F7 OLD

Question 1

Define common stock and list the basic properties.

Answer 1

Common stock: Residual ownership interest

Basic Rights include:
* Voting rights
* Dividend rights
* Rights to share in distribution of assets if corporation is liquidated, after satisfaction of creditor and preferred stockholders’ claims

Question 2

List some common properties of preferred stock.

Answer 2

• Convertible, callable
• Redeemable
• Dividends can be cumulative and/or participating

Question 3

What are the two alternative methods of accounting for treasury stock?

Answer 3

Cost method: Treasury stock is debited at cost of shares repurchased.

Legal (par value / stated value method): Treasury stock is debited at par value of shares repurchased.

Remember, no gains/losses are recognized on the income statement; income and retained earnings may never increase by the transaction; Additional-paid-in-capital–Treasury Stock account used to record “gains” and absorbs “losses.”

Treasury stock is not an asset; cash an property dividends are not paid on treasury stock; stock dividends may be paid on treasury stock.

Question 4

Summarize the cost method of accounting for treasury stock.

Answer 4

• Recorded, carried, and reissued at reacquistion cost
• Any “gain” is credited to Paid-In-Capital–Treasury Stock
• Any “loss” is charged against previous”gains”, then retained earnings
• Reported as a deduction from total stockholders’ equity

Question 5

Summarize the par value method of accounting for treasury stock.

Answer 5

• Recorded at par value with cost of stock that is in excess of par value recorded as a deduction to Paid-In-Capital–Treasury Stock and then from retained earnings after Paid-in-Capital–Treasury Stock is depleted.
• Reported as a deduction from capital stock.

Question 6

List the significant dates with respect to cash dividends.

Answer 6

• Date of declaration: becomes a liability and reduces retained earnings
• Date of Record: No journal entry, memorandum entry only
• Date of Payment: actually paid