F1 Module 4

Question 1

stock issued above par entry

Answer 1

Dr. Cash (sale price)
Cr. C/S (par value)
Cr. APIC (difference)

Question 2

stock issued at par entry

Answer 2

Dr. Cash (par value)
Cr. C/S (par value)

Question 3

stock issued below par entry

Answer 3

Dr. Cash (sale price)
Dr. APIC (difference)
Cr. C/S (par value)

*Note: debit of APIC represents discount on stock, or contingent liability to original owners

Question 4

stock subscriptions entry

Answer 4

-a contractual agreement to sell a specified number of shares at agreed price on credit
-upon full payment of subscription, a stock certificate is issued to evidence ownership

Question 5

sale of subscriptions entry

Answer 5

Dr. Subscription receivable
Cr. C/S subscribed
Cr. APIC

*subscriptions not paid for at year end treated as contra-equity and will offset amount of par and APIC

*subscriptions paid for after year-end but before F/S issued, subscriptions receivable debited as asset and increase APIC

Question 6

collect subscriptions entry

Answer 6

Dr. Cash
Cr. Subscription receivable

Question 7

issuance of stock previously subscribed entry

Answer 7

Dr. C/S subscribed
Cr. C/S (issued)

Question 8

default/forfeiture of subscription

Answer 8

-if all or part of subscription not collected:
-reverse applicable proportion of original entry and:
1) issue stock in proportion to amt paid
2) refund partial payment
OR
3) retain partial payment as liquidated damages for breach of contract by credit to APIC

Question 9

stock rights

Answer 9

-gives an existing shareholder the ability to buy additional shares
-carries a price below stock market’s price on date rights are granted
-requires a memo entry only
-if rights are redeemed by company, will decrease stockholder’s equity by amt of redeemed price

Question 10

exercise of stock rights entry

Answer 10

Dr. Cash (amt received)
Cr. C/S (par value)
Cr. APIC (residual)

Question 11

other stock valuation issues

Answer 11

-stock issued for outside services recorded at FV of stock
-trading price of stock is best evidence of FV
-stock issued in basket sale with other securities are allocated a portion of sales proceeds based on relative FMV of different securities

Question 12

date of declaration
date of record
date of payment

Answer 12

DD- date BOD approves dividend by Dr. RE CR. dividend payable
DR- BOD names shareholders to receive dividends
DP- dividend is actually paid

Question 13

cash dividends

Answer 13

-cash distributed to shareholders from C/S or P/S
-paid from retained earnings
-dividends paid only on authorized, issued and outstanding shares
-NOT paid/declared on T/S

Question 14

property (in-kind) dividends

Answer 14

-distribute noncash items to shareholders
-ex. inventory, investment securities etc.
-they are nonreciprocal (no need to exchange)
-on date of declaration, distribute property restated at FV and any gain or loss recognized in income
-same entry as declared dividend

Question 15

scrip dividends

Answer 15

-special form of notes payable where the cop commits to paying dividend at later date
-can be used when there is a cash shortage
-date declared: Dr. RE Cr. Notes payable
-they can bear interest from date declared to date paid

Question 16

liquidated dividends

Answer 16

-occur when dividends to shareholders exceed retained earnings
-DR. APIC and then Dr. C/S or P/S because not enough RE to pay it
-liquidating dividends reduce paid-in capital

Question 17

stock dividends

Answer 17

-distribute additional shares of stock to shareholders
-treatment depends on size (percentage) of dividend in proportion to outstanding shares before dividend

Question 18

small stock dividend

Answer 18

-<20 to 25% of shares previously outstanding
-treated as small because no impact on market price of stock
-FMV of SD transferred from RE to capital stock and APIC when declared
-no impact to equity as APIC substitutes RE

Question 19

small stock dividend entry

Answer 19

Dr. RE (# shares * FV)
Cr. C/S (# shares * par)
Cr. APIC (residual)

Question 20

large stock dividend

Answer 20

->20 to 25% of previously outstanding shares
-because its expected to reduce market price of stock
-par value of stock transferred from RE to capital stock to meet legal req.
-amt transferred is # shares * par value of stock
-if state law no require capitalization of RE for stock dividends, record stock distribution by changing number of shares outstanding and par value (similar to stock split)

Question 21

large stock dividend entries (declaration and distribution)

Answer 21

1) Dr. RE (% * par * number of shares outstanding)
Cr. C/S distributable

2) Dr. C/S distributable (same amt as 1))
Cr. Capital stock

Question 22

stock dividends on T/S

Answer 22

-these stock dividends are distributed from T/S when:
1) maintain ratio of T/S to shares outstanding to meet stock option or other contractual commitments
2) state law requires that T/S be protected from dilution

Question 23

stock splits

Answer 23

-occur when corp issues additional shares of its own stock to current shareholders (no charge) and reduces par proportionately
-no change to total book value of shares outstanding
-memo entry is merely a formality

Question 24

reverse stock splits

Answer 24

-reduces number of shares outstanding and increasing the par value proportionately
-one way to reduce amount of outstanding shares is to recall outstanding stock certificates and issue new certificates

Question 25

stock splits on T/S

Answer 25

-stock splits generally not applied to T/S because T/S not considered outstanding
-Exceptions to rule when:
1) ratio of T/S to outstanding shares to meet stock option or other contractual commitments
2) state law requires T/S be protected from dilution