Flashcards in Stockholders Equity Deck (97):
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.
When is APIC recorded on a stock subscription?
APIC increases on date subscription is recorded - not on the date paid for or issued
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.
When are dividends in arrear recorded for cumulative preferred stock?
They are not accrued until declared.
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.
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
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
When is Retained Earnings debited for FMV of Stock for a stock dividend?
When Stock Dividend is less than 25% of Common Stock outstanding
When is Retained Earnings debited for Par Value for a stock dividend?
When Stock Dividend is greater than 25% of common stock outstanding
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
What is the affect on APIC from a stock split?
Stock splits only affect par value - APIC remains the same.
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
What interest rate is used to discount stock options?
The risk-free interest rate
What date is used as the measurement date for share-based payments classified as liabilities?
The settlement date.
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
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
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
How is return on Common Stockholder's Equity calculated?
(Net Income - P/S Dividends) / Average Common Stockholders Equity
Note: Average CSE : Common Stock + RE
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
How is the dividend per share payout ratio calculated?
Dividends per share / earnings per share
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.
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
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
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
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
How should stock issued for services be recorded
At FV of stock issue or FV of service received whichever is more reliable
What is the proportional method and when is it used
Used with lump sum purchase
Both FV known
Allocate based on relative FV
What is incremental method and when is it used
Used with lump sum purchase
Only some FV known
Allocate price to FV of know and remainder to unknown FV
Calculate CS outstanding
Issued shares - TS
How is convertible PS recorded
As preferred stock until converted
No included in CS shares outstanding
What method is used for conversion of PS
Calculate APIC after PS conversion
CV of PS less BV of CS
Journal entry for issue of PS with a detachable warrant
DR cash received
CR PS (par)
Cr APIC - PS (FV PS - par)
Cr APIC - warrant (plug)
Journal entry for stock warrant exercise
Dr APIC - warranty (prev calc)
Cr CS (par)
Cr APIC CS (plug)
When do warrants increase SE
When cash received on exercise of warrant
When does APIC increase on stock subscription and when is stock issued
APIC increases on date stock subscription paid or issued
Stock issued when total subscription price paid
Journal entry or stock subscription on contract date
Dr Cash (if any)
Dr Subscription receivable (bal due)
Cr CS subscribed (stated value)
Cr APIC (plug)
Journal entry for stock subscription on date balance collected
Dr Cash (bal due)
Dr CS subscribed
Cr CS (stated value)
Cr Subscription revenue (balance due)
Journal entry for TS reissue by cost method
Cr TS (acquired price x shares)
Cr APIC TS (price - acquired price x shares )
How to record purchase of TS via cost method
Debit TS for price paid x shares
How is treasury stock recorded on balance sheet
Reduction in SE not asset
Journal entry for TS par value method
Dr TS (par when purchased)
Dr APIC (par - original issuance)
Difference between original issuance price and cost of TS credited to PIC - TS
How is a stock retirement recorded
CS and APIC removed from books based on original issuance, cash credited for cost of shares, remainder to RE
How are declared dividends allocated
First preferred dividend (and cumulative if in arrears)
Then common dividend
Then divide remainder between preferred and common based on par value dollars outstanding
What is cumulative PS dividend and how is it reported
Dividends not paid in a year accumulate
Must be disclosed in FS not accrued if not declared
What is recorded when a dividend is declared
Dividend liability , reduce RE
When is interest recorded
Not an expense or liability until incurred
What is a scrip dividend
Dividend not paid in cash when declared (promissory note)
Debit RE on issue date
Debit interest expense only when incurred
What is a liquidating dividend
Dividend in excess of RE
How are dividends declared in extractive industries
Dividends declared to extent of depletion expense + accumulated income
How is a transfer of a Nonmonetary asset to shareholder recorded
At FV and recognized gain/loss FV - CV
How is a property dividend where CV > FV recorded
Cr inventory (to adjust asset to market)
Cr dividend payable
How is a stock dividend recorded
Debit to RE at FV if dividend less than 20-25% of outstanding stock
Debit RE at par value if dividend more than 20-25% of outstanding stock
How does stock dividend impact B/S
Reclassification of SE , no asset or liability
Are funds for bond retirement an appropriation of RE
No, unless managements decides to appropriate
What event may trigger and automatic appropriation of RE
Acquisition of TS
What are share based payments and how are they recognized
Compensation via stock
Compensation expense at date of grant = shares x FV of option
If not immediately vested recognize ratably over service period
How do share based payments affect SE
Increase in SE by shares x option price
What are stock appreciation rights
Receive cash equal to excess of market price of stock on exercise date over market price at grant date
Calculate stock compensation plan expense
FV of instrument - contributions of employees
What rate is used to discount exercise price option and future dividend stream for stock based compensation
Risk free rate
How is compensation cost for share based payments to employees classified
As a liability measured by change in FV of instrument for each reporting period
Final measurement date is settlement date
How is cash retained as a result of excess tax benefit in connect with share based payment recorded on FS
As cash inflow from financing operations
How are share based payments reflected in dilutive EPS
Included In denominator at weighted average to reflect period of time outstanding unless considered antidilutve
Calculate basic EPS
NI - preferred dividend / CS outstanding
How are stock dividend and splits treated in EPS
Treat shares outstanding as issue for the entire period
How to treat shares issued during period for EPS
Calculate at weighted average shares ( shares x months outstanding /12)
How are stock dividends and splits treated for comparative purposes
Restate previous year EPS for new stock splits and dividend as if the occurs in prior years
When is EPS required to be reported
For income from continuing operations and net income only
How are stock dividends and splits treated for EPS when occurring after EoY but before FS issue
Adjust unissued FS for stock split dividend and disclose in FS notes
When are options considered dilutive
When exercise price
What is the treasury stock method for dilutive EPS and how is it calculated
Calculates options effect on denominator of EPS
Option Shares issued - (option proceeds /avg market price ) = shares issued not reacquired
Add to CS outstanding
Calculate dilutive EPS
NI - preferred dividend + preferred dividend not paid (if converted) / CS shares + shares of converted PS
What affects the denominator of dilutive EPS
All potential common shares that reduce current EPS
Calculate dilutive EPS incremental per share effect
(Bond int x bond ) - tax rate x (bond int x bond ) / shares per bond (if converted)
What is the assumed conversion method for dilutive EPS
Numerator increase by bond interest not incurred and denominator increases by weighted average shares outstanding
What is the if converted method of computing EPS
Assumes convertible securities are converted at beginning of earliest period reported or time of issuance if later
How is interest expense handled of convertible security is deemed dilutive
Interest expense added back to net income.
How is cash available for unsecured creditors calculated
Free assets + excess cash from assets from assets pledged with secured creditors - priority liabilities
How are contingent issues agreements treated for dilutive EPS
Included in dilutive EPS of contingency met
How is the amount realized by a secured creditor calculated in bankruptcy
FV Secured Collateral + ( debt - collateral x rate )
What will bankruptcy trustee do with Unrecorded assets and liabilities
Recorded asset/Liabilities and record a gain or loss
What is the primary purpose of a quasi reorganization
Eliminate deficit in RE so dividends can be paid without waiting for future earnings
Steps in quasi reorganization
1. Revalue assets
2. Reduce par
Decrease CS and increase APIC
3. Write off deficit to APIC
Increase RE to $0 and decrease APIC
How are the issue of stock rights recorded
Only memorandum entry
How is the redemption of stock rights treated
As a dividend
How are stock warrants treated
Make memo entry until exercised
Calculate ESOP compensation expense
Amount to be charged to expense by employer
How is an ESOP liability recorded
Obligation of ESOP recorded as liability if guaranteed by employer
Cr note payable
How is treasury stock and net unrealized loss on AFS securities reported
In SE as contra SE account
How is treasury stock treated in stock split
If treasury stock protected from dilution then TS increased by stock split
How do stock options increase SE
Cr CS (par x shares)
Cr APIC (option price - par x shares)
Calculate return on CS equity
NI - dividend / Avg CSE
Calculate BV per share
SE / CS
Calculate dividend payout ratio
Dividend per share / EPS
How are instruments that have both an equity and debt portion reported under IFRS
Report equity and liability parts separately