Module 3: Stockholder's Equity Part 1

Question 1

Cost Method vs Legal (par/state value) Method

Answer 1

Cost: Loss/gain on treasury stock is recorded when we resell it
Legal (Par/Stated) Method: Loss/gain on treasury stock recorded immediately upon repurchase

Question 2

Gain or loss on treasury stock formula

Answer 2

Reissue price - repurchase cost

Question 3

Appropriation of Retained Earnings

Answer 3

Serves to disclose to the shareholders that some of retained earnings is not available to pay dividends because they have been restricted for plant construction. When the purpose has been achieved, it should be restored to unappropriated retained earnings.

Question 4

When are dividends reported as a libility

Answer 4

When they are declared

Question 5

Gains and losses on Treasury Stock are recorded:

Answer 5

By increasing APIC - Treasury Stock, they are never recorded in the income statement

Question 6

Why selling treasury stock at lower then cost increases stockholder’s equity

Answer 6

Because it converts treasury stock (a reduction in equity) into cash, increasing overall equity even if the sale price is lower than the original cost

Question 7

To allocate the amount of proceeds for preferred and common stock we:

Answer 7

Use the fair value of each stock and multiply it by the shares and divide each amount by the total and get the percentage we need for each stock to allocate the proceeds

Question 8

Property dividend

Answer 8

A dividend distributed in the form of the company’s assets like land or inventory, instead of cash. When distributed the assets is adjusted to FV

Question 9

What happens to retained earning in a stock dividend

Answer 9

Retained earnings go down and common stock up

Question 10

When reissuing treasury stock APIC needs to (legal method)

Answer 10

be readjusted by doing the new selling price - par

Question 11

APIC under par value vs Cost Method

Answer 11

Par Value Method:
*APIC = Selling Price - Par
Cost Method:
*Initial Sale: APIC = Selling price - par
*Reissue Treasury Stock: APIC = Selling Price - Cost

Question 12

Book Value per common share

Answer 12

Common Stockholders’ equity / common shares outstanding
**Measures the amount that common shareholders would receive for each share if all assets were sold at their book (carrying value) and akk creditors were paid

Question 13

Why do property dividends reduce retained earnings?

Answer 13

Because the company gives away assets (like land or inventory), reducing its value. That dividend comes out of profits so retained earnings go down by the fmv