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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

BV method
No G/L


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 Cash
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

Dr cash
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
Decrease APIC


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

Dr loss
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



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


Under IFRS what are the TS methods

TS method, par value method, constructive retirement method