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Flashcards in FAR - Stockholders Equity Deck (45):

What is appropriated retained earnings?

Appropriated retained earnings:

Retained earnings assigned to a specific purpose like

constructing a building
pay back somebody


What do you do when you have appropriated retained earnings to construct a building and the building is finished? What is the accounting treatment for the appropriate retained earnings then?

Appropriated retained earnings are returned to unappropriated retained earnings at the entire amount.


Appropriate retained earnings to create building at 1,500K.

Finished creating building, then send this 1,500K appropriated retained earnings to

Unappropriated retained earnings.


When to report dividends paid to stockholders / shareholders?

On the date fo declaration


On date of declaration to pay out a dividend at a later date, how does this affect the stockholder's equity (on the balance sheet)?

On dividend decleared date:

Retained earnings Decrease >> Common stock GOES UP

Debit Retained Earnings
Credit common stock


What happens when company buys back a treasury stock and sells it?

It does not affect net income, earnings, (income statement)

Gains on treasury stock sales >> INCREASE APIC (balane sheet)

Losess on treasury stock sales or buy back >> Decrease APIC (balance sheet)

When APIC is $0.00 and there's a loss from additional treasury stock sales (sold at loss) or buys back more, then this extra loss goes to Net income, earnings, on the Income statement.


What is the formula for Book value per common stock?

How to calculate?

Book value per common stock =

Common stock holder's equity / # of common shares outstanding


C/S + APIC + Retained Earnings - Treasure stock
# of common stock shares outstanding (amount sold) - Teasury shares buy bought back


Definition of

Shares authorized

Issue shares

Shares outstanding

Shares authorized = amount of shares that is going to be sold by the company (not sold yet, its starting amount)

Issue shares = sold shares of stock to the public on the stock exchange

Shares outstanding = amount of shares sold.


What is quasi-re-organization?

To make changes on the balance sheet to reduce

Retained earnings deficit.

This done so there's enough retained earnings to pay out a dividend.


What is scrip dividend?

Scrip dividend = a note payable to pay a dividend (with interest) to share holders at a later date.

This is done by companies that has cash shortage.

Debit Retained Earnings
Credit Dividend payable


(1) What is liquidating dividend?

(2) What two balance sheet accounts used for liquidating dividends?

(1) Liquidating dividend = amount of payment paid to shareholders that is above Retained Earnings amount.

Retained earnings = 200,000
Pay out a cash dividend at $300,000

Liquidating dividend = $100,000

Liquidating dividend journal entry is
Debit APIC
Credit Common stock or Preferred stock

Liquidating dividend = Reduces APIC (additional paid in capital)


Retained earnings
then, additional paid in capital (APIC)

Retained earnings = 1st use to pay a normal dividend.
But, retained earnings not enough to pay an additional amount = this is a liquidating dividend.

Then: the APIC is reduced to pay out this liquidating dividend.


What is a 2-for-1 stock split?

It's a doubling of the amount of shares given out to shareholders.

Double up or 2 x Shares sold

Par value divide by 2 or Par value $$ / 2



How to calculate Stock dividend amount?

*Hint: stock dividend is not a $ cash dividend paid out. It just increases the number of shares a stockholder/stakeholder has.

[Beginning balance
+ shares issued
- Treasury stock buy back]
x %
Stock Dividend amount (# of shares)

600,000 beginning balance
+ 15,000 shares issued
- 12,000 treasury stock (buy back)
x 0.12
= 72,360 stock dividend (shares amount; not a $$ amount)


Are stock dividends and stock splits recorded at fair value? Explain why.

If so or if not, how are the handled in the income statement or balance sheet?

Stock dividends and stock splits = Not recorded at fair value.

Reason: This because they are income to the person who receives stock dividends and stock splits. They are not income to the company that sells out these stocks to the shareholders.

How handled on financial statements: They are not reported at fair value.

They are re-allocated on the "investment account balance" (balance sheet) by

$$$ value of shares
new amount of shares of stock

=> result in decreased Value Per Share.


(1) Define Grant (as in Date of Grant).

(2) Define Exercise (as in Date of Exercise).
When stocks are exercised, are stock options reduced on the exercise date?

(3) What is the formula to calculate the APIC increase on the result of the grant and exercise of the stock options and issuance of common stock to corporate executives?

(4) What is the compensation expense for restricted expense as follows:

On 1/1/Yr 1, company issued to is employees 10,000 shares restricted stock. On Jan. 1 , yr 2, company issued to its employees more restrictd stock shares of 20,000.

Here is the info on Fair value of stock:
Date Fair value of stock (per share)
1/1/Yr 1 $20
12/31/Yr 1 22
1/1/Yr 2 25
12/31/Yr 2 30

These restricted stock shares vest at end of 4-year period. There are no forfetures. What amount should be recorded as compensation expense for 12 month period ended Dec. 31, year 2?

(5) What is the formula to find Intrinsic value of an option at time of initial investment?

(1) Grant = the company issues the stock option to the person.

(2) Exercise = The person holding the stock option buys the underlying stock at a specific price.
Yes, Stock options OUTSTANDING are reduced at the Exercise Date.

(3) Cash from exercise stock option
+ Compensation expense
- Common stock at var value ($$ par value x # shares)
= APIC account

Reference: this formula derives from this journal entries:

Journal entry: Granting stock options - record compensation expense
Debit: Compensation expense
Credit: APIC - stock options

Journal entry: Exercise the stock options
Debit: Cash (stock option price x # of shares)
Debit: APIC - stock options
Credit: Common stock (par value x # of shares)
Credit: APIC

(4) Use this formula:
Total compensation cost = Market price at Grant Date
x # of restricted stock

Yr 1: $20.00 at grant x 10,000 shares = $200,000
yr 2: $25.00 at grant x 20,000 shares = $500,000

$200,000 x 1/4 (from 4-year period) = 50,000
$500,000 x 1/4 (from 4-year period) = 125,000

Total compensation as of Dec 31, year 2:
+ 125,000

(5) Formula on intrinsic value:

Number of shares x Market price on Grant date - Exercise share price

Ex: 100 shares options $10.00 market (grant date) - $9.00 exercise
= 100 share options x $1.00
= $100 intrinsic value


How do you calculate the compensation expense for let's say Year 1 income statement when the services are going to be rendered over a period of time?

Fair value of options at grant date / Services for period (years, months, etc.)

= Compensation expense in Year 1
(on Income statement)


When stock rights are issued without consideration, how are they handled in the financial statements?

Issued (sold) Stock rights without consideration

are "disclosed" only in the disclosure notes of the financial statements.

They are no journal entries to report them as an account on the face of the Balance sheet.

Stock rights are not income statement items.
With the exception to compensation expense.


What is the formula to calculate "cost of stock rights" (i.e. investment in stock rights)?

Cost of stock rights

= [FMV of rights / (FMV rights + FMV stock ex-rights)] x Cost of stock


When a cash dividend is declared to be paid to stockholders, how does it affect the working capital?

What is the rule for this effect?

Cash dividend reduces the working capital on Declaration date. (not the date when cash is paid out to pay a dividend to stock holders)

Working capital = Current assets - current liabilities

A liability for a cash dividend is incurred and thus
>> Increase current liabilities -> Decrease working capital


Retained earnings appropriation can be used to????

Restrict earnings available for dividends.



A retained earnings appropriation ____ (_____) "unappropriated retained earnings" and sets up (_____) "appropriated retained earnings."

It does not affect ________ _________.

A retained earnings appropriation debits (reduces) "unappropriated retained earnings"

and sets up (credits) "appropriated retained earnings."

It does not affect income statement.


(Investing cash flow CPA question)

How to calculate the payments for purchases of property, plant, and equipment.


+ Change (increase) on P/P/E account (balance sheet)
- change (decrease) on P/P/E account (balance sheet)
+ Sold
- Any exchanges for bonds
= Cash paid


(Financing cash flow CPA question)

How to calculate for cash dividends paid?


Beg. Retained earnings
+ Net Income
- Increase Dividends payable
- ending retained earnings
= Dividends paid

FYI - Original formula:

Beg. Retained earnings
+ Net Income
- Increase Dividends payable
+ Decrease dividend payable - Dividends paid
= Ending retained earnings


(Financing cash flow CPA question)

How to calculate redemption of bonds payable (pay off the bond)?


Beg bonds payable
+ Issued
- Ending bonds payable
= Redemption

FYI - Original formula:

Beg bonds payable
+ Issued
- Redemption (cash paid out to reduce bonds payable)
= Ending bonds payable


What is a property dividend?

What is the accounting treatment for property dividend distribution?

Property dividend = a distribution of physical assets or subsidiary's share of stocks given to stockholders.

Accounting treatment:
When property dividend declared (at declaration date), use FMV of asset to reduce/lower retained earnings.

Also, at declaration date, adjust asset's cost to FMV.
This done via:
FMV property dividend (physical asset)
- Cost of property dividend (physical asset)
= gain or loss on disposal of the asset

FYI - Retained earnings is reduced when:
a) Distributing cash dividends
b) Distributing property dividends


What is the accounting treatment on a stock dividend that is (less than 20-25% of stock outstanding)?

How does this affect shareholder's equity on the balance sheet?

Accounting treatment on stock dividend (less than 20% to 25% of stock outstanding):

At declaration date (only on this date) >> transfer stock dividend's FMV from Retained earnings to capital stock and paid-in capital.

Dr Retained Earnings
Cr. Common stock (capital stock)
Cr. Additional paid-in capital (Paid in capital)

This has NO effect on the shareholder's equity in balance sheet. This because all transfers are made with in the shareholder's equity.


When treasury stock are purchased back by the company, i.e. the company buys its own stock back, are these included in the Current assets section as "investments in marketable equity securities?"

Answer: No. that's because when a company buys back its own shares of stock, these shares are reported as

"Treasury stock" in the shareholders' equity section on the balance sheet.


What is the formula to calculate the outstanding common shares?

Hint: outstanding common shares means # of shares already sold out to the public


Original shares outstanding
- Shares in treasury
+ treasury shares sold
+ New shares issued (sold)
= total shares outstanding before stock split
x two-for-one split (or 3-for-1 split or any-for-one split)
= Shares outstanding after stock split


What is the percentage of common shares outstanding

for small stock dividend


for large stock dividend?

Small stock dividend = less than 20% of outstanding shares before stock split

Large stock dividend = more than 20% of shares outstanding


Small stock dividend (less than 20% shares outstanding) uses ____ value.

Large stock dividend (more than 20% shares outstanding) uses ____ value.

Small stock dividend (less than 20% shares outstanding) uses FAIR MARKET (FMV) value.

Large stock dividend (more than 20% shares outstanding) uses PAR value.


(1) What is the formula to calculate book value per share of common stock when preferred stock is involved?

(2) What is the formula of book value per share on just common stock?


(1) P/S + C/S + APIC + RE - Treasury stock - PR stock interest
Total shares outstanding

= book value per share

PR stock interest =
Par value preferred shares
+ Premium on preferred
+ Dividend in arrears

(2) Book value on common stock:

Book value = Common Stockholder's Equity / Common shares outstanding


What is dividend in arrears?

What is the accounting treatment when a company receives preferred dividends in arrears in current year?

Dividend in arrears = dividends only on preferred stock that was supposed to be paid in the past years are not paid off yet.

Accounting treatment: when a company receives the dividend in arrears in the current year, the dividend in arrears are included in current year "income from continuing operations."


When a company declared and paid ONLY a liquidating dividend of this amount (i.e. $100,000), the distribution results in:


Decreased paid in APIC

No change on retained earnings.
This because a pure liquidating dividend means there is no more "retained earnings" left to decrease to pay out a liquidating dividend.


Treasury Stock - Cost Method

(1) What is it?
(2) T/S sale on a gain affects?
(3) T/S sale on a loss affects?
(4) Journal entires for (a) issue (sell common stock), (b) buy back C/S (T/S stock) above issue price (sale) price and (c) Re-issue (re-sell) the T/S above cost and below cost.

(5) Conceputal: The acquisition of treasury stock (buying back treasury stock) at a price less than their book value (via the cost method) will:

(1) Cost method on treasury stock = Report same $$ amount on Treasury stock buy back cost amount and the cash given out to buy the T/S.

Journal entry (cost method): - buy back stock for $10.00 at 100 shares when it the C/S par value is $2.00
Dr. Treasury stock $1000
Cr. Cash $1000

(2) T/S sale on gain affects only APIC-TS only via: Sale on T/S --> GAIN >> UP APIC-TS

(3) T/S sale on loss affects: APIC-TS
--> Loss reduces APIC-T/S to zero, then Reduce Retained earnings

($) Journal entries:
(a) Issue common stock:
10,000 shares, $10 par value common stock. Sold at $15.00 issue (sale price)

Cash 150,000
CS 100,000 ($10 par x 10,000)
APIC 50,000 ($15 sale - $10 par x 10,000)

(b) Buy back C/S (buy treasury stock)
Repurchased 200 shares at $20 per share (purchase price)

Treasury stock 4000
Cash 4000 ($20 purchase x 200 shs)

(c) Re-issue (sell treasury stock) above purchase cost
Sell 100 shares (repurchased at $20.00 cost) for $22 sale

Cash 2200
T/S 2000
APIC-TS [($22 sale - $20 cost) x 100] 200

(d) Re-issue NEXT set of T/S shares (sell next set of treasury stock) below purchase cost
Sell 100 shares (repurchased at $20.00 cost) for $12 sale price

Cash 1200
APIC-TS 200 ($22 - $20 cost) x 100
R/E 600 (plug)
T/S 2000

(5) Conceptual:

1) Decrease stockholder's equity.
All treasury stock transactions decrease total equity

2) increase book value per share.

Original book value per share:

$10 per share = $1000 book value / 100 shares

new book value per share:

If 10 share were repurchased for $8.00 (less than the $10 book value), then:

$920 book value / 90 shares = $10.22 book value per share.


Treasury Stock - Par Method

(1) What is it?
(2) T/S sale on a gain affects?
(3) T/S sale on a loss affects?
(4) Journal entires for
(a) issue (sell common stock),
(b) buy back C/S (T/S stock) above issue price (sale) price
(c) buy back C/S (t/s stock) below issue price (sale Price)
(d) Re-issue (re-sell) T/S stock above re-purchase price
(e) Re-issue (re-sell) the T/S below re-purchase price

(1) Par Method: to buy back and sell T/S stock at the par value of the c/s stock.

(2) T/S sale gain >> Credit to APIC
(3) T/S sale loss >> Debit APIC (reduce APIC), when APIC is reduced to zero, then Debit Retained Earnings (reduce retained earnings)

(4) Journal entries:
(a) Original sale of common stock: 10,000 shares x $10.00 par value, sold at $15 per share.

Cash 150,0000
Common stock ($10 par s 10,000) 100,000
APIC ($15 - $10 = $5.00 x 10,000) 50,000

(b) Buy back C/S (buy TS) above Issue (sale price)
Buy back 200 c/s shares at $20.00 per share purchase price. **$20.00 purchase > $15.00 sale

T/S ($10 par x 200) $2000
APIC (($15 sale - $10 par) x 200) 1000
Retained earnings* 1000 (plug)
Cash ($20.00 x 200) 4000

*Debit R/E when there's no original APIC-TS balance before this buy back.

(c) Buy back T/S below ISSUE (sale price)
Buy back 200 c/s shares at $12.00 per share (puchase price)
** $12.00 puchase


When a company declared and distributed property dividend from its overstocked inventory,

the inventory's carry amount is above its market value,

thus result in: ________________________

Result in:

A recognized loss that reduce income before extraordinary items (i.e. loss in income from continuing operations before discontinued ops and before extraordinary items).


Dividends declared and paid in the form of assets other than cash are recorded by the distributing corporation at ___ _____ at the date of ______.

Dividends declared and paid in the form of assets other than cash are recorded by the distributing corporation at fair market at the date of declaration.


How do you allocate amount of proceeds to convertible preferred stock?


CS shares x Sales price = FV on CS
PS shares x Sales price = FV on PS


Total fair value (FV)

3) Allocate via ratio

FV CS x Total allocated BASIS for c/s
Total FV

FV PS x Total allocated BASIS for p/s
Total FV


If there is no par value mentioned about the common stock and only stated value, how is the common stock reported then?

# of shares of common stock x Stated value


What is the calculation for the gain on disposal of a stock being used as a property dividend distribution?


FMV stock at declaration ($$ FV x # of shares)
- Book value on stock ($$ BV x # of shares)
= Gain on disposal of stock used for property dividend distribution


FMV at stock declaration = $3.00 x 1000 total shares = $3000 fmv

BV of stock used for property distribution = $1.00 x 1000 total shares = $1,000

Gain on disposal = $3,000 FV - $1,000 BV
= $2,000 gain


When collectible is reasonably assured, the subscription price that is above stated vale on a no-par common stock subscribed should be recorded as _______

Additional paid-in capital (APIC) when the subscription is received.

FYI - APIC is created to hold $$ amounts for that is GREATER than par-value or stated value on Common stock sold to shareholders.

Example: $10.00 par value, Issue $24,00. APIC is $14.00 ($24 - $10)

Or: $1.00 stated value, issue price is $23.00
APIC: $22.00 ($23.00 sale - $1.00 stated)


What is the rule on using different value for a stock dividend that is more than or less than 20-25%?


1) For stock dividends less than 20-25% >> charged to retained earnings at Fair market value (FMV)

2) Stock dividend more than 20-25% >> use par value

3) Stock dividend between 20-25% >> use PAR value or FMV.


What is the rule that dividends in arrears should be disclosed (presented) on the current year financial statement?

Dividends in arrears are disclosed when these dividends are DECLARED.

Dividends in arrears reported (disclosed/presented) as liabilities on the balance sheet when Dividends-in-arrears are DECLARED to be paid to shareholders on a later date.


If the re-acquisition price (the price to buy back stock (becomes Treasury stock) is

a) less than original issue (sale) price, THEN _________

b) more than original issue (sale) price, THEN ________

If the re-acquisition price (buy back price) is

a) less than original issue price >> Gain credited to APIC

b) more than original issue price >> Loss is debited to Retained Earnings


True or false: Preferred stock does not have voting rights



Preferred stock different types:

(1) Cumulative preferred stock
(2) Non-cumulative preferred stock
(3) Participating preferred stock
(4) Non-participating preferred stock
(5) Preference upon liquidation
(6) Convertible preferred stock
(7) Callable (redeemable) preferred stock
(8) Mandatory Redeemable Preferred stock (liability)

(1) Cumulative Preferred stock: The cumulative feature provides that all or part of the preferred dividend not paid in any year accumulates and must be paid in the future before dividends can be paid to common shareholders. The accumulated amount is referred to as dividends in arrears. The amount of dividends in arrears is not a legal liability, but it must be disclosed in total and on a per share basis either parenthetically on the balance sheet or in the

Summary: Cumulatie preferred stock = accumulatie diviends not paid yet to preferred stock holders in curenty year to accumulatie and be aid in later years before paying any remaining cash dividends to common stockholders.

Dividends in arrears = dividends not paid yet in prior years on cumulative preferred stock. This is not LEGAL LIABILITY. It's a Disclose in total and on Per share basis in foot notes or as ($$$) on B/S

(2) Non-Cumulative Preferred Stock: With non-cumulative preferred stock, dividends not paid in any year do not accumulate. The preferred shareholders lose the right to receive dividends that are not declared.

Summary: No accumulate dividends to be paid in later years to holders of Non-cumulative preferred stock. P/S not get any diviends that are not declared in current period

(3) Participating Preferred stock: The participating feature provides that preferred shareholders share (participate) with common shareholders in dividends in excess of a specific amount. The participation may be full or partial .

(Type 1): Fully participating means that preferred shareholders participate in excess dividends without limit. Generally, preferred shareholders receive their preference dividend first, and then additional dividends are shared between common and preferred shareholders.

(Type 2): Partially participating means preferred shareholders participate in excess dividends, but to a limited extent (e. g . , a percentage limit).

Summary: Preferred and Common stock holders share excess of dividends. Fully particpatine preferred = Preferred shareholders share Excess dividends (extra portion of cash dividends left over) with NO LIMIT.
Partially particpiate = P/S holders have access to excess dividend but at limited amount.

4. Non·Participating Preferred Stock: When preferred stock is non-participating, preferred shareholders are limited to the dividends provided by their preference. They do not share in excess dividends.

Summary: Only collect a limited amount of dividends based on their preference in the preferred stock.

(5) Preference upon Liquidation:
Preferred stock may include a preference to assets upon liquidation of the entity.

If the liquidation preference is significantly greater than the par or stated value, the liquidation preference must be disclosed . The disclosure of the liquidation preference must be in the equity section of the balance sheet, not in the notes to the financial statements.

Summary: P/S holder gets portion of assets when entity is liquidated.

Liquidiate preference > par or stated value. Disclose this liquidation preference on Balance sheet's Equity section. NO DISCLOSE in footnotes.

(6) Convertible Preferred Stock:
Convertible preferred stock may be exchanged for common stock (at the option of the stockholder) at a specified conversion rate.

Summary: convert p/s shares to a certain # of C/S. PS holders decides to whether to convert or not.

(7) Callable (Redeemable) Preferred Stock:
Callable preferred stock may be called (repurchased) at a specified price (at the option of the issuing corporation). The aggregate or the per share amount at which the
preferred stock is callable must be disclosed either on the balance sheet or in the footnotes.

Summary: Company buys back the Preferred stock at a set price at a future date. Company decides when to buy back P/S stock. Disclose the total or Per share amount of the "Callable"portion of the P/S on Balance sheet or in foot notes

(8) Mandatorily Redeemable Preferred Stock (Liability)
Mandatorily redeemable preferred stock is issued with a maturity date. Similar to debt, mandatorily redeemable preferred stock must be bought back by the company on the maturity date. Mandatorily redeemable preferred stock must be classified as a liability, unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.

Summary: This P/S type is a liability with maturity date. At maturity date, the company must buy back this P/S (pay money to PS holders to get back PS shares).

Only time Mandatory Redeemable PS stock not liability -> when the company is liquidated or TERMINATED.

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