FAR Module 15 SHE Flashcards
Is common stock ever issued at a discount?
How does that affect the JE?
Rarely because of the liability to the purchaser for the discount. In many states this discount is considered legal capital. The liability is avoided by setting par values below market.
If such an instance occurred you would debit a discount account instead of crediting APIC
What is the JE to record the issuance of common stock
Debit cash (amount received) Credit common stock (par/stated value) Credit APIC (plug)
If a stock is “no par” how does that affect the JE?
All the proceeds are credited to Common Stock.
Preferred stock can be … (4)?
Are these options mutually exclusive?
Participating
Cumulative
Convertible
Callable
These options are not mutually exclusive
What are the features of participating stock?
Participating preferred stockholders share with common stockholders in dividend distributions after both preferred and common stockholders receive a specified level of dividend payout.
Participation with common stockholders in dividends is usually specified in terms of a percentage of legal capital.
For example, 7% preferred receive 7% of their par value in dividends before common stockholders receive dividends. Fully participating preferred would receive the same percentage dividend as common stockholders if the common stockholders received over a 7% dividend.
What are the features of cumulative stock? Are dividends in arrears a liability? Do they need to be disclosed?
Dividends that are not paid in any year (dividends in arrears) must be made up before distribution can be made to common stockholders. However dividends in arrears are not a liability until declared. They should be disclosed parenthetically or in the footnotes
What are the features of convertible stock?
Preferred stockholders have an option of exchanging their stock for common stock at a specified ratio.
What are the features of callable stock? Are gains/losses recognized?
The corporation has the option to repurchase the preferred stock at a specified price. Mandatorily redeemable preferred stock must be classified as liabilities on the balance sheet. No gains or losses are recognized on callable stock.
What are stock subscriptions?
Stock (either common or preferred) can be subscribed by investors. A receivable is established and “stock subscribed” credited. When the total subscription price is received the stock is issued
What is the JE for a stock subscription at the date of subscription?
Debit cash
Debit subscription receivable
Credit common stock subscribed
Credit APIC
What is the JE for a stock subscription at the date of cash receipt/issuance?
Debit cash
Credit subscriptions receivable
Debit common stock subscribed
Credit common stock
T/F
treasury stock is an asset of the corporation
FALSE
treasury stock is a contra SHE account
What are the two methods of accounting for treasury stock?
Cost method
Par value method
How is the cost method different from the par value method in regards to treatment of treasury stock?
The cost method treats the transactions like a repurchase and later a resale.
The par value method treats the repurchase as a retirement and then treats the resale as a new issue.
The big difference is when the gain/loss is recognized. Under cost you recognize this when you resell. Under par you recognize this when you retire the stock.
What are the JEs for the cost method when reacquiring stock (purchasing treasury stock) and subsequently reselling it?
Purchasing Treasury Stock:
Debit treasury stock
Credit cash
Reselling Stock: Debit cash Debit RE (if loss and no previous gains) Credit treasury stock Credit PIC-TS (if gain)
how is the balance sheet presented when treasury stock is under the cost method
Common stock APIC RE TOTAL Less treasury stock TOTAL SHE
What is the exception that says you should debit a different account when recognizing a loss on reselling stock?
If a PIC-TS account already exists (we have previously recognized gains on reselling stock) you debit this account until it reaches zero and THEN debit retained earnings.
how is the balance sheet presented when treasury stock is under the par value method
Common stock Less treasury stock (shown as contra account) Net common stock APIC RE TOTAL SHE
What are the JEs for the par value method when reacquiring stock (purchasing treasury stock) and subsequently reselling it?
Purchasing Treasury Stock: Debit treasury stock Debit APIC Debit RE (loss in retirement) Credit cash
Reselling Stock:
Debit cash
Credit treasury stock
Credit APIC
T/F
total stockholders’ equity is not affected by the method selected (cost vs. par value). Only the allocation among the equity accounts is different
TRUE
When is a repurchase of stock considered a formal retirement?
When there is no intent of reissue
When formally retiring stock, what is the JE?
Debit common stock
Debit APIC
Debit RE (loss on retirement)
Credit Treasury stock
What are the dates associated with a dividend?
Date of declaration
Date of record
Date of payment
What happens at the date of declaration? What entry is made? How does this effect SHE?
An entry is made to record the dividend liability
debit retained earnings
credit dividends payable
this entry reduces stockholders equity
What happens at the date of record
No entry is made.
Those owning stock at the date of record will be paid the previously declared dividends.
There is no journal entry, only a memo entry
What happens at the date of payment? What entry is made? How does this affect SHE?
The liability is paid
debit dividends payable
credit cash
this does not reduce stockholders equity
What are property dividends?
How are they recorded? (FV or Cost?)
How is a gain/loss computed?
These are dividends payable in an asset other than cash, but the entries are similar to those of cash dividends.
They are recorded at fair value of the asset transferred with a gain (loss) recognized on the difference between the assets book value and fair value at disposition
What are liquidating dividends?
Are they disclosed?
What is the debit?
Liquidating dividends are dividends based on something other than earnings. They are a return of capital to stockholders and should be disclosed
Paid-in capital is usually debited rather than retained earnings. Common stock cannot be debited because it is the legal capital that can only be eliminated upon corporate dissolution
What are scrip dividends?
Do they bear interest?
JE at issuance?
JE at payment?
Scrip dividends are issuances of promises to pay dividends in the future (may bear interest) instead of cash. They are a liability which is extinguished by payment.
JE when issuance is made:
Debit RE
Credit Scrip Dividends Payable
JE when paid:
Debit Scrip Dividends Payable
Debit Interest Expense (maybe)
Credit Cash
What are stock dividends? How are they different from cash and property dividends?
Stock dividends are not a liability when declared. They can be rescinded, as nothing is actually being distributed to stockholders except more stock certificates. Current assets are not used to pay the dividend. After stock dividends, shareholders continue to own the same proportion of the corporation
What are the thresholds for a small stock dividend versus a large stock dividend?
< 20-25%
> 20-25%
What are the JEs associated with stock dividends for a small stock dividend?
At declaration:
Debit retained earnings (FMV)
credit stock dividend distributable (par)
credit APIC (plug)
At issuance:
Debit stock dividend distributable
credit common stock
What are the JEs at declaration and issuance associated with stock dividends for a large stock dividend?
At declaration:
Debit retained earnings (par)
credit stock dividend distributable (par)
NO APIC!
At issuance:
Debit stock dividend distributable
credit common stock
What is a stock split
Stock splits change the number of shares outstanding and the par value per share. Par value is reduced in proportion to the increase in the number of shares. The total par value outstanding does not change and no charges are made to retained earnings. This is only a memo entry, not a journal entry. There is no affect in any accounts!
What is an appropriation of retained earnings? What JEs are involved?
An entry to appropriate retained earnings restricts the amount of retained earnings that is available for dividends. This restriction does not necessarily provide cash for any intended purpose. The purpose is to show the assets in the amount of the appropriation are not available for dividends. When a reserve is no longer needed the entry must be reversed. The journal entry to set up an appropriation is:
debit retained earnings
credit reserve for retained earnings
What is a share-based payment
Share-based payments are transactions where in an entity acquire goods or services by issuing shares of stock, share options, or other equity instruments
How are share-based payments to employees accounted for?
Share-based payments to employees are measured based on the fair value method. The cost of the services is measured at the grant-date fair value of the equity instruments issued or the fair value of the liability incurred. (Employee service cost is based on the fair value of any amount the employee pays or is obligated to pay for the instrument)
# of shares * FV of option / # of yrs required service
What are the JEs involved in a share-based payment to employees?
Recognize deferred compensation expense
Recognition of compensation expense
Exercise of option
Recognize deferred compensation expense:
Debit deferred comp expense
Credit stock options outstanding
Recognition of compensation expense:
Debit compensation expense
Credit deferred comp expense
Exercise of option: Debit cash Debit stock options outstanding Credit common stock Credit APIC
What assumption is one of the basic principles underlying the primary financial statements that is related to bankruptcy
Going concern assumption
What is bankruptcy
Bankruptcy is the final legal act for a company. In bankruptcy the accounting and financial reporting must present the information necessary for the liquidation of the business
What is a quasi-reorganization?
The purpose of a quasi-reorganization is to allow companies to avoid formal bankruptcy proceedings through an informal proceeding. In this situation there is a deficit in retained earnings and the objective is to eliminate the deficit
What are the three steps in a quasi-reorganization and what are the corresponding JEs
1) adjust assets to FMV
debit RE
credit assets
2) take equity from common stock to PIC debit existing PIC debit capital stock Credit RE credit PIC - quasi reorganization (plug)
3) eliminate deficit with equity from PIC
Debit PIC
Credit RE
After a quasi-reorganization what disclosure must be kept and for how long
For 10 years have the disclosure “since quasi-reorganization of January 1, 2000”
What is the dividend payout ratio and what does it measure
Dividends per share / earnings per share
Measures percentage of earnings distributed as dividends
What is the book value of common stock ratio and what does it tell us
Common stockholders equity /
common shares outstanding
This is not a meaningful measure because assets are carried at historical cost. This ratio is for a point in time
What is the “rate of return on common stockholders equity” ratio and what does it measure
Net income available to common stockholders /average common stockholders equity
This measures the return earned on the stockholders investment in the firm
What is the debt to equity ratio and what does it tell us
Total debt (all liabilities) / stockholders equity
shows creditors the corporation’s ability to sustain losses
what is a stock right and what is its purpose
Stock rights are evidenced by warrants indicating the number and price at which shares may be purchased. This is so that ownership percentage can be maintained
At issuance of a stock right what happens
The issuer makes a memo entry
On the balance sheet you put the SHE accounts in what order?
In order of who gets paid first in the event of liquidation (preferred stock comes first)
Upon exercise of a stock right what journal entry is made
Debit cash
credit common stock
credit APIC
T/F
preferred stockholders are only entitled to their par value. APIC for PS goes to CS. Dividends in arrears & liquidating premiums go to PS
TRUE
T/F
it is not necessary to disclose information relating to stock rights outstanding because those rights only maintain the ownership %, they don’t change it
FALSE
such rights must be disclosed
T/F
under IFRS a schedule must be presented that reconciles the number of shares of stock at the beginning and end of each period
TRUE
What additional items are disclosed in SHE under IFRS?
The capital contributions in excess of par (also called APIC), the revaluation reserve, reserves for other items, and RE
T/F
dividends in arrears accumulate each year and must be disclosed in the financial statements (does not need to be accrued as they are not considered a liability until they are declared)
TRUE
T/F
dividends that are based on funds other than retained earnings are considered to be liquidating dividends
TRUE
T/F
liquidating dividends are considered to be a return on capital
FALSE
They are a return OF capital
T/F
the amount of liquidating dividends equals the balance in accumulated depletion
TRUE
What is the measurement date for a share-based payment to employees that is classified as a liability
The settlement date
In accounting for stock-based compensation, what interest rate is used to discount both the exercise price of the option and the future dividends stream
The risk-free interest rate
