FAR - Financial Statement Acct - Owner's Equity Flashcards
number of common shares issued?
of outstanding shares + # treasury shares.
types of common stock rights.
- Voting;
- Dividend;
- Preemptive.
Define “legal capital.”
par value of the stock or the stated value of the stock issued.
Define “dividends in arrears.”
Unpaid dividends for a particular year on cumulative preferred stock.
number of shares in the Treasury determined?
number of shares purchased by the issuing firm and not yet reissued.
two main Owners’ Equity categories?
Earned + contributed
purpose does legal capital serve (par value stock)?
- Establishes minimum investment;
- Provides protection for creditors (dividends may not be paid from legal capital):
- dividends can’t be paid from here
- if no protection, mgmt. could liquidate by paying back shareholders
main types of businesses?
1) sole proprietors
2) partnerships
3) corps
What does Owner’s Equity represent?
Represents the residual interest in the net assets of an entity that remains after deducting its liabilities.
number of shares outstanding determined?
number of shares currently held by stockholders.
primary measurement basis for contributed capital?
historical value of direct investments made in the firm by investors.
types of preferred stock rights?
- Nonvoting;
- Dividend preferences;
- Liquidation preferences.
Define “authorized shares.”
total number of shares that may be issued.
List the major Owners’ Equity accounts for a corporation.
Listed in order of declining performance on the B/S
- Preferred stock;
- Common stock;
- Additional paid-in capital, preferred;
- Additional paid-in capital, common;
- Retained earnings;
- Treasury stock.
Treasury shares reduce the number of shares outstanding, and reissuance increases the number of shares outstanding?
Stock dividends and splits increase the number of shares outstanding on the date of distribution by the percentage effect implied by the dividend (%) or split (100% or multiply by 2).
True
outstanding stock?
stock held by public shareholder
Issued shares include outstanding shares and treasury shares. Treasury shares are issued but not outstanding. Stock splits are applied to all outstanding and treasury shares because a split reduces the par value of each share of issued stock, and increases the number of shares in inverse proportion.
true
classification of the stock subscriptions receivable account?
Contra owners’ equity (contra common stock subscribed) or as an asset.
journal entry to record initial payment of stocks sold on subscriptions.
DR: cash
DR: stock subscription receivable
CR: common stock subscribed
CR: contributed capital in excess of par
basis of allocation for stock basket sale proceeds?
FMV of stock in basket via 1) proportional method, or 2) incremental method
alternatives to par value when a stock does not have such value.
1) no par
2) stated value
stock issued for nonmonetary consideration valued?
FMV of stock or FMV of asset rec’d, more reliable figure
Define “par value”.
minimum legal issue price for capital stock in most states and appears on the stock certificate.
value is added to the contributed capital account when a no par stock has a stated value?
Contributed capital in excess of stated value (common).
journal entry for subsequent payments on stock sold on subscriptions.
DR: Cash
CR: Subscriptions Receivable
requirements for stock sold on a subscription basis.
- Specifying share price;
- Number of shares;
- Payment dates.
Any additional paid-in capital is recorded when the contract is signed, just as if cash were received at that point.
true
accounting treatment for the conversion of preferred stock?
- Preferred stock accounts are transferred to common stock accounts;
- If total preferred stock value is less than common stock par value, debit retained earnings.
3) no gain/loss on conversion
4) retire P.S. at Par, issue C.S. at Par
what amount is Preferred Stock Additional Paid in Capital debited when called or redeemed?
Amount recorded from original issuance.
Under what condition is retained earnings debited on conversion of preferred stock to common stock?
Total recorded value of preferred is less than par value of common on conversion.
accounting treatment for the retirement of preferred stock?
- All related Owner’s Equity accounts are removed;
- Debit differences go to retained earnings;
- Credit differences go to contributed capital.
When a firm retires preferred stock, cash is paid to the shareholders reducing total owners’ equity. Retained earnings can never be increased when shares are retired, redeemed, or converted into another class of stock.
True
J/E for called/redeemed P.S?
DR: P.S. (Par) DR: APIC P.S. (amount on original issue) DR: R.E. (if difference exists) CR: amount paid to call stock DR: APIC from retirement of P.S> (difference/plug)
How can retained earnings be affected by treasury stock transactions?
decrease as a last resort (never increase)
methods for accounting for treasury stock.
1) cost
2) par
accounting treatment of purchases of stock under the par value method.
- Treasury stock is debited at par;
- Additional Paid in Capital (APIC) is debited by amount credited when stock was originally issued;
- Cash is credited.
Under the cost method of accounting for treasury stock, how is treasury stock presented on the balance sheet?
Treasury stock is subtracted from very bottom of Owners’ Equity section of the balance sheet.
When is paid in capital from treasury stock decreased under the cost method?
When treasury stock is reissued for less than cost.
accounting treatment of reissuance of stock under the par value method.
- Treasury stock is credited at par;
2. Remainder of entry is treated like stock issuance.
effect of treasury stock transactions on earnings?
no effect on earnings
relationship of total owners’ equity for cost and par method?
They are equal, although certain components of owners’ equity would show different balances.
treasury stock presented on the balance sheet under the par value method?
subtraction from the common stock account in the balance sheet.
effect on owners’ equity when treasury stock is purchased and subsequently reissued at a price in excess of cost (using the cost method)?
Increase owners’ equity by the difference in purchase cost and reissuance price.
accounts may reflect different balances under the cost and par method for the same firm?
Treasury stock, paid in capital in excess of par-common, paid in capital from treasury stock, retained earnings.
cost method for accounting for treasury stock.
- Purchases are debited at cost;
2. Reissuances debit cash, credit treasury stock at cost, and contributed capital is plugged.
When is paid in capital from treasury stock increased under the par method?
When treasury stock is purchased for less than original issue price.
Under the par method of accounting for treasury stock, the amount of additional paid-in capital FROM ORIGINAL ISSUANCE is reduced when treasury stock is purchased. When treasury stock is reissued, additional paid-in capital is credited for the amount in excess of par, just as in the issuance of unissued shares.
true
Under the par value method, when treasury stock is purchased and retired at a price exceeding the original issue price, the following entry is made. No additional paid-in capital from treasury stock transactions exists. Therefore, retained earnings is debited. Common stock par Additional paid-in capital original issue price - par Retained earnings acquisition price - original issuance price Cash acquisition price. Thus, net common stock, APIC, and R.E. decrease.
true
When treasury stock is cancelled (retired), the common stock account is reduced by the par value of the common stock cancelled
true
shares are considered donated treasury shares. Treasury stock and a gain or revenue account are increased by the market value of the stock received in donation (FAS 116). The increase in the treasury stock account decreases the owners’ equity, but the gain or revenue increases the owners’ equity by the same amount. Therefore, there is no net effect on the owners’ equity
true
Under the cost method, additional paid-in capital from treasury stock transactions is credited when treasury stock is reissued at a price in excess of cost. This account is to be debited before retained earnings when the opposite occurs: reissue treasury stock at less than cost (as happened in the question).
T
Under the cost method, when treasury stock is purchased for an amount less than original price, the treasury stock account is debited. This is a contra OE account.
Additional paid-in capital and retained earnings are unaffected. Under the par method, the treasury stock account is debited for par value, and additional paid-in capital is debited for the amount in proportion to the original issue price. Because less was paid for the treasury stock than was received on original issuance, retained earnings is unaffected. Rather, additional paid-in capital from treasury stock is credited for the difference, but not by as much as the debit to the original issuance additional paid-in capital account.
On balance, additional paid-in capital decreases under the par method relative to the cost method, but there is no difference in the effect on retained earnings (neither method affects retained earnings under the conditions in the problem).
`
T
Additional paid-in capital is reduced when stock is retired because the additional paid-in capital from treasury stock transactions is closed.
T
When treasury stock is reissued at a price exceeding its cost, the cost method records the increase in paid-in capital related to treasury stock.
T
cash/property dividends reduce R.E & assets -> liab recognized on D.O.D.
stock dividends reduce R.E. -> no distribution of assets/no liability recognized
TRUE
Date of declaration (recognize dividend liab)
Date of record (cut-off date)
Payment date
recognize liab/reduction in R.E.
RE XXX
DIV PAYABLE XXX
shareholders on this date will be recipients of divs
NO ENTRY
divs are distributed
DIV PAYABLE XXX
CASH XXX
Div in arrears
unpaid divs on cumulative p. stock, no liab recognized until D.O.D. Preferred S/Hs entitled to be paid first before distribution, must be disclosed in footnotes
Property Divs
non-cash distributon, related gain/loss on disposal will be recognized on date of declaration, divided recorded @ FMV.
Scrip Div
div distributed in note interest bearing form b/c firm doesn’t have the cash at D.O.D.
interest expense - scrip div
computed from DOD to Payment date, principal = amount declared
Return ON capital
cash, property, scrip dividends = distributions of earnings (NOT contributed capital)
Return OF capital
return of capital contributed (amount invested by S/H)
Liquidating dividend
return of capital
Reduce contributed capital account (must be disclosed) - capital acct must be debited
payment of div > earnings received = liquidating div
The reduction of RE is net of?
net of gains/losses, gains decrease reduction, losses increase reduction
stock dividends
Stock dividends, like all dividends, cause a decrease (debit or charge) in retained earnings. A stock dividend is a permanent capitalization of retained earnings to contributed capital. Stock dividends are made in lieu of cash dividends. No liab/distribution of assets. Awarded in proportion to their existing holdings.
Date of declaration implication
Retained earnings are decreased (or a holding account called Dividends, which is closed to retained earnings, may be recorded), and dividends payable are increased. Dividends payable are a current liability, causing working capital to decrease.
Stock dividend effect
increase number of shares issues/outstanding
EPS is decreased
distributed to reduce stock market price/reduce cash dividend demand
permanent capitalization of RE into contributed capital
don’t reduce firm’s net assets/OE
Stock dividend accounting
Small stock dividend = % of div 25%
= capitalize at par value
stock split
not a dividend, adjust par value/# of issued shares
no journal entry is required
common stock/RE are not affected
2-for-1 stock split
double outstanding shares
cut par value in half
100% stock dividend is a “large” stock dividend because it exceeds 20% - 25%. Large stock dividends are capitalized at par value. Retained earnings is reduced by the par value of the shares issued, and common stock is increased by the par value of stock issued. There is no effect on additional paid-in capital because the entire decrease in retained earnings is recorded in common stock. A large stock dividend permanently capitalizes the par value of the issued shares into common stock.
True
stock dividend is a “small” stock dividend because it is less than 20% - 25%. Small stock dividends are capitalized at market value, which exceeds par in this case. Retained earnings is reduced by the market value of the shares issued, common stock is increased by the par value of stock issued, and additional paid-in capital is increased by the difference between market value and par value times the number of shares issued.
True
nonparticipating preferred stock
entitled to annual dividend percentage
participating preferred stock
stock may receive dividends in addition to annual current dividend requirement & common stock receives a matching amount. Fully or partially participating.
fully participating preferred stock
after dividends in arrears allocated, remaining divs are allocated based on total par value of preferred & common outstanding. if Divs are not sufficient to pay common a matching amount, then there is no participation for preferred
dividends in arrears
Preferred S/Hs paid divs before common
Partially participating preferred stock
after common is paid its matching, preferred receives dividends up to an additional percentage, remainder goes to common. If DIVS are not sufficient to provide additional participating percentage to both common/preferred, then each receives its share based on proportion to total par value
stock right
S/H has option to purchase a certain # of shares of the issuing firm at a specified price during a period (convey preemptive rights). S/Hs given rights via stock warrant to purchase pro rata # of shares to keep current % in firm. Rights have expiration date and must be exercised by this date.
Unappropriated RE
available for dividend declaration, no determined future use, no purpose, not all must be paid in dividends
Appropriated RE
Declared off-limits for dividends/preserved
May relate to financial planning/firm expansion
May relate to legal requirement related to Treasury Stock
May relate to contractual obligation
Disclosed in notes
Restriction on RE
constraint placed on portion of RE by external party (similar to appropriate RE)
Disclosed in notes
Book Value/Share
Common stockholders’ Equity/share of O/S C/S at end of period
Common Stockholders’ Equity
Total OE after preferred DIVS are removed (liquidation preference & preferred stock DIVS in ARREARS)
Quasi Reorganization
alternative to bankruptcy, fresh start/new, more conservative asset values, decreases total OE
Quasi Reorganization Conditions
operating losses created retained earnings deficit/asset values overstated
1) positive prospects - unable to pay DIVS until deficit absorbed by future income
2) updated B/S - no retained earnings deficit
Quasi Reorganization Requirements
1) S/H & creditor Approval
2) RE becomes zero after quasi-reorganization
3) no negative contributed capital balance
4) assets written down to MKT value
5) RE dated for period of 3-10 years to indicate balance reflects income earned after quasi-reorg
Quasi Re-org Acct steps
1) write assets down to MKT Value reducing RE (increase deficit)
2) reduce contributed capital to absorb RE deficit
3) change par value/number shares to absorb remaining deficit
he purchase of treasury stock at any price decreases total owners’ equity under the cost method because treasury stock is a contra OE account. When the purchase price per share is less than book value per share, then the denominator decreases by a greater percentage than does the numerator, and book value per share increases.
True
