Stockholder's Equity Part 1 & 2

Question 1

How is loss calculated under the par value method for treasury stock transactions?

Answer 1

Loss is calculated by the difference between the original issue price and the repurchase price under the par value method.

Question 2

How do gains and losses from treasury stock transactions affect the financial statements?

Answer 2

Treasury stock transactions only affect the balance sheet and are recognized as a direct adjustment to stockholder’s equity under both the cost and par value method. Treasury stock transactions have no effect on the income statement.

Question 3

What effect would a stock dividend less than 20-25% of total stock would have on assets, total stockholder’s equity, and retained earnings accounts?

Answer 3

A stock dividend with less than 20-25% would transfer the FMV of the stock dividend at declaration date from RE to capital stock. This stock dividend would not have an effect on assets or total stockholder’s equity, but would decrease the retained earnings

Question 4

What effect does the stock dividend have on stockholder’s equity?

Answer 4

Stock dividend increases the number of shares owned but does not affect capital stock and retained earnings.

Question 5

How does the exercise of stock rights affect additional paid in capital and net income if stocks are issued at a price above par value?

Answer 5

The exercise of stock rights would increase additional paid in capital and has no effect on net income