F7-M1 Stock Holders Equity Pt.1 Flashcards
Appropriated Retained Earnings
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
Treasury Stock Transactions
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
Common stock that contains unconditional redemption value feature
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
Shareholders Equity - Dividends paid
Dividends paid are a direct reduction of retained earnings for prior periods + current year.
Cumulative Preferred stock dividends & dividends in arrears
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.
Book Value per Common share formula
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
The acquisition of treasury stock at a price less than their book value will:
- Decrease stockholders equity in total. All treasury stock transactions decrease total equity
- 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
Two Methods of accounting for Treasury Stock are permitted:
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
Participating preferred stock
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
Dividends
They become a liability on the books of the issuing company along with change in RE the day is DECLARED
Property Dividend
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.
Date of Declaration
The date the board of directors formally approves a dividend.
A liability is created ( Dividends payable) and RE is reduced (debited)
Stock Dividend
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
Liquidating dividend
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
Cash Dividend
Working capital is decreased Pom the declaration date, Per rule a liability for a cash dividend is incurred and recorded on the declaration date
Common stock
The common stock account will increase by the number of shares issued x its par value of the shares themselves
Rights issued vs rights exercised
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”
Subscription of “No Par” Common Stock
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
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?
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
2 for 1 split
When stock split happens you also split the price of the par for the stock
Stock options
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
When are convertible securities recognized when computing EPS
Only if the conversion is dilulitive
What per-share amount must be reported on the face of a public company’s income statement?
Income from continuing operations
In determining EPS, interest expense, net of applicable income taxes, on convertible debt that is diluted should be:
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
When computing BASIC EPS
Convertible securities are ignored for purposes of computing the weighted average of common shares outstanding
BASIC EPS FORMULA
Income Available to common shareholders / weighted average number of common shares outstanding
DILUTED EPS FOMRULA
= Income available to the common shareholders + interest on dilutive securities / Weighted average # of common shares (assuming all dilutive securities are converted to common stock)*
Convertible preferred stock
Ignore taxes
Dilution from convertible Bonds
Subtract the income tax expense
Calculating Basic EPS when stock dividends are issued
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
The numerator in the Diluted EPS
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
Operating Cashflows
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)
Investing cashflows
Cash Receipts and disbursements from Non-Current assets
Financing Activities
Cash receipts and disbursements from debt (Including Current liabilities) and equity
Indirect Method
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
Financial Statements required of both DEFINED benefit pension plans and DEFINED Contribution plans
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”
How should an investment be reported on a define benefit plan
They must be reported at FAIR VALUE in a defined benefit plans statements
Components of statement of CHANGES in net assets available for benefits
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
Components of Statement of Changes in Accumulated Plan Benefits
- 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
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?
Equity instruments issued for employee services are to be valued at the date of Grant
Compensation Expense on employee stock options recognition
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
