Stockholders Equity Flashcards
When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?
APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.
When is APIC recorded on a stock subscription?
APIC increases on date subscription is recorded - not on the date paid for or issued
When are dividends in arrear recorded for cumulative preferred stock?
They are not accrued until declared. Only Disclosed in the notes.
When are dividends in arrears included as a disclosure and not an accrual in the financial statements?
If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.
What is the gain or loss when a non-monetary asset is distributed to a shareholder?
The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company’s books
What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?
The effect on Retained Earnings is the Carrying Amount of the asset
. RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount
Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash
The net effect of the entry is that RE will decrease by the CV of the asset
When is Retained Earnings debited for FMV of Stock for a stock dividend?
When Stock Dividend is less than 25% of Common Stock outstanding
When is Retained Earnings debited for Par Value for a stock dividend?
When Stock Dividend is greater than 25% of common stock outstanding
What is the effect of a stock dividend or a stock split on total shareholder equity?
Stock dividends and stock splits both have no effect on Total Shareholder Equity
What is the affect on APIC from a stock split?
Stock splits only affect par value - APIC remains the same.
When is compensation expense recorded at the time of grant for a stock option?
Compensation expense is recorded at the time of grant if options are exercisable immediately
They are based on past service.
Expense recognized : FV Stock Option x # of Shares
What interest rate is used to discount stock options?
The risk-free interest rate
What date is used as the measurement date for share-based payments classified as liabilities?
The settlement date.
How are compensation costs for share-based payments classified as liabilities measured?
Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period
What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?
Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance
What is the primary purpose of a quasi-reorganization?
To eliminate a deficit balance in RE by restatingits overvalued assets to Fair Value (and thus reduce future depreciation).
Thus, facilitate a declaration of dividends. It does not directly protect a company from its creditor.
How is return on Common Stockholder’s Equity calculated?
(Net Income - P/S Dividends) / Average Common Stockholders Equity
Note: Average CSE : Common Stock + RE
How is book value per share of common stock calculated?
Total Common Stock
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value
Book Value per Share : Total Book Value / Shares outstanding
How is the dividend per share payout ratio calculated?
Dividends per share / earnings per share
How is basic Earnings Per Share (EPS) calculated?
(Net Income - Preferred Dividends) / Average C/S Outstanding
Note - If cumulative- subtract the P/S dividend regardless of whether or not they’re declared.
For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?
For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year
For which areas is EPS required to be shown?
EPS is only required to be shown for Income from Continuing Operations and Net Income.
All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes
When do stock options increase share outstanding?
Only if they are dilutive.
Their exercise price is LESS than the market value.
If not- you ignore them in the calculation
How is EPS calculated when convertible bonds are taken into consideration?
[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)
Bond interest is added back because if converted- there would be no bond interest expense
Contingent Issue Agreements are included in Diluted EPS if contingency is met
Is Treasury stock issued? Outstanding?
Issued, but NOT outstanding
Is Mandatorily Redeemable P/S classified as equity or a liability?
Liability
List types of transactions that affect APIC
- sale of T/S at a Gain 2. quasi-reorg 3. issuance of liquidating dividends 4. conversion of bonds 5. declaration of small stock dividends
What effect to Quasi Reorganizations have on Total Stockholder’s Equity?
No effect on total. Reduces par value of C/S and Increases APIC.
When is the G or L calculated for T/S under the cost method?
G/L is calculated upon reissuance of T/S
When is the G or L calculated for T/S under the par value method?
G/L is calculated upon buy back of T/S
How will Net Income and Retained Earnings be affected by Treasury Stock?
NI and RE will NEVER increase. RE may decrease when APIC-T/S does nto have a large enough balance to absorb the loss
What is the difference between the par and cost method of T/S?
The timing of recognition of Gain or Loss
What are the similarties between the par and cost method of T/S?
G&Ls are a direct adjustment to SE & not included in Net Income
Cost method for T/S: What amount do you credit T/S when you reissue the stock?
At the company’s cost to buy back the shares
Cost Method for T/S: What accounts absorb the gain or loss upon the reissuance of T/S?
APIC-T/S is credited for gains upon reissuance (for the difference between the company’s cost to buyback and selling price of the reissuance). APIC-T/S is debited for Losses, but ONLY to the extent that there is already a credit balance in APIC-T/S. The remaining loss is debited to RE. If there is not a prior balance in APIC-T/S, then you must debit RE for the whole loss.
Under which T/S method are the sources of capital associated with the original issue are maintained?
The par method
The par value is also known as
the legal or stated value method
