Equity Flashcards Preview

Wiley FAR > Equity > Flashcards

Flashcards in Equity Deck (36):

How is the number of shares in the Treasury determined?

The number of shares purchased by the issuing firm and not yet reissued.


List the main types of ownerships in business organizations.

  1. Sole proprietorship;
  2. Partnership;
  3. Corporation.


List the two main Owners' Equity categories.

  1. Earned;
  2. Contributed.


List the types of preferred stock rights.

  1. Nonvoting;
  2. Dividend preferences;
  3. Liquidation preferences.


Define "authorized shares."

The total number of shares that may be issued.


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.


Define "legal capital."

The par value of the stock or the stated value of the stock issued.


What is the primary measurement basis for contributed capital?

The historical value of direct investments made in the firm by investors.


How is the number of shares outstanding determined?

The number of shares currently held by stockholders.


What purpose does legal capital serve?

  1. Establishes minimum investment;
  2. Provides protection for creditors (dividends may not be paid from legal capital).


What is the number of common shares issued?

The number of shares ever issued by the firm but not retired is:

# of outstanding shares + # treasury shares


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.


List the types of common stock rights.

  1. Voting;
  2. Dividend;
  3. Preemptive.


How do you calculate 

Total # of Issued Shares?

# of shares outstanding

+ Treasury shares

[x 2 for Stock Split (if applicable)]

Total # of Shares Issued


What is the correlation between

the Total # of shares issued 

and the total # of outstanding shares?

The number of issued shares is always

> or =

the number of outstanding shares if the firm has treasury stock.


How do you calculate # of shares outstanding?

(# of shares issued — shares held)

+ Internal stock distribution 

+ New issuance or Resale of stock

x 2 for Stock Split

= # of Shares Outstanding



How do you calculate 

Net Income?

Assets =

+ Liabilities

+ Owner's Equity (Net of Dividends) 

+ RE (Net Income)

Net Income is a plug figure in this equation.



What are stock splits?

Stock splits are applied to all outstanding and treasury shares because a split reduces the par value of each share of issued stock, and increases the number of shares in inverse proportion.


What does a Stock Dividend do to

the # of common shares outstanding?

It increases the # of shares outstanding


What is the journal entry for 

Stock Issuance?


      Common Stock



How are Stock Issue costs treated?

  • Reduction of proceeds from issuance
  • Both cash and PIC are reduced by the issue costs
  • Annual costs of maintaining the stock records are expensed as incurred.

A image thumb

How are true No Par stocks handled?

  1. The entire proceeds from issuance of stock are credited to the common stock account;
  2. No contributed capital account is recorded.


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).


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.


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.


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 basis of allocation for stock basket sale proceeds?

Fair value of individual stocks in the basket.


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


What are the requirements for stock sold on subscription? 

  1. Specify the share price
  2. # of shares
  3. Payment dates



What is a Basket Sale?

  1. A basket sale occurs when two or more securities are bundled together and sold in a single transaction.
  2. The total amount received must be allocated to the individual securities sold.
  3. Allocating methods  --  For example, common stock and preferred stock might be bundled together and sold in a single transaction. In allocating the proceeds to the common stock sold and the preferred stock sold, the company will use the proportional method or the incremental method.


What are the two allocation Methods of a 

Basket Sale?

  • Proportional method  --  When both securities have established market values, the allocation will be based on their respective fair market values.
  • Incremental method  --  When only one security has an established fair market value, that security is assigned proceeds equal to the known fair market value. Any incremental proceeds are allocated to the remaining security sold.


What is the JE for Issuance of Stock for

Nonmonetary Consideration?


      Common Stock