Stockholders' Equity Flashcards
Retained earnings
Accumulated, undistributed P/L to date
Rule for appropriated R/E
When the purpose of the appropriation has been achieved, it should be restored to unappropriated R/E
Gain or loss from treasury stock under cost method
Any gain or loss associated with treasury stock is accounted for upon reissuance
At what date would retained earnings decrease by the amount of dividends?
On the date of declaration
Date of declaration
The date the board of directors formally approves a dividend
Dr. RE
Cr. Dividends payable
Why are stock splits usually not applied to treasury stock?
Because such stock is not considered outstanding
When would stock splits apply to treasury stock?
- When the company is maintaining a ratio of treasury shares to shares outstanding in order to meet stock option or other contractual commitments
- State law requires that treasury stock be protected from dilution
What JE is made when the rights to purchase unissued C/S are given (without consideration)?
No JE because no consideration given
How does the redemption of stock option rights affect equity?
It reduces equity by the amount paid
Stock right
Provides an existing shareholder with the opportunity to buy additional shares
Usually carries a price below stock’s market price on date the rights are granted
How should stock issued for outside services be recorded?
At FV of the stock (trading price = best evidence of FV)
What is the rule for the purchase and/or sale of treasury stock?
There is no gain or loss on the purchase/sale
Any “difference” goes to “PIC” or if there is not enough PIC to absorb loss, the loss would be debited from RE
What is the primary purpose of a quasi-reorganization?
To eliminate a RE deficit so that future earnings will be available for dividends rather than limited to offsetting the RE deficit
Scrip dividends
A special form of N/P whereby a corporation commits to paying a dividend at some later date (used when there is a cash shortage)
Dr. RE
Cr. N/P
Cr. Accrued interest
Liquidating dividend
When dividends to S/H exceed RE
Dr. APIC (first)
Dr. C/S or P/S
What should a property dividend be recorded in RE at?
The property’s market value at date of declaration
Preferred stock
Equity security with preferences and features no associated with common stock
Cumulative preferred stock
All or part of the preferred dividend not paid in any year accumulates and must be paid in the future before dividends can be paid to common s/h
When are stock options outstanding reduced in a compensatory stock option plan?
At the exercise date
Computation of book value per common share
Book value per common share = Common stockholders’ equity / Common shares outstanding
On what date is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on FMV of the award?
The date of grant
Participating preferred stock
Preferred s/h share (participate) with common s/h in dividends in excess of a specific amount
Share equally then pro rata
How is compensation expense calculated?
Calculated at the grant date of the option and allocated over the vesting period
In a stock dividend, if it is small (<20%), how is it treated?
The FMV of stock dividend at the date of declaration is transferred from RE to capital stock and APIC
In a stock dividend, if it is large (>25%) how is it treated?
The par/stated value of the stock dividend is normally transferred from RE to capital stock (number of shares issued x par value)
How is the intrinsic value of options calculated?
Number of share options x Market price of stock on date of grant less exercise price of share option
How should c/s that contains an unconditional redemption feature be accounted for?
As a liability on the date of issuance b/c there is an obligation of cash outflow in the future that the company has no ability to prevent
Madatorily redeemable preferred stock (liability)
Issued with a maturity date
Must be bought back by the company on the maturity date (similar to debt)
