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.
