F7 - Stockholder's Equity, Cashflows, And Ratio Analysis

Front 1

Components of stockholders' equity:

Back 1

1. Capital stock (a.k.a. legal capital)

2. Additional paid-in capital (A.P.I.C.)

3. Retained earnings or deficit

4. Accumulated other comprehensive income

5. Treasury stock (accounted for differently)

Front 2

Define capital stock:

Back 2

A.K.A. Legal capital

Legal capital is the amount of capital that must be retained by the corporation for the protection of creditors. The par or stated value of both preferred and common stock is legal capital and is frequently referred to as "capital" stock.

Front 3

Capital Stock - Par Value:

Back 3

Generally, preferred stock is issued with a par value, but common stock may be issued with or without a par value. No-par common stock may be issued as true no-par stock or no-par stock with a stated value. Any excess of the actual amount received over the par or stated value of the stock is accounted for as additional paid-in capital.

Front 4

Common Stock - Overview:

Back 4

Common shareholders bear the ultimate risk of loss & receive the ultimate benefits of success, but they are not guaranteed dividends or assets upon dissolution. Common shareholders generally control management. They have the right to vote, the right to share in earnings of the corporation, and the right to share in assets upon liquidation after satisfaction of creditors' claims & those of preferred shareholders.

Front 5

Common Stock: Pass Key

Back 5

Common shareholders may have preemptive rights to a proportionate share of any additional common stock issued if granted in the articles of incorporation.

Front 6

Common Stock - Book Value per Common Share Calculation:

Back 6

Book value per common share = Common shareholders' equity/Common shares outstanding

Front 7

Common Stockholders' Equity Formula

Back 7

Total shareholders' equity - Preferred stock outstanding (@ greater of call price or par value)

- Cumulative preferred dividends in arrears = Common shareholders' equity

Front 8

Preferred Stock: Overview

Back 8

Preferred stock is an equity security w/ preferences & features not associated w/ common stock. Preferred stock may include a preference relating to dividends, which may be cumulative or non-cumulative & participating or nonparticipating. Preferred stock may also include a preference relating to liquidation. Usually, preferred stock does not have voting rights.

Front 9

Preferred Stock: Cumulative Preferred Stock

Back 9

The cumulative feature provides that all or part of the preferred dividend not paid in any year accumulates & must be paid in the future before dividends can be paid to common shareholders. The accumulated amount is referred to as dividends in arrears. The amount of dividends in arrears is not a legal liability, but it must be disclosed in total & on a per share basis either parenthetically on the B/S or in the footnotes.

Front 10

Preferred Stock: Non-Cumulative Preferred Stock

Back 10

With non-cumulative preferred stock, dividends not paid in any year do not accumulate. The preferred shareholders lose the right to receive dividends that are not declared.

Front 11

Preferred Stock - Participating Preferred Stock:

Back 11

The participating feature provides that preferred shareholders share w/ common shareholders in dividends in excess of a specific amount. Fully participating means that preferred shareholders participate in excess dividends w/o limit. Generally, preferred shareholders receive their preference dividend 1st & then additional dividends are shared between common & preferred shareholders. Partially participating means preferred shareholders participate in excess dividends, but to a limited extent (e.g., a % limit)

Front 12

Preferred Stock: Non-Participating Preferred Stock

Back 12

When preferred stock is non-participating, preferred shareholders are limited to the dividends provided by their preference. They do not share in excess dividends.

Front 13

Preferred Stock - Preference upon Liquidation:

Back 13

Preferred stock may include a preference to assets upon liquidation of the entity. If the liquidation preference is significantly greater than the par or stated value, the liquidation preference must be disclosed. The disclosure of the liquidation preference must be in the equity section of the B/S, not in the notes to the FSs.

Front 14

Preferred Stock - Convertible Preferred Stock:

Back 14

Convertible preferred stock may be exchanged for common stock (at the option of the stockholder) at a specified conversion rate.

Front 15

Preferred Stock - Callable (Redeemable) Preferred Stock:

Back 15

Callable preferred stock may be called (repurchased) at a specified price (at the option of the issuing corporation). The aggregate or the per share amount at which the preferred stock is callable must be disclosed either on the B/S or in the footnotes.

Front 16

Preferred Stock - Mandatorily Redeemable Preferred Stock (Liability)

Back 16

Mandatorily redeemable preferred stock is issued w/ a maturity date. Similar to debt, the mandatorily redeemable preferred stock must be bought back by the company on the maturity date. Mandatorily redeemable preferred stock must be classified as a liability, unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.

Front 17

Define Additional Paid-In Capital:

Back 17

A.P.I.C is generally contributed capital in excess of par or stated value. It can also arise from other types of transactions. E.g. the sale of treasury stock at a gain, quasi-reorganization, the issuance of liquidating dividends, conversion of bonds, & the declaration of a small stock dividend. A.P.I.C. from these sources may be aggregated & shown as one amount on the B/S.

Front 18

Define Retained Earnings:

Back 18

Retained earnings (or deficit) is accumulated earnings (or losses) during the life of the corporation that have not been paid out as dividends. The amount of accumulated retained earnings is reduced by distributions to stockholders & transfers to A.P.I.C. for stock dividends. Retained earnings does not include treasury stock or accumulated OCI.

Front 19

Retained Earnings Formula:

Back 19

Net Income (loss) - Dividends Declared +/- Prior period adjustments +/ Accounting changes reported retrospectively + Adjustment from quasi-reorganization = Change in retained earnings

Front 20

Classification of Retained Earnings (appropriations)

Back 20

Retained earnings may be classified as either appropriated or unappropriated. The purpose of appropriating RE is to disclose to shareholders that some of the RE are not available to pay dividends because they have been restricted for legal or contractual reasons or as a discretionary act of management for specific contingency purposes. Appropriation of RE may not be used to absorb costs or losses or be transferred to income.

Front 21

Classification of Retained Earning (Appropriations) - Journal Entry

Back 21

The following entry is recorded when an appropriation is made:

DR: Retained earnings (unappropriated)

CR: Retained earnings appropriated for ...

Front 22

Define Quasi-Reorganization:

Back 22

(AKA corporate readjustment) is an accounting adjustment (not a legal reorganization) that revises the capital structure of a corporation as though it had been legally reorganized. It allows a corporation w/ a significant deficit in RE to eliminate that deficit & have a "fresh start." A quasi-reorganization requires formal approval by the shareholders.

Front 23

Quasi-Reorganization - Purposes:

Back 23

The purposes of a quasi-reorganization are to restate overvalued assets to their lower fair values (and thus reduce future depreciation) and to eliminate a retained earnings deficit (and thus facilitate the declaration of dividends.

Front 24

Methods of accounting for treasury stock - Cost Method:

Back 24

Used 95% of the time. Treasury shares are recorded & carried at reacquisition cost. Gain or loss is determined when treasury stock is reissued or retired & original issue price & BV of the stock do not enter into the accounting. "APIC from treasury stock" is credited for gains & debited for losses when treasury stock is reissued at prices that differ from the original selling price. Losses may also decrease RE if APIC from treasury stock account doesn't have a balance large enough to absorb the loss. NI or RE will never be increased through treasury stock transactions.

Front 25

Methods of accounting for treasury stock - Legal (or Par/Stated Value) Method:

Back 25

Used 5% of the time. Treasury shares are recorded by reducing the amounts of par value & APIC received at time of original sale. Treasury stock is debited for its par value. APIC-Common Stock is reduced for the pro rata share of original issue price attributable to the reacquired shares. APIC from treasury stock is credited for gains & debited for losses when treasury stock is repurchased at prices that differ from original selling price. Losses may also decrease RE if APIC from treasury stock account does not have a balance large enough to absorb the loss.

Front 26

Retirement of Treasury Stock:

Back 26

When treasury stock is acquired w/ the intent of retiring the stock (regardless of whether it is accomplished) & the price paid is in excess of the par or stated value, that excess may be charged against either (1) all paid-in capital arising from past transactions in the same class of stock or (2) RE. When the price paid for acquired treasury stock < par value, the difference is credited to paid-in capital.

Front 27

Define donated stock:

Back 27

A company's own stock received as a donation from a shareholder. There is no change in total shareholders' equity as a result of the donation, but the number of shares outstanding decreases, resulting in higher book value per common share. The company should record donated stock at fair market value.

Front 28

Date of Declaration:

Back 28

The declaration date is the date the board of directors formally approves a dividend. On the declaration date, a liability is created (dividends payable ) and retained earnings is reduced.

Front 29

Date of Record:

Back 29

The date of record is the date the board of directors specifies as the date the names of the shareholders to receive the dividend are determined. There is no journal entry on this date.

Front 30

Cash Dividends:

Back 30

Cash dividends distribute cash to shareholders and may be declared on common or preferred stock. They are paid from retained earnings. Dividends are paid only on authorized, issued, and outstanding shares. They are not paid (or declared) on treasury stock.

Front 31

Property (In-Kind) Dividends:

Back 31

Property dividends distribute noncash assets (e.g., inventory, investment securities) to shareholders. They are non-reciprocal transfers of nonmonetary assets from the company to its shareholders. On the date of declaration, the property distributed is restated to FV & any gain or loss is recognized in income. The dividend liability & related debit to RE is recorded at FV of the assets transferred.

Front 32

Scrip Dividends:

Back 32

Scrip dividends are a special form of notes payable whereby a corporation commits to paying a dividend at some later date. Scrip dividends may be used when there is a cash shortage. On the date of declaration, RE is debited & notes payable is credited. Some scrip dividends bear interest from the declaration date to the date of payment

Front 33

Liquidating Dividends:

Back 33

Liquidating dividends occur when dividends to shareholders exceed retained earnings. Dividends in excess of RE would be debited first to APIC & then to common or preferred stock (as appropriate). Liquidating dividends reduce total paid-in capital.

Front 34

Stock Dividends:

Back 34

Stock dividends distribute additional shares of a company's own stock to its shareholders. The treatment of stock dividends depends on the size (%) of the dividend in proportion to the total shares outstanding before the dividend.

Front 35

Stock Dividends: Treatment of a Small Stock Dividend (<20-25%)

Back 35

This dividend is treated as a small stock dividend because the issuance is not expected to affect the market price of the stock. The FV of the stock dividend at the date of declaration is transferred from RE to capital stock & APIC. There is no effect on total shareholders' equity, as paid-in capital is substituted for RE (i.e. RE is "capitalized" & made part of paid-in capital).

Front 36

Stock Dividends: Treatment of a Large Stock Dividend (>20-25%)

Back 36

This dividend is treated as a large stock dividend, as it may be expected to reduce the market price of the stock. The par value is normally transferred from RE to capital stock in order to meet legal requirements. The amount transferred is the # of shares issued x the par value.

Front 37

Stock Splits:

Back 37

Stock splits occur when a corporation issues additional shares of its own stock to current shareholders & reduces the par value per share proportionately. There is no change in the total BV of the shares outstanding. So NO Journal Entry. A stock split usually does not affect RE or shareholders' equity.

Front 38

Stock Split: Before and After

Back 38

Before the split:

Common stock (10,000 shares outstanding @ $10 par) = $100,000

After the split:

Common stock (20,000 shares outstanding @ $5 par) = $100,000

Front 39

Rights and Privileges of Securities:

Back 39

An entity is required to disclose in the FSs:

- Dividend & liquidation preferences

- participation rights

- call prices & dates

- conversion or exercise prices

- rates and pertinent dates

- sinking-fund requirements

- unusual voting rights

- significant terms of contracts to issue additional shares

Front 40

Plack Co. purchased 10,000 shares (2% ownership) of Ty Corp. on February 14, Year 1. Plack received a stock dividend of 2,000 shares on April 30, Year 1, when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15, Year 1. In its Year 1 income statement, what amount should Plack report as dividend income?

Back 40

$24,000.

Dividend Income

= No. of shares × dividend per share

= 12,000 shares x $2/share

= $24,000

Front 41

On January 15, Year 1, Rico Co. declared its annual cash dividend on common stock for the year ended January 31, Year 1. The dividend was paid on February 9, Year 1, to stockholders of record as of January 28, Year 1. On what date should Rico decrease retained earnings by the amount of the dividend?

Back 41

January 15, Year 1. The date of declaration is the date the board of directors formally approves a divided. A liability is created (dividends payable), and retained earnings is reduced (debited).

Front 42

A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased? Common Stock? Additional Paid-In Capital?

Back 42

No-No. No entry is made when the rights are issued since no consideration is given. If the rights are exercised and stock is issued, then common stock and additional paid-in capital increase.

Front 43

Sep, Yr 1, West made a dividend distribution of 1 right for each of its 120,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's $50 variable rate preferred stock at an exercise price of $80 per share. On Mar 20, Yr 5, none of the rights had been exercised, & West redeemed them by paying each stockholder $0.10 per right. As a result, West's stockholders' equity was reduced by:

Back 43

$12,000. In Year 1, no dividend was recorded since none of the rights were exercised and no value was assigned. In Year 5, redemption reduced equity by $12,000 [120,000 rights x $.10 per share].

Front 44

East Co. issued 1,000 shares of its $5 par common stock to Howe as compensation for 1,000 hours of legal services performed. Howe usually bills $160 per hour for legal services. On the date of issuance, the stock was trading on a public exchange at $140 per share. By what amount should the additional paid-in capital account increase as a result of this transaction?

Back 44

$135,000. The fair market value surrendered for the legal services equals $140,000 ($140 × 1,000 shares). The billing rate is similar to a list price and would be used for valuation purposes if no other information was available. The par value of the stock is $5,000 ($5 × 1,000 shares) and the additional paid in capital equals $135,000 ($140,000 less $5,000).

Front 45

During Yr 1, Brad issued 5,000 shares of $100 par convertible preferred stock for $110/share. One share of preferred stock can be converted into 3 shares of Brad's $25 par common stock at the option of the preferred shareholder. On Dec 31, Yr 2, when the market value of the common stock was $40 per share, all of the preferred stock was converted. What amount should Brad credit to Common Stock and to APIC as a result of the conversion?

Back 45

$375,000 common stock.

$175,000 additional paid-in capital.

DR: Preferred Stock$ 500,000

DR: APIC - PS50,000

CR: Common Stock$ 375,000

CR: APIC - CS175,000

Front 46

When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of:

a. Payment.

b. Declaration or record, whichever is earlier.

c. Declaration.

d. Record.

Back 46

Choice "c" is correct. When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of declaration by the board of directors.

Front 47

If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be:

a. Treated as a reduction in the carrying amount of remaining treasury stock.

b. Reported as a gain in the income statement.

c. Credited to additional paid-in capital.

d. Credited to retained earnings.

Back 47

Credited to "paid-in capital."

Rule: There is no gain or loss on the purchase and/or sale of treasury stock. Any "difference" goes to "paid-in capital," or if there is not enough paid-in capital to absorb a loss, the loss would be debited (subtracted) from "retained earnings."

Front 48

The primary purpose of a quasi-reorganization is to give a corporation the opportunity to:

a. Revalue understated assets to their FV.

b. Distribute the stock of a newly-created subsidiary to its stockholders in exchange for part of their stock in the corporation.

c. Obtain relief from its creditors.

d. Eliminate a deficit in retained earnings.

Back 48

Choice "d" is correct. The primary purpose of a quasi-reorganization is to eliminate a retained earnings deficit so that future earnings will be available for dividends rather than limited to offsetting the retained earnings deficit. ARB 43 Ch 1A para. 2

Front 49

East had sufficient RE in Yr 1 as a basis for dividends, but was temporarily short of cash. East declared a dividend of $100,000 on April 1, Yr 1, & issued promissory notes to its stockholders in lieu of cash. The notes, dated April 1, Yr 1, had a maturity date of March 31, Yr 2, & a 10% interest rate. How should East account for the scrip dividend & interest?

a. Debit RE for $110,000 on March 31, Year 2.

b. Debit RE for $110,000 on April 1, Year 1.

c. Debit RE for $100,000 on April 1, Yr 1, & debit interest expense for $7,500 on Dec 31, Yr 1.

d. Debit RE for $100,000 on April 1, Yr 1, & DR interest expense for $10,000 on March 31, Yr 2.

Back 49

Debit retained earnings for $100,000 on April 1, Year 1, and debit interest expense for $7,500 on December 31, Year 1.

Front 50

Liquidating dividend formula:

Back 50

(amount in excess of retained earnings balance)

Total dividend declared - Retained Earnings = Liquidating Dividend

Front 51

Nov 2, Yr 1, Finsbury issued warrants to its stockholders giving them the right to purchase add'l $20 par value common shares at $30. The stockholders exercised all warrants on March 1, Yr 2. The shares had market prices of $33, $35, & $40 on Nov 2, Yr 1, Dec 31, Yr 1, & March 1, Yr 2, respectively. What were the effects of the warrants on Finsbury's APIC & Net income?

Back 51

Rule: That portion of proceeds in excess of stocks' par value is credited to "additional paid-in-capital" at the time the rights are exercised.

Choice "a" is correct. The rights were exercised in Year 2. The exercise of stock rights increases additional paid-in capital, but has no effect on "net income."

Front 52

Cobb purchased 10,000 shares of Roe on Feb 12, Yr 1. Cobb received a stock dividend of 2,000 shares March 31, Yr 1, when the carrying amount per share on Roe's books was $35 & the MV per share was $40. Roe paid a cash dividend of $1.50 per share on Sep 15, Yr 1. In Cobb's I/S for year ended Oct 31, Yr 1, what should Cobb report as dividend income?

Back 52

$18,000. Stock dividends are not recorded as income on the books of the recipient. The total number of shares increases in a stock dividend and the subsequent cash dividend is $1.50 on 12,000 shares or $18,000.

Front 53

Beck issued 200,000 shares of common stock when it began operations in Yr 1 & issued an add'l 100,000 shares in Yr 2. Beck also issued preferred stock convertible to 100,000 shares of common stock. In Yr 3, Beck purchased 75,000 shares of its common stock & held it in Treasury. At Dec 31, Yr 3, how many shares of Beck's common stock were outstanding?

Back 53

225,000 shares outstanding at 12/31/Year 3.

Front 54

A property dividend should be recorded in retained earnings at the property's:

a. Book value at date of issuance (payment).

b. Market value at date of declaration.

c. Book value at date of declaration.

d. Market value at date of issuance (payment).

Back 54

Choice "b" is correct. A property dividend should be recorded in retained earnings at the property's market value at date of declaration.

Front 55

Dec 31, Yr 1 & Yr 2, Carr Corp. had outstanding 4,000 shares of $100 par value 6% cumulative preferred stock and 20,000 shares of $10 par value common stock. At December 31, Year 1, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in Year 2 totaled $44,000. Of the $44,000, what amounts were payable on each class of stock?

Back 55

$36,000 preferred stock dividend payable $8,000 common stock dividend payable.

Front 56

Dec 31, Yr 1, Eagle reported $1,750,000 of appropriated RE for the construction of a new office building, completed in Yr 2, at total cost of $1,500,000. Yr 2, Eagle appropriated $1,200,000 of RE for construction of a new plant. Also, $2,000,000 of cash was restricted for the retirement of bonds due Yr 3. In its Yr 2 B/S, Eagle should report what amount of appropriated RE?

Back 56

Rule: When the purpose of the appropriation has been achieved, it should be restored to unappropriated retained earnings.

$1,200,000 appropriated retained earnings at Dec. 31, Year 2 (for the construction of a new plant only).

Front 57

Yr 1, Fogg issued $10 par value common stock for $25/share. No other common stock transactions occurred until Mar 31, Yr 3, when Fogg acquired some issued shares for $20 a share & retired them. Which of the following states an effect of the acquisition & retirement?

a. Additional paid-in capital is decreased.

b. Retained earnings is increased.

c. Year 3 net income is increased.

d. Year 3 net income is decreased.

Back 57

Choice "a" is correct. Additional paid-in capital is decreased upon the acquisition and retirement of shares at a cost ($20) less than initial selling price ($25). Since 1/10 of the shares are assumed retired, 1/10 of common stock at par is retired. The difference between the cost of retirement ($2,000) and par retired ($1,000) is the decrease in additional paid-in capital.

Front 58

On December 1, Line Corp. received a donation of 2,000 shares of its $5 par value common stock from a stockholder. On that date, the stock's market value was $35 per share. The stock was originally issued for $25 per share. By what amount would this donation cause total stockholders' equity to decrease?

Back 58

$0 decrease in total stockholders' equity due to donation of its own stock from a stockholder because there is no cost to the corporation.

Front 59

Quoit issued preferred stock w/ detachable common stock warrants. The issue price exceeded the sum of the warrants' FV & the preferred stock's par value. The preferred stock's FV was not determinable. What amount is assigned to the warrants outstanding?

a. Excess of proceeds over the par value of the preferred stock.

b. The fair value of the warrants.

c. Total proceeds.

d. The proportion of the proceeds that the warrants' fair value bears to the preferred stock's par value.

Back 59

Choice "b" is correct. The fair value of the warrants is credited to paid in capital.

Front 60

In a compensatory stock option plan for which the grant and exercise dates are different, the stock options outstanding account should be reduced at the:

a. Beginning of the service period.

b. Beginning of the vesting period.

c. Date of grant.

d. Exercise date.

Back 60

Choice "d" is correct. Stock options outstanding are reduced at the exercise date.

Front 61

Universe issued 500,000 shares of common stock in the current year. Universe declared a 30% stock dividend. The MV was $50/share, the par value was $10, & the avg. issue price was $30/share. By what amount will Universe decrease stockholders' equity for the dividend?

Back 61

The net effect on Universe's stockholders equity is zero, as the reduction to RE is offset by an equal increase in common stock.

Journal Entry:

DR: Retained earnings (.30 x 500,000 x $10)$ 1,500,000

CR: Common stock ($10 per value)$ 1,500,000

Front 62

Murphy had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy reacquired 30,000 of those shares at a cost of $15/share & recorded the transaction using the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share, & recognized a $50,000 gain on its I/S on May 20. Which of the following is correct?

a. Murphy's NI for current year is overstated.

b. Murphy should have recognized a $50,000 loss on its I/S for the current year.

c. Murphy's NI for current year is understated.

d. Murphy's comprehensive income for the current year is correctly stated.

Back 62

Choice "a" is correct. Net income or retained earnings will never be increased through treasury stock transactions. Murphy Co. incorrectly recognized a gain from the issuance of the treasury stock and as such overstated Murphy's net income for the current period.

Front 63

Porter began its business last year & issued 10,000 shares of common stock at $3/share. Par value of the stock is $1 per share. During January, Porter bought back 500 shares at $6 per share, which were reported as treasury stock. The treasury stock shares were reissued later in the current year at $10/share. Porter used the cost method to account for its equity transactions. What amount should Porter report as paid-in capital related to its treasury stock transactions on its B/S for current year?

Back 63

$2,000. Using the cost method, the treasury stock transactions include the reissuance of the treasury shares at $10 per share ($4 per share to APIC x 500 shares = $2,000). The additional paid-in capital from the original issuance of the stock is not paid-in capital related to the treasury stock and is not included.

Front 64

Baker issued 100,000 shares of common stock in the current year. Oct 1, Baker repurchased 20,000 shares of its common stock for $50 per share. At that date, the stock's par value was $1.00 & avg. issue price was $40.00/share. Baker uses the cost method for treasury stock transactions. Dec 1, Baker reissued the stock for $60/share. What amount should Baker report as treasury stock gain at Dec 31?

Back 64

$0. Corporations are not permitted to report I/S gains & losses from treasury stock transactions. Instead, treasury stock "gains & losses" are reported as direct adjustments to stockholders' equity. Gains are recorded by crediting APIC - Treasury Stock, while losses are recorded by first reducing any existing APIC - Treasury Stock to $0, and then debiting any additional loss to Retained Earnings.

Front 65

During the current year, Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost method to account for treasury stock. What amount should Onal report in its income statement for these transactions?

Back 65

$0. Gains and losses on treasury stock transactions are never recorded on the income statement. Gains are recorded by increasing Additional Paid-in Capital―Treasury Stock. Losses are recorded by first eliminating any balance in Additional Paid-in Capital―Treasury Stock and then decreasing retained earnings.

Front 66

On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the FV of the award?

a. Date of exercise.

b. Date of grant.

c. Date of restriction lapse.

d. Date of vesting.

Back 66

Choice "b" is correct. Per SFAS 123 (ASC 718-20), equity instruments issued for employee services are to be valued at the date of the grant.

Front 67

Division has 20,000 shares of $5 participating 9 % cumulative preferred stock & 100,000 shares of $2 common stock. July 1, the board of Division declared a $30,000 dividend at the time the common stock was selling for $25 per share and the preferred stock was selling for $30. The total dividends paid to each class of stock on the payment date was:

Back 67

Preferred $10,000 Common $20,000

Participating preferred stock splits dividend distributions w/ common shareholders only after the common shareholders have received % percentage dividends equivalent to preferred shareholders. The remaining dividend is shared in relation to relative capitalization.

Front 68

Kuchman issued 40,000 shares of its $8.00 par value common stock for $9 on Jan 1, Yr 1. Kuchman repurchased 1,000 shares at $8 per share April 1, Yr 2, resold 500 shares at $9 per share on July 1, Yr 2, & on Oct 1, Yr 2, resold the final 500 shares at $5 per share. Assuming Kuchman uses the par value method of accounting for its treasury stock, retained earnings at Dec 31. Yr 2 would be reduced by:

Back 68

$500. Using the par value method, the company effectively retires reacquired stock at the time of repurchase and accounts for any gain through APIC--Treasury Stock & any loss through RE. Resale of stock above par results in elimination of the related treasury stock amount & in the recording of APIC. Resale of stock significantly below par results in recording a loss in retained earnings to the extent the loss exceeds the previously recorded APIC--Treasury Stock.

Front 69

Gregory's grants its president 2,000 stock options on Jan 1, Yr 1 that give him rights to purchase shares of the company for $40/share on Dec 31, Yr 2. At the time the options were granted, the FV of the options totaled $20,000. At Dec 31, Yr 1 the company's stock sold for $45/share & at Dec 31, Yr 2 the selling price of the stock was $55/share. On Dec 31, Yr 2, the president resigned from the company & did not elect to exercise the options. In its Yr 2 FSs, Gregory's would recognize compensation expense relative to the options of:

Back 69

$10,000. The company would calculate compensation expense on the grant date and recognize this expense over the service period (matching principle). Compensation expense relative to stock options is recognized regardless of whether the option is exercised.

Total Compensation expense/Years = $20,000/2yrs = $10,000.

Front 70

Jones issued 10,000 shares of $15 par common stock on Feb 1 for $20/share. The company bought back 2,000 shares when the share price fell to $16/share on August 31 & then resold 1,000 shares when the price rebounded to $22/share on Dec 15. Jones accounts for its treasury stock transactions using the cost method. What amount would Jones report as Common Stock in the equity section of its Dec 31 B/S?

Back 70

When the cost method is used to account for treasury stock, common stock is reported on the balance sheet as the total shares issued at par value:

10,000 shares issued x $15/share = $150,000

Front 71

Lem Co., which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem's additional paid-in capital from common stock decrease as a result of the acquisition?

Back 71

$100. Under the par value method, when the shares are (re)acquired by Lem, the treasury stock is recorded at par value ($6/share) & APIC is reduced by the $100 recorded when the shares were originally issued. The difference, in this case between the $10 buy-back price and the $7 initial issuance price, or $3/share, is assigned to retained earnings as a reduction.

Front 72

Meadow approved a stock-option plan that grants the company's top 3 execs options to purchase a maximum of 1,000 shares each of Meadow's $2 par common stock for $19/share. Options were granted on Jan 1 when the FV of the stock was $20/share. Meadow determined that the FV of the compensation is $300,000 & the vesting period is 3 yrs. What amount of compensation expense should Meadow record in the year the options were granted?

Back 72

$100,000. Compensation expense is calculated at the grant date of the option and allocated over the vesting period: $300,000 / 3 years = $100,000 per year.

Front 73

A company whose stock is trading at $10/share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend?

a. Treasury stock is debited for $300.

b. APIC is credited for $2,700.

c. Common stock is debited for $3,000.

d. Retained earnings is debited for $300.

Back 73

Choice "d" is correct. A 30% common stock dividend would be classified as a large stock dividend by GAAP because the stock dividend is more than 20% to 25% of the previously outstanding shares. For a large stock dividend, RE is debited for the par value of the additional shares issued.

Front 74

What type of adjustment do you record for a LARGE stock dividend?

Back 74

When more than 20-25% of the previously issued shares outstanding are distributed, the dividend is treated as a large stock dividend and the retained earnings should be reduced by the PAR VALUE of the stock dividend.

Front 75

What type of adjustment do you record for a SMALL stock dividend?

Back 75

When less than 20-25% of the shares previously outstanding are distributed, the dividend is treated as a small stock dividend and the retained earnings should be decreased by the FAIR MARKET VALUE of the stock dividend.

Front 76

Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $0.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment?

Back 76

Intrinsic value of options based compensation using the following formula:

# of share options × (Market price of the stock on the date of the grant less exercise price of the share option)

Thus, the intrinsic value of the call option at the time of the initial investment would be 100 × ($10.00 − $9.00) = $100.

Front 77

Which of the following financial instruments should be reported on the issuer's books as a liability on the date of issuance?

a. Common stock that is issued at a 5% discount as part of an employee share purchase plan.

b. Common stock that contains an unconditional redemption feature.

c. Preferred stock that is convertible to common stock five years from the issue date.

d. Cumulative preferred stock.

Back 77

Choice "b" is correct. Common stock that contains an unconditional redemption feature should be reported on the issuer's books as a liability on the date of issuance because there is an obligation of a cash outflow in the future that the company has no ability to prevent.