or declared on treasury stock.
o Property (in-kind) dividends distributes non cash assets. On the date of declaration, the property should be restated to fair value and any gain or loss should be recognized in income. The dividend liability and reduction to retained earnings should be recorded at the fair value of the assets transferred.
o Scrip dividends are a special form of notes payable that a corporation commits to paying a dividend at a later date. This may happen because of a cash shortage. On the date of declaration notes payable is credited instead of dividends payable. If the scrip dividends bear interest from the declaration date to date of payment it needs to be accrued.
o Liquidating Dividends which exceed retained earnings, are charged APIC and then to common or preferred stock. This reduces total paid in capital.
o stock dividends give shareholders additional shares and have many rules on treatment depending on the proportion of stocks distributed

Question 29

Stock dividends:

Small, large, and treasury

Answer 29

Small Stock dividends is less than 20-25 percent of outstanding shares (not expected to effect the market price of the stock). At the date of declaration, the fair market value of the stock dividend is transferred from retained earnings to capital stock and APIC. No effect on total shareholders equity because retained earnings is capitalized.
* Debit Retained Earnings (number of shares * fair value)
* Credit Common Stock (number of shares * par value)
* Credit Paid in capital (difference)

Large stock dividends are greater than 20-25 percent of previously outstanding shares. The par value of the stock dividends is transferred from RE to capital stock.
* Journal Entry for the declaration of the stock dividend at par
o Debit Retained Earnings (# of shares * par value)
o Credit Common Stock distributable
* Journal entry to record the distribution of the stock dividend at par
o Debit Common Stock distributable
o Credit Capital stock, (number of shares * par value)
* However, if not required by state law to capitalize RE because their articles of incorporation were amended, record it like a stock split and change the number of shares outstanding and the par value per share.

Stock dividends on treasury stock
* Exceptions to allow dividends on treasury stock (because not considered outstanding are) are contractual obligations of the company to meet treasury stock to shares outstanding ratios and state law required that treasury stock be protected from dilution

Question 30

Stock Splits

Answer 30

o Stock splits do not typically affect retained earnings or total shareholders equity as the par value is reduced proportionally with the split ratio
 Reverse: recall outstanding stock certificates and issue new certificates.
 Exceptions for splits on treasury stock: contractual obligations of the company to meet treasury stock to shares outstanding ratios and state law required that treasury stock be protected from dilution

Question 31

Cash restricted for the retirement of bonds is treated as…

Answer 31

typically reduces cash and does not affect retained earnings unless it specifically mentions appropriation.

Question 32

How to value the appropriated retained earnings:

Answer 32

when funds are appropriated but not fully used, those funds are moved to unappropriated retained earnings.

Question 33

When repurchasing stock and reissuing treasury stock, when do we adjust the common stock accounts?

Answer 33

Common stock accounts are adjusted for the par value method only.

when repurchasing stock using the cost method treasury stock uses the repurchase price in the calculation. when the treasury stock is then sold use the repurchase price per stock to value it. With the cost method we do not adjust the common stock for repurchasing and reissuing.

Question 34

How does treasury stock effect the stockholders equity balance?

Answer 34

treasury stock reduced stockholders equity on the balance sheet.

Question 35

Dividends in arrears should be represented on the financial statements as:

Answer 35

A disclosure of the amount.

They are not recorded as a liability until they are declared.

Question 36

Allocating proceeds from a “basket” purchase or sale that involves convertible preferred stock

Answer 36

Allocated based on relative fair market values. take each issued items fair market value and the quantity of each sold and get their proportion % from that.

Question 37

Where are gains and losses reported from treasury stock transactions?

Answer 37

Not the income statement

Gains hit APIC

Losses hit APIC then retained earnings

Question 38

Does the sale of treasury stock increase or decrease stockholders equity? regardless of gain or loss.

Answer 38

If cash is received from the sale, then selling off treasury stock increases stockholders equity.

Question 39

When stock is repurchased using the par method how do you calculate APIC CS?

wait this might not be right

Answer 39

repurchased shares * original gain per share

original gain per share (issue price - par value)

Question 40

So when you repurchase treasury stock with the par method how are the APIC accounts handled.

Answer 40

if the stock is $2 par, originally issued for $5, and repurchased for $12.

at the repurchase date APIC CS can only be decreased at its original issuance rate, in this case that is (5-2).

But because there is a remaining loss (12-(5-2)). that needs to be decreased from Retained Earnings.

Question 41

When treasury stock using the par method is then reissued what do you use to calculate APIC?

Answer 41

Reissue price per share - original par value

then multiply that by the stocks reissued.

Question 42

Property dividends are deducted from RE when?

Answer 42

at market value on the date of declaration

Question 43

If a declared property dividend has a greater fair value than carrying value on the date of declaration, what happens?

Answer 43

The excess of fair value over carrying value is a gain on marketable securities. The dividend fair value is a reduction to RE.

The value of these two together is the impact on RE.

Question 44

Stock dividends are not recorded as _____ on the recipients books

Answer 44

Income

Question 45

How would a 5% stock dividend affect each assets, stockholders equity, and retained earnings?

Answer 45

A small stock dividend (less than 20-25%) at declaration date transfers FMV of the stock from RE to capital stock and paid in capital. All of these transfers occur in stockholders equity.

Assets: No effect

Stockholders equity: No effect

Retained Earnings: Decrease

Question 46

When information is provided for how many stocks are authorized and the amount that is outstanding, which value do you use if a 10% stock dividend is declared?

Answer 46

The number stock outstanding.

Question 47

How is treasury stock affected by stock splits?

Answer 47

it is impacted at the same pro rata rate as common stock.