Study Unit 13: Equity Flashcards
Classes of Equity:
How do you calculate the # of issued and o/s shares for each class of stock given in a problem?
If an entity does not hold any stock as treasury stock, the number of shares of each type of stock may be determined by dividing the amount allocated to each stock account by the related par value.
Classes of Equity:
What type of financial instruments issued by a public company s/b reported on BS on the date of issuance.
Mandatorily redeemable financial instruments (MRFIs) are redeemable shares that embody an unconditional obligation to transfer assets at a fixed or determinable time or upon an event certain to occur. MRFIs must be accounted for as liabilities.
Eg. Common stock that contains an unconditional redemption feature.
Stock Warrants and Stock Rights:
When shares of preferred stock with detachable common stock warrants are issued at a price that exceeds both the par value and the fair value of the preferred stock….
the consideration received must be allocated between the preferred stock and the detachable warrants.
The amount allocated to the stock warrants outstanding should be recorded in the equity section as contributed capital.
At the time the warrants are exercised, contributed capital will reflect both the cash received upon the exercise of the warrants and the carrying amount of the warrants. Total equity, however, will be increased only by the amount of cash received because the carrying amount of the warrants is already included in total equity.
Stock Warrants and Stock Rights:
When rights are issued without consideration - which of the following accounts will be increased (CS, APIC)
When rights are issued without consideration, only a memorandum entry is made. Common stock and additional paid-in capital are affected only if the rights are exercised.
When stock rights are exercised and stock is issued, the issuing company will reflect the proceeds as an increase in common stock and additional paid-in capital. Thus, retained earnings will not be affected when rights are either issued or exercised.
Treasury Stock - Acquisition
COST method - what are the entries made?
Under the cost method, the acquisition of treasury stock is recorded as a debit to treasury stock and a credit to cash equal to the amount of the purchase price.
Treasury stock xxx
Cash xxx
This transaction results in a DECREASE in both total assets and total equity. Additional paid-in capital is UNAFFECTED by the treasury stock purchase.
Treasury Stock - Acquisition
PAR VALUE method - what are the entries made?
The par-value method treats a treasury stock purchase as a constructive retirement. Assuming no balance in paid-in capital from treasury stock transactions, the entry for the treasury stock purchase using the par-value method is:
eg.
Treasury stock 600
APIC 100
RE 300
Cash 1,000
Entry for issuance of the stock was:
Cash 700
CS ($6/sh) 600
APIC 100
See Unitl 13.4 (Focus question # 2 for details)
Treasury Stock - Reissue
How does a reissuance of treasury stock affect RE using COST method?
Retained earnings is increased by net income and decreased by net losses, dividends, and certain treasury stock transactions.
Under the cost method to account for treasury stock, the treasury stock sold DOES NOT AFFECT RETAINED EARNINGS.
Under the cost method, the excess should be credited to additional paid-in capital.
Retirement of Stock
Cash Dividends (Decrease RE)
When should cash dividends be recorded on the books?
On the date of declaration, a cash dividend becomes a legal liability of the corporation (unlike stock dividends, cash dividends cannot be rescinded)
Cash Dividends (Decrease RE)
How are dividends in arrears handled?
Dividends in arrears on preferred stock are not obligations of the company and are not recognized in the financial statements. However, the aggregate and per-share amounts of arrearages in cumulative preferred dividends should be disclosed on the face of the balance sheet or in the notes.
eg. The aggregate amount in arrears is $20,000 [(3,000 shares × $100 par × 5% × 2 years) – $10,000 paid in Year 4].
Property Dividends and Liquidating Dividends
What are the accounting effects of dividend declaration (property) and distribution?
When a corporation declares a dividend consisting of tangible property, the property is first REMEASURED TO FAIR VALUE as of the date of declaration.
The dividend should then be recognized as a decrease in (debit to) retained earnings and a corresponding increase in (credit to) a dividend payable.
Retained earnings xxx
Dividend payable xxx
The distribution of the property dividend is recognized by a debit to property dividend payable and a credit to the property account.
Property dividend payable xxx
Property account xxx
Property Dividends and Liquidating Dividends
What are the accounting effects of liquidating dividends?
The portion of a dividend that is liquidating results in a distribution in excess of the corporation’s retained earnings.
The effect of a liquidating dividend is to DECREASE CONTRIBUTED CAPITAL. Additional paid-in capital is debited first to the extent available before other contributed capital accounts are charged. Thus, declaration of a cash dividend, a portion of which is liquidating, DECREASES BOTH additional paid-in capital and retained earnings.
Stock Dividends and Stock Splits
How do stock dividends affect shareholder’s equity?
When a stock dividend is declared, a portion of retained earnings is reclassified as contributed capital. The net effect on total equity is thus $0.
Stock Dividends and Stock Splits
How are stock dividends recorded (when they may have a stock split)?
eg.
The board of directors declared a 30% common stock dividend. As this issuance is more than 25% of the previously outstanding common shares, it should be accounted for as a stock split in the form of a dividend. Generally (depending on the state of incorporation), the company will capitalize retained earnings in an amount based on the par value. Thus, the journal entry at the date of declaration will be:
RE (1,000 shares X 30%) $300
CS dividend distributable $300
Share-Based Payment
What is the measurement date for shares issued to employees in share option plans accounted for using FV method?
The date on which options are granted to specified employees.
Under the fair-value method, compensation cost is measured at the grant date, which is when any needed approvals have been received, and the employer and employee “reach a mutual understanding of the key terms and conditions of a share-based payment award.”
This expense is based on the fair value of the award at that date and recognized over the requisite service period.
This period is most often the period over which the vesting conditions are expected to be satisfied.
