Stockholders Equity

Question 1

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

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

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

When are dividends in arrear recorded for cumulative preferred stock?

Answer 4

They are not accrued until declared.

Question 5

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

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

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

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

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

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

What is the affect on APIC from a stock split?

Answer 11

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

Question 12

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

What interest rate is used to discount stock options?

Answer 13

The risk-free interest rate

Question 14

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

Answer 14

The settlement date.

Question 15

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

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

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

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

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

How is the dividend per share payout ratio calculated?

Answer 20

Dividends per share / earnings per share

Question 21

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

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

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

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

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

Question 26

What is a liquidating Dividend

Answer 26

Any dividend which exceeds the balance of retained earnings is considered a liquidating dividend

Question 27

What is the effect on total stockholders equity as a result of acquisition of treasury stock and reissuance of treasury stock

Answer 27

Acquisition decreases total stockolders equity

Reissuance increases total stockholders equity

Question 28

EPS

Answer 28

Net income-preferred/# of CS outstanding

Question 29

Stock dividend

Answer 29

multiply % by total outstanding and add. This should be considered outstanding for the entire year. (remember the weight other outstanding transactions during the year ie if purchased in Oct 3/12X # of shares purchased)

Question 30

calculating CS and APIC

Answer 30

CS gets recorded at par always, the additional amt paid at issuance is recorded to APIC, same for preferred stock.

Question 31

What is the effect on Total SE with an acquisition of treasury stock under par and cost methods?

Answer 31

same for both, decreases total SE.
For par calculate Treasury at par and calculate issued price for APIC, plu remaining into RE.
For Cost just record Treasury at purcahse price.

Question 32

ESOP-what amount is charged to compensation expense?

Answer 32

the amount the employer contributed or committed to be contributed to an ESOP with respect to a given year at the market rate

Question 33

What entry is recorded for a stock split?

Answer 33

None. The total par value of shares outstanding remains unchanged, as do the balances of additional paid-in capital and retained earnings. No journal entries are recorded for a stock split.

Question 34

Retirement of stock

Answer 34

When retiring common stock, common stock is debited for PV; APIC is debited for a pro rata portion based on how much common stock is retired compared to total common stock outstanding; and the remaining debit is to retained earnings.

Question 35

Do stock dividends and stock splits affect SE?

Answer 35

No. Stock dividends-reclassification. Stock splits increase number decrease par value, stays the same in total

Question 36

Contributed capital is the same as..

Answer 36

Paid in capital

Question 37

Is it appropriate to recognize gain or loss on treasury stock transactions?

Answer 37

No, gain or loss is not recognized

Question 38

Is it appropriate to recognize gain or loss on treasury stock transactions?

Answer 38

No, gain or loss is not recognized

Question 39

Indirect method operating section

Answer 39

Net income

Question 40

How would the declaration of a 10% stock dividend by a corporation affect each of the following on its books?

Answer 40

Decrease RE, no effect on SHE

Question 41

Cumulative preferred dividends in arrears are not a liability until declared

Answer 41

It should be disclosed in a footnote or parenthetically

Question 42

The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased?

Answer 42

there is no effect on the common stock or additional paid-in capital accounts until the rights are exercised.

Question 43

granted stock options to corporate executives for the purchase of 10,000 shares of the company’s $20 par value common stock at 70% of the market price on the exercise date, December 30, year 1

Answer 43

The intrinsic value of the option is net of any amounts that the employee must pay. The employees must pay 70% of the value of the stock on the exercise date. Therefore, the employees will pay 70% × $60 = $42 per share. On the exercise date, the compensation expense recognized is $60 – $42 = $18 × 10,000 options = $180,000.

Question 44

The requirement is to determine the amount that should be recorded in Sayon’s additional paid-in capital account for the business combination.

Answer 44

the amount recorded in the additional paid-in capital account is equal to $1,365,000 [(200,000 shares × $7 per share) – $35,000 registration and issue costs].

Question 45

Assuming that the cost method of accounting for treasury stock transactions is used, what is the effect on additional paid-in capital from treasury stock transactions

Answer 45

When treasury stock is acquired using the cost method, a stockholders’ equity account is debited for the cost of the treasury stock.When the treasury stock is subsequently sold for cash at more than its acquisition price, additional paid-in capital is credited for the gain

Question 46

The BV per share of common stock is

Answer 46

Total SE – Portion allocated to preferred (include arrears)

Outstanding common shares