FAR - Stockholders Equity

Question 1

How do you calculate EPS and diluted EPS?

Answer 1

EPS = (NI - Applicable preferred dividends) / (Weighted avg number of CS outstanding)

Diluted EPS is if everything that can be convertible into CS is converted.

Note shares of stock issued as a result of stock dividends or splits should be considered for the entire period in which they were issued.

Question 2

How do you know if it is dilutive?

Answer 2

Compare against current EPS
Anything that can be converted in common shares and has lower EPS is dilutive, else it is antidilutive.
Preferred stock is not convertible and has no impact.
10% convertible bonds, issued at par, with $1000 bond convertible into 20 common shares. Given tax rate is 30%, the numerator would increase by $70 (interest exp less tax exp) and denominator by 20 shares. The ratio effect is 70/20 or 3.5. Compare the 3.5 against current EPS.
Another example is preferred stock with 6%, $100 par cumulative convertible into 4 CS. This would be 6/4 or 1.5.

Question 3

For what instances does EPS data have to be reported on the face of the IS

Answer 3

EPS must be presented for income from continuing operations and NI. EPS on discontinued must be shown on the face of the IS or in footnotes.

Question 4

What is the JE when a cash dividend is declared and when it is paid?

Answer 4

Declared
DR RE
CR Dividends payable

Paid
DR Div payable
CR Cash

Question 5

What is the amount of expense recognition on stock appreciation rights when it can be exercised immediately VS if it can only be exercised in three years?

Answer 5

If it can be exercised immediately, the total amount should be recognized. If it can only be exercised in three years, then one third should be recognized in each of the three years.

Question 6

What is total contributed capital?

Answer 6

Total contributed capital is total legal capital plus other paid in amounts. This includes the amount from common and preferred stock issues, even for those subscribed and not yet paid for.

Question 7

What is the JE when preferred shares are subscribed? Ex: sold for $17/sh and par is $10/sh

Answer 7

DR Stock subscriptions receivable 17k
CR PS subscribed 10k
CR Paid in preferred 7k

Question 8

What happens if employees are given stock options but do not exercise them and they expire?

Answer 8

If the employee option expires or is not exercised, previously recognized compensation cost is not reversed.

Question 9

What are the JE when treasury stock is purchased for cash at more than par value under cost and par value method?

Answer 9

Cost method
DR Treasury stock (COST)
CR Cash (COST)

Par value method
DR Treasury Stock (PAR)
CR RE (PLUG)
CR Cash (COST)

Question 10

What is the JE for a stock dividend? How is SE impacted?

Answer 10

DR RE
CR Invested Capital

Transfer at par value, total equity does not change.

Question 11

What interest rate is used to discount the exercise price and future dividend stream of stock based compensation?

Answer 11

Risk free interest rate

Question 12

IFRS - what are the acceptable methods of accounting for treasury stock?

Answer 12

Par value method
Cost method
Constructive Retirement method

Question 13

When do bonds and cumulative preferred stocks result in liabilities?

Answer 13

Bonds will have their interest as a current liability.

Cumulative preferred dividends are not considered liabilities until declare by the Board.

Question 14

What is a liquidating dividend? What is the JE?

Answer 14

A liquidating dividend represents a return of capital to stockholders because the dividend declared exceeds the corporation’s RE.

DR RE (Balance)
DR Additional Paid in capital (Plug)
CR Dividends payable (DIVIDEND amt)

Question 15

IFRS - what is the method used to convert preferred into common shares?

Answer 15

Book value method.

Market method is not allowed by IFRS, but US GAAP allows.

Question 16

What is APIC? How is it recorded?
Company issued for $105/sh, 8k shares of 100$ par convertible PS in 2009. One PS is convertible into 3 CS with $25 par. In August 2010, all PS is converted. The market value of CS at date of conversion is $30/sh. What is credited to APIC as a result?

Answer 16

The convertible PS was issued for 840k at par value of 800k. The APIC on PS is 40k when issued.
To convert the PS, reverse the original entry. Then credit the 600k to CS with the remaining to APIC CS of 240k.

DR PS 800
DR APIC on PS 40
CR CS 600
CR APIC Capital 240

Question 17

How do you calculate return on common stockholder’s equity?

Answer 17

NI available to common stockholders (NI less preferred dividends paid) / average common Stockholders equity (incl CS and RE)

Question 18

Company used cost method. Acquired 6000 cs of their own $1 par CS at $18/sh. In 2010, company issued 3000 of these shares at $25/sh. What is the JE?

Answer 18

Acquisition
DR Treasury Stock 108
CR Cash 108

Reissued
DR Cash 75
CR Treasury stock 54
APIC - TS 21

If the reissue was at an amount less than cost, then the APIC-TS would be debited for the difference, but only up to the credit balance in that account. The remainder would be made up by RE.

Question 19

Bonds with detachable stock warrants - how is the value allocated?

Answer 19

Sale proceeds are allocated to bonds and stock warrants based on the relative fair values at the date of issuance. The amounts allocated to warrants is recorded as paid in capital - stock warrants.

Question 20

How much gain is recognized on a nonmonetary dividend?
Ex: Company purchased in march for 200. FV on declaration date Dec20 is 300, FV on record date Jan 10/11 is 310, distribution date on Jan28,11, is 305.

Answer 20

A transfer of a nonmonetary asset to a stockholder in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss recognized on the disposition of the asset.The FV on the declaration date less the carrying value = the Gain or loss.
As the trading security was purchased in the current year, it has not been adjusted to FV, thus use 200 as carrying value.

Question 21

How are stock dividends recorded and how does it affect RE?
Sept 30, Company issued 3000 CS at $10 par as a stock dividend. No entry on declaration date. Market value after issue is $15/sh. The SE accounts have CS 50k shares at 200k, APIC 300k, and RE 350k
What is the RE after stock div?

Answer 21

The stock dividend is 15% dividend (3k/20k). A stock div less than 20-25% is recorded at the FV of the shares to be issued. This is charged to RE and credited to Stock div distributable and Paid in Capital.

RE is charged 45k (3kX15) making the balance 305k.

Question 22

How is treasury stock treated?

Answer 22

Equity transactions involving treasury stock never produce gains or losses.
Treasury stock is not a valuation account; each share of TS is accounted for as an individual item and each share has the same value as before the transaction. If the number of TS is reduced, the value reported for TS lowers too.
Using the cost method, if it is sold above cost, the JE:
DR Cash (Price)
CR Treasury stock (COST)
CR APIC-TS (Excess)
If TS is sold below cost, then RE is debited.