FAR 1A4 Equity Flashcards
How are unrealized gains/losses on equity securities reported?
✅ Included in net income 📈
✅ Affects retained earnings 💰
✅ This includes available-for-sale (AFS) equity securities because equity securities are measured at fair value.
Where are unrealized losses on available-for-sale (AFS) debt securities reported?
✅ They are included in shareholder’s equity as a component of accumulated other comprehensive income (AOCI).
What increases and decreases retained earnings?
✅ Increases:
📈 Net income
🔄 Prior-period adjustments
🔄 Quasi-reorganizations
❌ Decreases:
📉 Net losses
📉 Prior-period adjustments
💸 Cash, property, scrip, and stock dividends
📉 Treasury stock transactions and stock retirements
What happens when debt is settled using stock or property?
✅ If the fair value of the stock or property is less than the carrying amount of the debt, the difference is recognized as a gain 📈
✅ This gain increases retained earnings.
✅ The fair value of the stock issued is added to equity through common stock and additional paid-in capital (APIC).
How should stock issued at market price be accounted for?
✅ Look at the date of issuance 📆
✅ If the issuance date matches the trading price date, then:
📊 The difference between the par value and the trading price is recorded in APIC.
Where is the excess of proceeds over cost recorded when treasury stock is sold under the cost method?
✅ In APIC – Treasury Stock, NOT retained earnings.
What does “unappropriated retained earnings” mean?
✅ It means the company has not yet allocated the earnings for a specific use.
How does a stock dividend impact retained earnings and total equity?
✅ Retained earnings decrease 📉
✅ Total equity remains the same because the amount is reallocated to common stock and APIC.
What happens when treasury stock is sold for less than its cost?
✅ Retained earnings decrease by the loss amount.
✅ Total equity remains unchanged, as the reduction in treasury stock is offset by the proceeds received.
What happens when treasury stock is sold for more than its cost?
✅ The excess proceeds are recorded in APIC – Treasury Stock. 📈
✅ Retained earnings remain unaffected.
What is the relationship between Accumulated Other Comprehensive Income (AOCI) and Other Comprehensive Income (OCI)?
✅ OCI captures current-period gains/losses.
✅ AOCI accumulates these amounts over multiple periods, similar to how retained earnings accumulate net income over time.
If treasury stock is sold at a loss under the cost method, how is the loss accounted for?
✅ The loss is first charged to APIC – Treasury Stock.
✅ If APIC – Treasury Stock is insufficient, the remaining loss is deducted from retained earnings.
