FAR 27 - Equity 1 - Shareholder Rights/Stock Issuance/Preferred/Treasury Stock Flashcards Preview

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Flashcards in FAR 27 - Equity 1 - Shareholder Rights/Stock Issuance/Preferred/Treasury Stock Deck (44):
1

Of the 125,000 shares of common stock issued by Vey Corp., 25,000 shares were held as treasury stock at December 31, 2004. During 2005, transactions involving Vey's common stock were as follows:

* January 1 through October 31 - 13,000 treasury shares were distributed to officers as part of a stock compensation plan.
* November 1 - A 3-for-1 stock split took effect.
* December 1 - Vey purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not retired.

At December 31, 2005, how many shares of Vey's common stock were issued and outstanding?
Shares Issued
Shares Outstanding

Shares Issued = 375,000
Shares Outstanding = 334,000
Issued shares include outstanding shares and treasury shares. Treasury shares are issued but not outstanding. 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.

Assume the stock has a par value of $3 before the split. After the 3-for-1 split in this question, the par value is $1, but the number of shares is tripled. Treasury shares must be adjusted for splits because treasury shares typically are reissued. No shares were retired.

Therefore, the number of issued shares at the end of the year is three times the number at the beginning of the year: 125,000(3) = 375,000 shares issued at December 31, 2005.

Number of shares outstanding at December 31, 2005 = (100,000 + 13,000)3 - 5,000 = 334,000.

Only 100,000 shares were outstanding at the beginning of the year because the 125,000 issued shares includes the 25,000 in the treasury. The split took effect after 13,000 of the 25,000 treasury shares at the beginning of the year were issued. The 5,000 treasury shares purchased at December 1 already reflect the split and are not adjusted further.

2

Jones Co. had 50,000 shares of $5 par value common stock outstanding at January 1. On August 1, Jones declared a 5% stock dividend followed by a two-for-one stock split on September 1. What amount should Jones report as common shares outstanding at December 31?

$105,000
A 5% stock dividend increases outstanding shares by 5%, and a 2-for-1 split doubles outstanding shares. The number of outstanding shares at year-end therefore is 105,000 = 50,000(1.05)(2). Each subsequent dividend or split compounds the previous change.

3

Kamy Corp. is in liquidation under Chapter 7 of the Federal Bankruptcy Code. The bankruptcy trustee has established a new set of books for the bankruptcy estate. After assuming custody of the estate, the trustee discovered an unrecorded invoice of $1,000 for machinery repairs performed before the bankruptcy filing.
In addition, a truck with a carrying amount of $20,000 was sold for $12,000 cash. This truck was bought and paid for in the year before the bankruptcy.

What amount should be debited to estate equity as a result of these transactions?

$9,000
The debit to estate equity is the additional expense and loss that had not been previously recorded.

This amount is $9,000 ($1,000 repair cost + $8,000 loss on the truck). The $8,000 loss is the difference between the $20,000 carrying amount and the $12,000 proceeds.

4

Which of the following errors could result in an overstatement of both current assets and stockholders' equity?
A. An understatement of accrued sales expenses.
B. Noncurrent note receivable principal is misclassified as a current asset.
C. Annual depreciation on manufacturing machinery is understated.
D. Holiday pay expense for administrative employees is misclassified as manufacturing overhead.

D. This error reduces expenses because part of the holiday pay will be held back in ending inventory, which is a current asset. Thus, net income, and therefore OE are overstated, as well as ending inventory, which is a current asset.

5

T/F: The two main categories of owners' equity are earned capital and contributed capital.

True

6

T/F: A firm's legal capital is, at minimum, the number of issued shares times par value per share.

True

7

When collectability is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as
A. No par common stock.
B. Additional paid-in capital when the subscription is recorded
C. Additional paid-in capital when the subscription is collected
D. Additional paid-in capital when the common stock is issued

B. This is one of the few examples of a recognized executory contract. Given that collectability is not an issue, the recording of a stock subscription is essentially the same as the entry for issuing stock for cash, except that a receivable stands in place of cash, and common stock subscribed stands in place of common stock.

Common stock subscribed is an owners' equity account that is replaced by common stock upon issuance. Any additional paid-in capital is recorded when the contract is signed or recorded, just as if cash were received at that point.

8

On March 1, 2005, Rya Corp. issued 1,000 shares of its $20 par value common stock and 2,000 shares of its $20 par value convertible preferred stock for a total of $80,000.
At this date, Rya's common stock was selling for $36 per share, and the convertible preferred stock was selling for $27 per share.

What amount of the proceeds should be allocated to Rya's convertible preferred stock?

$48,000
The total proceeds are allocated to the two securities based on relative market values.

Market value of common: 1,000($36) = $36,000
Market value of preferred: 2,000($27) = 54,000
Total market value $90,000

Allocation of proceeds to preferred = ($54,000/$90,000)$80,000 = $48,000

9

An individual contracts for the purchase of 200 shares of $10 par common stock at a subscription price of $15. After making payments totaling $1,200, the subscriber defaults. Shares are issued in proportion to the amount of cash paid by the investor. The summary journal entry to record the net effect of these two transactions includes:
A. Debit share purchase contract receivable $1,800.
B. Credit common stock $2,000
C. Credit paid in capital in excess of par on common, $400
D. Credit share purchase contract receivable $600

C. The net effect of the transactions is to receive cash of $1,200 and issue stock for that amount at $15/share; $1,200/$15 = 80 shares fully paid. Required net changes in balances are (1) common stock, 80($10) = $800, (2) PIC-CS, 80($15 - $10) = $400, (3) cash $1,200. The share purchase contract receivable account is opened and then closed for the same amount. There is no ending balance in that account.

10

On July 1, 2005, Cove Corp., a closely-held corporation, issued 6% bonds with a maturity value of $60,000, together with 1,000 shares of its $5 par value common stock, for a combined cash amount of $110,000.

The market value of Cove's stock cannot be ascertained. If the bonds were issued separately, they would have sold for $40,000 on an 8% yield to maturity basis.

What amount should Cove report for additional paid-in capital on the issuance of the stock?

$65,000
The amount of the proceeds allocated to the stock is $70,000 ($110,000 - $40,000). When only one of the two securities has a known market value, that value is allocated to that security and the remaining proceeds are allocated to the security without a known market value.

The total par value of 1,000 shares of $5 par stock is $5,000. Therefore, $65,000 ($70,000 - $5,000) is recorded in additional paid-in capital on common stock.

11

T/F: The common stock subscribed account is not replaced with the common stock account until the shares are issued.

True

12

T/F: When common stock is subscribed at a contract price above par, contributed capital in excess of par on common is credited.

True

13

T/F: The common stock subscribed account is an asset account.

False.
This is a contra owner's equity account, but can be classified as an asset if the subscription is paid in full before the FS are issued or available to be issued.

14

T/F: Subscriptions receivable on stock can be reported as an asset or contra OE account.

True.

15

T/F: When stock is issued in excess of par, the total increase in owners' equity is equal to the issue price of the stock multiplied by the number of shares issued.

True.

16

When preferred stock is called and retired, which account or aggregate category of accounts can be increased?
Total Owners' Equity
Retained Earnings

Total Owners' Equity = No
Retained Earnings = No
When a firm retires preferred stock, cash is paid to the shareholders reducing total owners' equity. Retained earnings can never be increased when shares are retired, redeemed, or converted into another class of stock.

17

500 shares of 6%, $100 par callable preferred stock are called at $101. The shares were issued at $103 per share. The journal entry to record the retirement includes which of the following?
A. Cr. paid in capital from retirement of preferred stock, $1,000.
B. Dr. paid in capital from retirement of preferred stock $1,500.
C. Cr. retained earnings $1,000
D. Dr. preferred stock $51,500

A. The $2 difference multiplied by 500 shares yields $1,000 paid in capital kept by the firm. The journal entry is:

DR: Preferred stock 500($100) 50,000
DR: PIC-preferred 500($103 - $100) 1,500
CR: PIC-retirement of preferred 1,000
CR: Cash 500($101) 50,500

18

T/F: The annual dividend commitment for cumulative preferred stock must be paid each year.

False.
Not if it is called or redeemed.

19

T/F: When preferred stock is called or redeemed, retained earnings may not be credited.

True

20

T/F: When preferred stock is called or redeemed, retained earnings may be debited.

False.
Any debit difference is recorded in retained earnings.

21

Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share.

On December 31, 2005, Cyan's retained earnings were $300,000. In March 2006, Cyan reacquired 5,000 shares of its common stock at $20 per share. In June 2006, 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 ended December 31, 2006 was $60,000.

At December 31, 2006, what amount should Cyan report as retained earnings?

$360,000
The treasury stock transactions had no effect on retained earnings because the stock was reissued at a price in excess of its purchase price. This transaction increases additional paid-in capital from treasury stock transactions. Retained earnings cannot be increased as a result of treasury stock transactions. Purchases of treasury stock under the cost method do not affect retained earnings.

Thus, the ending retained earnings balance is:
$360,000 = $300,000 beginning balance + $60,000 earnings for 2006.

22

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?
Net common stock
Additional paid-in capital
Retained earnings
(increase / decrease / no effect)

Decrease, decrease, decrease
Under the par value method, when treasury stock is purchased and retired at a price exceeding the original issue price, the following entry is made. No additional paid-in capital from treasury stock transactions exists. Therefore, retained earnings is debited. Common stock par Additional paid-in capital original issue price - par Retained earnings acquisition price - original issuance price Cash acquisition price. Thus, all three accounts listed in the question are decreased.

23

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, does the par value method report a greater amount for additional paid-in capital and a greater amount for retained earnings?
Additional paid-in capital
Retained earnings
(yes or no)

No, no
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. Under the par 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.

On balance, additional paid-in capital decreases under the par method relative to the cost method, but there is no difference in the effect on retained earnings (neither method affects retained earnings under the conditions in the problem).

24

During the current year, Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost method to account for treasury stock. What amount should Onal report in its income statement for these transactions?

$0
Income is not affected by treasury stock transactions. When a firm transacts with its owners acting as owners, it cannot profit or report a negative income. In this case, the $3 difference between the $10 reissue price of the treasury stock and its $7 cost is credited to an owners' equity account as paid-in capital from treasury stock transactions. The firm's net worth has increased as a result of its treasury stock purchase and reissuance, but the "gain" is not recognized as earnings.

25

Baker Co. issued 100,000 shares of common stock in the current year. On October 1, Baker repurchased 20,000 shares of its common stock on the open market for $50.00 per share. At that date, the stock's par value was $1.00, and the average issue price was $40.00 per share. Baker uses the cost method for treasury stock transactions. On December 1, Baker reissued the stock for $60.00 per share. What amount should Baker report as treasury stock gain at December 31?

$0
There is no gain on the reissue of treasury stock. The journal entry upon reissue is:
DR: Cash 1,200,000 ($60X20,000)
CR: Treasury Stock 1,000,000 ($50X20,000)
CR: Contributed Capital from Treasury Stock 200,000 ($60-$50X20,000)

26

The acquisition of treasury stock will cause the number of shares outstanding to decrease if the treasury stock is accounted for by the
Cost method
Par value method

Yes, yes
The acquisition of treasury stock reduces the number of shares of stock outstanding, regardless of the method used to account for the treasury stock.
Shares in the treasury are considered issued, but not outstanding.

27

Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The par value of the stock was $1 per share.

During January of the current year, Porter bought back 500 shares at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were reissued later in the current year at $10 per share. Porter used the cost method to account for its equity transactions.

What amount should Porter report as paid-in capital related to its treasury stock transactions on its balance sheet for the current year?

$2,000
When treasury stock is reissued at a price exceeding its cost, the cost method records the increase in paid-in capital related to treasury stock. This account is an owners' equity account - treasury stock transactions do not affect earnings. The increase for this situation is 500($10 - $6) = $2,000.

The full entry for reissuance is: dr. Cash $5,000; cr. Treasury stock $3,000; cr.

Paid-in capital from treasury stock $2,000.

28

What are the two methods available to account for treasury stock?

Cost Method - records the treasury stock account at the cost of shares reacquired.
Par Value Method - records the treasury stock account at the par value of shares reacquired.

29

T/F: In the balance sheet, treasury stock under the cost method is disclosed as a contra OE account and is measured at original issue price.

False.
Treasury stock is subtracted at the very bottom of the OE section of the BS.

30

T/F: Under the par value method of accounting for treasury stock, the entry to record reissuance of treasury stock depends on the difference between the cost of the treasury stock and the reissue price.

False.
Reissuances are treated as a regular issuance of stock except that treasury stock is credited, rather than CS.

31

T/F: In the balance sheet, treasury stock under the par value method is disclosed as a contra OE account and is measured at par.

True

32

T/F: The balance in treasury stock is the same whether the cost or par value method of accounting for treasury stock is used.

False.
Cost method records the TS account at the cost of shares reacquired. Par Value method records the TS account at the par value of shares reacquired.

33

T/F: Regardless of the reissue price of treasury stock, under the cost method, the treasury stock account is credited at cost.

True

34

T/F: Total OE is the same whether the cost or par value method of accounting for treasury stock is used.

True

35

T/F: It is possible for retained earnings to be credited as a result of a treasury stock transaction.

False
RE is never credited for stock transactions.

36

T/F: The balance in contributed capital in excess of par on common stock is the same whether the cost or par value methods of accounting for treasury stock is used.

False.
Cost - reissue at a price exceeding (or less than) cost.
Par Value - purchase at a price less than (or exceeding) original issue price.

37

T/F: In the balance sheet, treasury stock under the cost method is disclosed as a contra OE account and is measured at cost.

True

38

T/F: The balance in common stock is the same whether the cost or par value method of accounting for treasury stock is used.

True

39

T/F: Under the par value method of accounting for treasury stock, the total reduction in OE resulting from the purchase of treasury stock is the total cost of treasury stock purchased.

True

40

T/F: It is possible for a firm to record a loss as a result of a treasury stock transaction.

False.

41

T/F: Under the cost method of accounting for treasury stock, the entry to record reissuance of treasury stock depends on the difference between the original issue price and the cost of the treasury stock.

False.
Reissuances credit the TS account at cost, and the difference between the purchase price and reissue price is recorded in contributed capital from treasury stock.

42

T/F: When treasury stock is purchased and recorded under the par value method, the contributed capital in excess of par account is debited for the original amount recorded in that account when the stock was first issued.

True

43

T/F: When treasury stock is purchased and recorded under the par value method, and the cost exceeds the original issue price of the stock, contributed capital from treasury stock transactions is debited for the difference before retained earnings.

True

44

T/F: Under the par value method of accounting for treasury stock, the total reduction in OE resulting from the purchase of treasury stock is the total par value of treasury stock purchased.

False.
and the contributed capital in excess of par account that was credited when the stock was issued is debited for the original amount recorded.

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