Equity Flashcards
Posy Corp. acquired treasury shares at an amount greater than their par value, but less than their original issue price. Compared to the cost method of accounting for treasury stock, the par value method reports a greater amount for:
Assume:
Par value of shares = $1,000
Original issue price = $1,200 ($1,000 par, $200 additional
paid-in capital)
Reacquisition price = $1,100
(1) Reacquisition using cost method:
Dr. Cr. Treasury shares $1,100
Cash $1,100 (2) Reacquisition using par value method:
Dr. Cr. Treasury shares $1,000 Additional paid-in capital 100 Cash $1,100 The entry under the par value method reduces additional paid-in capital (i.e., the amount is not “greater”), while retained earnings are not affected
In 20X1, Seda Corp. acquired 6,000 shares of its $1 par value common stock at $36 per share. During 20X2, Seda issued 3,000 of these shares at $50 per share. Seda uses the cost method to account for its treasury stock transactions. What accounts and amounts should Seda credit in 20X2 to record the issuance of the 3,000 shares?
The cost method of accounting for treasury stock treats the acquisition and reissue of the shares as two parts of one transaction. Thus, Seda Corp. would make the following entries:
Dr. Cr. Acquisition: Treasury stock (at cost) $216,000
(6,000 sh x $36/sh)
Cash $216,000
Reissue: Cash (3,000 sh x $50/sh) $150,000
Treasury stock (at cost)
(3,000 sh x $36/sh) $108,000
Additional paid-in
capital
(3,000 sh x ($50/sh - $36/sh)) $42,000
What are issued shares
Issued shares are the number of shares of authorized capital stock that have initially been released to individuals or entities outside the issuing corporation. . Treasury stock is considered as “issued” since these shares were originally released to outsiders. The subsequent ownership by the issuing corporation does not change the status of these shares as “issued.”
Note issued shares is total shares authorized, don’t forget to include stock split as well.
What are outstanding shares
Outstanding refers to the number of shares of capital stock that have been issued and are currently owned by stockholders. Treasury stock is not considered to be “outstanding” since it is owned by the issuing corporation, not by outside shareholders.
What is Book Value per share
Book value per share is the book value of the corporation (available to common, i.e., total stockholders’ equity less preferred equity and dividends in arrears) divided by the number of shares of common stock outstanding (i.e., treasury shares are not included).
What method do you use when their is a lump sum of Preferred Stock and Common Stock issued.
Use the relative fair value method for valuing proceeds of lump sum issuance of C/S and P/S
Cross Corp. has outstanding 2,000 shares of 11% preferred stock, $50 par. On August 8, 20X1, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross’ additional paid-in capital from preferred stock totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts as follows:
What is JE for Redemption
The entry to record the redemption and retirement of the preferred stock:
Dr. Cr. 11% Preferred stock (.25 x 2,000 x $50) 25,000 Additional paid-in capital from preferred stock ($25,000 - $22,500) 2,500 Cash 22,500
NOTE: Retained earnings would be debited if the balance in additional paid-in capital from preferred stock was less than the amount by which the cash paid to redeem the stock exceeded the par value.
During 20X1, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad’s $25 par common stock at the option of the preferred shareholder. On December 31, 20X2, 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 additional paid-in capital common stock as a result of the conversion?
What is JE for the conversion?
JE for issuance of convertible P/S
DR Cash 550,000
CR P/S 500,000
CR APIC-P/S 50,000
JE for conversion:
DR P/S 500,000
DR APIC-P/S 50,000
CR C/S 375,000
CR APIC-C/S 175,000
What is a quasi-reorganization?
A quasi-reorganization is a modification of the capital structure of a corporation to eliminate a retained earnings deficit without the need for formal bankruptcy proceedings. It basically involves three steps:
- Any overvalued assets (or understated liabilities) are adjusted against retained earnings.
- The debit balance in retained earnings is eliminated against additional paid-in capital and/or by reducing the par or stated value of the stock with a corresponding increase to retained earnings.
- If additional paid-in capital is insufficient to absorb the deficit, the par value of capital stock is reduced, with a corresponding increase in APIC (to avoid a debit balance in APIC).
What is JE for stock subscription?
Journal entry to record subscription for no par common stock with stated value:
Dr. Cr. Stock subscriptions receivable XXX Common stock subscribed (for shares subscribed x stated value per share) XXX Additional paid-in capital
Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31, 20X1, Cyan’s retained earnings were $300,000. In March 20X2, Cyan reacquired 5,000 shares of its common stock at $20 per share. In June 20X2, Cyan sold 1,000 of these shares to its corporate officers for $25 per share. Cyan uses the cost method to record treasury stock. Net income for the year ending December 31, 20X2, was $60,000. On December 31, 20X2, what amount should Cyan report as retained earnings and what is JE for C/S from start to finish?
JE to record issuance:
DR Cash 200,000
Cr C/S 100,000
CR APIC C/S 100,000
JE to record T/S
DR T/S 100,000
CR Cash 100,000
JE to record re issuance
DR Cash 25,000
CR T/S 20,000
CR APIC 5,000
Note: The re-issuance of the 5,000 shares of treasury stock at $5 more per share than acquisition cost resulted in a credit to additional paid-in capital. Retained earnings were not affected.
On December 31, 20X1 and 20X2, 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. On December 31, 20X1, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in 20X2 totaled $44,000. Of the $44,000, what amounts were payable on each class of stock?
Preferred stock dividends for each year must be paid before common stock dividends may be paid. Cumulative preferred stock dividends in arrears must be caught up as well, prior to paying any dividends to common stock for the year.
Dividends in arrears on preferred stock $12,000
Preferred stock dividend requirement
for 20X1 (4,000 shares x $100 x 6%) 24,000
——-
Dividends allocable to preferred shares $36,000
=======
Dividends allocable to common shares
($44,000 - $36,000) $ 8,000
NOTE: Dividends in arrears and current dividends on cumulative preferred stock must be paid before any dividend can be paid to common. Since the preferred stock is not participating, the total amount remaining after the current and in arrears amount is paid to preferred goes to common.
On incorporation, Dee, Inc., issued common stock at a price in excess of its par value. No other stock transactions occurred, except treasury stock was acquired for an amount exceeding this issue price. If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following?
A.
Net common stock: No effect; Additional paid-in capital: Decrease; Retained earnings: No effect
B.
Net common stock: Decrease; Additional paid-in capital: Decrease; Retained earnings: Decrease
C.
Net common stock: Decrease; Additional paid-in capital: No effect; Retained earnings: Decrease
D.
Net common stock: No effect; Additional paid-in capital: Decrease; Retained earnings: Decrease
JE for PAR Value method at issuance:
DR CASH 100
CR C/S 1
CR APIC C/S 99
JE for PAR Value method at reaquisition:
DR T/S 1
DR APIC 99
DR R/E 1
Cr CASH 101
Answer: (B)
Note:T/S under PAR VALUE METHOD is CONTRA C/S, Whereas T/S under Cost method is contra equity
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?
Original issuance under PAR JE
DR CASH 700
CR C/S 600
CR APIC 100
Reacquire stock under PAR Value DR T/S 600 DR APIC 100 DR R/E 300 Cr Cash 1,000
What is difference between large stock dividend and small stock dividend?
Large stock dividend is >30%, uses par value see JE:
DR R/E (@PAR)
CR C/S (@PAR)
Small stock dividend is
