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FAR > Owner's Equity pg 405-465 > Flashcards

Owner's Equity pg 405-465 Flashcards

1
Q

OE Account Types

A
  • Preferred Stock
  • Common Stock
  • Add’l Pd in Capital, preferred
  • Add’l Pd in Capital, common
  • Retained Earnings-Net of firm’s earnings to date less dividends to date, plus or minus other items including prior period adj & certain accting changes
  • Accum other Comprehensive Income
  • Treasury Stock- Cost or Par value of common stock of firm purchased by firm (stock of Coke purchased by coke) contra to OE acct
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2
Q

Corporate Form of Business Advantages/Disadvantages

A

Advantages:
-Shareholders have limited Liability. Corporation is separate legal entity Shareholders not liable for actions of corporation & can lose only their investment.
- Easier to raise significant amts of capital
-Lack of Mutual agency (one shareholder doesn’t bind corp or other shareholders
Disadvantages:
-Double Taxation
-Great deal of more regulation including SEC reporting requirements

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3
Q

Hybrid Corporations

A
  • Characteristics of both corporations & partnerships or sole proprietorships
  • S corp: If relevant tax rules are followed limited liability is retained but income is taxed only once
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4
Q

No Par Value

A

Alternatives to No Par Value
1. Firm may designated stated value which serves same function as par except doesn’t appear on certificate
2. Firm may not use par at all, stock referred to as no par stock
No Par Credited
-Entire issuance proceeds credited to capital stock an no add’l pd in capital

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5
Q

Legal capital Protection for Creditors

A
  1. Dividends may not be pd from legal capital,
  2. If no protection mgmt could liquidate corp by paying back shareholders and leaving creditors with assets not worth book value
  3. Many states, firm may not pay dividends to common stock in amt cause total assets be less than total liabilities plus liquidation preference of preferred stock
  4. Stock cannot be discounted (if is contingent liability equal to difference b/w par or stated value & acquisition cost of stock borne by original shareholder
  5. Limit on Treasury stock transactions: Many states treasury stock may not be purchased in excess of amts of unrestricted or unappropriated retained earnings (Treasury stock is restriction on RE)
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6
Q

Rights when purchase Common Stock

A
  1. Voting Rights: Right to participate in major operating/financing decisions through voting but NO right to participate in day-to-day mgmt functions
  2. Dividend Rights: Preferred shareholders receive dividend allocation prior to any allocation to common shareholders
  3. Preemptive Rights: Allow current shareholders to maintain existing % of firm in event new stock issued-not always present
  4. Rights Related to Liquidation: Creditors satisfied 1st, then preferred shareholders, remaining assets distributed to Common Shareholders
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7
Q

Preferred Stockholder Rights

A
  1. Nonvoting
  2. Dividend Preference: Receive dividend before common stock
  3. Add’l features: dividend preference for preferred shareholders can be enhanced by add’l features such as cumulative preferred stock & participating preferred stock
  4. Dividends in Arrears: Preferred stock cumulative and dividends for yr not pd, then called dividends in arrears, these are pd before any other class of stock including current preferred stock dividend–no liability to dividends in arrears until dividends are declared-disclosed in footnotes until pd
  5. Liquidation Preference: Creditors pd first. secondly preferred shareholders , no preemptive right
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8
Q

Stock Disclosures

A
  1. Rights & preferences of each class of stock (including liquidation preferences & voting rights)
  2. # Shares authorized, issued & outstanding for each class of stock
  3. Par value for each class of stock
  4. Treasury shares
  5. Restriction regarding dividends & dividends in arrears
  6. call & conversion info
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9
Q

Stock sold on subscription basis

A

-requires contract specifying 1) share price, 2) # of shares 3) pmt dates
-implication is selling price of stock will be received in series of pmts, once full amt received, stock will be issued
-Stock subscriptions receivable is contra to common stock subscribed (contra OE) BUT if subscription fully pd before FS issued then acct classified as asset
-If subscriber defaults possibilities include
> Return all pmt to subscriber
> Issue shares in proportion to pmts made
> Subscriber receives no refund or shares

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10
Q

Stock issue exchange for nonmonetary consideration

A
  • Transaction recorded based on FMV of stock sold or asset received whichever most clearly determined
  • When small # shares in relation to # outstanding and actively traded FMV of issued shares usually more reliable–opposite is true for significant # shares
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11
Q

Basket Sale

A

-Occurs when two or more securities bundled together & sold in single transaction-total amt received must be allocated to individual securities sold

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12
Q

Allocating Methods for Basket Sales

A
  1. Proportional Method: When both securities have established market values, allocation based on respective FMV
  2. Incremental Method: Only 1 security has FMV, security assigned proceeds equal to known FMV, any incremental proceeds allocated to remaining securities sold
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13
Q

Stock Issue Costs

A
  • Treated as reduction to proceeds of stock issuance–reduces contributed capital in excess of par acct
  • RATIONAL: No future benefit of issue costs, they have already served their purpose

–This is DIFFERENT from debt issuance costs (bond issue costs) which are deferred and amortized over debt term

-Annual costs of maintaining stockholder records and processing dividends are expensed as incurred

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14
Q

Convertible Preferred Stock & Preferred Stocks w/ Warrants

A
  1. Convertible PS: JE for issuance of convertible doesn’t allocate proceeds to conversion feature- securities recorded at issuance like w/ convertible bonds
  2. W/ Warrants: Issue price of PS allocated to PS accts and another OE acct for common stock warrants. Allocation based on fair value—when warrants exercised cash is debited, warrant acct closed, common shares issued, common stock accts established–same procedure for bonds w/ detachable warrants
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15
Q

Calling/Redeeming PS

A

-All OE accts are removed, no gain/loss recognized for event (transaction b/w firm and owners)

-Debit Diff: recorded in Retained Earnings
-Credit Diff: recorded in contributed capital acct
-Dividend in Arrears: must be pd when shares acquired (retained earnings is debited)
- JE for General Ledger:
DR.Perferred Stock
DR. Contributed capital in excess of par
DR:Retained Earnings-if difference is debit
CR: Cash
CR Contributed from retirement of PS-if difference is credit

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16
Q

Conversion of PS

A

-When converted to CS, PS accts transferred to CS accts. NO gain or loss
- If total recorded value of PS less than par value CS issued on conversion, Retained earnings debited for diff
-JE for General Ledger:
DR: PS
DR: Contrib Cap excess of par
DR: RE- if needed
CR: CS
CR: Contributed Cap in excess of par, common-if diff is credit

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17
Q

Redeemable PS

A

1).Redeemed @ specified date and specified price - Mandatorily redeemable
OR
2)Redeem stock @ option of shareholder

18
Q

Mandatory Redeemable BS Classification

A
  • Must be classified as debt (instead of OE) unless redemption is required to occur only if issuign firm goes out of business
  • End of each yr liability reported @ PV fo amt to be paid at maturity. Implicit rate @ date of issuance is used for discounting. Interest Exp recorded for amt cash dividends pd, as adjusted for change in PV of maturity amt
  • If either maturity date or maturity value not known fair value used for BS reporting and change in FV is used for interest exp
19
Q

Accounting Generalization about Treasury Stock

A
  • No one owns TS
  • Not an asset
  • Firm cannot record any income acct in TS transaction
  • Firm cannot profit from TS transaction
  • TS acct debited upon purchase of TS. (contra OE acct) CS stock acct not affected by TS bc TS considered issued stock
  • TS reduces # shares outstanding but # shares issued
  • When TS purchased, EPS increases bc denominate of EPS is reduced w/ no effect on numerator
  • Net assets & OE of firm decrease by cos of TS purchased
  • Retained Earnings can be decreased in some cases, but NEVER increased by TS (example COST METHOD: reissue reduces contributed cap from TS to zero, RE is reduced for remaining diff b/w price and reissue price)
  • TS REPORTED AS SUBTRACTION FROM COMMON STOCK ACCT IN BS.
20
Q

Two methods to account for TS

A
  1. Cost Method: records TS acct @ cost of shares reacquired

2. Par Value Method: Records TS acct @ par of shares reacquired

21
Q

Cost Method (account for TS)

A
  • TS debited for cost @ purchase date (contributed cap not affected when issued)
  • Reissuance credits TS acct @ cost and diff b/w cost and reissue price recorded in contributed cap from TS
22
Q

Par Value Method (account for TS)

A
  • TS debited for par value @ purchase date and contributed capital in excess of par (credited at issuance) is now debited for original amt recorded
  • Reissuances treated as regular issuance of stock except TS credited rather than CS
23
Q

Cost V.S. Par value method (account for TS)

A

When TS purchased @ cost>par BUT costl pd in cap from TS credited for diff.

24
Q

Share retirement instead of TS

A
  • Retired shares placed back into authorized but unissued category. Accting is same as purchase of TS under par value method EXCEPT CS acct used instead of TS
  • Purchase Price < original issue price, contributed cap from stock retirement is credited
  • Purchase price > original issue price, contributed cap from stock retirement debited until exhausted, and Retained earnings debited for remainder
25
Q

Property Dividend

A
  • Typically investment insecurities of other firms.
  • Related liability & gain/loss on disposal of asset recognized on date of declaration
  • Dividend recorded at MV @ declaration date
  • NET reduction in Retained Earnings is book value of asset to be distributed
  • Cash & property dividends are considered Return ON Capital, NOT contributed capital, Reduces Retained Earnings
26
Q

Scrip Dividend

A
  • First distributed in Note Payable (doesn’t have cash to pay but wants to assure shareholders dividend is coming)
  • Interest pd on note until dividend pd (computed from date of declaration to date of pmt using interest rate on note)
  • Partial Pmt: If partial pmt is made, interest is computed from date partial pmt made to date final pmt made
  • Considered Return ON Capital, NOT contributed capital, reduces Retained Earnings
27
Q

Liquidating Dividends

A

-Considered Return OF Capital contributed capital (an amt invested by shareholder)
-Reduces contributed capital acct, not retained earnings
-Occurrence Example: Pmt of dividend in excess of earnings by firm in extractive industries
>Firm $30,000 Net Income, $10,000 depletion. Can declare dividend of $40,000. Reduce RE for $30,000 first then Contributed Capital for $10,000. $10,000 is the liquidating dividend

28
Q

Timing of Dividend Declared

A

-There is NO recognition of dividends declared after BS date but before FS are authorized for issue. NO liability or reduction in retained earnings is recorded

29
Q

Stock Dividends

A
  • Increased # shares issued/outstanding
  • EPS decreased
  • Permanent capitalization of retained earnings into contributed capital
  • Purpose:
    1. Reduce market price of stock
    2. Reduce demand by shareholders of cash dividends
  • NO liability is recorded!
  • Real Estate trusts may declare dividends can be pd in cash or stock–stock portion of distribution treated as stock issuance NOT stock dividned
30
Q

Large/Small stock dividend

A

-Small: % dividend is less than 20-25%
>Capitalize @ market price- bc small dividend is not expected to change market price
-Large: % dividend is greater than 20-25%
>Capitalize @ par value
> Can also be accounted for as stock split effected in form of stock dividend–Debit to contributed capital in excess of par (NOT retained earnings-retained earnings is NOT capitalized to permanent capital)
-OE not changed by stock dividend (retained earnings reduced & contributed capital increased (unless dividend is accounted for as stock split))

31
Q

Stock Split

A
  • NOT a dividend. Adj to par value & # issued shares
  • NO accting entry needed (some make memo entry)
  • NO change in OE
32
Q

Treasury Shares/Stock Dividends

A

Treasury shares no stock dividends UNLESS intended to be used to meet commitment under stock option plan

33
Q

Dividend appropriations/restrictions

A
  • DO NOT REDUCE RETAINED EARNINGS OR DIVIDENDS DECLARED, but can help assist in making dividends declared decision.
  • Both are disclosed in notes to FS
34
Q

Dividend Priorities

A
  1. Dividend in Arrears (if cumulative)
  2. Preferred Stock
  3. Common Stock: same % as PS
  4. Preferred: Additional %
  5. Common: remainder
35
Q

Fully/Partially Participating Preferred Stock

A

1.Fully: if dividends left over after dividend in arrears, preferred stock, common stock then rest allocated to preferred and common based on par value
Partially: Look @ example on pg 439-440

36
Q

Statement of Retained Earnings

A 
Beg RE
\+/- prior period adj
\+/- change in acct principle (catch up adj)
=Restated Beg RE
\+/- net income
\+/- cash/property dividend
\+/- stock dividend
= End RE

Footnote: End RE balance is $XX of that amount, $YY has been appropriated for…

37
Q

Book Value per Share equations:

A
  • Common Stockholders Equity: Total OE - liquidation preference of PS - PS dividends in arrears
  • Book Value / Share: Common Stockholders’ equity/ending common shares outstanding
38
Q

Quasi Reorganization

A

-Conditions: Operating losses created deficit in RE and certain asset values are overstated
>but firm has positive prospects for the future but will not be able to pay dividends until deficit absorbed by income
> Instead of continuing w/ unrealistic asset values/ neg RE a QR will provide updated balance sheet w/ no RE deficit

39
Q

Quasi-Reorganization Requirements

A
  1. Approval by shareholders/creditor
  2. RE balance must become 0 immediately after QR
  3. No contributed cap acct can have negative balance after QR
  4. Assets must be written down to Market Value (write-ups possible but rare)
  5. RE must be dated for period of 3-10 yrs after QR to indicate balance reflects income earned after QR
40
Q

Accounting Steps to Quasi-Reorganization

A
  1. Write assets down to market value (create larger RE deficit)
  2. Reduce Contributed cap to absorb RE deficit
  3. Change Pare Value OR # Shares if needed to absorb remaining deficit

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