FAR 1 Module 3 Flashcards
What is the cost method?
The cost method is an accounting approach used to value an asset based on its original purchase price plus any additional costs incurred, helping business track their total expenses
What is the cost method formulas
Treasury stock = Shares repurchased X purchase price per share
APIC = (Reissue price - cost per share) X number of shares reissued
Note: APIC can be APIC-CS and APIC-TS
APIC-Common stock
APIC-Treasury stock
What is the Legal (par) method?
The legal par method records the minimum price (par value) of shares when a company issues stock. Any money received above this par value is added to Additional Paid-In Capital (APIC)
What are the important legal par method formulas?
Treasury stock = Shares repurchased x par value per share
APIC = (Issue price per share - Par value per share) x Shares repurchased or reissued
RE = (Repurchase price per share - Original Issue price per share) x Shares repurchased
What are treasury stocks and where should they be recorded?
Treasury stock refers to shares that a company has repurchased from the market and holds in its own treasury, reducing the number of outstanding shares. (buy back)
Treasury stock should be recorded as a reduction in the stockholders equity section of the BS
What are dividend arrears?
Dividend arrears are missed payments that a company owes to its preferred shareholders, meaning they haven’t received their scheduled dividends when they were supposed to.
Dividend arrears is a preferred stock
What happens when a corporation sells some of its treasury stock at a price that exceeds its cost? How should the excess be handled?
No gain or loss on the purchase and/or sale of TS. Any difference goes to APIC. If not enough APIC to absorb loss, the loss would be Debited from RE
JE Example:
Debit Cash $10,000
Credit Treasury Stock $5,000
Credit APIC $2,500
How is the sale of treasury stock at less than stock treated on the stockholders equity?
Selling treasury stock increases cash (asset) and removes treasury stock from equity, increasing overall stockholders’ equity even if sold at a loss.
What is the retained earnings formula?
RE
+ net income
- Dividends
How is the Cost method and the legal method (par) method record treasury stock? And what is the impact on RE?
Cost method - records treasury stock at cost (purchase price). It does not directly affect RE the same way that profit or dividends do
Legal method (par) - records treasury stock at par value and the gains or losses from the treasury stock transactions affect RE
If a company sold shares of donated (treasury) stock, what accounts are a credit in the journal entry if the the share price was more than the original fair value?
The credit journal entries would be
DB Cash
Credit APIC
Credit Donated treasury stock
Retained earnings account is not used to recognize a sale of donated stock
What happens to dividends when a company has preferred and common stock?
Preferred stockholders are paid first:
Any missed (arrears) dividends must be paid before anything goes to common stock.
Cumulative preferred stock:
Dividends from past years (arrears) must be paid in full before the current year’s dividends.
Common stock get the leftover:
After all preferred stock dividends are fully paid, the remaining amount is distributed to common stockholders.
What accounts do Freight in and Freight out fall under?
Freight in: COGS
Freight out: Selling expense
When are retained earnings RE usually included when doing the Legal par method
RE is usually included in the JE during buybacks/repurchases. example: treasury stock
