Stockholders' Equity

Question 1

Issue C/S - JE

Answer 1

Dr. Cash from proceeds received from sale
Cr. C/S @ par or stated value (the legal value)
Cr. Paid-in capital in excess of par (the excess of the cash over the par value or stated value)

Question 2

Participating

Answer 2

Share with Common Stockholdersin dividend distributions after both preferred and common stock holders receive a specified level of dividend payment.

Question 3

Cumulative

Answer 3

Dividends not paid in any year (dividends in arrears) must be made up before distribution can be made to C/S holders (not a liability until they are declared)
Should be disclosed paranthetically in the footnotes

Question 4

Convertible

Answer 4

P/S holders have an option of exchanging their stock for C/S at a specified ratio.

Question 5

Callable

Answer 5

Corporation has the option to repurchase the P/S at a specified price.
- If called no gain or loss is recognized on the I/S
Cr. Gains - taken to paid in capital acct.
Dr. Losses - charged to R/E

Question 6

Call back P/S - JE

Answer 6

Dr. P/S (call back # of shares x par value)
Dr. P/S paid in accounts (original APIC for P/S x # of shares)
Dr. R/E (if loss
Cr. Cash (amount paid)
Cr. Paid in capital from P/S retirement (if gain)

Question 7

Non-redeemable P/S

Answer 7

Will be shown in the equity section

Question 8

Redeemable P/S

Answer 8

Manditorily redeemable - must be classified as a liability on the B/S
If redeemable for cash should be classified outside of permanent equity (as temporary equity) this is a messanine account that falls between liabilities and SHE.

If the P/S is redeemable at a fixed or determinable price on a fixed or determinable date, at the option of the holder, or upon the occurance of an event not within the control of the issuer.

Question 9

Stock Subscriptions

Answer 9

SEC registrants must show this as a contra-equity account not an asset (contra to C/S)
Corporation is selling Stock on an installment basis.
They will not issue any stock until they receive the total amount owed to them.

Question 10

Stock Subscription- JEs

Answer 10

At Subscription (record subscription)
Dr. Subscription receivable (balance)
Dr. Cash (downpmt amount)
  Cr. C/S Subscribed (par)
  Cr. Paid-in capital in excess of par (subscription > par)

Cash receipt & issuance 
Dr. Cash    (balance)  
   Cr. Subscription receivable (bal)
Dr. C/S prescribed  (at par)
   Cr. C/S (at par)

Question 11

Treasury Stock - Cost method - JEs

Answer 11

Acquired back shares of Treasury Stock
Dr. Treasury Stock (at cost)
Cr. Cash

Resell:
Dr. Cash (received)
Cr. Treasury Stock (remove at the original cost)
Cr. Paid-in capital treasury stock

Question 12

Treasury Stock - Par value - JEs

Answer 12

Sell
Dr. Cash
Cr. C/S (at par)
Cr. Paid-in captial in excess of par

Retiring the Stock
Dr. APIC in excess of par value (# of shares x (SP-Par)
Dr. Treasury Stock (at par)
Cr. Cash
Cr. Paid-in capital for T/S (gain from retirement)

Question 13

Retirement of Stock

Answer 13

Buying back treasury stock & not selling it back (formally retiring)
Dr. Common Stock (# of shares x par)
Dr. Paid in cap in excess of par (# of shares x original paid in capital in excess of par)
Dr. Retained earnings (if a loss)
Cr. Treasury Stock (for Book value, this is originally a Dr. Balance)
Cr. Paid-in capital from retirement (if gain)

Question 14

Dividends

Answer 14

Date of declaration: only on this date is SHE reduced
Dr. RE
Cr. Div Payable

Date of record - no JE only a memo entry

Payment Date: when liability is paid
Dr. Div Payable
Cr. Cash
No effect on SHE (this was affected at the date of declaration.

Question 15

Property Dividends

Answer 15

Giving away some type of an asset as a dividends. 
Declaration at FMV
1. the asset is carried at Book Value so it has to be brought to FMV. 
If FMV > BV bring asset up  to FMV 
Dr. Property 
   Cr. gain on disposal of asset 
If FMV< BV write asset down to FMV
Dr. Loss on disposal of asset 
   Cr. Property 
Record the property div at FMV 
 Dr. Retained Earnings  (fmv of property)
  Cr. Property div payable   
(reduction in SHE when the property div is declared)
When asset is given away:
Dr. Property div payable 
  Cr. Property

Question 16

Liquidating Dividends

Answer 16

Have to be disclosed in the footnotes
-dividends based on other than earnings
-return of capital to S/H and should be so disclosed
When company declares a dividend > than what’s in R/E. Bal in RE 20k Div declared 45k
Dr. RE 20k
Dr. Paid in captial 25k (liquidating div is the amount which reduces Paid in capital)
Cr. Dividends Payable 45k

Question 17

Scrip dividends

Answer 17

Issuance of promissory notes to pay dividends in the future (may bare interest) instead of cash.
Dr. RE (decreased SHE)
Cr. Scrip dividends payable
Scrip dividends are a liability which is extinguished by payment.
Dr. Scrip dividends payable (amount owed)
Dr. Interest Expense
Cr. Cash

Question 18

Stock Dividends

Answer 18

Two Types:
Small: increases the # of shares by 20-25%
Large: Increases the # of shares by more than 20-25%

Question 19

Small Stock Dividend - increases # of shares by 20-25%

Answer 19

Date of declaration:
Dr. R/E    (FMV of the shares)
   Cr. C/S distributable 
   Cr. APIC 
Issuance:
Dr. Stock dividend distributable 
  Cr. C/S

Question 20

Large Stock Dividends - increases # of shares by more than 20-25%

Answer 20

Date of declaration:
Dr. R/E (for the Par value of the shares)
Cr. C/S Distributable (distribution for the par value)
Issuance:
Dr. Stock dividend distributable
Cr. C/S

Question 21

Stock Splits

Answer 21

Changes the number of shares outstanding and the par value per share.
2 for 1: take each share and split it to 2 shares- par value decreases by 1/2
Reversed stock split: 1 for 2: Number of shares decrease by 1/2 - par value doubles
*There’s no JE for stock splits- issue a Memo (does not affect SHE)

Question 22

Share-based payments to Employees

Answer 22

Fair value of Options at grant date x Number of options= Deferred compensation expense.
Dr. Deferred compensation exp.
Cr. Stock options outstanding (paid in cap account)
*No effect to SHE- Deferred comp is a contra account to stock options outstanding.

During each of the years until the stock based comp can be excercised:
Dr. compensation exp
Cr. deferred compensation

When the option is excercised:
Dr Cash (this is the increase in equity)
Dr. Stock options outstanding (to remove the stock option)
Cr. C/S (at par)
Cr. APIC (plug)

Question 23

Stock appreciation rights (SAR)

Answer 23

Allow employees to receive stock or cash equal in amount to the difference between the market value and some predetermined amount per share for a # of shares.
Allows employees to receive the amount of share appreciation without having to make cash outlays as is common in stock option plans.

Question 24

Corporate Bankruptcy - Statement of affairs

Answer 24

Presents the current market values of the assets and the status of the various categories of the equity interests of the corp.
Classifies assets in the following order of priority (highest to lowest)
Fully secured creditors
Partially secured creditors
Unsecured creditors
- Priority
-Non Priority

Question 25

Quasi Reorganization

Answer 25

Allows companies to avoid formal bankruptcy proceedings through an informal proceeding.
Deficit in R/E - no pmt in dividends.
Procedure is applicable during a period of declining price levels.

Question 26

Quasi Reorganization procedures

Answer 26

1. authorization from Stockholder & creditors
2. Revaluation of assets to current values (fair values) normally the assets are over valued.
3. Elimination of any deficit by charging Paid-in capital.

Question 27

Quasi Reorganization JEs

Answer 27

Write down assets
Dr. R/E (write down)
Cr. Assets (write down)

To eliminate deficit:
Dr. Paid-in capital (deficit)
Cr. R/E (deficit) to bring the RE to zero

**If ther’s not enough in APIC to eliminate the deficit to zero use the C/S account and take away equity from the account.
Dr. C/S
Cr. APIC
this will create enough equity in APIC to eliminate the deficit in R/E.

Question 28

Stock Rights

Answer 28

Existing stockholders are given rights to buy additional stock at a certain value for a certain period of time.
Announcement: Memo entry - no JE
When the rights are excercised and converted to Stock - affects SHE
Corp receives cash - this is the amount of the increase to SHE

Question 29

Book value of Common Stock ratio

Answer 29

Applies only to C/S
Total SHE - P/S SHE = C/S balance of SHE

C/S balance of SHE/outstanding shares of C/S
*Treasury stock is not outstanding so should be backed out of the o/s shares.

Question 30

Dividend payout

Answer 30

measures percentage of earnings distributed as dividends

Dividends per share/Earnings per share (always use basic earnings per share)

Question 31

Rate of return on common stockholders’ equity

Answer 31

measures the return earned on the stockholders’ investment in the firm.

NI available for C/S holders / C/S holders equity (make sure to deduct the P/S equity from total equity) and take the average of the CY and PY/2

Question 32

Debt to equity

Answer 32

shows creditors the corporation's ability to sustain losses 
Total debt (all liabilities)/Stockholder's equity