Chapter 13: Equity

Question 1

Does a declaration of a stock split affect retained earnings?

Answer 1

No. No journal entry is recorded for a stock split.

Question 2

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

Answer 2

Fair value at the date of declaration.

Question 3

What are the different classes of equity?

Answer 3

Capital stock, additional paid-in capital, retained earnings, and accumulated other comprehensive income

Question 4

Are common shareholders entitled to dividends?

Answer 4

No.

Question 5

Under the cost method for Treasury Stock, when reissue price is greater than cost, where is the excess reported?

Answer 5

The excess is credited to paid-in capital from treasury stock transactions.
(DB) Cash
(CR) Treasury Stock
(CR) PiC from treasury stock

Question 6

Under the cost method for Treasury Stock, when reissue price is less than cost, where is the excess reported?

Answer 6

The excess is debited to Retained Earnings.
(DB) Cash
(DB) Retained earnings
(CR) Treasury Stock

Question 7

What will impair the firm’s ability to pay dividends in the future between a stock split and stock dividend?

Answer 7

A stock dividend will impair the firm’s ability to pay dividends while both will not decrease SE.

Question 8

What is the entry for issuance of treasury stock under the par-value method?

Answer 8

(DB) Cash
(CR) Treasury stock
(CR) PiC from treasury stock transactions

Question 9

What’s the entry for the treasury stock purchase using the par-value method when the TS is acquired for above issue price?

Answer 9

Under the par-value method, the acquisition of treasury stock is accounted for by reducing additional paid-in capital by the amount recorded when the shares were originally issued.

(DB) Treasury Stock [shares x par value]
(DB) Additional paid-in capital [shares x original amount at issue date]
(DB) Retained Earnings [difference]
(CR) Cash [for amount purchased at]

Question 10

What is a stock warrant?

Answer 10

A right to purchase share at a specified price within a specified period.

Question 11

What is the journal entry for dividend declaration and subsequent payment?

Answer 11

(DB) Retained Earnings [shares outstanding x $]
(CR) Dividend payable
(DB) Dividend payable
(CR) Cash

Question 12

Is a gain or loss recorded during a treasury stock retirement?

Answer 12

No gain or loss is reported on transactions involving entities own stock.

Question 13

When are common shareholders allowed to receive a dividend?

Answer 13

Once all preferred dividends in arrears have been paid.

Question 14

What are dividends in arrears?

Answer 14

Preferred dividends that were not declared in prior years.

Question 15

When does a stock dividend become a stock split?

Answer 15

When there is an issuance of more than 20% to 25% of the previously outstanding common shares (25% for public entities)

Question 16

When is the par value of stocks reduced? With a stock split or a stock dividend?

Answer 16

A stock split.

Question 17

What is the JE for a stock dividend?

Answer 17

(DB) Retained earnings [(shares x %) x market price]
(CR) Common stock dividend distributable [par value]
(CR) Additional paid-in capital – common [difference]

Question 18

How are share-based payments initially measured?

Answer 18

At the grant-date fair value of the equity instruments that an entity is obligated to issue

Question 19

What is the grant-date?

Answer 19

A date at which a mutual understanding of the key terms and conditions if the award have been reached

Question 20

What is the JE for the recognition of a share-based payment during the requisite service period?

Answer 20

(DB) Compensation expense
(CR) Paid-in capital – equity award

Question 21

What is the JE when the shares are issued for a share-based payment?

Answer 21

(DB) Cash
(DB) Paid-in capital – equity award
(CR) Common stock
(CR) Paid-in capital in excess of par

Question 22

What is the JE when a share-based payment is forfeited or it expires?

Answer 22

(DB) Paid-in capital – equity award
(DB) Paid-in capital – forfeitures

Question 23

What is the vesting period?

Answer 23

The requisite service period is the period during which employees must perform services.

Question 24

What happens to retained earnings when a small stock dividend is declared (less than 20% to 25% of the previously outstanding common shares)?

Answer 24

Retained earnings is debited for the fair value of the stock.

Question 25

How is RE effected when a cash dividend is declared?

Answer 25

It is decreased on date of declaration