F7-M1 Stock Holders Equity Pt.1

Question 1

Appropriated Retained Earnings

Answer 1

When the purpose of the appropriation has been achieved, it should be put back into UN-appropriated earnings
Restricted cash for the retirement of bonds does not affect retained earnings

** pay attention if the appropriation is RE

Question 2

Treasury Stock Transactions

Answer 2

G/L on Treasury stock are never recorded on the income statement.

Gains are recorded by increasing APIC-Treasury stock.

Losses are recorded eliminating the balance on APIC-treasury stock and then Decreasing Retained Earnings

Treasury stock are shown separately as a reduction to equity, not as an adjustment to common stock at par

Question 3

Common stock that contains unconditional redemption value feature

Answer 3

Should be reported on the issuers book as a liability on the date of issuance because there is an obligation in the future for a cash outflow that the company cannot prevent

Question 4

Shareholders Equity - Dividends paid

Answer 4

Dividends paid are a direct reduction of retained earnings for prior periods + current year.

Question 5

Cumulative Preferred stock dividends & dividends in arrears

Answer 5

Dividends are paid on par value, we take the Par value multiply by the number of shares outstanding then we multiply the % of preferred stock dividends on the CY and add any dividends in arrears. The remaining outstanding total if there is any dividends left after paying dividends to preferred stock holders and dividends in arrears to preferred stock holders goes to common stock in a form of dividends.

Question 6

Book Value per Common share formula

Answer 6

BV per common share= Common stockholders equity / common shares outstanding

Common shareholders’ equity includes the reduction for treasury stock. Common shares outstanding is calculated by subtracting treasury shares

Question 7

The acquisition of treasury stock at a price less than their book value will:

Answer 7

1. Decrease stockholders equity in total. All treasury stock transactions decrease total equity
2. Increase book value per share. Book value per share is based on the number of outstanding common shares which reduced by the acquisition of treasury stock (the denominator is reduced). The number at or (book value) also is reduced by the cost to purchase shares, but the overall effect on the ratio is an increase in book value per share.

EX: if BV were $1,000 and there were 100 common shares, the BV per Common share would be $10

If the shares were repurchased for $8 (less than orig. BV per share) the new BV would be $920 and reduced the number of share to 90, Thus resulting in a new BV per common share of $10.22, which is larger than $10

Question 8

Two Methods of accounting for Treasury Stock are permitted:

Answer 8

1) Cost Method- Gain or loss calculated upon reissue (used in entities 95% of the time) - NI or RE will never go up

ANY EXCESS OF LOSS UNDER COST METHOD - Reissued below cost WILL affect RE unless APIC has enough balance to absorb the loss

2) Legal (Par stated value) Method- Gain or Loss calculated immediately upon Repurchase (rarely use in practice but it is tested)

The primary difference between these two methods is the timing of the recognition of gain or loss on treasury transactions. under both methods gain or losses are recorded as a direct adjustment to stockholders equity and are not included in the determination of net income

Question 9

Participating preferred stock

Answer 9

Splits dividend distributions with common shareholders only after the common shareholders have received a percentage dividends equivalent to preferred shareholders. The remaining dividends is shared in relation to relative capitalization

Question 10

Dividends

Answer 10

They become a liability on the books of the issuing company along with change in RE the day is DECLARED

Question 11

Property Dividend

Answer 11

Property dividend should be recorded on RE at the property Market Value at the date of declaration

Dividends of property recorded at “Fair value” and RE is “Decreased” when Declared

Any gain or loss on property dividends should be recognized in income.

Question 12

Date of Declaration

Answer 12

The date the board of directors formally approves a dividend.

A liability is created ( Dividends payable) and RE is reduced (debited)

Question 13

Stock Dividend

Answer 13

Stock dividends and stock splits are not considered income to the recipient. Investors do not record dividends at fair market value. They simply reallocate the investment account balance (under either the equity method or cost method)over more shares so that the value per share increases

A stock dividend less than 20-25% of stock outstanding is treated by transfer FMV of the stock dividend at declaration date from RE to Capital stock and APIC.

A stock dividend is not revenue, receipt of a stock dividend increases the number of shares held and decreases the cost basis per share

There is no effect on Shareholders equity because all transfers take place within Shareholders Equity
** Need to know the different between a small stock dividend and a large stock dividend
More than 25% is classified as a large stock dividend by GAAP. For stock Dividends RE is debited for the par value of the additional shares issued
Date of Declaration JE
Dr. RE (eg. 30% x 1000 Shares outstanding x$1 Par). $300
Cr. Common stock to be distributed $300

If the stock dividend was regarded as a small stock dividend at a $10 per share stock. APIC would be credited $2700
DR. RE (30% x 1000 shares x $10 Fair value) $3000
CR. Common stock to be distributed. $300
CR. APIC $2700

Treasury took is debited when a company reacquires its own stock, not in a stock dividend transaction

Question 14

Liquidating dividend

Answer 14

By definition is a return on capital that was originally contributed to the company in excess of RE. A PURE LIQUIDATING DIVIDEND implies there is NO RE left to decrease

Return on capital - decreases APIC not a Distributions of earnings which decreases RE

If you exceed your RE its considered a Liquidating Dividend. If APIC has to make up for the balance difference if there is to RE balance (considered Liquidating)

Ex: Assume 80% distribution of earnings and 20% liquidating with $100,000 Dividend:
DR. RE $80,000
DR. APIC $20,000
CR. Cash $100,000

Question 15

Cash Dividend

Answer 15

Working capital is decreased Pom the declaration date, Per rule a liability for a cash dividend is incurred and recorded on the declaration date

Question 16

Common stock

Answer 16

The common stock account will increase by the number of shares issued x its par value of the shares themselves

Question 17

Rights issued vs rights exercised

Answer 17

No entry is made when rights are issued since no consideration is given.

**If the rights are exercised ed and stock dividend is issued, the common stock and APIC increase
When stock rights are “issued” with out consideration no entry is made, only a disclosure by either the issuer or the recipient

At the time rights are “excercised” (and receives a cash inflow), APIC would be credited if the purchase price of the stock EXCEEDS the par value (which is usually the case)
Excersice of rights JE:
DR. Cash (2,000 Sh x $15) $30,000
CR. Common stock (2000 Sh x $10 par). $20,000
CR. APIC $10,000
RE is not affected because capital transactions are not “operations” transactions”

Question 18

Subscription of “No Par” Common Stock

Answer 18

When collectibility is “reasonably assured” the excess of the subscription price over stated value of the no par common stock subscribed, should be recorded in APIC when subscription is received. This happens when the subscription is RECORDED in other words

Question 19

A company Declared 10% stock dividend on 15,000 outstanding common stock par value of $5 and FMV of $10.
What is the change in stockholders equity?

Answer 19

10% stock dividend qualifies as a small stock dividend and is not expected to affect the market price of the stock.

The declaration is transferred from retained earnings to common stock and APIC

DR Retained Earnings $15,000 ( 1,500 shares [10%] x $10 FMV)
CR Common stock $7,500
CR Additional paid-in-capital $7,500

Question 20

2 for 1 split

Answer 20

When stock split happens you also split the price of the par for the stock

Question 21

Stock options

Answer 21

Stock options are valued at the fair value of the options issued. The value is determined based on the FMV on the grant date and recorded as compensation expense over the service period between the grant date and the vesting date

Question 22

When are convertible securities recognized when computing EPS

Answer 22

Only if the conversion is dilulitive

Question 23

What per-share amount must be reported on the face of a public company’s income statement?

Answer 23

Income from continuing operations

Question 24

In determining EPS, interest expense, net of applicable income taxes, on convertible debt that is diluted should be:

Answer 24

Interest expense (net of tax) on debt considered would be Added back to the number for for EPS if the effects a dilutive.

NOTE: Interest is not added back “if-converted” method for instruments that require cash settlement of principal and interest where only the conversion premium is share-settled

Question 25

When computing BASIC EPS

Answer 25

Convertible securities are ignored for purposes of computing the weighted average of common shares outstanding

Question 26

BASIC EPS FORMULA

Answer 26

Income Available to common shareholders / weighted average number of common shares outstanding

Question 27

DILUTED EPS FOMRULA

Answer 27

= Income available to the common shareholders + interest on dilutive securities / Weighted average # of common shares (assuming all dilutive securities are converted to common stock)*

Question 28

Convertible preferred stock

Answer 28

Ignore taxes

Question 29

Dilution from convertible Bonds

Answer 29

Subtract the income tax expense

Question 30

Calculating Basic EPS when stock dividends are issued

Answer 30

When calculating WASCO - the avg # of shares to be used in EPS calculation, STOCK DIVIDENDS are treated as if they occurred at the beginning of the period. Calculated as follows

Shares outstanding 1/1 100,000
Stock Dividend** 3/31 24,000
Stock issuance 6/30 5,000

Calculation:
124,000 shares x 6/12 = $62,000
129,000 shares x 6/12 = 64,500

	weighted average = $126,500

Question 31

The numerator in the Diluted EPS

Answer 31

Is equal to the income available to common shareholders plus the after tax interest expense that would not been incurred if the bonds have been converted
EX:
Net income $600,000
- $5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued 4 years ago at a discount which is being amortized in the amount of $20,000 per year. The stated rate of interest on the bonds is 9%, and the bonds were issued to yield 10%. Each $1,000 bond is convertible to 20 shares of common stock
- Corporate tax rate is 25%

CALCULATION: Interest payments of $450,000 ($5,000,000 face x 9% stated rate) + discount amortization of $20,000
Income available to common shareholders _ interest of dilutive securities
=$600,000 +[$470,000 x (1-25%)] =$952,500

Question 32

Operating Cashflows

Answer 32

Cash receipts and disbursements from transactions reported on the income statement and current assets and current liabilities ( EXCEPT current notes payables and the current portion of LT Debt which are reported on the financing cash flows)

Question 33

Investing cashflows

Answer 33

Cash Receipts and disbursements from Non-Current assets

Question 34

Financing Activities

Answer 34

Cash receipts and disbursements from debt (Including Current liabilities) and equity

Question 35

Indirect Method

Answer 35

1) When using the indirect methods - supplement disclosures of cash paid for interest and income taxes is required. Major classes of gross cash receipts and gross cash payments

CFO= NI + Noncash Expenses/lossses - Noncash Income/gains - Increases (decreases) in operating liabilities/(assets) - Increases (decreases) in operarating assets/ liabilities

Question 36

Financial Statements required of both DEFINED benefit pension plans and DEFINED Contribution plans

Answer 36

There are 2 statements that are required for a defined contribution plan

1) Statement of changes in net assets Available for benefits
1) Statement of Net assets available for benefits

In addition, but not required, optional statement of cash flow for define pension plans and define contribution plans is the “ Statement of Net funded Status”

Question 37

How should an investment be reported on a define benefit plan

Answer 37

They must be reported at FAIR VALUE in a defined benefit plans statements

Question 38

Components of statement of CHANGES in net assets available for benefits

Answer 38

The statement of changes in net assets available for benefits show:
- The appreciation of the Fair value of the investment
- Any other investment income
- Investment expenses
- Contributions
- Benefits paid
- Administrative expenses
To arrive at net increase or decrease for benefits during the period

Question 39

Components of Statement of Changes in Accumulated Plan Benefits

Answer 39

• Every factor in a plans actuarial PV of plan benefits
• Changes in Actuarial assumptions
• The effect of plan amendments
• the amount of benefits paid to beneficiaries

Question 40

Which of the following dates a public entity is required to measure the cost of employee services in exchange for an award of equity interest, based on the FMV of the award?

Answer 40

Equity instruments issued for employee services are to be valued at the date of Grant

Question 41

Compensation Expense on employee stock options recognition

Answer 41

The company would calculate compensation expense on the grant date and recognize this expense over the service period. This compensation expense, calculated on grant date will be recorded over the excercised date

Compensation expense is recognized regardless of wether the option is excercised

We take the Fair value of the options at the grant date divided by the service years