F7: Stockholder's Equity Flashcards
Capital stock is:
- Preferred stock + common stock
- This cannot be used for dividends
- AKA legal capital
Facts about common stock
- last in line
- right to vote
Book value per Common Share calculation
Common SHE / common shares outstanding
Common Stockholder’s Equity formula
Total SHE
- Preferred stock outstanding
- Cumulative preferred dividends in arrears
= Common SHE
Facts about preferred stock
- Have preference in dividends
- No voting rights
Cumulative preferred stock
- Dividends not paid accumulate to be paid in the future
- Called “dividends in arrears”
- Must be paid before common stock dividends
Participating preferred stock
- Share equally the excess pro rata
- Fully participating (participate in excess without limit)
- Partially participating (participate in excess at a limited extent)
Convertible preferred stock
Can be exchanged for common stock at option of investor
Callable (redeemable) preferred stock
Can be repurchased at a specific price at option of entity
Mandatorily Redeemable preferred stock
- Liability
- preferred stock issued with a maturity date
- Gives a date that it MUST be bought back by the company
Examples of transactions that cause APIC
- Treasury stock at a gain
- Quasi-reorganization
- Issuance of liquidating dividends
- Conversion of bonds
- Declaration of small stock dividend
Retained earnings definition
Accumulated earnings (losses) during life of corporation that have not been paid out as dividends
Retained earnings formula
NI - Dividends declared \+- Prior period adjustments (net of tax) \+- Retrospective accounting changes (net of tax) \+ Adjustments from quasi-reorganization = Change in RE
Purpose of appropriations of RE
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
Quasi-reorganization definition
An accounting adjustment that revises capital structure to eliminate a deficit and have a fresh start
Purpose of Quasi-reorganization
- To restate overvalued assets to their lower fair values
- To eliminate RE deficits
Steps involved in a Quasi-reorganization
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
Treasury stock definition
- Stock that has been issued to shareholders and subsequently reacquired
- Reduces SHE as a debit balance
2 methods of accounting for treasury stock
1- Cost
2- Par
Primary difference between cost and par methods
The timing of recognizing gains/losses on treasury stock transactions
Cost Method
- 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
PAR Method
- 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
Dividend definition
- A pro rata distribution by a corporation
- Represents a distribution of earnings
3 Dates for distributions (and definitions):
1- Date of Declaration (BOD formally approves a dividend)
2- Date of Record (no JE)
3- Date of Payment (date of actual payment)
Cash dividends treatment
- Paid from RE
- Paid only on authorized, issued, and outstanding shares
- NOT paid on TS
Property dividends treatment
- 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
Scrip Dividends definition
- Form of notes payable where corporation commits to paying a dividend at some later date
- Usually used when there’s a cash shortage
Liquidating dividends definition
- Occur when dividends to shareholders exceed RE
- Debit to APIC first to empty out and then to CS/PS
Stock dividends treatment
- No dividend income reported by shareholder, just changes
- Treatment depends on size of declaration
Treatment of a small stock dividend (>25%)
Reduce RE by FMV of stock
Treatment of a large stock dividend (>25%)
Reduce RE by Par value
Stock split treatment
No JE, just change to # shares outstanding and par value
2 methods to issue stock to employees
1- noncompensatory
2- compensatory
Noncompensatory stock option
- No JE until stock is purchased, then regular JE
- GAAP only
Requirements to be noncompensatory
- Eligible to all FT employees
- Time permitted to exercise rights is reasonable
- Any discount offered is reasonable
IFRS: Noncompensatory treatment
- Doesn’t believe in noncompensatory
- Treats all employee stock options as compensatory
Compensatory stock option
- 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)
