F7: Stockholder's Equity

Question 1

Capital stock is:

Answer 1

• Preferred stock + common stock
• This cannot be used for dividends
• AKA legal capital

Question 2

Facts about common stock

Answer 2

• last in line

- right to vote

Question 3

Book value per Common Share calculation

Answer 3

Common SHE / common shares outstanding

Question 4

Common Stockholder’s Equity formula

Answer 4

Total SHE
- Preferred stock outstanding
- Cumulative preferred dividends in arrears
= Common SHE

Question 5

Facts about preferred stock

Answer 5

• Have preference in dividends

- No voting rights

Question 6

Cumulative preferred stock

Answer 6

• Dividends not paid accumulate to be paid in the future
• Called “dividends in arrears”
• Must be paid before common stock dividends

Question 7

Participating preferred stock

Answer 7

• Share equally the excess pro rata
• Fully participating (participate in excess without limit)
• Partially participating (participate in excess at a limited extent)

Question 8

Convertible preferred stock

Answer 8

Can be exchanged for common stock at option of investor

Question 9

Callable (redeemable) preferred stock

Answer 9

Can be repurchased at a specific price at option of entity

Question 10

Mandatorily Redeemable preferred stock

Answer 10

• Liability
• preferred stock issued with a maturity date
• Gives a date that it MUST be bought back by the company

Question 11

Examples of transactions that cause APIC

Answer 11

• Treasury stock at a gain
• Quasi-reorganization
• Issuance of liquidating dividends
• Conversion of bonds
• Declaration of small stock dividend

Question 12

Retained earnings definition

Answer 12

Accumulated earnings (losses) during life of corporation that have not been paid out as dividends

Question 13

Retained earnings formula

Answer 13

NI
- Dividends declared
\+- Prior period adjustments (net of tax)
\+- Retrospective accounting changes (net of tax)
\+ Adjustments from quasi-reorganization
= Change in RE

Question 14

Purpose of appropriations of RE

Answer 14

Disclose to the shareholders that some of the RE are not available to pay dividends due to legal/contractual reasons, or as a discretionary act of mgmt

Question 15

Quasi-reorganization definition

Answer 15

An accounting adjustment that revises capital structure to eliminate a deficit and have a fresh start

Question 16

Purpose of Quasi-reorganization

Answer 16

• To restate overvalued assets to their lower fair values

- To eliminate RE deficits

Question 17

Steps involved in a Quasi-reorganization

Answer 17

1- revalue assets to current FV and liability to PV
2- bring RE to zero (by eliminating deficit)
3- Plug difference to APIC
Results in no change to total equity; just restructures it

Question 18

Treasury stock definition

Answer 18

• Stock that has been issued to shareholders and subsequently reacquired
• Reduces SHE as a debit balance

Question 19

2 methods of accounting for treasury stock

Answer 19

1- Cost

2- Par

Question 20

Primary difference between cost and par methods

Answer 20

The timing of recognizing gains/losses on treasury stock transactions

Question 21

Cost Method

Answer 21

• TS recorded at their reacquisition cost
• Gain/losses determined when TS is reissued
• APIC account used
• May decrease RE if APIC isn’t big enough to absorb a loss

Question 22

PAR Method

Answer 22

• Not commonly used
• TS recorded at par value
• Gain/loss not recorded until buy back
• APIC is used, but only for original value over par

Question 23

Dividend definition

Answer 23

• A pro rata distribution by a corporation

- Represents a distribution of earnings

Question 24

3 Dates for distributions (and definitions):

Answer 24

1- Date of Declaration (BOD formally approves a dividend)
2- Date of Record (no JE)
3- Date of Payment (date of actual payment)

Question 25

Cash dividends treatment

Answer 25

• Paid from RE
• Paid only on authorized, issued, and outstanding shares
• NOT paid on TS

Question 26

Property dividends treatment

Answer 26

• noncash assets
• on declaration date, property to be distributed is restated to FV
• any gain/loss recognized in income
• dividend liability should be recorded at FV

Question 27

Scrip Dividends definition

Answer 27

• Form of notes payable where corporation commits to paying a dividend at some later date
• Usually used when there’s a cash shortage

Question 28

Liquidating dividends definition

Answer 28

• Occur when dividends to shareholders exceed RE

- Debit to APIC first to empty out and then to CS/PS

Question 29

Stock dividends treatment

Answer 29

• No dividend income reported by shareholder, just changes

- Treatment depends on size of declaration

Question 30

Treatment of a small stock dividend (>25%)

Answer 30

Reduce RE by FMV of stock

Question 31

Treatment of a large stock dividend (>25%)

Answer 31

Reduce RE by Par value

Question 32

Stock split treatment

Answer 32

No JE, just change to # shares outstanding and par value

Question 33

2 methods to issue stock to employees

Answer 33

1- noncompensatory

2- compensatory

Question 34

Noncompensatory stock option

Answer 34

• No JE until stock is purchased, then regular JE

- GAAP only

Question 35

Requirements to be noncompensatory

Answer 35

• Eligible to all FT employees
• Time permitted to exercise rights is reasonable
• Any discount offered is reasonable

Question 36

IFRS: Noncompensatory treatment

Answer 36

• Doesn’t believe in noncompensatory

- Treats all employee stock options as compensatory

Question 37

Compensatory stock option

Answer 37

• Plans are valued at FV of options issued
• FV determined by pricing model (such as Black-Scholes method)
• Compensation is recognized over service period (aka vesting period)