FAR - Equity, Pensions, & Cashflows

Question 1

How is treasury stock recorded under the cost method? and under the par value method.

Example: Par value $6, stock trading price $10, originally issued at $7, only 1 share re-purchased

Answer 1

Cost Method:
Debit: Treasury Stock $10
Credit: Cash $10

Par Value Method:
Debit: Treasury Stock $6
Debit: APIC $1
Debit: R/E $3
Credit: Cash $10

Question 2

What would be an impact on the cash flow statement for a 3 month US treasury?

Answer 2

because the term is 3 months is would be considered a cash equivalent and would have no impact on the statement of cash flows

Question 3

Where is amortization of a bond discount reported in the cash flow statement

Answer 3

in the operating activities section

Question 4

If a company has not declared or paid cumulative preferred stock dividends in the last 3 years, how is this recorded on the financial statements?

Answer 4

not recorded in the FS, disclosed in the footnotes

Question 5

How is treasury stock be recorded in the balance sheet?

Answer 5

treasury stock should be a reduction to equity on the balance sheet

Question 6

For dividend payments, what happens on the date of declaration, and the date of record?

Answer 6

The date of record is the date on which the shareholders who receive the dividend are determined.

The date of declaration is when dividends payable and retained earnings is adjusted in the financials

Question 7

How should a property dividend be recorded in retained earnings?

Answer 7

at market value at date of declaration, however, the net impact on RE is the FMV minus the gain

Question 8

what is the impact of a 15% stock dividend on share holders equity?

Answer 8

a stock dividend that is less than 20 to 25% of the stock outstanding has no impact on SHE. the FMV of the stock is moved from RE to capital stock/paid in capital

Question 9

What is a 30% stock dividend recorded on the date of declaration? $10 FMV, 1000 shares of $1 par

Answer 9

the JE for the large stock dividend:

debit: R/E $300
credit: C/S $300

Question 10

What is a 15% stock dividend recorded on the date of declaration? $10 FMV, 1000 shares of $1 par

Answer 10

the JE for the small stock dividend:

debit: R/E $1500
credit: C/S $150
credit: APIC $1350

Question 11

How is a liquidating dividend recorded? Assume 80% distribution of earnings and 20% liquidating with a $100K dividend

Answer 11

Debit: RE $80K

Debit: APIC $20K

 Credit: Cash: $100K

Question 12

How is a property dividend recorded when the FMV is different than the BV?

Answer 12

The difference (either gain or loss) is recorded in income from continuing operations

Question 13

How are the following reported in SHE:

C/S, no par, $1 stated value, 20,000 shares originally issued for $11

P/S, $10 par value, 6000 shares originally issued for $20 per share

Answer 13

C/S $20K

P/S $60K

APIC $260K(1020K)(106K)

Question 14

1,000 stock options were granted on 1/1/22 and the option fair value was determined to be $30K. The options were exercised at the end of the first year. What is the entry to record the grant and exercise?Par value was $10/ share and option call price was $20/share.

Answer 14

To record the expense of the grant:

Comp Exp $30K
PIC SO O/S $30K

*equity is offset by these to accounts so no impact to equity (Comp Exp results in lower NI which impact R/E)

To record the exercise of the options:

Cash $20K
PIC SO O/S $30K
C/S $10K
PIC over Par $40K

*impact on SHE is $20K

Question 15

Does EPS need to be reported for Discontinued Operations and Income from Continuing Operations?

Answer 15

Yes to both. Will need to report both basic and diluted EPS

Question 16

Are stock options always included in the DEPS calculation?

Answer 16

no they are only included if they are in the money (ITM)

Question 17

How does preferred stock impact DEPS?

Answer 17

For DEPS only, Preferred stock is assumed to be exercised at the beginning of the year so the dividend payment does not get subtracted from Net Income AND the conversion shares are added to the denominator.

Question 18

How should plan investments be reported on a defined benefit plan’s financial statements?

Answer 18

at fair value

Question 19

What financial statements are required for defined benefit pension plans and defined contribution pension plans?

Answer 19

Both plans require the Statement of Net Assets Available for Benefits & the Statement of Changes in Net Assets Available for Benefits.

Additionally Defined benefit pension plans also require the Statement of Accumulated Plan Benefits and Statement of Changes in Accumulated Plan Benefits

**statement of cash flow is optional but not required for both plans

Question 20

How is an undistributed stock dividend declared by the board reported?

Answer 20

It is reported in the SHE. The FV of the additional shares issued is reclassified from RE to capital stock. The difference goes to APIC.

Question 21

What is the impact of a stock split on SHE?

Answer 21

No Journal entry recorded

Question 22

How does the company record a small stock dividend?

Answer 22

They will reduce retained earnings by the number of shares X the MARKET price of the shares. Dr. Retained Earnings Cr. Common Stock Cr. Paid in Capital

Question 23

How does a company record a large stock dividend?

Answer 23

Shares being issued X par value. This will reduce retained earnings. Dr. Retained Earnings Cr. Common Stock

Question 24

How does a company determine whether the stock dividend qualifies as small stock or large stock treatment?

Answer 24

If the company issues a stock dividend that is less than 25% of the shares outstanding then it is small stock. Otherwise it is considered a large stock dividend

Question 25

How does a small and large stock dividend impact shareholders equity?

Answer 25

There is no impact to shareholders equity

Question 26

A company declares a property dividend with a fv of $78k and cv of $60k. How is the property measured? And what is the impact on retained earnings?

Answer 26

The property will be measured at $78k FV. The impact on retained earnings will be $78k minus the $18k gain

Question 27

If a company issues a property dividend where the fv is less than cv, how is this loss accounted for?

Answer 27

The loss will be recognized as an operating item

Question 28

During a stock split what equity accounts are impacted?

Common stock
APIC
Retained Earnings

Answer 28

Common stock is the only account that is impacted

Question 29

If a company issues stock in exchange for professional consulting service, how is the stock recorded?

Answer 29

It is recorded at fair value at the grant date. Do not use the fair value at issuance date.

Question 30

How should a company record an undistributed stock dividend declared by the BOD?

Answer 30

It should be reclassified in SHE. Debit RE and credit capital stock/apic

Question 31

What are the financial statements for pension plans?

Answer 31

Both defined and contributed pension plans:

1. Statement of Net Assets Available for Benefits
2. Statement of Changes of Net Assets Available for Benefits

Defined pension plans also have:

1. Statement of accumulated plan benefits
2. Statement of changes in accumulated plan benefits

Question 32

When recording treasury stock what account is additional paid in capital recorded to cost method vs par value method?

Answer 32

Cost method is “additional paid in capital - TS”

Par value is “additional paid in capital - C/S”

Question 33

How to calculate the book value per common share?

Answer 33

it is common shareholder’s equity divided by common shares outstanding

Question 34

how is a mandatory redeemable preferred stock accounted for?

Answer 34

if the mandatory redeemable preferred stock is issued with a maturity date then it is considered a liability

Question 35

Cross Corp. had 2,000 outstanding shares of 11% preferred stock, $50 par. These shares were not mandatorily redeemable. On August 8, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross’s additional paid-in capital from preferred stock totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts:

Answer 35

P/S $25K, APIC $-2.5K, RE 0

*if the stock is redeemed and retired for a price less than the issuance price then a credit is made to APIC and not RE

Question 36

how are retained earnings classified?

Answer 36

appropriated - discloses to shareholders that some of the RE is not available to pay dividends. reasons to appropriate earnings are: contractual/ legal reasons (ie clause in debt agreement) or act of mgmt (ie plant expansion)

unappropriated - bucket for everything else

Question 37

When a property dividend is declared and the market value of the property exceeds its book value, the excess is recorded to?

Answer 37

net income - it is considered a gain

Question 38

does a company need to report EPS for discontinued operations?

Answer 38

yes it does if there is disc ops. EPS can be reported on the face of the IS or in the notes.

Question 39

What is the impact on assets, liabilities, and SHE when a company sells a stock subscription?

Answer 39

there is no impact to assets, liabilities, or SHE bc the journal entry is offsetting in SHE.

Dr Subscriptions Receivable (contra equity acct)
Cr Common Stock subscribed
Cr Additional paid in capital

Question 40

What is the impact on assets, liabilities, and SHE for the collection of a stock subscription?

Answer 40

assets and equity are increased.

Dr Cash
Cr Subscription receivable

Question 41

What is a scrip dividend?

Answer 41

a scrip dividend is basically a notes payable where a company commits to paying a dividend at a later date. there is no cash outflow. companies that are strapped for cash use this

dr R/E and cr Notes payable

Question 42

On December 1, Year 4, Line Corp. received a contribution of 2,000 shares of its $5 par value common stock from a shareholder. On that date, the stock’s fair value was $35 per share. The stock was originally issued for $25 per share. By what amount will this contribution cause total equity to decrease if Line accounts for treasury stock using the cost method?

Answer 42

$0

Contributions received ordinarily are recorded as revenues or gains when received. However, adjustments or charges or credits resulting from transactions in the entity’s own stock are excluded from net income or the results of operations. Thus, the receipt of a contribution of a company’s own stock is recorded at fair value as increases in both contributed capital and treasury stock. Because these accounts offset, the net effect on equity is $0.