F7

Question 1

Legal Capital Definition

Answer 1

*amount of capital that must be retained by the corporation for the protection of creditors (cannot pay out dividends from this amount)

Question 2

Book Value per Common Share

Answer 2

= (Common Shareholder’s Equity)/(Common Shares Outstanding)

Question 3

Convertible vs. Callable Preferred Stock

Answer 3

Convertible = investor has this right
Callable = option of the entity

Question 4

Mandatorily Redeemable Preferred Stock

Answer 4

*must be treated as a liability since it is more of a debt instrument

Question 5

Participating Preferred Stock

Answer 5

• shares in remaining dividends
• common shareholders must be accounted for after preferred using the same return %
• then divide the remaining dividends pro rata based upon legal capital proportions

Question 6

Quasi-Reorganization

Answer 6

• used to reduce retained earnings back down to zero
• also used to restate overvalued assets to their lower fair values

*credit any excess after reducing par value to APIC

Question 7

Methods of Accounting for Treasury Stock

Answer 7

1. cost method
2. par method

Cost Method = G/L upon reissuance
Par Method = G/L upon acquisition

• special APIC account will be used for G/L
• *otherwise it will be plugged to R/E for losses

Question 8

Par Value Method of Treasury Stock

Answer 8

• only recognize APIC - T/S upon repurchasing the treasury stock
• plug to APIC - C/S when the treasury stock is reissued

Question 9

Par Value Method Retirement

Answer 9

DR: C/S
CR: T/S

*both have equivalent par values so they cancel one another out

Question 10

Sale of Subscriptions

Answer 10

DR: Subscriptions Receivable
CR: Common Stock subscribed
CR: APIC

Collection
DR: Cash
CR: Subscriptions Receivable

Issuance of Stock Previously Subscribed
DR: Subscriptions Receivable
CR: Common Stock (issued)

Question 11

Property Dividends

Answer 11

*remove A/D and old cost and recognize new asset at FMV along with a gain or a loss

Question 12

Liquidating Dividend

Answer 12

• when dividends exceed R/E
• first go to APIC
• then go to common stock

Question 13

Scrip Dividends

Answer 13

• shortage of cash so notes are issued instead

* CR: Notes Payable instead of Dividend Payable

Question 14

Journal Entry for Large Dividend

Answer 14

R/E
Common Stock Distributable

Common Stock Distributable
Capital stock, $10 par common

Question 15

Noncompensatory vs. Compensatory Stock Issued to Employees

Answer 15

Noncompensatory: no J/E until the stock is purchased
**under IFRS, all stock options are compensatory
Compensatory: accrue an expense over the vesting term

Question 16

Does the fair value of the stock for compensatory options matter?

Answer 16

No; no gain or loss

Question 17

Statement of Changes in Shareholder’s Equity: GAAP vs. IFRS

Answer 17

GAAP allows it to be a primary financial statement or be put in the notes
IFRS and SEC require it to be a financial statement

Question 18

Basic EPS Formula

Answer 18

Basic EPS = (Net Income - Preferred Dividends)/(Weighted Average Common Stock Outstanding)

Question 19

Basic EPS Formula: Preferred Stock Issues

Answer 19

Noncumulative: only subtract if declared
Cumulative: always subtract out that year’s rate

Question 20

How are stock splits and stock dividends treated for EPS?

Answer 20

• treat them as though they occurred at the beginning of the year
• may have to go back and restate the prior year’s financials for comparative purposes

Question 21

Examples of Dilutive Securities

Answer 21

• convertible securities
• warrants and other options
• contracts that may be settled in cash or stock
• contingent shares

Question 22

When using the Treasury Stock Method for Dilution due to Options and Warrants, which price should you use for the theoretically reacquired stock?

Answer 22

• the average market price

* do not add back the proceeds since they are used to theoretically reacquire stock

Question 23

Options and Dilutive EPS

Answer 23

• must have intrinsic value to be dilutive

* no addition to the numerator since all proceeds are hypothetically used to reacquire shares at the market average rate

Question 24

Contingent Shares That Are Dilutive

Answer 24

INCLUDED IN BASIC EPS; already accounted for in diluted EPS

Question 25

Adjustments to NI for Indirect Operating Cash Flow

Answer 25

\+Depreciation
\+Amortization 
- Gains
\+Losses
-equity earnings affiliated

Question 26

Are trading securities operating or investing?

Answer 26

*operating if they are classified as current assets

Question 27

Classification of Retained Earnings

Answer 27

*purpose is to disclose that some of the retained earnings are not available because they have been restricted
*should be reversed when the action is taken
DR: Retained earnings (unappropriated)
CR: Retained earnings appropriated for [purpose]