Flashcards in EQUITY Deck (71):
List the requirements for a quasi-reorganization.
1. Shareholder and creditor approval; 2. Retained earnings balance must be zero immediately afterwards; 3. No contributed capital account can have a negative balance afterwards; 4. Assets must be written down to market value; 5. Retained earnings must be dated for 3-10 years afterwards.
List the accounting steps in a quasi-reorganization.
1. Write assets to market value, further reducing retained earnings; 2. Reduce contributed capital to absorb earnings deficit; 3. If needed, change par value or number of shares of common stock to absorb remaining deficit.
Define "book value per share".
Common stockholders' equity per share of outstanding common stock at the end of the period.
Define "common stockholders' equity".
Total Owner's Equity after preferred dividend claims are removed.
What is the effect of a quasi-reorganization on total owners' equity?
Decrease in total owners' equity.
What is the effect of a quasi-reorganization on retained earnings?
Increase in retained earnings.
What is the effect on book value per share of a transaction that increases earning?
Increase in book value per share.
What is the effect of dividends in arrears on book value per share?
Decrease on book value per share.
Is there any additional participation to preferred stock if total dividends are not sufficient to provide common stock with dividends based on the fully participating preferred percentage?
There is no additional participation.
List the order of dividend payment if nonparticipating preferred stock is outstanding.
1. Preferred: dividends in arrears (if cumulative); 2. Preferred: current period dividend; 3. Common: remainder.
List the order of payment for partially participating stocks.
1. Dividends in arrears; 2. Current p/s dividend; 3. Preferred stock receives up to an additional percentage.
List the order of dividend payment when partially participating preferred stock is outstanding.
1. Preferred: Any dividends in arrears; 2. Preferred: Current period dividends; 3. Common: Preferred percentage x total par outstanding; 4. Preferred: Additional percentage; 5. Common: Remainder.
What dividends are paid before any other dividends are paid?
Preferred stock dividends in arrears.
Is there any additional participation to preferred stock if total dividends are not sufficient to provide the partially participating preferred percentage to both common stock and preferred stock?
The remainder of dividends after the basic preferred percentage is provided to common, is multiplied by the ratio: total preferred par value to total par value of both classes of stock.
List the two main Owners' Equity categories.
1. Earned; 2. Contributed.
Define "dividends in arrears."
Unpaid dividends for a particular year on cumulative preferred stock.
What does Owner's Equity represent.
Represents the residual interest in the net assets of an entity that remains after deducting its liabilities.
List the major Owners' Equity accounts for a corporation
1. Preferred stock; 2. Common stock; 3. Additional paid-in capital, preferred; 4. Additional paid-in capital, common; 5. Retained earnings; 6. Treasury stock.
Define "authorized shares."
The total number of shares that may be issued.
List the types of common stock rights.
1. Voting; 2. Dividend; 3. Preemptive.
What is the number of common shares issued?
The number of shares ever issued by the firm but not retired = # of outstanding shares + # treasury shares.
How is the number of shares in the Treasury determined?
The number of shares purchased by the issuing firm and not yet reissued.
What is the primary measurement basis for contributed capital?
The historical value of direct investments made in the firm by investors.
Define "legal capital."
The par value of the stock or the stated value of the stock issued.
List the main types of ownerships in business organizations.
1. Sole proprietorship; 2. Partnership; 3. Corporation.
What purpose does legal capital serve?
1. Establishes minimum investment; 2. Provides protection for creditors (dividends may not be paid from legal capital).
List the types of preferred stock rights.
1. Nonvoting; 2. Dividend preferences; 3. Liquidation preferences.
How is the number of shares outstanding determined?
The number of shares currently held by stockholders.
Under what condition is retained earnings debited on conversion of preferred stock to common stock?
Total recorded value of preferred is less than par value of common on conversion.
What is the accounting treatment for the conversion of preferred stock?
1. Preferred stock accounts are transferred to common stock accounts; 2. If total preferred stock value is less than common stock par value, debit retained earnings.
What is the accounting treatment for the retirement of preferred stock?
1. All related Owner's Equity accounts are removed; 2. Debit differences go to retained earnings; 3. Credit differences go to contributed capital.
For what amount is Preferred Stock Additional Paid in Capital debited when called or redeemed?
Amount recorded from original issuance.
What is the date used to establish market price for small stock dividends?
How is a small stock dividend accounted for?
Capitalize retained earnings at market price.
What is a small stock dividend?
Percent of dividend is less than 20-25%.
Define "stock dividend".
A distribution by a firm of its stock to its shareholders in proportion to their existing holdings.
How is a large stock dividend accounted for?
Capitalize retained earnings at par value.
How is a stock split accounted for?
No accounting entry needed.
What is a large stock dividend?
Percent of dividend is greater than 20-25%.
What is the basis of allocation for stock basket sale proceeds?
Fair value of individual stocks in the basket.
Describe the journal entry to record initial payment of stocks sold on subscriptions.
DR: Cash DR: Subscription Receivable CR: Common Stock Subscriptions CR: Additional Paid in Capital (contract price-par).
What value is added to the contributed capital account when a no par stock has a stated value?
Contributed capital in excess of stated value (common).
What is the classification of the stock subscriptions receivable account?
Contra owners' equity (contra common stock subscribed).
List the requirements for stock sold on a subscription basis.
Contract stating: 1. Specifying share price; 2. Number of shares; 3. Payment dates.
Define "par value".
The minimum legal issue price for capital stock in most states and appears on the stock certificate.
Describe the journal entry for subsequent payments on stock sold on subscriptions.
DR: Cash CR: Subscriptions Receivable
How is stock issued for nonmonetary consideration valued?
Fair value of stock or consideration, whichever is more reliable.
List the alternatives to par value when a stock does not have such value.
1. Stated Value; 2. No Par Value.
Define "restrictions on retained earnings".
An external constraint placed on a certain portion of retained earnings by an external party.
Describe the accounting entry to record stock rights issued to outside parties for service at issuance.
Record an expense and an owners' equity account equal to the difference between the market price and exercise price, times the number of shares under option.
Define "retained earnings appropriation".
Management's formal communication that a portion of retained earnings has been declared off-limits for dividends.
How should restrictions and appropriations on retained earnings be reported?
Disclosed in footnotes.
What is often used to convey preemptive rights regarding stocks?
What is the effect of retained earnings appropriations on assets?
No effect on assets.
List the reasons for appropriating retained earnings.
1. Financial planning; 2. Legal requirement; 3. Contractual obligation.
Describe the accounting entry to record stock rights issued to outside parties for services at exercise of rights.
Record the stock issuance at the exercise price and remove the OE account credited at issuance of the rights.
Under the cost method of accounting for treasury stock, how is treasury stock presented on the balance sheet?
Treasury stock is subtracted from very bottom of Owners' Equity section of the balance sheet.
What is the relationship of total owners' equity for cost and par method?
They are equal, although certain components of owners' equity would show different balances.
Describe the cost method for accounting for treasury stock.
1. Purchases are debited at cost; 2. Reissuances debit cash, credit treasury stock at cost, and contributed capital is plugged.
What is the effect of treasury stock transactions on earnings?
There is no effect.
How is treasury stock presented on the balance sheet under the par value method?
Reported as a subtraction from the common stock account in the balance sheet.
When is paid in capital from treasury stock decreased under the cost method?
When treasury stock is reissued for less than cost.
What is the effect on the treasury stock account under the cost method when donated stock is received?
Effect on the treasury stock account is an increase for the fair value of the stock received.
What is the effect on the treasury stock account under the par method when donated stock is received?
Effect on the treasury stock account is an increase for the par value of the stock received.
List the methods for accounting for treasury stock.
1. Cost Method; 2. Par Value Method.
What is the effect on owners' equity when treasury stock is purchased and subsequently reissued at a price in excess of cost (using the cost method)?
Increase owners' equity by the difference in purchase cost and reissuance price.
How can retained earnings be affected by treasury stock transactions?
Decreased (as a last resort) but never increased.
Describe the accounting treatment of purchases of stock under the par value method.
1. Treasury stock is debited at par; 2. Additional Paid in Capital (APIC) is debited by amount credited when stock was originally issued; 3. Cash is credited.
When is paid in capital from treasury stock increased under the par method?
When treasury stock is purchased for less than original issue price.
Describe the accounting treatment of reissuance of stock under the par value method.
1. Treasury stock is credited at par; 2. Remainder of entry is treated like stock issuance.