FAR 2I - Equity Flashcards
How does buying treasury stock at greater than book value affect equity and EPS?
Buying treasury stock at greater than book value reduces equity and the number of shares outstanding, which increases EPS due to fewer shares being available.
What are the two methods for accounting for treasury stock?
Cost Method: Treasury stock is carried at cost until reissued or retired.
Par Value Method: Reacquired shares are treated as if retired, and subsequent sales are treated as if the shares were unissued.
Do treasury stock transactions result in a gain or loss?
No, treasury stock transactions do not result in a gain or loss. They affect additional paid-in capital (APIC) and retained earnings, as they are treated as equity transactions.
When is a liability for dividends payable recorded?
A liability for dividends payable is recorded when the board of directors declares the dividend. Prior to declaration, there is no legal obligation to pay.
What are liquidating dividends, and how are they recorded?
Liquidating dividends are a return of capital, not a return on investment. They occur when dividends exceed retained earnings and are debited to other equity accounts.
What factors are commonly considered in a partnership’s income or loss distribution agreement?
Salaries for partners.
Interest on capital balances.
Bonuses to managing partners.
Residual distributed by a fixed ratio.
How are initial partnership capital accounts determined?
Initial partnership capital accounts are based on the net fair value invested by each partner into the partnership.
What happens to a subscriber’s rights when stock is sold on a subscription basis?
The subscriber usually has all the rights and privileges of a stockholder, unless specified otherwise in the subscription contract, even before the full subscription price is paid.
How are quasi-endowments classified in Not-for-Profit (NFP) organizations?
Quasi-endowments in NFPs are classified as net assets without donor restrictions because future governing boards can undo the designation.
What are warrants, and what rights do they give the holder?
Warrants give the holder the right to purchase a set number of shares at a fixed price on or before the expiration date. They provide potential for future equity ownership.
How are partnership capital balances treated during liquidation?
During liquidation, combine the partner’s loans to the partnership with their capital balances. After paying debts and accounting for losses, distribute any remaining cash based on the final capital account balances.
How does the bonus-to-new-partner method work in partnerships?
Under the bonus-to-new-partner method, the new partner’s capital is based on their percentage ownership of the total revalued partnership capital, computed by adding the new partner’s investment.
When issuing additional shares less than 20-25%, what amount is transferred from retained earnings?
When issuing additional shares less than 20-25%, transfer an amount equal to the fair value of the additional shares from retained earnings.
How are warrants recorded?
Warrants are recorded when issued, typically under equity. They provide the holder the option to purchase shares at a fixed price before expiration.
What is the difference between cost method and par value method for treasury stock?
Cost Method: Reacquired shares are carried at cost until sold or retired.
Par Value Method: Reacquired shares are treated as if they were retired immediately.
How are treasury stock sales treated under the par value method?
Under the par value method, the reacquisition and subsequent sale are treated as separate transactions. The sale is accounted for as if the shares were newly issued.
How are liquidating dividends accounted for?
Liquidating dividends are recorded by debiting equity accounts when the dividend amount exceeds retained earnings, as they represent a return of investment rather than income.
What happens if a partnership agreement does not specify profit or loss distribution?
If there is no specific agreement, profits and losses are shared equally among all partners, regardless of their capital contributions.