Stockholders' Equity Flashcards
What is meant by par value of stock?
Represents the company’s minimum legal liability per share of stock
How might stock subscriptions be handled? Provide the journal entry.
A cash down payment is received and the remaining subscribed amount is booked as a receivable. The par value portion of the subscribed stock is not yet outstanding, but receives a separate “common stock subscribed” designation representing their being effectively committed. APIC-CS is the plug.
Dr. Cash
Dr. Stock subscription receivable
Cr. Common Stock subscribed
Cr. APIC-CS
When is APIC recorded on a stock subscription?
APIC increases on date subscription is recorded - not on the date paid for or issued
Distinguish between authorized, issued, and outstanding stock.
1) Authorized shares represent the maximum number of shares legally permitted to distribute.
2) Issued shares represent those authorized shares that have actually been distributed.
3) Outstanding shares are those that have been issued and are in the hands of the shareholders.
What is treasury stock?
Shares that a company keeps in their own treasury (and are thus not outstanding). Treasury stock may have come from a repurchase or buyback from shareholders; or it may have never been issued to the public in the first place.
What are the two methods used for buying back outstanding shares (i.e., accounting for treasury stock)?
1) Cost Method
2) Par value Method
Distinguish between the cost and par value methods of accounting for treasury stock
1) Cost method = stock repurchased is booked at cost, and is resold at the same per share cost. Any debit differences are booked to APIC-TS until they are used up, whereupon it is booked to Retained Earnings. (until retirement)
2) Par value method = stock repurchased is akin to reversing the issuance entry where both par and APIC-CS values at issuance are affected. Subsequent resales of this treasury stock are treated like a new issuance with the par value per share remaining the same and the APIC-CS amount representing the difference between the market and par value share prices.
What type of contra account is treasury stock under both the cost and par value methods?
Under the cost method, treasury stock is considered a contra-equity account, while it is considered a contra-common stock account under the par value method.
Under the cost method, when reselling treasury stock for less than what it was repurchased for, what is the treatment for the “debit plug”?
Debit APIC-treasury stock until it is used up, wherepon retained earnings is then debited.
Under the par value method, when reselling treasury stock for less than what it was repurchased for, what is the treatment for the “debit plug”?
Doesn’t matter as each resale of treasury stock is treated as a new issuance, with APIC-CS representing the difference between the market and par value share prices.
Distinguish between cumulative and non-cumulative preferred stock
With cumulative preferred stock, dividends missed in earlier years must also be paid to the preferred shareholders before common shareholders receive anything. Conversely, noncumulative does not have this perceived liability.
When are dividends in arrears 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 meant by participating preferred stock?
If the common shareholders get a dividend that is a higher rate on its par value than the stated rate on the preferred shares, then preferred shareholders must get the same higher rate.
What is meant by convertible preferred stock?
The preferred shareholder has the option of converting their preferred stock for common stock at a specified ratio
What is meant by callable preferred stock?
The corporation has the option of repurchasing the preferred stock at a specified price
What is meant by preferred stock with warrants?
The warrants are convertible into shares of common stock
What is meant by liquidation value for preferred stock?
Is typically the par value of the preferred shares, unless specifically stated
What is meant by liquidation preference for preferred stock?
If the corporation liquidates, preferred shareholders must be paid before common shareholders
Distinguish between stock options, stock rights, and stock warrants
All give their respective holders the right to buy shares of stock at an established price for a specific period of time. They differ in who they are issued to. Stock rights are issued to existing shareholders, stock options are issued to officers or employees, and stock warrants are often issued to bondholders.
What are meant by preemptive rights?
Privilege of select shareholders granting them the right to purchase additional shares prior to the general public having the opportunity in a seasoned offering. Done so that shareholders can maintain their investment ownership percentages and avoid dilution.
Distinguish between compensatory and noncompensatory stock options
Most stock options are considered compensatory, which results in recognizing an associated compensation expense. Those not involving recognition of compensation expense are considered noncompensatory (are similar to or negligable to those offered to regular shareholders)
What is the journal entry that records the granting of employee stock options?
Dr. Deferred compensation (depending on whether immediately exercisable)
Cr. APIC-Stock options outstanding
**Multiply number of options granted by fair value amount provided
Distinguish between cliff and graded vesting schedules
Under cliff vesting, options vest all at once or 100 percent after five years of service, where as under graded vesting employees are 20 percent vested after three years and become 20 percent vested each year after that.
What are the vesting journal entries that account for employee stock options?
Dr. Compensation expense
Cr. APIC-Stock options outstanding
**Multiply number of options granted by fair value amount provided
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 is the journal entry for exercising employee stock options?
Dr. Cash
Dr. APIC-Stock options outstanding
Cr. Common Stock
Cr. APIC-CS
What is the journal entry for recording the expiration of employee stock options?
Dr. APIC-Stock options outstanding
Cr. APIC-Expired stock options
What is the journal entry for recording stock appreciation rights?
Dr. Compensation expense
Cr. Liability for appreciation rights
Distinguish between declaration, record, and payment dates for dividends
1) Declaration date is the date the board of directors commits to the dividend.
2) Record date is the date that shareholders are identified as the ones entitled to the dividend.
3) Payment date is the date that the distribution is made to the shareholders of record.
What are the journal entries for recording a cash dividend?
Dr. Retained Earnings
Cr. Dividends Payable
Dr. Dividends Payable
Cr. Cash
What is a scrip dividend? What is its journal entry?
An interest bearing note payable.
Dr. Retained Earnings
Cr. Note Payable
What value is a property dividend exercised at?
Fair market value on the date of declaration
What journal entry records a property dividend?
Dr. Retained Earnings
Cr. Asset
Cr. Gain
What journal entry records a liquidating dividend?
Dr. Retained Earnings
Dr. APIC
Cr. Cash
What distinguishes a small dividend from a large dividend? Why the disparity?
20-25% of the total stock outstanding (less than is small and greater than is large). The reason for the disparity between recording large and small dividends is due to the fair market value of the stock not being a realistic estimate when there are large stock dividends.
What journal entry records a small stock dividend?
Dr. Retained Earnings
Cr. Common Stock
Cr. APIC-CS
What journal entry records a large stock dividend?
Dr. Retained Earnings
Cr. Common Stock
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 types of dividends have zero effect on total stockholders’ equity?
Stock dividends and stock splits
Do investors receiving stock dividends or stock splits have journal entries?
No, as their carrying investment amounts remain unaffected
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.
Distinguish between appropriated and unappropriated Retained Earnings
Appropriated retained earnings are reserved for a specific purpose, where as most retained earnings are not reserved for specific purposes and are thus unappropriated
What journal entry records appropriated Retained Earnings?
Dr. Retained Earnings (unappropriated)
Cr. Retained Earnings (reserved/appropriated for lawsuits, etc.)
How might companies treat a deficit in Retained Earnings?
By undergoing a “quasi-reorganization”, otherwise known as a “fresh start”.
What type of Journal Entry records a “Fresh start/Quasi-reorganization?”
Cr. Retained Earnings by amount need to make it zero
Cr. Assets to align them with their FMV
Dr. APIC for the balance (if enough APIC exists)
Dr. Common stock (if not enough APIC, reduce par value of common stock)
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
What does the Statement of Retained Earnings look like?
Beginning R/E \+/- Prior Period adjustment = Adjusted R/E \+ Net Income for YE - Dividends = R/E at YE
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.
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.
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
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
When might Equity Securities be classified as liabilities instead?
When there are equity instruments that are mandatorily redeemable upon the occurrence of an even that is not certain to occur, or some other type of obligation to repurchase equity shares that requires parting with assets.
When might there be no stockholders equity section on a company’s balance sheet?
When the firm’s equity instruments are subject to mandatory redemption.
What are the three methods to account for Treasury Stock stock under IFRS?
1) Par Value Method
2) Cost Method
3) Cost Retirement Method
