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Flashcards in Stock Issuance Deck (48):
1

What is the allocation method used to determine convertible stock issuance?

1) How much did we issue both stocks for?

  • Issuance dollar amount for both

2) What is the total market value of both stocks?

(CS stocks x market) + (PS stocks x market)

= Total Market Value

3) Out of our stock issuance, how much of that was convertible stock?

[CS or PS Market (whichever has the convertible feature) / Total Market Value ]

x Issuance $ amount

2

What is the standard JE for

Stock Issuance?

Cash (use stock amount x market value)

       CS     (stock amount x par)

       PS     (stock amount x par)

       PIC    (Plug figure) 

3

On September 1, 2004, Hyde Corp., a newly formed company, had the following stock issued and outstanding:

  • Common stock, no par, $1 stated value, 5,000 shares originally issued at $15 per share.
  • Preferred stock, $10 par value, 1,500 shares originally issued for $25 per share.
  • Hyde's September 1, 2004 statement of stockholders' equity should report

Cash    112,500

    CS        5,000

    PS        15,000 

    PIC      92,500

4

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

Additional paid-in capital when the subscription is recorded.

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.

Stock Receivable

    Common Stock subscribed

Any additional paid-in capital is recorded when the contract is signed or recorded, just as if cash were received at that point.

 

5

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?

Cash                         $110,000

    Bonds Payable           40,000

    Common Stock             5,000 

     Additional PIC            65,000

Note that in this question, the maturity value of $60,000 for the bond includes the common stock. $40,000 is used since it's the true value of the bond without the stock included.

6

What is the accounting treatment for the conversion of preferred stock?

  1. Preferred stock accounts are transferred to common stock accounts;
  2. If total preferred stock value is less than common stock par value, debit retained earnings.

7

What is the accounting treatment for the retirement of preferred stock?

  1. All related Owner's Equity accounts are removed;
  2. Debit differences go to retained earnings;
  3. Credit differences go to contributed capital.

8

For what amount is Preferred Stock Additional Paid in Capital debited when called or redeemed?

Amount recorded from original issuance.

9

Under what condition is retained earnings debited on conversion of preferred stock to common stock?

Total recorded value of preferred is less than par value of common on conversion.

10

What are the general features of

Preferred Stock?

  1. Callable
    • Can be called in by issuer
  2. Redeemable
    • Issuing firm purchases stock back at specified price and date.
    • Classifed as debt rather than owner's equity.
    • Reedemable is like a bond
  3. Convertible

11

What are the related entries for calling and redeeming preferred stock?

Retained Earnings

    Cash

 

Preferred Stock

Contributed Capital in excess of par

Retained Earnings

     Cash

12

What is the journal entry for retirement of

Preferred stock?

Ex: When Preffered Stocks are called?

Preferred Stock [(Par x shares)]

APIC [(Issue price — Original par x shares)]

       APIC (Plug figure)

       Cash (Shares x Price called)

13

What is the journal entry to record conversion of Preferred Stock to Common Stock?

Preferred Stock [(Par Value) x shares]

PIC Preferred [(Issued Price - Par Value) x share]   

     Common Stock [Par Value x shares]

     PIC Common     (Plug)

14

What is a Mandatorily Redeemable Preferred Stock?

Classified as a liability on the balance sheet.

15

What are property dividends?

Valued at FMV of the property at date of declaration.

16

What happens when a company makes a liquidating dividend?

  • Debit additional paid-in capital rather than retained earnings.
  • Common stock cannot be debited because it is considered legal capital which is only eliminated upon the dissolution of the corporation.

17

Are dividends considered a liability?

All dividends are considered a liability on the dates declared.

18

What is considered a large stock dividend and how are those valued/reported?

  • Large Stock divideds are recorded at Par
  • A stock dividend of 40% of the shares outstanding is considered a large stock dividend.

19

How should a company handle

cumulative preferred stock?

Only the current year dividends in arrears are subtracted from net income in the numerator of basic earnings per share

20

What is a Treasury Stock?

  • When a company buys their own stock
  • Treasury is not considered an asset
  • Does NOT represent ownereship
    • No one owns Treasury Stocks
    • Treasury Stocks are just stocks taken OUT of circulation

21

What if the Treasury Stock price is < Original issue price of the stock?

Treasury Stock (Par)

 

22

Describe the cost method for accounting for treasury stock.

  • Purchases are debited at cost;
  • Reissuances
    • debit cash
    • credit treasury stock at cost 
    • contributed capital is plugged.

23

What accounts may reflect different balances under the cost and par method for the same firm?

  • Treasury stock
  • Paid in capital in excess of par-common
  • Paid in capital from treasury stock
  • Retained earnings.

24

What is the effect of treasury stock transactions on earnings?

There is no effect.

25

Under the cost method of accounting for treasury stock, how is treasury stock presented on the balance sheet?

Treasury stock is subtracted from very bottom of Owners' Equity section of the balance sheet.

26

When is paid in capital from treasury stock increased under the par method?

When treasury stock is purchased for LESS than original issue price.

27

Describe the accounting treatment of reissuance of stock under the par value method.

  1. Treasury stock is credited at par;
  2. Remainder of entry is treated like stock issuance.

28

List the methods for accounting for treasury stock.

  1. Cost Method;
  2. Par Value Method.

29

When is paid in capital from treasury stock decreased under the cost method?

When treasury stock is reissued for LESS than cost.

30

What is the effect on owners' equity when treasury stock is purchased and subsequently reissued at a price in excess of cost (using the cost method)?

Increase owners' equity by the difference in purchase cost and reissuance price.

31

What is the relationship of total owners' equity for cost and par method?

They are equal, although certain components of owners' equity would show different balances.

32

Describe the accounting treatment of purchases of stock under the par value method.

  1. Treasury stock is debited at par;
  2. Additional Paid in Capital (APIC) is debited by amount credited when stock was originally issued;
  3. Cash is credited.

33

What is the effect on the treasury stock account under the cost method when donated stock is received?

Effect on the treasury stock account is an increase for the fair value of the stock received.

34

What is the effect on the treasury stock account under the par method when donated stock is received?

Effect on the treasury stock account is an increase for the par value of the stock received.

35

How can retained earnings be affected by treasury stock transactions?

Decreased (as a last resort) but never increased.

36

How is treasury stock presented on the balance sheet under the par value method?

Reported as a subtraction from the common stock account in the balance sheet.

37

Lem Co., which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem's additional paid-in capital from common stock decrease as a result of the acquisition?

Treasury Stock             $600

APIC - Common            $100

Retained Earnings         $300

    Cash                                      $1,000

Once the balance of the contributed capital for common stock is reduced to zero, you would debit retained earnings.

 

38

What calculation is made when stock is cancelled (retired)?

When treasury stock is cancelled (retired), the common stock account is reduced by the par value of the common stock cancelled.

39

If a corporation sells some of its treasury stock at a price that exceeds its cost,

this excess should be

An increase to APIC

Under both the par and cost methods, sale of treasury stock at a price in excess of cost increases an additional paid-in capital account.

40

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

Cash                  $5,000

     Treasury               3,000

      APIC                     2,000

 

 

41

What is the difference between the 

Par Value Method and the Cost Method?

Par Value 

  • Uses par value of share in reissuance of treasury stock
  • Affects Retained Earnings

 

Cost Method

  • Uses cost of share in reissuance of treasury stock
  • Does NOT affect Retained Earnings

  

42

What are the steps leading to the reissuance of Treasury stock?

Original Issuance

Cash

      CS

      APIC

Repurchase of Shares

Treasury stock (Cost or Par)

APIC  (close out from original issuance)     

          Cash

Reissuance of Treasury Stock

Cash

     Treasury Stock (Cost or Par)

      APIC

PAR affects RE, Cost does not.       

43

How does Treasury Stock affect

Net Income?

It Does Not Affect Net Income

  • 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.

44

When is the Retained Earnings affected when reissuing TS using the Cost Method?

The Retained Earnings is hit when there is no APIC to draw on.

Cash

RE  (APIC balance is < or = 0)

      Treasury Stock

45

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 and Par Method

  • 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.

46

In 2003, Fogg, Inc. issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, 2005, when Fogg acquired some of the issued shares for $20 per share and retired them.

Which of the following statements correctly states an effect of this acquisition and retirement?

Additional PIC is decreased

Cash    25

     APIC    10

      CS       10

 

CS       10

APIC    10

     Cash     20

47

What is the JE for Treasury stock using the 

Cost Method?

Treasury Stock

     Cash

48

Lem Co., which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share.

By what amount would Lem's additional paid-in capital from common stock decrease as a result of the acquisition?