FAR - Chapter 5 Flashcards
Retained Earnings, Stockholders Equity, and Earnings per Share
Weighted Average Common Shares Outstanding
Shares outstanding at the beginning of the period
+ Shares sold during the period
- Shares reacquired during the period
- Reverse stock splits
+ Stock dividends & stock splits
Calculation of Basic EPS (earnings per share)
Income available to common shareholders (net income - preferred dividends) / Weighted Average Common Shares Outstanding
presented on income statement for continuing operations
Calculation of diluted EPS
Income available to common shareholders (net income - preferred dividends) + Interest from diluted securities* / Weighted Average Common Shares Outstanding assuming that all dilutive securities have been converted into common stock
- convertible preferred stock, convertible bonds, options, and warrants
Dilutive vs Antidilutive
Dilutive: when basic EPS decreases; Diluted EPS < Basic EPS
Antidilutive: when basic EPS increases as a result of conversion
When to exercise options & warrants - “treasury stock method” at market price
Exercise if:
Exercise Price < Average Market Price
Do not exercise if:
Exercise Price > Average Market Price
Date of Declaration
Represents the date that dividends have formally been approved for distribution by the board of directors. This is the date the liability will be reported in the financial statements.
Debit: Retained Earnings (equity)
Credit: Dividends Payable (liability)
Payment Date (for dividends)
Date the board of directors specify dividends will be distributed to shareholders
Debit: Dividends Payable
Credit: Cash
Property dividends
Distributions made in the form of property (PP&E, securities, etc.) - FMV
Date of Declaration JEs
Debit: Retained Earnings
Credit: Dividends Payable
and
Debit: Investment in Stock
Credit: Gain on Investment
or
Debit: Loss on Investment
Credit: Investment in Stock
Date of Payment JEs
Debit: Dividends Payable
Credit: Investment in Stock
Large stock dividend
Stock dividend distributed / Total stock outstanding = Greater than 25%
recorded at its par value
Date of Declaration
Debit: Retained Earnings
Credit: Common Stock Distributable
Date of Payment
Debit: Common Stock Distributable
Credit: Capital Stock
Small stock dividend
Stock dividend distributed / Total stock outstanding = Less than 25%
recorded at its current market value
Date of Declaration
Debit: Retained Earnings
Credit: Common Stock
Credit: Additional paid-in capital
Cumulative preferred stock (annual calculation)
Total preferred shares
x par value
x dividend rate
= annual dividend to preferred shareholders
- if not distributed in the current year, then the dividend amount will accumulate
Participating: excess distribution is allocated pro rata
Preferred stock:
(Preferred stock outstanding / total stock outstanding) x excess amount
Common stock:
(Common stock outstanding / total stock outstanding) x excess amount
Cumulative, fully participating, preferred stock priority list
1st priority: distribution on preferred dividends in arrears
2nd priority: distribution of current period preferred dividends
3rd priority: distribution of current period common dividend
4th priority: distribution of excess dividends in arrears, current period preferred dividends, and current period common dividends
Additional paid-in capital (APIC)
reflects increases in capital assets in excess of par value (stated value) that come from transactions engaged by an organization & its own stock
Face value < Excess over par
Repurchase of outstanding stock - why would a company repurchase
- provide stock for employee compensation contracts
- prevent takeover attemps or reduce number of shareholders
- increase earnings per share (EPS)
- increase return on equity
- provide tax efficient distributions of excess cash to shareholders
- create a larger market for company’s stock
Restricted retained earnings (JE)
Debit: Retained earnings unappropriated
Credit: Retained earnings appropriated
appropriated: no intention to distribute remaining retained earnings
What impacts retained earnings?
- Net income - increases
- Net losses - decreases
- Cash dividends - decreases
- Treasury stock transactions (par value method) - increases & decreases
Book value per common share
Common stockholders equity / Common shares outstanding
Cost method
- Record at cost to repurchase on the open market
- Additional paid-in capital (APIC) & retained earnings will fluctuate during reissuance
Par method
- Record treasury stock at original par value
- Additional paid-in capital (APIC) & retained earnings will fluctuate during repurchase of treasury stock & during reissuance
Treasury stock JEs for cost method & par method - the point JEs are posted
- Initial issuance of common stock
- Reacquisition of treasury stock
- Reissuance of treasury stock
Lessee or Lessor accounting
Operating lease
1. capitalized (BS)
2. lessor retains control
3. lease expense
4. amortization expense NOT recorded
Finance lease
1. capitalized (BS)
2. lessee obtains control
3. interest expense
4. amortization expense recorded
If BONES, it’s a finance lease. Otherwise, it is an operating lease.
Step 1 - lessee accounting
Written bargain purchase option exists for the asset. Reasonable expectation that the lessee will exercise the option.
Transfer of ownership of the leased property from the lessor to the lessee occurs by the end of the lease agreement.
The net present value of the collective lease payments as well as the guaranteed residual value equates to or is > of the assets fair market value.
Lease term represents a “major component” of the remaining economic life.
Asset is deemed specialized; not expected to have an alternative use when the lease agreement concludes.
Calculate lease expense/interest expense
Step 2 - lessee accounting
Not BONES - operating lease
total lease payment = lease expense
Yes BONES - finance lease
beginning lease liability
x implicit* interest rate
= interest expense
- use the rate that the lease contract implies
2nd choice: incremental borrowing rate %
Calculate decline in principal
Step 3 - lessee accounting
Operating lease
total lease payment
- interest expense
= principal reduction
Finance lease
total lease payment
- interest expense
= principal reduction
Determine amortization expense
Step 4 - lessee accounting
Operating lease
no amortization expense recorded
Finance lease
Straight line
NPV min lease payments / lease pay periods
Determine ending liability’s balance/ROU (right of use) asset
Step 5 - lessee accounting
Operating lease
beginning lease liability
- principal reduction
= ending balance
Finance lease
beginning lease liability
- principal reduction
= ending balance
beginning ROU asset
- amortization amount
= ending balance
Operating lease - lessee accounting
Step 1 - Net present value = PV factor x payments
Total lease payment - remains the same
Step 2 - Interest expense - not recorded by lessee
Step 3 - Principal reduction - recorded as a reversal to the lease liability
Step 4 Amortization expense - not recorded
Step 5 - Ending lease liability & Ending carrying value of the ROU asset (Step 1 - Step 3) amount will be the same
Initial entry
Debit: ROU asset
Credit: lease liability
amount from step 1
End of year entry
Debit: lease expense (total lease payment (step 1))
Debit: lease liability (step 3)
Credit: Cash (same as lease expense)
Credit: Accumulated amortization (same as lease liability)
