Stockholders' Equity II

Question 1

WHAT happens when dividends are declared as a distributed property dividend and the merchandise’s carrying amount is in excess of its market value?

Answer 1

THERE is a Loss

The Loss is reported as a reduction to income from continuing operations

Question 2

HOW are stock options that have a grant date recognized?

Answer 2

USING their Fair Value

• with the grant date ($ - Amount) recognized evenly over the vesting period (i.e. 3-years, 5-years, etc.)

Question 3

WHAT are Dividend Distributions that are NOT paid out of earnings considered?

Answer 3

Liquidating Dividends

They reduce Additional paid-in capital (APIC), NOT retained earnings

Question 4

WHAT happens when the collectability is reasonably assured for a common stock subscription?

Answer 4

A Receivable for the remaining subscription price is recorded immediately as a debit along with cash received

Credit: (1) Common stock subscribed and (2) Additional paid-in capital

Question 5

True or False.

Dividends on cumulative preferred stock are discretionary and retained earnings would be appropriated for dividends in arrears

Answer 5

False.

Dividends on cumulative preferred stock are discretionary and retained earnings would NOT be appropriated for dividends in arrears

Question 6

True or False.

The Declaration of a Stock Dividend decreases the number of common stock outstanding.

Answer 6

FALSE.

The Declaration of a Stock Dividend increases the number of common stock outstanding.

Question 7

Are gains and losses reported when accounting for bond conversions with the book value method?

Answer 7

NO.

No gain or loss is recorded on the transaction

e.g. outstanding convertible bonds with a face value of $1,000,000 and an unamortized discount of $300,000 – Your stockholders’ equity increase would be $700,000

Question 8

WHAT is a “liquidating dividend?”

Answer 8

ANY dividend paid in an amount that is in excess of retained earnings

IT would be recorded as:
A decrease to Additional Paid-in Capital (APIC) rather than retained earnings

Question 9

True or False.

A Stock Dividend increases the number of shares outstanding, and has a significant monetary effect on Stockholders’ Equity.

Answer 9

FALSE.

A stock dividend increases the number of shares outstanding, but has NO monetary effect on any component of stockholders’ equity

Question 10

WHAT is a “noncontrolling” interest in a subsidiary considered and WHERE would it show up on the Balance Sheet?

Answer 10

AS a component of stockholders’ equity

IT is required to be reported in the stockholders’ equity section of the balance sheet

Question 11

True or False.

Shares “Issued” and Shares “Outstanding” are the same.

Answer 11

FALSE.

Shares “Issued” are the Shares without factoring those that are “Treasury” Stock.

Shares “Outstanding” are the Shares when you are factoring the “Treasury” Stock.

Question 12

True or False.

Retained Earnings appropriation can restrict earnings available for dividends.

Answer 12

TRUE.

WHY? - Because this is a means of communicating to financial statement users that the company is anticipating a need that will prevent the distribution of dividends

Question 13

AT What Date is a liability for a property dividend recorded?

Answer 13

AT the declaration date

NOTE: Since the gain or loss on the property is ultimately closed into retained earnings, the net effect on retained earnings will be the cost of the property

Question 14

FOR compensatory stock options, WHEN are compensation expenses recognized?

Answer 14

IN the period or periods in which the services are rendered

E.g. Stock options granted in June 20X1, but services are “rendered” in 20X2, 20X3, and 20X4 – You would recognize the expense in those three years of “rendered” services

Question 15

WHAT Balance Sheet (B/S) carrying amount is used when a company goes through a “quasi-reorganization?”

Answer 15

THE Fair Value

i.e. ANY deficit in retained earnings is eliminated and assets that are overstated are written down to their fair values

Question 16

True or False.

Current liabilities are affected by both the declaration and distribution of a stock dividend

Answer 16

FALSE.

Current liabilities are affected by neither the declaration nor the distribution of a stock dividend.

i.e. At the time that a stock dividend is declared, the Retained Earnings account is reduced and a separate stockholders’ equity account, such as “stock dividends distributable” is increased

Question 17

True or False.

The issuance of stock rights to shareholders reduces retained earnings.

Answer 17

FALSE.

The issuance of stock rights to shareholders does not reduce retained earnings.

i.e. It is recorded for disclosure purposes but no assets, liabilities, or equity accounts are affected.

Question 18

WHEN should a stock options outstanding account be reduced if the compensatory stock option plan has different grant, measurement, and exercise dates?

Answer 18

AT the Exercise Date

Question 19

WHAT methods may Treasury stock be accounted for under IFRS?

Answer 19

(1) Cost method
(2) Par value method
(3) Constructive Retirement method

Question 20

WHAT happens when stock, common or preferred, are retired for an amount less than its par value?

Answer 20

THE difference is recognized as a credit to additional paid-in capital