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
(L) Does the investor’s position of ownership change with a stock split?
The investors’ relative position of ownership interests is unchanged; there are merely more shares representing the ownership rights.
(L) ASC 320 General Definition
This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and all investments in debt securities.
(L) In computing Book Value, if there is only one class of stock, book value is based on what?
In computing Book Value, if there is only one class of stock, book value is based on what?
(L) How is the par-value method used in recording treasury stock?
The par-value method results in the shares being recorded at par with the treasury shares shown in the balance sheet as a reduction of capital stock outstanding.
(L) True or False? A company cannot affect the income statement by trading in its own stock.
True, a company cannot affect the income statement by trading in its own stock.
(L) For available for sale securities IFRS requires that the unrealized gain be reported as a:
Part of other comprehensive income.
(L) ASC 320 states the fair value of an equity is readily determinable if?
The fair value of an equity security is readily determinable if sales prices are currently available on a registered securities exchange, publicly reported over-the-counter market, or comparable foreign market.
(L) If a subscriber defaults on a subscription contract the default could result in these four occurrences:
1) Forfeiture of all amounts paid.
2) Refund of amount paid.
3) Partial refund.
4) Issuance of shares in proportion to amount paid for.
(L) Do stock dividends or stock splits change stockholder’s equity?
No, neither a stock dividend nor a stock split change stockholders’ equity.
(L) Name a general purpose of donated stock.
May be purchased to buy out a stockholder, or to create a market demand for the stock and thus retard a downward trend in the market value.
(L) Name three ways that Capital Stock can be recorded:
1) Par Value
2) No-Par Value (Stated Value)
3) No-Par Value (No Stated Value)
(L) True or False? Tradable is an acceptable method of recording investments under IFRS.
False, tradable is not an acceptable method of recording investments under IFRS.
(L) Held-to-maturity Securities are:
Debt securities that the entity has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and are reported at amortized cost.
(L) ASC 20-25% guideline regarding Stock Splits and Stock Dividends
In ASC 505, a guideline was established that where additional shares were issued, less than 20% or 25% of the total shares outstanding indicated a stock dividend; whereas a distribution in excess of that indicated a stock split.
(L) If the donated stock is not to be resold, how should the company treat it?
The company should effect a formal reduction of its stated capital
(L) The total cost of treasury stock carried should be shown as a ___________ of retained earnings in the balance sheet.
restriction
(L) Trading Securities
Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized holding gains and losses included in earnings.
(L) Retained Earnings Balance is:
Retained earnings balance is cumulative net income of a corporation from date of incorporation or reorganization, after deducting losses, distributions to stockholders, transfers to capital accounts, and after accounting for prior period adjustments.
(L) If a transaction is considered a stock dividend (ASC 505) retained earnings should be capitalized based on?
If the transaction is a stock dividend, capitalize retained earnings based on fair value of additional shares issued.
(L) Retained earnings should never/always be increased as a result of treasury stock transactions.
Retained earnings should never be increased as a result of treasury stock transactions.
(L) Legal Capital
Legal capital is that portion of corporate capital required by state statute to be retained in the business to afford creditors a minimum degree of protection.
(L) How should be “Gains” on capital stock acquired (for reasons other than retirement) be treated?
“Gains” on sales of treasury stock not previously accounted for as constructively retired should be credited to capital in excess.
(L) Available for sale securities are:
Debt and equity securities not classified either as held-to-maturity securities or trading securities are classified as available for sale securities and are reported at fair value.
(L) Stock Split
A distribution of additional shares effected to reduce the market price per share
(L) Name five characteristics of Preferred Stock.
1) Fixed dividend rate
2) Preference in liquidation of assets
3) Participating or non-participating. Participation must be stated in problem.
4) Cumulative or non-cumulative.
5) Absence of voting rights
(L) How should be “Losses” on capital stock acquired (for reasons other than retirement) be treated?
“Losses” should be charged to capital in excess to the extent that previous net “gains” from sales or retirements of the same class of stock are included therein, otherwise to retained earnings.
(L) If a transaction is a stock split (ASC 505), what are the two ways it can be recorded?
Stock split with no change in total capital or retained earnings are capitalized to the extent of the par or stated value of the shares.
(L) Treasury Stock
Treasury stock is a corporation’s own stock, once issued and fully paid, and later reacquired but not canceled in accordance with a formal procedure specified by law.
(L) When preferred stock is redeemed, what are preferred shares entitled to receive?
Par value
Dividends (in arrears if cumulative and any participating dividends)
Redemption premium
(L) In published statements this element of stockholders’ equity is normally shown under one title; however, separate accounts must be maintained in the accounting records by source.
Capital Contributed in Excess of Par Value of Stock
(L) The terms “Gains” and “Losses” regarding treasury stock are used:
The terms “gains” and “losses” are used in connection with describing the transaction; however, treasury stock transactions do not result in net income for financial reporting purposes. Also, treasury stock transactions are not taxable.
(L) Why would a company consider doing a quasi-reorganization?
Assets may be overvalued and/or the corporation may have a deficit in its retained earnings account. These factors may hinder the corporation’s ability to attract investors because dividends are unlikely.
(L) Preferred Stock Participation in Dividends
Rule #1
When the common stock has a par or stated value, participation is allocated on the aggregate dollar amount of preferred and common stock outstanding. Current dividends should be the same percentage of total par value of each class of stock outstanding.
(L) Name the two accounting methods used in recording with treasury stock.
1) Cost (preferable)
2) Par-value or retirement method
(L) The transfer of a security between categories must be accounted for at _________.
Fair Value
(L) A legal right usually granted to stockholders is the pre-emptive right which allows:
The individual stockholders to subscribe to any additional issues of the same class of stock on a pro rata basis
(L) Name four characteristics of a quasi-reorganization. (What happens in one?)
1) The corporate entity remains intact.
2) Recorded asset values should be readjusted to the fair value.
3) A deficit is eliminated (usually).
4) Facts must be disclosed.
(L) When treasury stock is purchased, how should the cost be handled?
The cost of treasury stock, regardless of par, should be carried as the value of treasury stock as a reduction of stockholders’ equity.
(L) Preferred Stock Participation in Dividends
Rule #2
When the common stock is no-par with no stated value, retained earnings available for participation is based on the number of shares of preferred and common stock outstanding.
(L) Subscription of capital stock occurs when?
A subscription of capital stock occurs when an investor contracts to purchase stock, making payment(s) in the future. Usually, a partial payment is made at the time of the contract and the stock is not issued until final payment has been made.
(L) How is the cost method used in recording treasury stock?
Where the “cost” method is used, acquisitions are recorded at cost and the total cost is shown in the balance sheet as a reduction of stockholders’ equity.
(L) Name four elements of Stockholder’s Equity
1) Contributed Capital:
* Capital Stock (Legal Capital)
* Capital Contributed in Excess of Par or Stated Value
2) Retained Earnings
3) Treasury Stock
4) Accumulated Other Comprehensive Income
(L) Advantage of the pre-emptive right for stockholders
This privilege allows the existing stockholders to maintain their relative interests in the corporation’s earnings, assets, and management.
