FAR - 15 STOCKHOLDER'S EQUITY

Question 1

Tresury Stock

Cost Method

Answer 1

• Under the cost method, T/S is considered a contra Equity Account
• Cost In, Cost Out until Retired
• APIC - TS is mainly a plug

Question 2

Treasury Stock

Par Value Method

Answer 2

• Under the Par Value Method, T/S is considered a contra Common Stock account.
• Par in, Par Out
• APIC - CS is recorded per share on issuance

Journal Entry: Repurchase

DR: Treasury Stock (#shares x par value)

DR: APIC-CS (#shares x APIC per share on intial issuance)

CR: Cash (consideration given)

CR: APIC Treasury (plug)

Journal Entry: Resell of TS (Like issuing new stocks)

DR: Cash

CR: T/S

CR: APIC - CS

Shortcut: CS Issued Price less TS purchase price multiplied by number of TS purchased.

Question 3

Stock Rights

vs.

Stock Options

vs.

Stock Warrants

Answer 3

Stock Rights - Issued to existing shareholders

Stock Options - Issued to officers or employees

Stock - Warrants - Issued to bond holders

Question 4

Stock Rights

Answer 4

Stock Rights - sometimes called preemptive or subscription rights, are contractual rights held by existing shareholders to purchase a proportional share of new shares in the same class, to preserve their preexisting ownership percentage (to prevent dilution of ownership).

Question 5

Types of Dividends (6)

Answer 5

1. Cash
2. Property (FMV @ date of declaration)
3. Script (Interest bearing Note Payable)
4. Liquidating (return of Capital)
5. Stock - Small vs. Large
6. Stock Split

NOTE: If it is not a cash dividend, it doesn’t mean that the company doesnt have any Retained Earnings, it just means that the company doesnt have cash on hand so it can be in a form of notes, asset or return of capital.

Question 6

Property Dividend

Answer 6

Property is given as a dividend & FMV @ date of declaration. Property Dividends can be stocks owned from investments.

NOTE: Net effect on stock holders equity is the carrying value of the asset given up. Gain/Loss is recognized on the date of declaration and is part of Net Income from continuing operations.

Date of Declaration Entry:

DR: Retained Earnings

DR: Asset

CR: Dividend Payable

CR: Gain on Asset

Payment Date Entry:

DR: Dividend Payable

CR: Asset

Question 7

Script Dividend

Answer 7

Srip - Give dividend but no Cash involved

Short-cut of JE:

DR: Retained Earnings (Face of the Note)

CR: Note Payable (At Year End, Interest expense is for the month it has been outstanding)

Question 8

Partial Liquidating Dividend

vs.

Liquidating Dividend

Answer 8

When a dividend declared is greater than the balance of Retained Earnings prior to declaration. The amount of dividend in excess of RE represents a return of contributed capital.

Journal Entry: (for Company Issuing Div)

DR: RE

DR: APIC

CR: Dividends Payable/Cash

Journal Entry: (for entity receiving the Dividend)

DR: Cash

CR: Dividend Income

CR: Investment (reduction of investment/return of capital)

Liquidating Dividend: (APIC is reduced NOT RE)

DR: APIC

CR: Dividend Payable/Cash

NOTE: Distributions that are not paid out of earnings are considered liquidating dividends. They reduce additional paid-in capital, not retained earnings.

Question 9

Stock Dividend

Small vs. Large

Answer 9

Small < 20-25% - Record at FMV against RE

DR: RE (FMV of Stock)

CR: CS (par)

CR: APIC

Large > 20-25% - Record at Par against RE

DR: RE

CR: CS (at Par)

NOTE: A stock dividend increases the number of shares outstanding, but has no monetary effect on any component of stockholders’ equity.

Question 10

Stocks

Authorized, Issued, Outstanding, T/S

Answer 10

Authorized - Maximum number of shares that are legally allowed to be distributed

Issued - Number of shares that has been distributed

Outstanding - Issued less T/S, number of stocks still with the shareholders

Treasury Stocks - Stocks that have been bought back by the company. Issued less Outstanding

Question 11

Share-based payments classified as EQUITY

(Stock Options given to Employees)

Answer 11

Stock options given to employees as compensation. Measurement = Grant Date to determine the amount of compensation expense. Compensation expense is to be allocated equally during the vesting period.

Date of Grant = Measurement Date

DR: Deferred Compensation

CR: APIC - Stock Options Outstanding

As Compensation expense is recognized.

DR: Compensation Expense (allocated over vesting period)

CR: Deferred Compensation

When Options are Excercised

DR: Cash (#option excercised * FMV of security)

DR: APIC - Stock Options Outstanding (option price * # opt)

CR: Common Stock

CR: APIC - CS (plug)

NOTE: The net increase in stockholder’s equity after stock options are excercised is the cash amount received. (shares * price at grant date)

Question 12

Share-based payments classifed as Liabilities

(Stock Appreciation Rights)

Answer 12

• Share based compensation paid in cash based on the appreciation of stocks.
• Measurement date = settlement/excerside date
  
  • ​Therefore creates a liability until paid.
• Compensation in a SAR is measured in each reporting period (Increases in Stock = Compensation expense)

DR: Comp Expense (increase in stock)

CR: Liability for Appreciation rights

When employee excercises the rights

DR: Comp Expense (increase in stock - current)

DR: Liability for appreciation (previous increases)

CR: Cash (settlement date = measurement date)

Question 13

Presentation of Stock Holder’s Equity

(As many as 7 categories)

Answer 13

1. Preferred Stock
2. Common Stock
3. APIC
4. Noncontrolling Interest (minority interest)
5. Retained Earnings
6. Accumulated other comprehensive income (DENT)
7. Treasury Stock (at cost method)

Question 14

Stock Donation

Answer 14

Correct! The donation of stock to the company will be reported as income equal to the fair value of the stock received and as treasury stock in the same amount. Since the income will ultimately be closed into retained earnings, there is no net effect on stockholders’ equity.

Question 15

Which of the following financial instruments issued by a public company should be reported on the issuer’s books as a liability on the date of issuance?

Answer 15

Correct! An unconditional redemption feature allows the holder to exchange the shares for cash, which makes them equivalent to a liability, which how shares with such a feature are reported. Cumulative preferred stock, convertible common stock, and common stock issued at a discount are all reported as equity.

Question 16

Participating Preferred Stock

Arp Corp.’s outstanding capital stock at December 15, 20X0, consisted of the following:

30,000 shares of 5% cumulative preferred stock, par value $10 per share, fully participating as to dividends. No dividends were in arrears.
200,000 shares of common stock, par value $1 per share.

On December 15, 20X0, Arp declared dividends of $100,000. What was the amount of dividends payable to Arp’s common stockholders?

Answer 16

Since the preferred shares are fully-participating, the preferred stockholders will first get their normal dividend of 30,000 x 5% x $10 or $15,000. Next, the common stockholders will get a comparable dividend of 200,000 x $1 x 5% or $10,000. The remaining $75,000 will be allocated proportionately between the preferred and common stockholders on the basis of their relative total par values. The preferred shareholders will receive $300,000/$500,000 or 60% of the remainder amounting to $45,000. The common shareholders will receive $200,000/$500,000 or 40% of the remainder amounting to $30,000. In total, the common stockholders will receive $10,000 + $30,000 or $40,000.

Question 17

Book Value Per Share

Answer 17

+ Total Equity

• Preferred Stocks
• Preferred Stock Claims (Div in arrears, liquidation value)

= Equity Less Preferred Stocks

% Number of Common Stocks

= Book Value per Shar

Question 18

Contribution/Bonus Formula

Answer 18

Incorrect! Since the contribution is equal to 10% of income after the contribution but before tax, the formula for computing the contribution will be:

Contribution = 10% x ($75,000 - Contribution)

Contribution = $7,500 - 10% x Contribution

110% x contribution = $7,500

Contribution = $7,500/110% or $6,818

Question 19

Non-compensatory Stock Options

Answer 19

When rights are issued without consideration (non-compensatory stock options), no entry is made. The company makes a notation of the pertinent information, however, so that the rights are only disclosed. At the time the rights are exercised, the proceeds are allocated between common stock for the par or stated value with the excess reported in additional paid-in capital. Retained earnings is not affected.

Question 20

Statement of Retained Earnings

How is it presented?

Answer 20

+ Beginning R/E

+/- Prior period adjustment (NET OF TAX)

= Adjusted Beginning R/E

+ Net Income

• Dividends

= Ending Retained Earnings

Question 21

How to calculate the equity value if CS or PS are issued for land?

Answer 21

Use Relative Fair Value Approach.

When stock is issued in exchange for land, the land is recognized at its fair value, $299,000, and the total is allocated among the shares based on their relative fair values. X issued 10,000 shares of common stock, worth $30 each or $300,000, and 1,000 shares of common stock, worth $25 each or $25,000 for a total of $325,000. As a result, $300,000/$325,000 x $299,000 or $276,000 will be allocated to the common stock and $25,000/$325,000 x $299,000 or $23,000 will be allocated to the preferred stock. Since the common stock has no par or stated value, the entire $276,000 will be recorded in the common stock account. Since the preferred stock has a par value of $10 per share, or $10,000 in total, the difference of $13,000 will be recognized in additional paid in capital.