Stockholders Equity

Question 2

When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

Answer 2

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

Question 3

When is APIC recorded on a stock subscription?

Answer 3

APIC increases on date subscription is recorded – not on the date paid for or issued

Question 4

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

Answer 4

It will be restricted to the extent of the balance in the Treasury Stock account.

Question 5

When are dividends in arrear recorded for cumulative preferred stock?

Answer 5

They are not accrued until declared.

Question 6

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

Answer 6

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.

Question 7

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

Answer 7

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

Question 8

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

Answer 8

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 debit to RE and will be a wash

The net effect of the entry is that RE will decrease by the CV of the asset

Question 9

When is Retained Earnings debited for FMV of Stock for a stock dividend?

Answer 9

When Stock Dividend is less than 25% of Common Stock outstanding

Question 10

When is Retained Earnings debited for Par Value for a stock dividend?

Answer 10

When Stock Dividend is greater than 25% of common stock outstanding

Question 11

What is the effect of a stock dividend or a stock split on total shareholder equity?

Answer 11

Stock dividends and stock splits both have no effect on Total Shareholder Equity

Question 12

What is the affect on APIC from a stock split?

Answer 12

Stock splits only affect par value - APIC remains the same.

Question 13

When is compensation expense recorded at the time of grant for a stock option?

Answer 13

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

Question 14

What interest rate is used to discount stock options?

Answer 14

The risk-free interest rate

Question 15

What date is used as the measurement date for share-based payments classified as liabilities?

Answer 15

The settlement date.

Question 16

How are compensation costs for share-based payments classified as liabilities measured?

Answer 16

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

Question 17

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

Answer 17

Net increase to SHE = Gain on settlement of debt + Credit to SHE from stock issuance

Question 18

What is the primary purpose of a quasi-reorganization?

Answer 18

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

Question 19

How is return on Common Stockholder’s Equity calculated?

Answer 19

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE = Common Stock + RE

Question 20

How is book value per share of common stock calculated?

Answer 20

Total Common Stock
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
=Total Book Value 

Book Value per Share = Total Book Value / Shares outstanding

Question 21

How is the dividend per share payout ratio calculated?

Answer 21

Dividends per share / earnings per share

Question 22

How is basic Earnings Per Share (EPS) calculated?

Answer 22

(Net Income – Preferred Dividends) / Average C/S Outstanding

Note – If cumulative- subtract the P/S dividend regardless of whether or not they’re declared.

Question 23

For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

Answer 23

For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year

Question 24

For which areas is EPS required to be shown?

Answer 24

EPS is only required to be shown for Income from Continuing Operations and Net Income.

All others (discontinued operations) can be shown on the Financial Statements or in the notes

Question 25

How is EPS calculated when convertible bonds are taken into consideration?

Answer 25

[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)

Bond interest is added back because if converted- there would be no bond interest expense

Contingent Issue Agreements are included in Diluted EPS if contingency is met

Question 26

When do stock options increase share outstanding?

Answer 26

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

Question 27

What is special about stock dividends?

Answer 27

Unlike cash and property dividends, stock dividends are NOT a liability when declared

They can be rescinded as nothing is actually being distributed to stockholders except stock certificates

Current assets are NOT used to “pay” the dividend

Question 28

How are stock dividends recorded when they are declared?

Answer 28

Stock dividends are recorded as follows:

Retained earnings (FV of shares)
Stock dividend distributable (par)
Paid-in capital in excess of par (plug)

Note: Charge R/E for FV of stock dividend is less than 20% - 25% (small stock dividend) in stock outstanding. Charge RE for PAR VALUE of stock dividend is greater than 20% - 25% (large stock dividend) increase in stock outstanding