SHequity2 Flashcards
stock rights issued w/o consideration don’t affect CS and APIC until exercised by shareholders which then is recorded as an issuance of stock for cash increasing CS and APIC because it is a capital transaction. stock rights exercised or not does not affect RE because it is not an operations transactions.
example: A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased?
Common stock: No
Additional paid-in capital: No
example: Tem Co. issued rights to its existing stockholders without consideration. A stockholder received a right to buy one share for each 20 shares held. The exercise price was in excess of par value, but less than the current market price. Retained earnings decreases when:
Rights are issued: No
Rights are exercised: No
Stock dividends and stock splits are not considered income to the recipient.
Therefore, investors do not record stock dividends at fair market value. They simply reallocate the investment account balance (under either method – cost or equity) over more shares so that value per share decreases.
Stock dividends on common stock should be recorded at their fair market value by the investor when the related investment is accounted for under which of the following methods?
Cost: No
Equity: No
A corporation was organized in January, Year 1 with authorized capital of $10 par value common stock. On February 1, Year 1, shares were issued at par for cash. On March 1, Year 1, the corporation’s attorney accepted 5,000 shares of the common stock in settlement for legal services with a fair value of $60,000. Additional paid-in capital would increase on:
February 1, Year 1: No
March 1, Year 1: Yes
Feb 1 Year 1
debit Cash 50000
Credit CS 50000 (5000 shares X $10 par)
March 1, Year 1
debit Legal Services Expense 60,000
credit CS 50000
credit APIC 10000
Of the 125,000 shares of common stock issued by Vey Corp., 25,000 shares were held as treasury stock at December 31, Year 1. During Year 2, transactions involving Vey’s common stock were as follows:
January 1 through October 31: 13,000 treasury shares were distributed to officers as part of a stock compensation plan.
November 1:A 3-for-1 stock split took effect.
December 1: Vey purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not retired.
At December 31, Year 2, how many shares of Vey’s common stock were issued and outstanding?
Issued Shares: 12500 shares X 3=375000
Outstanding: [(125000 shares - 25000 TS + 13000 issued X3 stock split) - 5000 repurchased stock]
When both the 100% and the 5% stock dividends were declared, Gee’s common stock was selling for more than its $1 par value.
How would the 5% stock dividend affect the additional paid-in capital and retained earnings amounts reported in Gee’s Year 2 statement of owners’ equity?
additional paid-in capital: increase
retained earnings amounts: decrease
stock dividend less than 20-25% is recorded at fair value
debit RE
Credit CS
credit APIC
if stock dividend is more than 20-25% is recorded at par value
date of declaration:
debit RE
credit CS distributable
date of distribution:
debit CS distributable
credit capital stock at par value CS
stock dividend is not distributed on TS because
TS is not outstanding
A company has 10,000 shares of common stock issued and 2,000 shares of treasury stock. The par value of the stock is $10 per share. On January 1, Year 1, the company declared a 5 percent dividend to be paid in cash on June 30, Year 1. What journal entry should the company record on the declaration date?
10000 shares- 2000 TS = 8000
8000 X 5% X $10par = 4000
debit RE 4000
credit dividends payable 4000
Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise’s carrying amount over its market value should be reported as:
A loss is recognized for the merchandise’s carrying amount over its market value. This results in a reduction in income from continuing operations.
Rule: Dividends declared and paid in the form of assets other than cash are recorded by the distributing corporation at fair market value at date of declaration. Book value at date of declaration is used to measure gain or loss compared to fair value
Note: The loss or gain cannot be charged directly to retained earnings as it is not a prior period adjustment or an accounting change. However, property dividend declared is a reduction to RE using FMV
Retained earnings is reduced for both cash and property dividends.
subscription receivable
Choice “A” is correct. Upon issuing the stock subscription, Alder would have recorded the following entry:
DR Subscriptions receivable ($35 × 2,000 shares) $70,000
CR Common stock subscribed ($1 × 2,000 shares) $ 2,000
CR Additional paid-in capital 68,000
When the down payment was received, Alder would have recorded the following entry:
DR Cash $3,500
CR Subscriptions receivable $3,500
Once Terry defaults and Alder returns the cash, the following entry will be recorded:
DR Additional paid-in capital $68,000
DR Common stock subscribed 2,000
CR Subscriptions receivable $66,500
CR Cash 3,500
liquidating dividends
exceed RE and thus the leftover difference decrease APIC
Rule: A “liquidating dividend” is a return of capital (which decreases additional paid-in capital) and not a distribution of earnings (which decreases retained earnings).
Assume 80% distribution of earnings and 20% liquidating with a $100,000 dividend:
debit Retained earnings (80%) 80,000
debit Additional paid-in capital (20%) 20,000
credit Cash (dividend payable)100,000
How would a 5% stock dividend affect each of the following?
Assets:
Total stockholders’ equity:
Retained earnings:
Assets: no effect
Total stockholders’ equity: no effect
Retained earnings: Decrease
Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12, Year 1. Cobb received a stock dividend of 2,000 shares on March 31, Year 1, when the carrying amount per share on Roe’s books was $35 and the market value per share was $40. Roe paid a cash dividend of $1.50 per share on September 15, Year 1. In Cobb’s income statement for the year ended October 31, Year 1, what amount should Cobb report as dividend income?
10000 shares + 2000 shares of stock div= 12000 shares
12000 shares X 1.50 cash dividend per share = $18000
Stock dividends do not produce income for the recipient. they u=only increase shares
a 30% stock dividend does not affect SH equity
example:
Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30% stock dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 per share. By what amount will Universe decrease stockholders’ equity for the dividend?
0
The net effect on Universe’s stockholders equity is zero, as the reduction to retained earnings is offset by an equal increase in common stock:
debit Retained earnings (.30 x 500,000 x $10) 1,500,000
credit Common stock ($10 per value) 1,500,000
RE is not affected by
stock split
the stock dividend issued multiply its percentage by
CS outstanding and issued later
9000 shares outstanding + 200 shares issued later X 10%
