Stockholder's Equity

Question 1

How to report undeclared dividends on cumulative prefer stock?

Answer 1

Report in the footnotes. For undeclared dividends, no JE to be made or neither liability or equity get affected. Also, dividends when declared, it’s a liability.

Question 2

How to calculate book value per share of common stock?

Answer 2

• book value per share of common stock = common SE/common outstanding (issued)
• note: any preferred shareholder interest/info should be removed

Question 3

How to report common stock with unconditional redemption feature option?

Answer 3

It will be recorded as a liability on issuer’s book on issuance date because there is an obligation of cash outflow in the future that the company cannot prevent

Question 4

What is appropriated RE?

Answer 4

Appropriated RE is to disclose to common shareholders that RE is not available to pay dividends because it has been restricted for legal or contract reason. Once, contract or legal reason completed, it becomes unappropriated RE

Question 5

What is a treasury stock? How to calculate gain/loss on treasury stock and how to report them?

Answer 5

• A treasury (reacquired) stock is stock which is bought back by issuing company
• gain/loss is the difference b/w the resale price and reacquisition price
• gain is recorded by increase APIC - treasury stock
• loss is recorded by first eliminating any balance of APIC - treasury stock, then decreasing RE

Question 6

What happened when stock rights are “issued” WITHOUT consideration?

Answer 6

• No entry (disclosure only) is made either by issuer or recipient.
• When the rights are “exercised” APIC will be credited if the purchase price > than par value. No effect on RE or income

Question 7

what is liquidating dividend?

Answer 7

• It is a return of capital (which decreases APIC) and a distribution of earnings (which decreases RE until zero)
• It’s the difference b/w declared cash dividend and retained earnings

Question 8

what to record when a dividend is declared?

Answer 8

A credit of liability for cash dividend and debit of RE are recorded; therefore, working capital is decrease

Question 9

What happened to RE when a property dividend recorded at FMV exceeds BV?

Answer 9

The cost of the assets will be adjusted to FMV and reported as gain/loss on disposal of assets, and RE is reduced.

Question 10

what are “nominal” accounts?

Answer 10

Nominal accounts (income and expenses) are used to keep track of financial transactions for a period of time (a year). They begin with zero and closed at the end of each period.

Question 11

What is the rule of stock dividend less than 20-25% of outstanding stock?

Answer 11

Stock dividend transfers FMV of stock dividend at declaration date from RE to capital stock and APIC. Therefore, no affect on assets and total SE, but decrease on RE

Question 12

How to calculate total compensation cost for restricted shares?

Answer 12

• It equals market price of share on date of grant x numbers of restricted shares awarded.
• The stock compensation expense is recognized over the employees’ service period, which is divided by the time from grant to vesting date
• Compensation expense relative to stock options is recognized regardless of whether the option is excised.