Flash Cards 1
What is an impairment loss?
An impairment loss occurs when an asset’s carrying value (book value minus accumulated depreciation) exceeds its recoverable amount (fair value)
What is comprehensive income? (the definition and how to calculate it.)
Comprehensive income is the change in equity or net assets of a business from transactions or events from non-owner resources to calculate:
net income
+ other comprehensive income = comprehensive income.
Items that are excluded in comprehensive income
Unrealized loss on available-for-sale equity security
Actual return on pension plan assets
How do you calculate earnings per share?
net income (after preferred dividends are paid) is divided by the weighted average number of common shares outstanding.
Total shares × Period outstanding = Weighted average
120,000 3/12 (January 1 − March 31) 30,000
160,000 9/12 (April 1 − December 31) 120,000
150,000
What is a gain that should not be included in the calculation of the income?
Foreign currency translation adjustment gain, net of tax
What items are used in computing diluted EPS?
- potentially dilutive convertible bonds
- preferred stock
Gains or losses from treasury stock transactions affect ___________ under the legal method.
RE
APIC account is debited for losses; when the APIC does not have enough of a balance to absorb a loss, RE is further reduced.
For gains, APIC (not RE) is credited.
Which of the following is a true statement regarding the cost method versus legal method when accounting for treasury stock transactions?
Gains/losses from treasury stock transactions do NOT affect RE under the legal method. Instead the APIC account is debited for losses; however, when the APIC account does not have enough of a balance to absorb a loss, RE is further reduced. For all transaction gains, the APIC account (not RE) is credited.
What is the annual report that is filed with the United States Securities and Exchange Commission?
10-k
What amount should corporations report as treasury stock gain?
$0 Corporations are not permitted to report income statement gains and losses from treasury stock transactions. Instead, treasury stock “gains and losses” are reported as direct adjustments to stockholders’ equity. Gains are recorded by crediting APIC - Treasury Stock, while losses are recorded by first reducing any existing APIC - Treasury Stock to $0, and then debiting any additional loss to RE.
Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders’ equity and the book value per common share?
Decrease stockholders’ equity in total. All treasury stock transactions decrease total equity.
Increase book value per share. Book value per share is based on the number of outstanding common shares, which is reduced by the acquisition of treasury stock (the denominator is reduced). The numerator (book value) is also reduced by the cost to purchase the shares, but the overall effect on the ratio is an increase in book value per share. For example, if book value were $1,000 and there were 100 common shares, the book value per common share would be $10. If 10 shares were repurchased for $8 (which is less than the original book value per share), the new book value would be $920 and the reduced number of shares would be 90, thus, resulting in a new book value per common share of $10.22, which is larger than the original $10.
Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders’ equity and the book value per common share?
Decrease stockholders’ equity in total. All treasury stock transactions decrease total equity.
Increase book value per share. Book value per share is based on the number of outstanding common shares, which is reduced by the acquisition of treasury stock (the denominator is reduced). The numerator (book value) is also reduced by the cost to purchase the shares, but the overall effect on the ratio is an increase in book value per share. For example, if book value were $1,000 and there were 100 common shares, the book value per common share would be $10. If 10 shares were repurchased for $8 (which is less than the original book value per share), the new book value would be $920 and the reduced number of shares would be 90, thus, resulting in a new book value per common share of $10.22, which is larger than the original $10.
Deck Co. had 120,000 shares of common stock outstanding at January 1, Year 2. On July 1, Year 2, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to calculate year two earnings per share
140,000 shares of common stock is the weighted average for earnings per share. The calculation is as follows:
1-1-Year 2: Outstanding all year
120,000
7-1-Year 2: 40,000 issued x 6/12 = 20,000
Weighted average
140,000
Which of the following statements is correct regarding reporting comprehensive income?
Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.
A corporation declared a 10 percent stock dividend on 15,000 shares outstanding of $5 par common stock when the fair value was $10 per share. Which change in the corporation’s stockholders’ equity accounts is correct?
Additional paid-in-capital is increased by $15,000.
. A 10 percent stock dividend qualifies as a small stock dividend because the issuance is not expected to affect the market price of the stock. The stock dividend totals 1,500 shares (15,000 shares × 10% dividend). The fair value of the stock on the date of declaration is transferred from retained earnings to common stock and additional paid-in-capital
Because all treasury stock transactions were recorded under the “cost method,” and the resale of treasury stock was at a price that exceeded its acquisition price….
none of the treasury stock transactions affected retained earnings.
If stock dividend or a stock split changes common stock outstanding how do you calculate EPS?
the computation of EPS shall give retroactive recognition for all periods presented using the new number of shares because the reader’s primary interest is presumed to be related to
When calculating basic earnings per share what is the numerator? (Top)
It is income available to common shareholders, which is equal to net income - preferred dividends
(Note if they give you income available to common shareholders, do not subtract preferred dividends)
What is the formula for calculating basic earnings per share?
Income available to common shareholders
—————————————— weighted average number of common shares outstanding WACSO
