Stockholders' Equity

Question 1

True or False.

A gain or loss is recognized on the purchase, reissue or retirement of treasury stock.

Answer 1

FALSE.

No gain or loss is recognized on the purchase, reissue or retirement of treasury stock

Question 2

WHAT happens to Additional Paid-in Capital (APIC) attributed to common stock at issuance under the; “Par Value Method?”

Answer 2

THEY would be reversed upon reacquisition by the company

i.e. It would reverse the amount initially funded to the APIC account

Question 3

HOW are the stock dividends of company’s shares of par common stock recorded?

Answer 3

BY debiting Retained Earnings and crediting Common Stock

Question 4

WHAT affect if any does the issuance of warrants have on Net Income?

Answer 4

NONE. This does NOT affect Net Income

This would however result in an increase to “Additional Paid-in Capital” (APIC)

Question 5

HOW should a property dividend be recorded in Retained Earnings?

Answer 5

AT the property’s “Market Value” at date of declaration

NOTE: ANY difference between the fair value and the carrying value of the property is recognized as a gain or loss on disposal

Question 6

True or False.

Total Compensation Expense is the “Stated” Value of the options at the grant date.

Answer 6

FALSE.

Total compensation expense is the “Fair” value of the options at the grant date

Question 7

HOW is a Stock Dividend recorded?

Answer 7

WITH a (decrease) to Retained Earnings and an increase to Common Stock and Additional paid-in capital

NOTE: There is NO change to stockholders’ equity

Question 8

HOW would the Financial Statements be affected when a company issued rights to its existing shareholders WITHOUT consideration?

Answer 8

THE company would report it through disclosure BUT no entries would be used to record the issuance

NOTE: Common Stock and Additional paid-in capital would be increased when the rights are “exercised” NOT when the rights were issued

Question 9

Under the Par Value Method Treasury Stock is considered……..?

Answer 9

A Contra-Common Stock (C/S) Account

Question 10

Under the Cost Method, Treasury Stock is considered……..?

Answer 10

A Contra-Equity Account

Question 11

HOW are Retained Earnings Affected when a company issues rights to its existing stockholders and the rights are exercised?

Answer 11

IT is NOT affect – Meaning Retained Earnings are NOT affected

Proceeds from the exercise of the rights are allocated between Common Stock (C/S) for the par or stated value with the excess reported in Additional paid-in capital (APIC)

Question 12

WHAT does it mean when a stock option is exercisable immediately?

Answer 12

THAT the compensation is for services already provided

i.e. The entity would use the “fair value” of the stock option

Question 13

WHAT happens when a company declares dividends in excess of its retained earnings (R/E)?

Answer 13

THIS is considered a “liquidating dividend”

WHAT Happens? - Retained Earnings (R/E) are eliminated and the remainder is treated as a reduction of contributed capital (i.e. This reduces Additional Paid-in Capital first)

Question 14

WHAT is considered a “property dividend?” And how is it treated?

Answer 14

THE outstanding common shares of a company’s investment in an “Unrelated Party”

THE difference between the fair value and the carrying value of the Dividend Property is recognized as a gain or loss

Question 15

True or False.

Dividends in arrears on preferred stock are disclosed and accrued

Answer 15

FALSE.

Dividends in arrears on preferred stock are disclosed but NOT accrued

Question 16

HOW would you calculate your Pre-tax stock compensation using the “intrinsic method?”

Answer 16

TAKE the difference between your “Exercise price” and your “market value” per share and multiply this amount by the option shares

Question 17

WHAT is an example of a financial instrument issued by a public company that should be reported on their books on the date of issuance as a liability?

Answer 17

AN Unconditional Redemption Feature

WHY? - Because an unconditional redemption feature allows the holder to exchange the shares for cash, which makes them equivalent to a liability

Question 18

WHAT is considered a ‘small’ stock dividend?

Answer 18

A Dividend declared where common share outstanding percent is (less than 20-25%)

This would be credited to retained earnings at its “market value”

Question 19

WHAT is considered a ‘large’ stock dividend?

Answer 19

A Dividend declared where common share outstanding percent is (more than 20-25%)

This would be credited to retained earnings at “Par Value”

Question 20

HOW are the donation of company stock treated (reported)?

Answer 20

As a debit to Treasury Stock, removing the common shares formally credited to common stock outstanding

And with a credit to APIC - treasury stock

NOTE: This does not affect Stockholders’ Equity