F7- Stockholder's Equity

Question 1

Define Common Stock and list the basic properties.

FAR 7-1

Answer 1

Common Stocks: 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 stockholder’s claims.

Question 2

List some common properties of preferred stock.

              FAR 7-2

Answer 2

Convertible, callable

Redeemable

Dividends can be cumulative and/or participating

Question 3

Describe the adjustments of a quasi-reorganization.

             FAR 7-3

Answer 3

*Assets are restated at fair value (no increase in asset value is permitted, write-downs are charged directly to retained earnings).

• Liabilities are restated at present value.
• Retained earnings brought to zero balance by closing to additional paid-in capital or other capital accounts.
• Remember to continue to show the date of the adjustment to retained earnings for 3-10 years, as this is a departure from cost principle.
• No negative balance in any capital account.

Question 4

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

               FAR 7-4

Answer 4

Cost method: Unallocated reduction in stockholders equity.

Par value method: Deducted from capital stock.

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 absorb “losses.”

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

Question 5

Summarize the cost method of accounting for treasury stock.

                FAR 7-5

Answer 5

• Recorded, carried, and reissued at re-acquisition 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 stockholder’s equity.

Question 6

Summarize the par value method of accounting for treasury stock.

                  FAR 7-6

Answer 6

• Recorded at par value with excess to Paid-in Capital-Treasury Stock or deducted from retained earnings after charged to any Paid-in-Capital –Treasury Stock.
• Reported as a deduction from capital stock.

Question 7

List the significant dates with respect to cash dividends.

                   FAR 7-7

Answer 7

Date of Declaration: Becomes a liability and reduces retained earnings.

Date of Records: No journal entry, memorandum entry only.

Date of Payment: Actually paid.

Question 8

List five types of dividends.

               FAR 7-8

Answer 8

1. Cash.
2. Liquidating: Return of investment.
3. Property: FMV of assets given up, with gain/loss recognized.
4. Scrip: Promise to pay a dividend in future.
5. Stock: Results in capitalizing part of retained earnings, increasing legal capital. Remember, if < 20-25%, record at market value; if >20-25%, record at par value.

Question 9

What is the threshold for treating stock dividends as large vs. small stock dividends?

                     FAR 7-9

Answer 9

• Small stock dividend: < 20-25%
• Large stock dividend: >20-25 %

The treatment of stock dividends depends on the percentage of the dividend in proportion to the total shares outstanding prior to the declaration of the dividend.

Question 10

What is the accounting treatment of small stock dividends?

                FAR 7-10

Answer 10

Fair value of additional shares issued at the date of declaration is transferred from retained earnings to capital stock and additional paid-in capital.

Question 11

What is the accounting treatment of large stock dividends?

                   FAR 7-11

Answer 11

Par value of additional shares issued is transferred from retained earnings to capital stock.

Question 12

Identify the disclosure requirements about capital structure.

                  FAR 7-12

Answer 12

• Rights and privileges of various securities outstanding.
• Number of shares issued upon conversion, exercise, or satisfaction of required conditions during at least the most recent annual fiscal period and any subsequent interim period presented.
• Liquidation preference of preferred stock.
• Redemption requirements related to redeemable stock.

Question 13

Identify two types of stock options.

                FAR 7-13

Answer 13

Noncompensatory: Under U.S. GAAP, substantially all full-time employees may participate; offered equally or as a percentage of salary; reasonable exercise period; and discount is no greater than that offered to stockholders.

Compensatory: Compensation cost is determined on the grant date, using an option pricing model.

Note: Under IFRS, stock options are generally consider to be compensatory.

Question 14

Describe the computation and allocation of compensation expense under compensatory stock option plans.

                  FAR 7-14

Answer 14

Compensation cost is based on the fair value of the equity instrument awarded, determined by an option pricing model. This cost is expensed and allocated over the service period.

Question 15

Describe the accounting for unexercised, expiring stock options.

                 FAR 7-15

Answer 15

Any balance in “additional paid-in-capital–stock options” is reclassified to “additional paid-in-capital–expired stock options.”

Previously recognized compensation expense is not adjusted.