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
To what extent is retained earnings restricted if legally restricted due to Treasury Stock?
It will be restricted to the extent of the balance in the Treasury Stock account.
When are dividends in arrear recorded for cumulative preferred stock?
They are not accrued until declared.
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 restating its assets to Fair Value
It does not directly protect a company from its creditors
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
What is a liquidating Dividend
Any dividend which exceeds the balance of retained earnings is considered a liquidating dividend
What is the effect on total stockholders equity as a result of acquisition of treasury stock and reissuance of treasury stock
Acquisition decreases total stockolders equity
Reissuance increases total stockholders equity
EPS
Net income-preferred/# of CS outstanding
Stock dividend
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)
calculating CS and APIC
CS gets recorded at par always, the additional amt paid at issuance is recorded to APIC, same for preferred stock.
What is the effect on Total SE with an acquisition of treasury stock under par and cost methods?
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.
ESOP-what amount is charged to compensation expense?
the amount the employer contributed or committed to be contributed to an ESOP with respect to a given year at the market rate
What entry is recorded for a stock split?
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.
Retirement of stock
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.
Do stock dividends and stock splits affect SE?
No. Stock dividends-reclassification. Stock splits increase number decrease par value, stays the same in total
Contributed capital is the same as..
Paid in capital
Is it appropriate to recognize gain or loss on treasury stock transactions?
No, gain or loss is not recognized
Is it appropriate to recognize gain or loss on treasury stock transactions?
No, gain or loss is not recognized
Indirect method operating section
Net income
How would the declaration of a 10% stock dividend by a corporation affect each of the following on its books?
Decrease RE, no effect on SHE
Cumulative preferred dividends in arrears are not a liability until declared
It should be disclosed in a footnote or parenthetically
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?
there is no effect on the common stock or additional paid-in capital accounts until the rights are exercised.
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
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.
The requirement is to determine the amount that should be recorded in Sayon’s additional paid-in capital account for the business combination.
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].
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
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
The BV per share of common stock is
Total SE – Portion allocated to preferred (include arrears)
Outstanding common shares
