Flashcards in Equity Deck (64)
What is owners equity?
The owners' equity (OE) accounts represent the residual interest in the net assets of an entity that remain after deducting its liabilities.
What are the two main OE categories?
Earned and contributed
What is Par?
the minimum legal issue price for capital stock in most states and appears on the stock certificate.
What happens when a stock has no par value?
The firm may designate a stated value which serves the same function as par value except that it does not appear on the certificate.
The firm may not use a par value at all, in which case the stock is referred to as no par stock.
How is no par stock categorized?
If the stock is no-par stock, then the entire issuance proceeds is credited to the capital stock account and there is no additional paid-in capital account (contributed capital in excess of par).
What is the legal capital?
The legal capital or minimum capital of a corporation is usually the par value of the stock or the stated value of the stock issued
What are the rights for Preferred Stockholders?
Nonvoting, dividend preference, cumulative preferred stock and participating preferred stock, dividends in arrears, liquidation preference
What is an authorized share?
the total number of shares that can be issued
what is the number of stock shares issued?
The number of shares ever issued by the firm but not retired
What is the number of stock shares outstanding?
The number of shares currently held by stockholders
What is the common stock equation?
# Issued shares = # Outstanding shares + # Treasury shares
What information is required for the sale of stock on a subscription basis?
Specifying the share price;
Number of shares;
And the payment dates.
When is stock issued when sold on a subscription basis?
once the full amount is received
What type of account is common stock subscribed?
What is convertible preferred stock?
It allows the preferred shareholder to convert the preferred shares to common shares. The journal entry for issuance of convertible preferred stock does not allocate any of the proceeds to the conversion feature
What happens when a company calls and redeems preferred stock?
Any debit difference is recorded in retained earnings;
Any credit difference is recorded in a contributed capital account.
Any dividends in arrears must be paid when the shares are acquired (retained earnings is debited).
No gain or loss is recognized for these events because the transactions are between the firm and its owners.
What happens when preferred stock is converted?
When convertible preferred stock is converted into common stock, the preferred stock accounts are transferred to the common stock accounts. Again, there is no gain or loss.
What methods are available to account for treasury stock?
Cost Method which records the treasury stock account at the cost of shares reacquired;
Par Value Method which records the treasury stock account at the par value of shares reacquired.
- Owners' equity is reduced by the same amount, regardless of which method is used, but the balances of certain OE accounts are different under the two methods.
Explain the cost method for accounting for treasury stock.
At purchase, treasury stock is debited for cost. The contributed capital in excess of par account that was credited when the stock was issued is not affected. Reissuances credit the treasury stock account at cost, and the difference between the purchase price and reissue price is recorded in contributed capital from treasury stock.
Explain the par method for accounting for treasury stock.
At purchase, the treasury stock account is debited for par value, and the contributed capital in excess of par account that was credited when the stock was issued is debited for the original amount recorded. Reissuances are treated as a regular issuance of stock except that treasury stock is credited, rather than common stock
When treasury shares are purchased at a cost greater than par but less than original issue price, what is the relative impact of the cost and the par value methods on additional paid-in capital and retained earnings?
a. Cost Method -- Under the cost method, when treasury stock is purchased for an amount less than original price, the treasury stock account is debited. This is a contra OE account. Additional paid-in capital and retained earnings are unaffected.
b. Par Value Method -- Under the par value method, the treasury stock account is debited for par value, and additional paid-in capital is debited for the amount in proportion to the original issue price. Because less was paid for the treasury stock than was received on original issuance, retained earnings is unaffected. Rather, additional paid-in capital from treasury stock is credited for the difference, but not by as much as the debit to the original issuance additional paid-in capital account.
What happens to increase the contributed capital from treasury stock account?
Cost method = Reissue at a price exceeding cost
Par Value = Purchase at a price less than original issue price
What happens to decrease the contributed capital from treasury stock account?
cost method - reissue at a price less than cost
par value method - purchase at a price exceeding original issue price
What happens when a firm retires shares?
Retired shares are placed back into the authorized but unissued category.
If the purchase price is less than the original issue price, then contributed capital from stock retirement is credited.
If the purchase price is greater than the original issue price, then contributed capital from stock retirement is debited until exhausted, and retained earnings is debited for the remainder, if any.
When is a liability recorded for dividends?
A liability is recognized for these liabilities on the date of declaration
What is a declaration date for dividends?
declaration date is the date the board of directors formally declares the dividend. This is the most important date in terms of the effect on the firm's resources and therefore its balance sheet. At this date, the firm recognizes a liability and a reduction in retained earnings
What is the date of record for dividends?
the date of record is simply a cut-off date. The shareholders of record on this date will be the recipients of the dividend payments
What is the payment date for dividends?
the payment date is the date the dividends are actually distributed to the shareholders.
What are dividends in arrears?
Unpaid dividends for a particular year on cumulative preferred stock. Dividends are not required to be paid but are said to accumulate if unpaid