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Flashcards in Shareholders Equity Deck (38)
1

When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

2

When is APIC recorded on a stock subscription?

APIC increases on date subscription is recorded - not on the date paid for or issued

3

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

It will be restricted to the extent of the balance in the Treasury Stock account.

4

When are dividends in arrear recorded for cumulative preferred stock?

They are not accrued until declared.

5

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.

6

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company's books

7

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

The effect on Retained Earnings is the Carrying Amount of the asset

RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount

Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash

The net effect of the entry is that RE will decrease by the CV of the asset

8

When is Retained Earnings debited for FMV of Stock for a stock dividend?

When Stock Dividend is less than 25% of Common Stock outstanding

9

When is Retained Earnings debited for Par Value for a stock dividend?

When Stock Dividend is greater than 25% of common stock outstanding

10

What is the effect of a stock dividend or a stock split on total shareholder equity?

Stock dividends and stock splits both have no effect on Total Shareholder Equity

11

What is the affect on APIC from a stock split?

Stock splits only affect par value - APIC remains the same.

12

When is compensation expense recorded at the time of grant for a stock option?

Compensation expense is recorded at the time of grant if options are exercisable immediately

They are based on past service.

Expense recognized : FV Stock Option x # of Shares

13

What interest rate is used to discount stock options?

The risk-free interest rate

14

What date is used as the measurement date for share-based payments classified as liabilities?

The settlement date.

15

How are compensation costs for share-based payments classified as liabilities measured?

Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period

16

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

17

What is the primary purpose of a quasi-reorganization?

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

18

How is return on Common Stockholder's Equity calculated?

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

19

How is book value per share of common stock calculated?

Total Common Stock
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value

Book Value per Share : Total Book Value / Shares outstanding

20

How is the dividend per share payout ratio calculated?

Dividends per share / earnings per share

21

How is basic Earnings Per Share (EPS) calculated?

(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they're declared.

22

For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year

23

For which areas is EPS required to be shown?

EPS is only required to be shown for Income from Continuing Operations and Net Income.

All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes

24

When do stock options increase share outstanding?

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

25

How is EPS calculated when convertible bonds are taken into consideration?

[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)

Bond interest is added back because if converted- there would be no bond interest expense

Contingent Issue Agreements are included in Diluted EPS if contingency is met

26

JE for repurchasing treasury stock under Par Value method

Dr. T/S (shares * par)
Dr. APIC
Cr. PIC-T/S (plug)
Cr. cash

27

JE for resale of treasury stock under Par Value method

Dr. cash
Cr. PIC
Cr. T/S

28

JE for retiring stock under Par Value method

Dr. C/S
Cr. T/S

29

calculate dividends available for participating P/S

participating P/S * % = participating dividends
C/S * % = participating share for C/S
dividends declared - total participating dividends
excess allocated to P/S and C/S based on ratio of outstanding shares

30

effects of reverse stock split

does not affect any SE accounts
par value increases, number of shares outstanding decreases

31

compensation expense of stock options to employees

expense = [FMV of option * number of shares] ÷ requisite service period

32

JE recording stock options issued

Dr. Deferred Compensation
Cr. PIC-stock options [FMV of options * number of shares]

33

when to recognize full compensation expense of stock options

granted for prior service
exercisable immediately

34

JE recognizing compensation expense

Dr. Compensation expense
Cr. Deferred Compensation

35

JE for exercising stock options

Dr. Cash (share price * number of shares)
Dr. PIC-stock options (original balance)
Cr. C/S (par)
Cr. (plug)

36

gain on settlement of debt for reorganizations =

debt owed - cash paid - any issuance of stock

37

cost of stock rights received =

cost of investment allocated based on relative FMV

38

gain on sale of stock rights =

net proceeds from rights - [cost * (FMV of rights÷total FMV)]