Stock Rights, Retained Earnings

Question 1

What is a stock right?

Answer 1

Gives the holder the option to purchase a certain number of shares of the issuing firm at a specified price during a specified time period

Question 2

List the reasons for appropriating retained earnings

Answer 2

1. )Financial planning;
2. )Legal requirement;
3. )Contractual obligation

Question 3

Define “restrictions on retained earnings”

Answer 3

An external constraint placed on a certain portion of retained earnings by an external party. Same effect as an appropriation (Ex. States restricting RE in the amount of cost of treasury stock held by firm)

Question 4

How should restrictions and appropriations on retained earnings be reported?

Answer 4

Disclosed in footnotes

Question 5

Describe the accounting entry to record stock rights issued to outside parties for services at exercise of rights.

Answer 5

Record the stock issuance at the exercise price and remove the OE account credited at issuance of the rights

Question 6

Define “retained earnings appropriation

Answer 6

Management’s formal communication that a portion of retained earnings has been declared off-limits for dividends

Question 7

What is the effect of retained earnings appropriations on assets?

Answer 7

No effect on assets

Question 8

What is often used to convey preemptive rights regarding stocks?

Answer 8

Stock rights

Question 9

Describe the accounting entry to record stock rights issued to outside parties for service at issuance.

Answer 9

Record an expense and an owners’ equity account equal to the difference between the market price and exercise price, times the number of shares under option.