Lecture 19

Question 1

contributed capital

Answer 1

amount invested directly by owners thru acquisition of capital stock

Question 2

retained earnings

Answer 2

past earnings (net assets) reinvested in firm

“temporary investment

Question 3

common stock

Answer 3

basic ownership interest, conveys voting rights

shareholders bear majority of firm risk; claim to assets is residual (only exercisable after other claims have been satisfied)

Question 4

authorized shares

Answer 4

max # of shares of CS that can be sold to the public based on the articles of the corp

Question 5

issued shares

Answer 5

total shares sold to public

Question 6

outstanding shares

Answer 6

issued shares owned by stockholders

Question 7

treasury shares

Answer 7

issued shares that have been repurchased by the company

Question 8

par value

Answer 8

stated value on each stock certificate; arbitrarily set

“CS” on the BS

Question 9

APIC

Answer 9

diff b/w total amount the co receives when issuing stock and the par value

Question 10

Cash dividends on CS

Answer 10

not legally required

creates liability @time of declaration

Question 11

journal entry for declaration of cash divs

Answer 11

RE

    Div Payable

Question 12

journal entry for date of payment of cash divs

Answer 12

Div Payable

    Cash

Question 13

Preferred stock

Answer 13

right to receive dividends precedes CS rights (must be paid the full amount of their dividends before CS holders are paid)

amount of dividends to be paid is specified in the contract

dividend preference usually cumulative; when preferred dividends are unpaid = in arrears

when firm is liquidated, claim on assets of preferred shareholders > common shareholders

Question 14

how is preferred dividend determined

Answer 14

preferred dividend = percentage of the PAR VALUE

Question 15

stock splits

Answer 15

NO FORMAL JOURNAL ENTRY

Question 16

after stock split, SE accounts are

Answer 16

unchanged

Question 17

after stock split, firm must change

Answer 17

BS - # of shares and par value

Question 18

stock dividend

Answer 18

declaring dividends in stocks, rather than in cash

shares outstanding increases
#shares authorized and par value is the same

Question 19

after stock dividend, total SE is

Answer 19

unchanged

Question 20

stock dividend:
RE
CS
APIC

Answer 20

RE decreases, this amount is transferred to CS and APIC

Question 21

large stock dividend

Answer 21

20% or more

based on PAR VALUE

Question 22

journal entry for large stock div

Answer 22

RE

      CS

Question 23

small stock div

Answer 23

less than 20%

based on FAIR VALUE

Question 24

journal entry for small stock div

Answer 24

RE

        CS
        APIC

Question 25

reasons for stock repurchases

Answer 25

to temp hold shares for later use (grant as employee bonus)

artificial inflation of EPS
thwart takeovers
signal to market that firm is undervalued

Question 26

treasury stock account

Answer 26

represents shares that have been reacquired by firm
contra-equity account

entry @purchase based on MARKET PRICE

Question 27

reissuing treasury stock

Answer 27

diff b/w cash received and carrying amount (acquisition cost) affects APIC

if balance in APIC is insufficient, this affects RE

Question 28

journal entry reissue for more than acquisition

Answer 28

Cash

     treasury stock
     APIC

Question 29

journal entry reissue for less than acquisition

Answer 29

Cash
APIC

      treasury stock

Question 30

stock warrant

Answer 30

rights granted by firm to general investing public

shares granted were typically previously unissued

Question 31

stock warrants & options

Answer 31

rights granted by firm to people to acquire shares of capital stock at a specified price over a specified interval of time

Question 32

stock options

Answer 32

contract b/w firm and employees
options vest over some period of time

cannot be transferred, issued w/ an exercise price that equals market price on date of grant

Question 33

journal entry for issuing warrant

Answer 33

cash

     common stock warrants

Question 34

journal entry for exercise of warrant

Answer 34

Cash
CS warrant

       CS
       APIC

Question 35

journal entry for expiration of warrant

Answer 35

CS warrant

       APIC

Question 36

how to report stock options

Answer 36

record FAIR VALUE of options granted to employees as expense on IS

expense is amortized over vesting period

Question 37

vesting period

Answer 37

period of time the employees must wait until they’re capable of exercising their rights

Question 38

Fair value

Answer 38

current market value of the stock option

Question 39

fair value of stock options determined by…

Answer 39

using either current market value or appropriate valuation model

Question 40

rules for accounting for stock options

Answer 40

cost is allocated to expense over employee’s service period (usually vesting period)

when recording periodic expense, offset goes to PIC for options (equity account)

Question 41

journal entry for recording stock options

Answer 41

[calculate yearly expense]

Comp exp

         PIC options

Question 42

if proportion of employees expected to stay at the firm changes, this will be recorded by….

Answer 42

1. adjust for the previous years

2. record current year’s allocation of exp based on new retention rates

Question 43

OCI

Answer 43

other comprehensive income:

foreign currency transactions
hedges
pension liabilities
unrealized gains and losses on certain investments