Stockholders Equity

Question 1

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When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

Answer 1

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

Question 2

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When is APIC recorded on a stock subscription?

Answer 2

APIC increases on date subscription is recorded - not on the date paid for or issued

Question 3

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To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

Answer 3

It will be restricted to the extent of the balance in the Treasury Stock account.

Question 4

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When are dividends in arrear recorded for cumulative preferred stock?

Answer 4

They are not accrued until declared.

Question 5

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When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

Answer 5

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.

Question 6

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What is the gain or loss when a non-monetary asset is distributed to a shareholder?

Answer 6

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

Question 7

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What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

Answer 7

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

Question 8

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When is Retained Earnings debited for FMV of Stock for a stock dividend?

Answer 8

When Stock Dividend is less than 25% of Common Stock outstanding

Question 9

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When is Retained Earnings debited for Par Value for a stock dividend?

Answer 9

When Stock Dividend is greater than 25% of common stock outstanding

Question 10

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What is the effect of a stock dividend or a stock split on total shareholder equity?

Answer 10

Stock dividends and stock splits both have no effect on Total Shareholder Equity

Question 11

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What is the affect on APIC from a stock split?

Answer 11

Stock splits only affect par value - APIC remains the same.

Question 12

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When is compensation expense recorded at the time of grant for a stock option?

Answer 12

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

Question 13

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What interest rate is used to discount stock options?

Answer 13

The risk-free interest rate

Question 14

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What date is used as the measurement date for share-based payments classified as liabilities?

Answer 14

The settlement date.

Question 15

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How are compensation costs for share-based payments classified as liabilities measured?

Answer 15

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

Question 16

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What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

Answer 16

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

Question 17

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What is the primary purpose of a quasi-reorganization?

Answer 17

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

Question 18

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How is return on Common Stockholder’s Equity calculated?

Answer 18

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

Question 19

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How is book value per share of common stock calculated?

Answer 19

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

Question 20

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How is the dividend per share payout ratio calculated?

Answer 20

Dividends per share / earnings per share

Question 21

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How is basic Earnings Per Share (EPS) calculated?

Answer 21

(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they’re declared.

Question 22

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For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

Answer 22

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

Question 23

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For which areas is EPS required to be shown?

Answer 23

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

Question 24

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When do stock options increase share outstanding?

Answer 24

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

Question 25

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How is EPS calculated when convertible bonds are taken into consideration?

Answer 25

[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