FAR Chapter# 7 Flashcards
FAR 7-1 - STOCKHOLDERS’ EQUITY | Define common stock and list the basic properties.
Common stock: Residual owership interest
Basic rights include:
- Voting rights
- Dividend rights
- Rights to share in distributions of assets if corporation is liquidated, after satisfaction of creditor and preferred stockholders’ claims
FAR 7-2 - STOCKHOLDERS’ EQUITY | List some common properties of preferred stock.
Convertible, callable
Redeemable
Dividends can be cumulative and or participating
FAR 7-3 - STOCKHOLDERS’ EQUITY | Describe the adjustments of a quasi-reorganization.
Assets are restated at fair value (no increase in asset value is permitted, write-downs are charged direclty to retained earnings).
Liabiliities are restated at present value
Retained earnings brought to zero balance by closing to additional paid-in capital or other capital accounts.
Remember to continue to date retained earnings for 3-10 years, as this is a departure from cost principle.
No negative balance in any capital account.
FAR 7-4 - STOCKHOLDERS’ EQUITY | What are the two alternate methods of accounting for treasury stock?
Cost method: Unallocated reduction in stockholders’ equity
Par value method: Deducted from capital stock
Remember, no gains/losses are recognized on the income statement; income and retained earnings may never increase by the transaction; Additional Paid-in Capital - Treasury Stock account used to record “gains” and absorb “losses”.
Treasury stock is not an asset; cash and property dividends are not paid on treasury stock; stock dividends may be paid on treasury stock.
FAR 7-5 - STOCKHOLDERS’ EQUITY | Summarize the cost method of accounting for treasury stock.
Recorded, carried and reissued at reaquisition cost
Any “ gain” is credited to Paid-in Capital - Treasury Stock
Any “loss” is charged against previous “gains,” then retained earnings
Reported as a deduction from total stockholders’s equity
FAR 7-6 - STOCKHOLDERS’ EQUITY | Summarize the par method for accounting for treasury stock.
Recorded at par value with excess to Paid-in Capital - Treasury Stock or deducted from retained earnings after charged to any Paid-in Capital - Treasury Stock
Reported as a deduction from capital stock
FAR 7-7 - STOCKHOLDERS’ EQUITY | List the significant dates with respect to cash dividends.
Date of Declaration: Becomes a liability and reduces retained earnings
Date of Record: No journal entry, memorandum entry only
Date of Payment: Actually paid
FAR 7-8 - STOCKHOLDERS’ EQUITY | List five types of dividends.
Cash
Liquidiating: Return of investment
Property: FMV of assets fiven up with gain/loss recognized
Scrip: Promise to pay a dividend in future
Stock: Results in capitalizing part of retained earnings, increasing legal capital. Remember, if 20-25%, record at par value.
FAR 7-9 - STOCKHOLDERS’ EQUITY | What is the threshold for treating stock dividends as large vs. small stock dividends?
Small stock dividend: < 20-25%
Large stock dividend: > 20-25%
The treatment of stock dividends depends on the percentage of the dividend in proportion to the total shares outstanding prior to the declaration of the dividend.
FAR 7-10 - STOCKHOLDERS’ EQUITY | What is the accounting treatment of small stock dividends?
Fair value of additional shares at the date of declaration is transferred from retained earnings to capital stock and additional paid-in capital.
FAR 7-11 - STOCKHOLDERS’ EQUITY | What is the accounting treatment of large stock dividends?
Par value of additional shares issued is transferred from retained earings to capital stock.
FAR 7-12 - STOCKHOLDERS’ EQUITY | Identify the disclosure requirements about capital structure.
Compensation cost is based on the fair value of the equity instrument awarded, determined by an option pricing model. This cost is expensed and allocated over the service period.
FAR 7-13 - STOCKHOLDERS’ EQUITY | Identify two types of stock options.
Rights and privileges of various securities outstanding
Number of shares issued upon conversion, exercise, or satisfaction of required conditions during at least the most recent annual fiscal period and any subsequent interim period presented
Liquidation preference of perferred stock
Redemption requirements related to redeemable stock
FAR 7-14 - STOCKHOLDERS’ EQUITY | Describe the computation and allocation of compensation expense under compensetory stock option plans.
Compensation cost is based on the fair value of the equity instrument awarded, determined by an option pricing model. This cost is expensed and allocated over the service period.
Compensatory: Compensation cost is determined on the grant date, using an option pricing model.
Note: Under IFRS, stock options are generally considered to be compensatory.
FAR 7-15 - STOCKHOLDERS’ EQUITY | Describe the accounting for unexercised, expiring stock options.
Any balance in “additional paid-in-capital - stock options” is reclassified to “additional paid-in-capital - expired stock options”. Previously recognized compensation expense is not adjusted.
