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 and Liabilities to Present Value

Retained Earnings brought to zero by closing to APIC

No negative balances in any capital account

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.
Don’t subtract if dividends are in arrears from prior years

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 expenseContingent Issue Agreements are included in Diluted EPS if contingency is met

Question 26

Since the issue price of stock is always greater than par, then the excess over par is recorded as what?

Answer 26

APIC and is identified as being specifically from common stock.

Cash XX
C/S XX
APIC XX

Question 27

If a corporation issues stock and then repurchases the stock for more than the original issuance price, then the difference is recorded where?

Answer 27

Debited to Retained Earnings

Common Stock 10
APIC-CS 3
Retained Earnings 2
Cash 15

Question 28

What is a Stock Subscription?

Answer 28

Stock subscriptions are obtained from potential shareholders for new offers of the stock. A down payment is received at the time of the subscription, and the remainder when the stock is issued

Question 29

What is Treasury Stock?

Answer 29

When shares are repurchased, but not retired

They are not paid dividends, and are not voted, so they reduce the # of shares O/S

Considered Authorized, Issued, but not Outstanding

Question 30

Treasury Stock - COST Method

Answer 30

When shares are reacquired with the intention of reselling them soon thereafter, treasury shares are accounted for under the cost method.

The shares are recorded at cost and reported separately on the F/S as the last account in S/E.

Any gain is credited to APIC-T/S
Any Loss is charged against previous “gains”, then R/E

There is no difference between shares repurchased below the original issue price or above it.

Question 31

Treasury Stock - PAR Method

Answer 31

When shares are reacquired with the intention of holding the shares indefinitely, treasury shares are accounted for under the PAR method

Similar to retirement, but a debit to C/S instead and any APIC- Retired Stock is recorded to APIC- Treasury Stock

Not reported directly on the F/S, but reduce the amount shown as C/S.

Question 32

Stock Rights or Stock Warrants

Answer 32

Contractual rights held by existing shareholders to purchase a proportional share of new shares in the same class, to preserve their preexisting ownership percentage (to prevent dilution of ownership)

Question 33

Stock Options

Answer 33

Typically granted to employees as inducements to employees to purchase company stock, but also as compensation in many cases.

Only compensatory stock options are recorded. When recorded, it is based on the estimated fair value of the options when granted (grant date is the date the options are issued)

Question 34

Retained Earnings - what does this represent?

Answer 34

The accumulated earnings since inception of the company that has not been paid out to shareholders in the form of a dividend.

Question 35

When are the following dates relevant to dividends?
What is the JE to to record at this date?

1. Declaration Date
2. Record Date
3. Payment Date

Answer 35

1. Declaration Date: The BOD commits to the Dividend
   Retained Earnings XX
   Dividends Payable XX
2. Record Date: The S/H at this date are identified as the ones entitled to the dividend (NO JE)
3. Payment Date: Distribution is made to the S/H of record
   Dividends Payable XX
   Cash XX

Question 36

JE to record a CASH dividend

Answer 36

Retained Earnings XX

Cash XX

Question 37

JE to record a SCRIP dividend

Answer 37

Give Dividend but NO cash:
Retained Earnings XX
Note Payable XX

Question 38

JE to record a Stock Dividend (Small and Large)

Answer 38

Transfer from R/E to C/S (and APIC for large)

Small 20-25% (@PAR)
DR. Retained Earnings XX
CR. C/S XX

NOTE: Stock Dividends do not reduce Equity

Question 39

JE to record a Property Dividend:

Answer 39

Retained Earnings XX
Asset (@FV XX
Gain XX

(NOTE: Net of RE and Gain is the net effect to Equity)

Question 40

JE to record a Stock Split

Answer 40

C/S @ 10 x $10 XX
C/S @ 20 x $5 XX

(Double the shares, half the par)

Question 41

When can Retained Earnings be increased other than by Net Income?

Answer 41

When a Company has a Quasi-Reorganization

Question 42

Quasi Reorganization

Answer 42

To eliminate deficit balance in Retained Earnings by restating its assets to fair value.

Question 43

When are cummulative preferred dividends in arrears considered to be a liability?

Answer 43

Not until Declared, but should be disclosed in the footnotes

Question 44

What is included in Accumulated Other Comprehensive Income?

Answer 44

“D” - Derivative Cash Flow Hedges
“E” - Excess Adj. of Pension PBO & FV of PA @ YE
“N” - Net Unrealized changes in the value of Mkt Securit.
“T” - Translation Gain and Losses from Foreign Currency

Question 45

Book Value of C/S =

Answer 45

S/E - Preferred Stock = C/S / # of C/S O/S = BV per C/S

Question 46

How does a stock dividend affect Retained Earnings?

Answer 46

Regardless of the size of the stock dividend, this always reduces retained earnings and increases another SE account.
Small Dividend (20-25% of O/S shares) -recorded @ par:
Retained Earnings(par) XX
C/S Dividend Distributable (par) XX

Question 47

Restricted Stock issued to employees is accounted for how?

Answer 47

By recording total compensation cost using FV on the award date. The cost is then amortized over the vesting period.

Question 48

When distributing a property dividend, the difference between the merchandise’s carrying amount and the fair value should be recognized how in the financial statements?

Answer 48

a gain or loss should be recognized on the disposition of the asset (not extraordinary)

Question 49

When rights are issued to allow current shareholders the right to purchase unissued common stock what is the effect on the financial statements?

Answer 49

No entry is recorded. Only a memo entry.

If, and when, the recipients exercise their rights at a later date, cash would be increased as well as common stock and additional paid-in capital.

Question 50

Liquidating Dividend - what are they and how do they get recognized?

Answer 50

Liquidating dividends are distributions to shareholders from other contributed capital accounts rather than retained earnings.

A liquidating dividend represents a return of the shareholders’ investment, rather than a return on the investment. (not dividend revenue)

Question 51

What is the accounting for unexercised, expiring stock options?

Answer 51

Any balance in “APIC - Stock Options” is reclassified to “APIC - Expired Stock Options”.
Previously recognized compensation expense in NOT adjusted.