Stockholder's Equity Flashcards
Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at December 31, Year 1. During Year 2, transactions involving Nest's common stock were as follows: May 3 1,000 shares of treasury stock were sold. August 6 10,000 shares of previously unissued stock were sold. November 18 A 2-for-1 stock split took effect. Laws in Nest's state of incorporation protect treasury stock from dilution. At December 31, Year 2, how many shares of Nest's common stock were issued and outstanding? Shares Issued Outstanding a. 222,000 214,000 b. 222,000 218,000 c. 220,000 212,000 d. 220,000 216,000
CPA-00976 Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at December 31, Year 1. During Year 2, transactions involving Nest's common stock were as follows: May 3 1,000 shares of treasury stock were sold. August 6 10,000 shares of previously unissued stock were sold. November 18 A 2-for-1 stock split took effect. Laws in Nest's state of incorporation protect treasury stock from dilution. At December 31, Year 2, how many shares of Nest's common stock were issued and outstanding? Shares Issued Outstanding a. 222,000 214,000 b. 222,000 218,000 c. 220,000 212,000 d. 220,000 216,000 Explanation Choice "c" is correct. 220,000 shares issued, and 212,000 shares outstanding. Shares issued In treasury Shares Outstanding Dec. 31, Year 1 status 100,000 (5,000) 95,000 May 3, 1,000 shares of treasury stock sold −− 1,000 1,000 Sub total 100,000 (4,000) 96,000 Aug. 6, sale of previously unissued stock 10,000 −− 10,000 Sub total 110,000 (4,000) 106,000 Nov. 18, 2-for-1 stock split 110,000 (4,000) 106,000 Dec. 31, Year 2 status 220,000 (8,000) 212,000 Note: Because the state of incorporation protects treasury stock from dilution, the 2-for-1 stock split also increases treasury shares.
CPA-00971 On January 15, Year 1, Rico Co. declared its annual cash dividend on common stock for the year ended January 31, Year 1. The dividend was paid on February 9, Year 1, to stockholders of record as of January 28, Year 1. On what date should Rico decrease retained earnings by the amount of the dividend? a. January 28, Year 1 b. February 9, Year 1 c. January 15, Year 1 d. January 31, Year 1
Choice “c” is correct. The date of declaration is the date the board of directors formally approves a divided. A liability is created (dividends payable), and retained earnings is reduced (debited).
Choice “d” is incorrect. Retained earnings is decreased on the date of declaration, not at year end.
Choice “a” is incorrect. No journal entries are recorded on the date of record.
Choice “b” is incorrect. Retained earnings is decreased on the date of declaration. On the dividend payment date, the liability (dividends payable) is reduced (debited) and the cash payment is recorded (credit to cash).
CPA-01003 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 Additional paid-in capital a. Yes Yes b. Yes No c. No No d. No Yes
Choice “c” is correct. No entry is made when the rights are issued since no consideration is given. If the rights are exercised and stock is issued, then common stock and additional paid-in capital increase.
Choice “a” is incorrect. If the rights are exercised and stock is issued, then common stock and additional paid-in capital will increase.
Choice “b” is incorrect. The common stock account will increase, by par value of stock issued, only when stock is issued upon exercise of the rights.
Choice “d” is incorrect. Additional paid-in capital will increase, by the difference of the purchase price and the par value, only when stock is issued upon exercise of the rights.
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 Additional paid-in capital a. No No b. No Yes c. Yes No d. Yes Yes
Explanation
Choice “a” is correct. No entry is made when the rights are issued since no consideration is given. If the rights are exercised and stock is issued, then common stock and additional paid-in capital increase.
Choice “d” is incorrect. If the rights are exercised and stock is issued, then common stock and additional paid-in capital will increase.
Choice “c” is incorrect. The common stock account will increase, by par value of stock issued, only when stock is issued upon exercise of the rights.
Choice “b” is incorrect. Additional paid-in capital will increase, by the difference of the purchase price and the par value, only when stock is issued upon exercise of the rights.
During Year 1, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad's $25 par common stock at the option of the preferred shareholder. On December 31, Year 2, when the market value of the common stock was $40 per share, all of the preferred stock was converted. What amount should Brad credit to Common Stock and to Additional Paid-in Capital - Common Stock as a result of the conversion? Common stock Additional paid-in capital a. $375,000 $225,000 b. $375,000 $175,000 c. $600,000 $0 d. $500,000 $50,000
Explanation
Shares $100 par preferred stk $25 par common stk Add'l paid-in capital Total Preferred 5,000 $ 500,000 $ 50,000 $ 550,000 Conversion: Pref to (5,000) (500,000) (50,000) (550,000) Common 15,000 375,000 175,000 550,000 The correct answer can also be determined using journal entries: Issuance of Preferred Stock: Debit (Dr) Credit (Cr) Cash $ 550,000 Preferred Stock $ 500,000 APIC - PS 50,000 Conversion to Common Stock: Debit (Dr) Credit (Cr) Preferred Stock $ 500,000 APIC - PS 50,000 Common Stock $ 375,000 APIC - CS 175,000 Choice "b" is correct. $375,000 common stock. $175,000 additional paid-in capital.
If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be:
a.
Treated as a reduction in the carrying amount of remaining treasury stock.
b.
Reported as a gain in the income statement.
c.
Credited to additional paid-in capital.
d.
Credited to retained earnings.
Explanation
Rule: There is no gain or loss on the purchase and/or sale of treasury stock. Any “difference” goes to “paid-in capital,” or if there is not enough paid-in capital to absorb a loss, the loss would be debited (subtracted) from “retained earnings.”
Choice “c” is correct. When treasury stock is sold at a price that exceeds its cost, the excess would be credited to “paid-in capital.”
Choice “b” is incorrect. There is no gain recognized on the sale of treasury stock sold in excess of cost.
Choice “a” is incorrect. An “excess” (gain) from the sale of treasury stock would not reduce the carrying amount of the remaining treasury stock.
Choice “d” is incorrect. Excesses (gains) from sales of treasury stock are not credited to retained earnings.
The primary purpose of a quasi-reorganization is to give a corporation the opportunity to:
a.
Revalue understated assets to their fair values.
b.
Distribute the stock of a newly-created subsidiary to its stockholders in exchange for part of their stock in the corporation.
c.
Obtain relief from its creditors.
d.
Eliminate a deficit in retained earnings.
Explanation
Choice “d” is correct. The primary purpose of a quasi-reorganization is to eliminate a retained earnings deficit so that future earnings will be available for dividends rather than limited to offsetting the retained earnings deficit. ARB 43 Ch 1A para. 2
Choice “c” is incorrect. A quasi-reorganization is not related to debt relief.
Choice “a” is incorrect. A quasi-reorganization is not related to revaluing understated assets to their fair values.
Choice “b” is incorrect. A quasi-reorganization is not a treasury stock transaction.
East Corp., a calendar-year company, had sufficient retained earnings in Year 1 as a basis for dividends, but was temporarily short of cash. East declared a dividend of $100,000 on April 1, Year 1, and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, Year 1, had a maturity date of March 31, Year 2, and a 10% interest rate.
How should East account for the scrip dividend and related interest?
a.
Debit retained earnings for $110,000 on March 31, Year 2.
b.
Debit retained earnings for $110,000 on April 1, Year 1.
c.
Debit retained earnings for $100,000 on April 1, Year 1, and debit interest expense for $7,500 on December 31, Year 1.
d.
Debit retained earnings for $100,000 on April 1, Year 1, and debit interest expense for $10,000 on March 31, Year 2.
Explanation
Choice “c” is correct.
Debit (Dr) Credit (Cr)
Rretained earnings on April 1, Year 1 $ 100,000
Notes payable to stockholders $ 100,000
Interest expense on Dec. 31, Year 1 7,500
Accrued interest payable 7,500
Choice “b” is incorrect. Interest expense is not recorded as a debit to retained earnings. The interest expense will be reported on the income statement in the periods incurred. Only the $100,000 declared dividend will be debited to retained earnings.
Choice “a” is incorrect. Retained earnings will be debited for the $100,000 dividend on the April 1, Year 1 dividend declaration date. Interest expense will be reported on the income statement in the periods incurred.
Choice “d” is incorrect. Consistent with the matching principle, interest expense will be debited for $7,500 on December 31, Year 1 for the interest accrued from April 1, Year 1 - December 31, Year 1 and will be debited for $2,500 on March 31, Year 2 for the interest accrued from January 1, Year 2 - March 31, Year 2.
On January 2, Year 2, Lake Mining Co.'s board of directors declared a cash dividend of $400,000 to stockholders of record on January 18, Year 2, payable on February 10, Year 2. The dividend is permissible under law in the state where Lake is incorporated. Selected balances from its December 31, Year 1 balance sheet are as follows: Accumulated depletion $100,000 Capital stock 500,000 Additional paid-in capital 150,000 Retained earnings 300,000 The $400,000 dividend includes a liquidating dividend of: a. $100,000 b. $300,000 c. $0 d. $150,000
Explanation
Choice “a” is correct. $100,000 liquidating dividend (amount in excess of retained earnings balance).
Total cash dividend declared $ 400,000
Less retained earnings (300,000)
Liquidating dividend $ 100,000
Choice “c” is incorrect. The dividend is a liquidating dividend to the extent that the dividend exceeded retained earnings.
Choice “d” is incorrect. The liquidating dividend is not equal to the company’s additional paid-in capital. A dividend is a liquidating dividend to the extent that the dividend exceeds retained earnings.
Choice “b” is incorrect. The dividend is liquidating to the extent that the dividend exceeds retained earnings.
On January 2 of the current year, Kine Co. granted Morgan, its president, compensatory stock options to buy 1,000 shares of Kine's $10 par common stock. The options call for a price of $20 per share and are exercisable for 3 years following the grant date. Morgan exercised the options on December 31 of the current year. The market price of the stock was $45 on January 2 and $70 on December 31. Using an acceptable options pricing model, Morgan determined that the fair value of the options granted was $30,000. By what net amount should stockholders' equity increase as a result of the grant and exercise of the options? a. $50,000 b. $30,000 c. $20,000 d. $70,000
Explanation Choice "c" is correct. $20,000 increase in stockholders' equity. Compensation cost should be charged to expense over the service period. In this problem, since the options are exercised in the same period as the grant date, the total compensation cost must be charged to expense in Year 1. Effect on Stockholders' DR CR Equity Jan 2, Year 1 (when options granted) Compensation expense* $ 30,000 $ (30,000) Paid-in capital-stock-options-outstanding $ 30,000 30,000 Dec 31, Year 1 (when options exercised) Cash ($20 × 1,000) $ 20,000 Paid-in capital-stock-options-outstanding 30,000 $ (30,000) Common stock at par ($10 × 1,000) $ 10,000 10,000 Paid in capital in excess of par (squeeze) 40,000 40,000 Net effect on stockholders' equity $ 20,000 * Note: A charge to expense lowers retained earnings.
Rudd Corp. had 700,000 shares of common stock authorized and 300,000 shares outstanding at December 31, Year 1. The following events occurred during Year 2: January 31 Declared 10% stock dividend June 30 Purchased 100,000 shares August 1 Reissued 50,000 shares November 30 Declared 2-for-l stock split At December 31, Year 2, how many shares of common stock did Rudd have outstanding? a. 630,000 b. 660,000 c. 600,000 d. 560,000
Explanation
Choice “d” is correct. 560,000 shares of common stock outstanding at 12/31/Year 2 is calculated as follows:
Shares outstanding, 12/31/Year 1 $ 300,000
10% stock dividend (10% x 300,000), 1/31/Year 2 30,000
Treasury shares purchased, 6/30/Year 2 (100,000)
Treasury shares reissued, 8/1/Year 2 50,000
Shares outstanding, 8/1/Year 2 280,000
2-for-1 stock split, 11/30/Year 2 x 2
Shares outstanding, 12/31/Year 2 $ 560,000
At December 31, Year 1, Eagle Corp. reported $1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in Year 2 at a total cost of $1,500,000. In Year 2, Eagle appropriated $1,200,000 of retained earnings for the construction of a new plant. Also, $2,000,000 of cash was restricted for the retirement of bonds due in Year 3. In its Year 2 balance sheet, Eagle should report what amount of appropriated retained earnings? a. $1,450,000 b. $3,200,000 c. $2,950,000 d. $1,200,000
Explanation
Rule: When the purpose of the appropriation has been achieved, it should be restored to unappropriated retained earnings.
Choice “d” is correct. $1,200,000 appropriated retained earnings at Dec. 31, Year 2 (for the construction of a new plant only).
Choices “a” and “c” are incorrect. When the new ($1,500,000) office building was completed in Year 2, $1,750,000 was restored to unappropriated retained earnings.
Choice “b” is incorrect. “Cash restricted for the retirement of bonds” (an asset account called “sinking fund cash”) typically reduces regular cash and does not affect retained earnings. (There may also be an appropriation, but this would have to be specifically mentioned in the question.)
On December 1, Line Corp. received a donation of 2,000 shares of its $5 par value common stock from a stockholder. On that date, the stock's market value was $35 per share. The stock was originally issued for $25 per share. By what amount would this donation cause total stockholders' equity to decrease? a. $50,000 b. $70,000 c. $0 d. $20,000
Explanation
Choice “c” is correct. $0 decrease in total stockholders’ equity due to donation of its own stock from a stockholder because there is no cost to the corporation. The entry would be:
Debit (Dr) Credit (Cr)
Donated treasury stock (@ FMV) $ XX
Additional paid-in capital (@ FMV) $ XX
Both accounts enter into total stockholders’ equity; therefore, there is no change in total stockholders’ equity. When (if) the shares are reissued, the entry would be:
Debit (Dr) Credit (Cr)
Cash (@ sales price) $ XX
Additional paid-in capital (for sp carrying value) $ XX
Quoit, Inc. issued preferred stock with detachable common stock warrants. The issue price exceeded the sum of the warrants’ fair value and the preferred stock’s par value. The preferred stock’s fair value was not determinable. What amount should be assigned to the warrants outstanding?
a.
The proportion of the proceeds that the warrants’ fair value bears to the preferred stock’s par value.
b.
The fair value of the warrants.
c.
Total proceeds.
d.
Excess of proceeds over the par value of the preferred stock.
Explanation
Choice “b” is correct. The fair value of the warrants is credited to paid in capital.
Choice “c” is incorrect. If total proceeds were allocated to warrants, no value would be allocated to the common stock.
Choice “d” is incorrect. Par value is normally a nominal amount, even zero. (No par stock.)
Choice “a” is incorrect. An allocation of the warrants’ fair value and the preferred stocks’ par value would not make sense, since par value is unrelated to fair value.
In a compensatory stock option plan for which the grant and exercise dates are different, the stock options outstanding account should be reduced at the: a. Exercise date. b. Beginning of the vesting period. c. Date of grant. d. Beginning of the service period.
Explanation
Choice “a” is correct. Stock options outstanding are reduced at the exercise date.
Choice “c” is incorrect. Stock options outstanding are increased at the date of grant.
Choice “b” is incorrect. The beginning of the vesting period is not used.
Choice “d” is incorrect. The beginning of the service period is the beginning of the period over which the compensation expense is amortized.
