F7 Stockholders Equity

Question 1

Proceeds from the sale of Treasury Stock

Answer 1

Excess proceeds from the sale of treasury stock is considered additional paid-in capital. Treasury stock sold in excess of cost does NOT affect retained earnings. The cost method of accounting for treasury stock affects retained earnings only if the shares are sold below cost and the difference exceeds any additional paid-in capital from treasury stock.

Question 2

Calculating Retained Earnings

Answer 2

• Income since incorporation equals unadjusted retained earnings (RE)
• Cash dividends is a direct deduction from RE on the date of declaration
• Property dividends are deducted from RE at Market Value on the date of declaration

End RE=Unadjusted RE - Cash Dividends- Property Dividends

Question 3

Owners Equity includes 5 major components:

Answer 3

1.) Capital Stock
2.) Additional Paid-in Capital
3.) Retained Earnings or Deficit
4.) Accumulated Other Comprehensive Income
5.) Treasury Stock
When an entity presents consolidated financial statements, any noncontrolling interest must be shown in equity

Question 4

Capital Stock includes these terms:

Answer 4

Authorized- A corporation’s charter contains the amounts of each class of stock that it may legally issue.
Issued-
Outstanding- capital stock in the hands of shareholders

Treasury Stock is issued but not outstanding

Question 5

Common Shareholders’ equity =

Answer 5

total stockholders’ equity reduced for the claims of preferred shareholders

Question 6

Book value per share=

Answer 6

the common shareholders’ equity divided by the number of common shares outstanding at year-end

Question 7

Preferred Shares

Answer 7

Are “first in line” before common shareholders for dividends and payment in liquidation. May also be cumulative, participating, or convertible.

Mandatorily redeemable preferred stock is reported as a liability because it has a maturity date, like other debt instruments.

Question 8

Additional Paid-in Capital can come from…

Answer 8

several sources in addition to any amount received above the par value of shares issued

Question 9

Retained Earnings can be increased and decreased by many events, including:

Answer 9

income, losses, cash dividends, property dividends, stock dividends, prior-period adjustments, cumulative effects of changes in accounting principles, and quasi-reorganizations.

Question 10

Quasi-Reorganizations…

Answer 10

eliminate deficit balances in retained earnings by reducing the amount in C/S or APIC.

Question 11

Accumulated Other Comprehensive Income…

Answer 11

is an equity account into which the components of other comprehensive income flow.

Question 12

Treasury stock may be accounted for by the…

Answer 12

cost method or the legal (par value) method.

Question 13

Donated Shares result in

Answer 13

a credit to contributed capital

Question 14

Stock subscriptions are

Answer 14

contracts to buy stock at a future date

Question 15

Stock rights provide…

Answer 15

existing shareholders with the opportunity to buy additional shares and do NOT affect equity until exercised

Question 16

Dividends declared…

Answer 16

reduce retained earnings on the declaration date

Question 17

Liquidating dividends are…

Answer 17

dividends in excess of retained earnings

Question 18

Property dividends are recorded…

Answer 18

at their fair value at the declaration date. Gain or loss is recognized on that date

Question 19

Stock dividends occur in two sizes:

Answer 19

small and large.
The “break point is 20-25 % of outstanding C/S. Small stock dividends tend to be on the exam more often. Small stock dividends are recorded at fair value on the declaration date. Large stock dividends are recorded at par value.

Question 20

Stock splits..

Answer 20

do not require a journal entry and total book value of C/S is unchanged

Question 21

Compensatory stock option plans are..

Answer 21

accounted via the fair value method