Stockholder's Equity (F7 M5-M7) Flashcards
Outstanding vs. Issued stocks
Issued = authorized capital stock issued. includes TS Outstanding = stocks in hands of shareholders. not including TS
common shareholder’s equity formula
Total SHE (=A-L)
- Preferred stock outstanding (greater of call or par value)
- cumulative preferred dividend in arrears
book value per common share formula
common stock holder’s equity / common shares outstanding (issued - repurchased)
Participating preferred stock
- distribute to PF including dividends in arrears
- then distribute PF % to common shareholders
- then pro rata the excess
Nonparticipating preferred stock
- limited to dividends provided by preference
- do not share in excess unlike participating
Callable preferred stock
-may be repurchased at specified price by issuing corporation
Mandatorily redeemable preferred stock
- classified as a liability
- UNLESS redemption is required to occur only upon liquidation/termination of reporting entity
Appropriations of retained earnings
some of retained earnings are not available for dividends because they are restricted for:
- legal/contractual reasons (bond indenture)
- discretionary act of management for contingency purposes (plant expansion)
-appropriation may be used to offset losses but can not be transferred to income
Dr. Retained earnings (unappropriated)
Cr. Retained earnings (appropriated)
Treasury stock
- corporation’s own stock that has been issued and subsequently reacquired (but not retired)
- not entitled to rights of ownership (voting or receiving dividends)
- two methods of accounting: cost and legal (or par)
- G/L are not included in determination of net income and are a direct adjustment to Stockholder’s Equity
Cost method - treasury stock
- treasury stock recorded/carried at reacquisition cost
- G/L determined when stock is reissued or retired
- G/L is accounted by crediting/debiting APIC-Treasury Stock.
- If APIC-TS is not enough to absorb loss upon reissue, RE can be decreased
- net income/retained earnings will NEVER be INCREASED
Repurchase:
Dr. TS (at cost)
Cr. Cash
Reissue ABOVE cost:
Dr. Cash (selling price)
Cr. Treasury stock (at cost)
Cr. APIC-TS (plug/gain)
Reissue BELOW cost after above entry: Dr. Cash Dr. APIC-TS (decreased for loss) Dr. RE (excess of loss over APIC-TS) Cr. Treasury stock (at cost)
Par method - treasury stock
- Treasury shares are recorded by reducing amounts of par and APIC at time of original sale
- G/L recognized immediately upon repurchase
Repurchase ABOVE issue price: Dr. Treasury stock (at par) Dr. APIC-CS (reverse original APIC) Dr. Retained earnings (loss/plug) Cr. Cash (at cost)
Repurchase BELOW issue price: Dr. Treasury stock (at par) Dr. APIC-CS (reverse original APIC) Cr. cash (cost) Cr. APIC-TS (gain/plug)
Reissue shares:
Dr.Cash (selling price)
Cr. TS (at par)
Cr. APIC-CS (plug)
Retirement of treasury stock
-bought with INTENT of retiring
-cost method Dr. CS Dr. APIC-CS Dr. RE (plug) Cr. TS (cost)
-par method
Dr. CS (at par)
Cr. TS (at par)
Stock subscriptions
-Contractual agreement to sell a specified number of shares at an agreed-upon price
Dr. Subscriptions receivable (contra-equity)
Cr. Common stock “subscribed” (par)
Cr. APIC (plug)
Dr. Cash
Cr. Subscription receivable
Dr. Common stock subscribed
Cr. Common stock issued
Stock rights
- provides existing shareholders with opportunity to buy additional shares
- No JE until exercised/memo entry only
Dr. Cash
Cr. CS
Cr. APIC
Date of Declaration (dividend)
- the date the board of directors formally approves a dividend
- liability is created (dividends payable) and RE is reduced
Date of record
- date directors specify names of shareholders to receive dividend
- no JE
Date of payment
- dividend is actually disbursed
- reduce dividends payable and cash
Cash dividends
-financial outflow
only paid on authorized, issued, AND outstanding shares (so not TS)
Property in kind dividend
- distribute noncash assets
- date of declaration: property to be distributed is restated to FV and G/L should be recognized in income
- dividend liability should be recorded at FV
EX:
NBV = 30 (cost=70 and AD = 40)
FMV = 50
gain = 20
Dr. RE (FV)
Dr. AD
Cr. property (cost)
Cr. Gain
Scrip dividends
-notes payable where corporation commits to paying dividend at a later date
-date of declaration
Dr. RE
Cr. Notes payable
Liquidating dividends
- dividends to shareholders exceed retained earnings
- dividends in excess of RE is charged (debited) to APIC and then CS/PS
Stock dividends
- distributes additional shares to shareholders. no cash out.
- no dividend income to owner so decrease in cost basis
treatment depends on whether small or large
Small stock dividend
<25%
-reduce RE by FMV
Dr. RE (FMV)
Cr. CS (Par)
Cr. APIC (Plug)
Large stock dividend
> 25%
-reduce RE by par value
Stock splits
- no JE/memo entry only
- no change in total equity or total legal capital
Noncompensatory employee stock option
- not in lieu of salary
- no JE until employee buys stock/do NOT recognize compensation expense
meets ALL requirements:
- all full time employees may participate
- eligible to employees equally
- time permitted to exercise is limited to reasonable period
- discount is not greater than reasonable
Under IFRS*** - all employee stock plans are compensatory
Compensatory stock option
- valued at FV of options issued
- compensation expense calculated at grant date is allocated over service period (time between grant and vesting date)
Compensatory stock option journal entries
Grant date - no JE
Service period
Dr. Compensation expense
Cr. APIC - Stock options
Exercise options: Dr. Cash (at exercise price NOT fmv) Dr. APIC- Stock options (reverse) Cr. CS (par) Cr. APIC (plug)
Expiration of options
Dr. APIC - Stock options
Cr. APIC - expired stock options
Stock appreciation right (SAR)
- entitles employee to receive excess of market price at exercise date over predetermined amount at grant date
- excess * by number of rights outstanding is recorded as compensation exp and liability
- must be adjusted annually PROSPECTIVELY
Dr. Compensation exepense
Cr. Liability for SAR plan
Date of exercise:
Dr. Liability for SAR plan
Cr. Cash
