Stockholder's Equity Flashcards
How are stock rights to investor measured?
Rights to purchase add’l shares at option price. Cost of shares allocated between shares and rights based on relative fair value, reduces investment in stock.
Amount to rights = FMV of rights/(FMV rights + FMV of Stock) X Cost of Stock
DR: Invest. in rights
CR: Invest in stock
Rights are either sold, exercised, or lapse
How is a stock dividend from investment recorded?
Memorandum entry. Reduces cost per share of investment. Increases total shares held.
What is the journal entry for Stock Subscriptions?
DR Stock Subscription Receivable $17,000
CR Stock Subscribed $10,000
CR Paid in Preferred $7,000
Stock subscriptions are considered contributed capital.
How are property dividends recorded?
The fair value of the asset transferred with a gain (loss) recognized on the difference between the assets books value and its its fair value at the date of disposition. Recorded at date of declaration.
DR: Dividends paid (or retained earnings) (FV of property)
CR (DR):Gain(loss) (FV of property − BV)
CR: Property (BV of property)
What is the entry to record stock dividends under 20% (normal)?
Retained earnings is adjusted for fair value of the stock
DR: Retained Earnings (FV of stock)
CR: Common stock (par of stated)
CR: APIC (difference)
NOTE: Decreases RE
What is the way to record stock dividends more than 25% ?
No entry to APIC, record at par value
DR Retained Earnings (par or stated)
CR: Common Stock (par or stated)
NOTE: Decreases RE but no overall effect to stockholders equity, as both side are in SE
What is the order which dividend are paid?
- Preferred shareholders recieve dividends in arrears
- Preferred shareholders received current period dividend
- common shareholders receive a matching amount
- =the preferred % total x total par of common outstanding
- Preferred receive an addtional percentage if any dividends remain
- If participating preferred, capped at %
- If not enought to pay participating, allocate based on par percent (allocation of shares x par)
- Common receive any remaining dividends
How are the prices allocated to bundled stock under the proportional method or incremental method?
Proportional - When both securities have established fair values, the allocation is based on their respective fair values.
Incremental - When only one security has established fair value, that security is assigned based on the fair value and the remainder is assigned to the other security.
How are stock issuance costs recorded?
Costs associated with registering and issuing securities in the market. EX: lawyer fees, underwriter fees, registration with SEC, etc
Not an expense, reduces cash proceeds from issuance. Reduces APIC.
What are the entries for called or redeemed preferred stock?
DR: Dividends
CR Cash (record dividends in arrears)
DR: Preferred Stock at par (remove)
DR APIC - Preferred (remove)
DR Retained Earnings *(plug)
CR APIC Retirement of Preferred (plug)
CR Cash (Price Paid for redeemed)
CR Common Stock (for converted)
*Retained earnings can never be increased when shares are retired, redeemed or converted. This transaction reduces overall Owner’s Equity.
What are the entries for resale of treasury stock recorded using cost method?
Records the treasury stock account at the cost of shares reacquired
Sale more than cost:
DR: Cash (proceeds)
CR: Treasury Stock (at cost)
CR: APIC from TS ( proceeds over cost)
Sale less than cost:
DR: Cash (proceeds)
DR: APIC from TS ( difference up to balance)
DR: Retained Earnings (remainder of difference)
CR: Treasury Stock (at cost)
*Note, this will DECREASE retained earnings if sale is less than cost.
What are the entries for resale of treasury stock recorded using par value method?
Records the treasury stock account at the par value of shares reacquired.
DR: Cash (proceeds)
CR: Treasury Stock (at par)
CR: APIC from TS ( proceeds over par)
Essentially the same entry as issuance of unissued stock, just hits treasury stock
If treasury stock is retired instead of sold, debit common stock at par.
What are liquidating dividends?
Reduce paid in capital, not retained earnings
How is a stock dividend treated by the investor?
Reduction of cost per unit in investment.
Not income.
How are stock rights recorded?
When issued for no consideration
When issued for services
No entry when issued if for no consideration
If stock rights are exchanged for services, at time of issuance debit service expense for market value - exercise price at time issued (true cost to firm)
Issuance :
DR Services expense (Market value - strike price)
CR Stock Rights Outstanding
At Time of Exercise:
DR Cash (# shares x exercise price per share)
DR Stock Rights Outstanding
CR common stock (#shares x par)
CR APIC (#shares X exercise price - par)
