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?
What is APIC? Pg. 15-1
APIC increases on date subscription is recorded - not on the date paid for or issued
It is contributed capital; someone gives you more than “par”
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?
Pg. 15-15
To eliminate a DEFICIT balance in RETAINED EARNINGS by restating its assets to Fair ValueIt does not directly protect a company from its creditors; gives the company a “fresh start” => for journal entry take out common stock and asset
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? Pg. 26-1
*What type of preferred dividend will be considered?
*Simple capital structure where you cannot convert to common stock
(Net Income - Preferred Dividends) / Average C/S OutstandingNote - If cumulative- subtract the P/S dividend regardless of whether or not they’re declared.
*ALL cumulative and Non-cumulative only if 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 expenseContingent Issue Agreements are included in Diluted EPS if contingency is met
Cost method / marketable securities VS Equity Method VS Consolidation
a) 0-20% ownership; no influence over the investee company exists; can be trading securities, available for sale securities, and held to maturity sercurities
b) 20-50% ownership; has SIGNIFICANT voting influence over investee; NO “control”
c) 50%; investor has CONTROL of the investee; majority of the board of directors of the investee
For equity method, why do they call it the “one line consolidation? Pg. 4-5
Because when you record the journal entry of the acquisition of investment at cost, the investment would consist of BV + PP&E + GW
What if someone bought an investment at first using cost method, then increased their shares in order to buy it under the equity method? How do you account for the increase?
*Significance?
Since in the end the investment had enough shares to use the equity method, you have report what you had under the cost method, then what you had in the equity method
*If it was only the cost method, you would not recognize (no journal entry) since you do not have enough shares to recognize a percentage of income
What is preferred stock considered? Cost or Equity
Cost because they “preferred” to get the dividends first, but gave up their voting rights; therefore, when they declare dividends, it will come out of dividend income and not from investment in the journal entry
What is the significance of the fair value accounting option? Pg. 5-5
If the fair value option is elected, unrealized gain or loss for available for sale would be recognized in the INCOME STATEMENT and not in the balance sheet under OCI
What is “par” value?
What is “stated” value?
The minimum legal liability
Set by the board of directors
Reasons to buy back our stock? (treasury stock)
a) In order to issue stock options for the company
b) In order to increase earnings per share
What are 2 methods buy back stock? (treasury stock)
Pg. 15-3
a) Cost method (cost in “repurchase”, cost out “sell”) => one transaction approach
b) Par value method (par in “repurchase, par out “sell”) => 2 trancsaction approach; when you “sell” like issuing new stock
Treasury stock terms
a) Authorized
b) Issued
c) Outstanding
d) Treasury stock
*How do you calculate the amont issued VS the amount outstanding?
a) Maximum number of shares you are legally allowed to distribute
b) How many shares are actually distributed
c) It is authorized, issued, and still in the hands of the shareholders; used to calculate dividends paid
d) It is authorized, issued, and NOT outstanding
*The amounts outstanding includes everything (beginning, treasury stock in and out, and amount issued for stocks and bonds); the amounts issued include same as above, but excludes treasury stock in and out
What is retained earnings?
Accumulated earnings that has not been paid out to shareholders in the form of a dividend
Significance of treasury stock for journal entries?
Stockholder’s Equity #9
*Do you recognize a gain or loss with issuing or buying back treasury stock?
Its a contra equity account because even though its stockholders equity, it will increase on the debit side
Moreover, stockholder’s equity will decrease and book value per share will increase
*For treasury stock, a gain / loss is also not recognized => REMEMBER JOURNAL ENTRY!!! => you are buying back your own stock therefore NO!!!
What does a liquidating dividend and a non liquidating dividend reduce?
What is a liquidating dividend?
*What is the significance of a liqudating dividend?
Stockholder’s Equity #3
Liquidating dividend reduces APIC => when the dividend is more than retained earnings
Non liquidating reduces retained earnings
A return to capital; its the excess of a divdend and retained earning because dividends come out of retained earnings
*Dividends are taken out of retained earnings; the excess will be a liquidating dividend => will come from APIC
What is a type of dividend that will not reduce stockholders equity? Pg. 15-12
Stock dividend and stock splits
What is the effect of buying treasury stock to stockholder’s equity?
It will reduce stockholder’s equity, and is considered a contra equity account; when you buy back stock, it will lower owner’s equity, but will increase the value of the stock
How do you calculate items for the statement of retained earnings? Pg. 15-16
Add all but subtract dividends; prior period adjustment is net of tax
In the face of the income statement, when must you show earnings per share? Pg. 26-1
What about either on the face of the statement or in the notes to the financial statements?
Income from continuing operations and net income
Discontinued operations and extraordinary gains and losses
What is earning per share basic? Pg. 26-1
How do you calculate?
*When do you calculate the dividend?
Its where you cant convert to common stock and will not be diluted
Net Income
- Preferred dividend (all cumulative and non-cumulative only if declared
= $ avail to common stockholders
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Wtd avg number common stock outstanding (div and splits are retroactive) => include all years
*Add all outstanding shares then multiply by dividend percentage
What is the significance of diluting?
It is the POSSIBLE conversion which will reduce EPS
What is the components of a balance sheet?
Asset = liability + equity
What is the components of stockholder’s equity? Pg. 15-1
1) Preferred stock
2) Common stock
3) APIC
4) Noncontrolling interest
5) Accumulated OCI (DENT)
6) Treasury stock
Income statement VS Balance sheet
I/S: this year only
B/S: cummulated
How do you characterize treasury stock? ie) authorized, issued, or outstanding?
It is authorized and issued, but not outstanding => because company repurchased the stock and not in the hands of the shareholders
Journal Entry for giving out dividends Pg. 15-11 def for each
a) Declaration date
b) Record date
c) Payment date
a) The board of directors commits to the dividend
Retained earnings: debit
Dividend payable: credit
b) The shareholders at this date are identified as the ones entitled to the dividend
No Journal Entry
c) Distribution is made to the shareholders of record
Dividends Payble: debit
Cash: credit
Journal Entry to convert bonds to common stock? Stockholder’s equity #7
Bond payable: debit
Discount: debit
C/S: credit
APIC: credit
What do you think of when you see a stock warrant?
Pg. 10-10
Journal entry of when you issue a bond => think bond because it allows you to keep the bond Cash: debit Discount: debit Bond payable: credit APIC warrant: credit
What type of common stock will be reported as a liability?
Stockholder’s equity #13
When it has a redemption feature
What is a contra equity account? Stockholder’s equity #18
An example would be treasury stock; it increases in the debit side and it REDUCES stockholder’s equity
How are dividend amounts determined when there is Fair Value and Par Value Stockholder’s Equity #23
Fair Value for < 0 to 25% ownership “small”
Par Value for > 20-25% ownership “large”
Define retained earnings Pg. 15-11
Represents the accumulated earnings since inception that has not been paid out as a dividend
At the end of the year, net income is closed out via retained earnings
- Dividends also come out of here; does not affect STOCK RIGHTS
- Part of stockholders equity and is considered “earned”
- Also used in quasi reorganization => in journal entry get rid of C/S and assets in order to decrease negative retained earnings
What is a scrip dividend? Pg. 15-12
When you give a dividend and you have no money
RE: debit
Note Payable: credit
*Look at interest dates; will give interest becasue you issued a note payable
What is the journal entry to declare a dividend from common stock
Retained earnings: debit
C/S: credit
APIC: credit
For stockholder’s equity if they mention vesting (ie 4 year period), what should you do?
Divide the amount by 4 => when it vests
What is a scrip dividend? Pg. 15-12
When you give a dividend and you have no money
RE: debit
Note Payable: credit
What does declare a 5% stock dividend VS declare a 100% stock divdend
It means that the dividend will be 5% of the stock price
100% stock divdend is like stock split, therefore APIC is not affected
At what date does the if-converted method (diluted method) of computing earnings per share assume conversion of convertible securities? EPS #4
Beginning of the earliest period reported (or at time of issuance, if later)
How is Diluted EPS calculated? Pg. 26-4
Net income
+ Preferred dividend (not net of tax)
+ INTEREST EXPENSE saved from convertible bonds (net of tax)
+ $0 from treasury stock
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Wtd avg # of C/S outstanding (dividends & splits are retro)
+ # shares convertible securities are converted into (NOT weighted!!!)
+ Incremental # of C/S outstanding from treasury stock
For finding EPS, what do you need to consider with the denominator for the equation
Dividends and stock splits are RETROACTIVE!!! => include in all years
For issuing treasury stock which methods do you apply and how do you use them? Pg. 15-13
You should use the cost method (cost in, cost out; 1 transaction approach) and par method (par in, par out; 2 transaction approach, therefore when you sell like issuing new stock) => use both values for treasury stock journal entry
What do you think of when you get a problem with any kind of dividend? Pg. 15-12
How do you declare stock dividend, using PAR or FMV? Pg. 15-12
Think of the jounal entry of declaring a dividend; debit retained earnings since dividends are coming out of it
FMV for “small” dividends, < 25%
PAR for “large” dividends, > 25%
How do you compare declaring a 5% stock dividend and declaring a 100% stock dividend in regards to APIC and retained earnings? Stockholder’s equity #43
5%: since there is excess, APIC will increase, and decrease R/E
100%: does not affect APIC, and will decrease R/E
How do you calculate retained earnings? Pg. 15-16
Beginning retained earnings \+ Prior period adjustments (correction of a bubu) => net of tax = Retained earnings adjusted \+ Net income - Dividends = Ending Retained Earnings
For investments, which financial statement does equity in earnings go to?
Income statement
What is the significance of the journal entry of amortization/depreciation/impairment of excess between BV and purchase price? Pg. 4-5
Equity in Earnings: debit
Investment: credit
Only record this journal entry if there is depreciation in an asset or an impairment
If there is a liquidating dividend, what is the significance? Pg. 15-22 #4
Theres is NO reduction of retained earnings, and will result in a decrease in APIC
For EPS, which shares are not weighted for the denominator? Pg. 26-4
Only for diluted EPS & treasury stock method; shares convertible sercurity (diluted EPS), and shares of C/S outstanding from treasury stock method at average market price (treasury stock method)
