F1M3&4 Flashcards
Stockholder's Equity
Book Value per common share formula
common shareholders’ equity / common shares outstanding
Common shareholders’ equity formula
total shareholders equity - preferred stock outstanding (at great of call price or par value) - cumulative preferred dividends in arrears.
With participating cumulative preferred stock, before any proration of dividends may exist, the common shareholders must receive an …..
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.
Retained Earnings Formula
Net income (loss) – Dividends (cash, property, stock) declared +/- prior period adjustments +/- Accounting changes reported retrospectively.
Journal entry for when RE is to be appropriated
Debit: Retained Earning (unappropriated)
Credit: RE appropriated for [purpose]
Reverse this when the appropriation has occurred.
Treasury stock: Cost Method general information
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.
Cost Method: Treasury Stock
Journal entry to repurchase shares at a greater price than issued
Debit Treasury Stock (repurchase price per share * # of shares)
Credit Cash
Cost Method: Treasury Stock
Journal entry to reissue (sell) treasury stock for more than it was repurchased for aka “above cost”
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)
Cost Method: Treasury Stock
Journal entry to reissue (sell) treasury stock for less than it was repurchased for aka “below cost”
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)
Par Method: Treasury Stock
General information
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.
Par Method: Treasury Stock
Journal entry to repurchase common stock at a greater price than its issue price
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)
Par Method: Treasury Stock
Journal entry to repurchase common stock at a lower price than its issue price
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))
Par Method: Treasury Stock
Journal Entry to reissue shares for more than repurchase price
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)
Par Method: Treasury Stock
Journal Entry to reissue shares for less than repurchase price
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)
Treasury Stock: key reminder
par method: anytime the treasury stock account is touched it will always use the par value of the original issuance
Retirement of treasury stock
Journal entry for shares reacquired to retire at a greater value than it was originally sold for (cost method)
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)
Retirement of treasury stock
Journal entry for shares repurchased to retire at a greater value than it was originally sold for (par method)
Debit Common stock (number of shares * original par value)
Credit treasury stock (number of shares * original par value)
Donated Treasury Stock
Journal entry to record donated stock at fmv
Debit Donated Treasury stock (at FMV)
Credit Additional paid-in capital (at FMV)
Donated treasury stock
Journal entry if the donated stock is sold
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)
Stock Subscriptions to nonemployees
Journal entry for sale of subscription
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)
Stock Subscriptions to nonemployees
Collection of subscriptions
When the subscription is paid, cash is collected and the subscriptions receivable is reduced.
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
Debit Common stock subscribed (number of shares * par value)
Credit Common Stock (issued)
Stock Subscriptions to nonemployees
Default/forfeiture of a subscription
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.
Stock Rights
Journal entry for the exercise of stock rights.
Debit Cash (amount received)
Credit Common Stock (par value)
Credit Additional paid in capital (residual value)
Distributions to shareholders
Date of declaration
the date the BOD formally approves a dividend. On this date, a liability is created (dividends payable) and retained earnings is reduced (debited)
Distributions to shareholders
Date of record
the date the BOD specifies as the date the names of the shareholders to receive the dividend are determined.
Distributions to shareholders
Date of payment
the date on which the dividend is actually disbursed by the corporation or its paying agent.
Types of dividends:
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
Stock dividends:
Small, large, and treasury
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
Stock Splits
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
Cash restricted for the retirement of bonds is treated as…
typically reduces cash and does not affect retained earnings unless it specifically mentions appropriation.
How to value the appropriated retained earnings:
when funds are appropriated but not fully used, those funds are moved to unappropriated retained earnings.
When repurchasing stock and reissuing treasury stock, when do we adjust the common stock accounts?
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.
How does treasury stock effect the stockholders equity balance?
treasury stock reduced stockholders equity on the balance sheet.
Dividends in arrears should be represented on the financial statements as:
A disclosure of the amount.
They are not recorded as a liability until they are declared.
Allocating proceeds from a “basket” purchase or sale that involves convertible preferred stock
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.
Where are gains and losses reported from treasury stock transactions?
Not the income statement
Gains hit APIC
Losses hit APIC then retained earnings
Does the sale of treasury stock increase or decrease stockholders equity? regardless of gain or loss.
If cash is received from the sale, then selling off treasury stock increases stockholders equity.
When stock is repurchased using the par method how do you calculate APIC CS?
wait this might not be right
repurchased shares * original gain per share
original gain per share (issue price - par value)
So when you repurchase treasury stock with the par method how are the APIC accounts handled.
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.
When treasury stock using the par method is then reissued what do you use to calculate APIC?
Reissue price per share - original par value
then multiply that by the stocks reissued.
Property dividends are deducted from RE when?
at market value on the date of declaration
If a declared property dividend has a greater fair value than carrying value on the date of declaration, what happens?
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.
Stock dividends are not recorded as _____ on the recipients books
Income
How would a 5% stock dividend affect each assets, stockholders equity, and retained earnings?
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
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?
The number stock outstanding.
How is treasury stock affected by stock splits?
it is impacted at the same pro rata rate as common stock.
