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FAR > FAR - Stock Holders Equity > Flashcards

FAR - Stock Holders Equity Flashcards

1
Q

What is included on the Statement of changes in equity

A

It shows the changes over the year in these accounts:

  • Common Stock
  • Preferred Stock
  • APIC
  • RE
  • Treasury Stock
  • AOCI
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2
Q

How is it presented

A

It can be part of footnotes or as a separate statement

Public Co must show 3 years of comparative owners equity on the statement of changes in owners equity

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3
Q

How many years of comparative owners equity on their statement of changes in equity

A

Must show 3 years of comparative owners equity - if a public company

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4
Q

What is the biggest difference between common stock vs preferred stock

A

Common has voting rights and preferred does not

Preferred usually has dividends and dividend priority when common stock might not receive dividends

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5
Q

JE to issue stock

A

dr cash 100
cr C/S (Par) 10
cr APIC (balance) 90

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6
Q

What if the stock is No par - JE

A

dr cash 100

cr C/S 100

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7
Q

What are the three types of preferred stock

A

Callable

Redeemable

Convertible

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8
Q

Redeemable Preferred Stock - that has a specific date and price - how do you classify

A
  • You classify it as debt

- Cash dividends that you give out are “interest expense”

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9
Q

How do you handle dividends in arrears when preferred stock is callable or redeemable and then called or redeemed

A
  • Any dividends in arrears are paid first
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10
Q

What kind of an account is Treasury stock considered

A

A contra - owners equity account

It is NOT an ASSET
It is NOT a INVESTMENT

So Income is NEVER affected by Treasury Stock

Earnings per share is increased

RE can be decreased but NEVER increased by Treasury Stock

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11
Q

What happens to RE with Treasury Stock

A

RE can be decreased by T/S but NEVER increased by T/S

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12
Q

JE buy Treasury Stock and reissue - Cost Method

A

JE: 100 share for $20 per share

Dr T/S 2000
cr Cash 2000

JE: Reissue T/S 20 shares at $30

Dr Cash 600
Cr Contributed Capital Treasury Stock (plug) 200
Cr T/S (20 * $20) 400

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13
Q

When using the cost method what happens to the treasury stock that has been repurchased

A

Under Cost Method

  • The original purchase of the T/S assigns a value to the T/S when purchased
  • Bought it back at $20 per share -

This is like a par value for subsequent reissues: reissue 20 shares @ $30

dr Cash 600
cr Contributed capital T/S 200
cr T/S ( 20 * $20) 400

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14
Q

When using the Par method for T/S: JE

A

Under Par Method:
The C/S Par value follows the stock when repurchased:

Original Issue: $10 par at $20 per share
Par is $10 and APIC C/S $10

Buy 100 shares of T/S at $30 per share

Dr T/S ($10 par * 100 shares) 1000
Dr APIC C/S ($10 * 100 shares) 1000
Dr APIC T/S (plug) 1000
Cr Cash 3000

Buy 100 shares of T/S at $15

Dr. T/S ( $10 * 100 shares) 1000
Dr. APIC C/S ($10 * 100 shares) 1000
Cr APIC T/S 500
Cr Cash 1500

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15
Q

What kind of distribution is a dividend considered:

A

It is considered a distribution of earnings

You are giving away cash or property

Therefore it is NOT an expense

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16
Q

On what date do you recognize the liability for a dividend

A

On the date it is declared:

Dr. RE
cr Dividends payable

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17
Q

What is the date of record for dividends

A

The date of record is the cutoff date for owners who will receive dividends

If you buys dividends after this date - then you wont get any dividends that were declared

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18
Q

What is the payment date

A

this is the date the dividends are actually paid out

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19
Q

When do you record a liability on dividends in arrears

A

Dividends in arrears are dividends that accumulate because they weren’t actually paid out during the period

NO LIABILITY is recorded on dividends in arrears until they are DECLARED

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20
Q

What happens to owners equity when you pay a dividend

A

owner’s Equity is is reduced when paid

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21
Q

What is a script dividend

A

This is when you declare a dividend, but do not have the cash to pay for them

It is essentially notes payable to shareholders

the company will pay interest on the notes to the shareholders until the date the dividends are paid

22
Q

What is a liquidating Dividend

A

This is when dividends are a return OF capital rather than a return ON capital

This is common in industries involving natural resources

23
Q

What is a Stock Dividend - what are the affects on owner’s equity

A

This is when a firm pays dividends of additional stock in the company

It increases the number of shares outstanding

Is does NOT change ownership percentages

It does not affect any part of stockholder’s equity - no decrease

24
Q

What are the affects when you have a stock dividend and the dividend is less or more than 25% of outstanding shares

A

If LESS that 25% - capitalized at market value

If MORE than 25% - capitalized at par value

25
Q

What is a stock split

A

This doubles the number of outstanding shares 2:1 or 3:1

NEITHER RE or C/S accounts are affected by stock splits

26
Q

What is the order of dividend repayment

A
  • Preferred Shareholders with dividends in arrears are paid first
  • Preferred Shareholders next get current period dividends

-Common Shareholders:
matching amount = the preferred % * Ttl # of shares outstanding

  • Preferred receive additional percentage if any dividends remain
  • Common receive any remaining dividends after that
27
Q

Retained earnings

A

Retained earnings =

+ Income to date
- dividends declared to date
+/- any adjustments

It is not the same as cash

It is keeping track of the earnings to date by a firm

28
Q

How do you report Retained Earnings

A

It can be a separate statement in the financials or it can be part of the Statement of Changes in Owner’s Equity

29
Q

What are the types of adjustments to retained earnings

A
  • the cumulative effects of an accounting principle change

- the correction of an error that results in a prior period adjustment

30
Q

What is book Value per share - formula

A

Common stock holder’s equity / # of shares outstanding

31
Q

What is a quasi reorganization and what happens to its balance sheet

A

A quasi reorganization gives a corporation an opportunity to eliminate the overstatement of assets and to eliminate any deficit in Retained Earnings

It gives a company a fresh start

The B/S carrying amount are stated at Fair value

Any deficit in RE is eliminated and assets that are over stated are written down to their fair value

32
Q

can a company recognize a gain in transaction involving treasury stocks?

A

No - gains re not recognized on transactions inkling T/S

33
Q

What does it mean when a co issues rights without consideration to subscribe for additional shares

A

A stock subscription is when you get downpayments from potential investors for new offers of stock issued in the future

Without consideration means you got no money up. So no entry was made at the time of issuance

When rights are exercised:
dr cash
cr C/S (par)
cr APIC - any excess

Retained earnings - are not affected

34
Q

Property dividend - what are the rules on what value to ascribe and when

A

When issues - you use the Fair Value of the property on the DECLARATION date

The difference between carrying value and fair value is recognized as a loss or gain on disposal

It is as if it was sold for its fair value

Dr RE 100
cr. Asset 90
cr Gain 10

Dr RE 100
Dr loss 10
cr asset 110

35
Q

What is the affect of acquiring Treasury Stock on stock holders equity

A

This ALWAYS decreased Stockholder equity - because you use cash to buy T/S

36
Q

How is a bonus that is estimable and probable be handled - CEO gets it in year 3 and 4 of he is employed by dec 31 year 2

A

It is a contingent liability that is both estimable and probable.

Therefor you accrue the liability over the period in which the employee is performing services in exchange of rte compensation
The expense is therefore recognized in Years 1 and 2

dr compensation expense
cr accrued liability

and then is reduced with payments in years 3 and 4

dr accrued liability
cr cash

37
Q

Stock Warrants - JE and general notes

A

When bonds are issued with detachable warrants

dr cash
dr bond discount (amount allocated to warrant)
cr bonds payable
cr APIC (amount allocated to warrant)

When warrants are issued - any proceeds located to warrants are recorded in APIC as a Cr

If the warrants are issued to EXISTING shareholders - there are NO proceeds and therefore no change or affect on APIC

If warrants are exercised the proceeds will be recorded in common stock and APIC - No affect on income

dr APIC Amount dedicated to warrants
cr C/S Par)
cr APIC excess

If warrants expire without being exercise there is not entry made - The APIC previously credited to warrants is simply shifted to APIC C/S

38
Q

On July 1, 20X3, X Company issued 10,000 shares of its no par common stock and 1,000 shares of its $10 par 4% preferred stock in exchange for land that has a fair value of $299,000. The common stock has a fair value of $30 per share and the preferred stock has a fair value of $25 per share. How much will X record in additional paid-in capital as a result of the transactions?

A

Land is recognized at its fair value - $299,000

The total is therefore allocated among the shares based on there relative fair values

C/S Mkt $30 = 10,00030 = 300,000
P/S Mkt $25 = 10025 = 25,000

Total is 325,000

Treat like a lump sum:

300,000/325,000 * 299,000 = 276,000 allocated to C/S

25,000/ 325,000 * 299,000 = 23,000

Since C/S has no par - whole value is recorded here

dr Land 299,000
cr C/S ( no Par) 276,000
cr Preferred Stock ( $10) 10,000
cr APIC 13,000

39
Q

What is an appropriation of RE and when can you use it

A

this is a means of communicating to F/S users that though there is RE and perhaps the availability of cash - the co is anticipating needing the money so they will therefore not distribute a dividend

Example - restrict earning available for dividends

40
Q

The liability of the property dividends is the fair value on the declaration date. What happens to gain/loss at end of the year

A

The distribution is recorded

dr RE ( fair value of property)    78,000
       cr Asset  ( carry value)            60,000
       cr Gain    (any difference)       18,000

or dr for a loss

The gain or loss is ultimately closed into RE so the net effect on RE is the cost of the property

-78,000
+18,000
= net effect is a credit ( or lowering) in RE for the carrying value or 60,000

41
Q

What are the 3 methods use to account for T/S under IFRS

A

Cost Method
Par Method
Constructive retirement Method ( similar to par value method)
- this si used when they do not intend to reissue shares

42
Q

What do you do when you declare a liquidating dividend

Templeton Company declared a $250,000 cash dividend payable to common stockholders when its retained earnings had a balance of $175,000. How will the dividend be accounted for?

A

RE is reduced to Zero

the remainder is treated like a reduction in contributed capital

It reduces APIC first

Retained earnings is reduced to zero and the remaining $75,000 reduces the balance in additional paid in capital.

43
Q

When you have a stock purchase plan - how do you recognize expense related to the plan

A

you expense the amount that you match the employees

they contributed 350,000 you match $2 for every employee $1

So your expense is $700,000 of rte year

44
Q

When a co issues rights to existing stock holders without consideration - what is the JE and what is the affect on RE

A

dr cash
cr c/s
cr APIC

there is NO JE at the time the rights are issued

When they are exercised like normal

RE is never affected

45
Q

What do you do when you exchange services rendered for stock

A

services are accounted for at the fair value of the stock given in exchange for the services.

Use the amount or market price on the date you executed the contract ( no when it was completed)

dr consulting service expense ($40 * 1000 shares) 40,000
cr C/S (10) 10,000
cr APIC the balance 30,000

46
Q

What do you do if you issue a stock subscription and collect $ at the time

A

you plan to issue $10 par stock at $30 per share and get a subscription from potential buyers at $3 per share down payment

at time the subscription is taken out

dr cash $3
dr subscription receivable $27
cr C/S subscribed(par) $10
cr APIC C/S(balance) $20

When the balance is paid;

dr Cash 27
dr C/S subscribed 10
cr subscription receivable 27
cr C/S 10

47
Q

Script dividend - rules and JE

A

This is when you declare a dividend, but do not have enough cash to pay it so it is innocence like you are issuing a notes payable that you then later pay interest expense on:

dr. RE 100,000
cr Notes payable 100,000

at end of year you paid interest of 10,00

dr interest expense 10,000
cr cash 10,000

48
Q

What are stocks with an unconditional redemption feature

A

An unconditional redemption feature allows the holder to exchange shares for cash

This makes them equivalent to a liability and is how they are reported

49
Q

How are cumulative preferred stocks, convertible common stocks and common stocks issued at a discount reported

A

All are reported as equity

50
Q

How do you handle a dividend in kind that has appreciated in value

A

When an appreciated asset is distributed as a dividend in kind - a gain is recognized

Its is difference between the fair value and the carrying value - $200

dr RE 700
cr Dividends payable 700

dr land 200
cr gain on land 200

on day you pay dividend

dr dividends payable 700
dr land 7000

The net effect is that the gain will close out into RE increase it. So you reduced RE by 700, but later added back the gain of 200.

the net result is that RE is reduced only by 500

51
Q

Does the issuance of stock rights to share holders reduce RE

A

NO - it is recorded for disclosure but affects no accounts

52
Q

A property dividend should be recorded in RE at the property’s what value on the date of declaration

A

market value

FAR (50 decks)

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