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Flashcards in Stockholders Equity Deck (39):
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 arrears recorded (accrued) 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?

(FMV on distribution date - CV)=Gain/loss on non-monetary asset

7

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

The net effect=RE Decreases by the CV of the asset. Here's why:
1. DR RE for FMV of asset when the dividend is declared
2. DR Loss or CR Gain when the asset is distributed, which offsets original effect of the debt to RE and will be a wash.

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 (SMALL STOCK DIVIDEND=FMV)
**Stock Dividends are the only dividends that do NOT decrease SE

9

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

When Stock Dividend is greater than 25% of common stock outstanding (LARGE STOCK DIVIDEND=PAR)
**Stock Dividends are the only dividends that do NOT decrease SE

10

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

Stock dividends and stock splits have NO EFFECT on Stockholders Equity
**Stock Dividends are the only dividends that do NOT decrease SE

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 Discounts stock options

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 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 SE = Gain on settlement of debt + Credit to SE 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?

+ C/S
- P/S
- P/S Dividends in Arrears
- P/S Liquidation Premium
=Total Book Value
/ Shares outstanding
=Book Value per Common Share

20

How is the dividend per share payout ratio calculated?

Dividends per share / earnings per share
OR
DPS/EPS=Payout ratio

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 DILUTIVE & Exercise Price < FMV

If not, 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 expenseContingent Issue Agreements are included in Diluted EPS if contingency is met

26

Treasury Stock defined=

T/S= Authorized, Issued, but NOT Outstanding

27

T/S Methods

GAAP & IFRS=
1. Cost Method (Cost In, Cost Out :: Until Retire)
2. Par Value Method (Legal Method) (Par In, Par Out; Resell like New Issuance)

IFRS Only
3. Constructive Retirement Method (Like Par Value but when shares are repurchased DR C/S not T/S)

28

T/S Cost Method JEs:
Issue Stock
DR Cash (Issue Price*#Shares)
CR C/S (Par*#Shares)
CR APIC-C/S [(Issue Price-Par)*#Shares]

Repurchase Stock
DR T/S @ Cost (Repurchase Price * #Shares)
CR Cash (same)

Resell Stock (Use FIFO if several)
DR Cash (Resell Price * #shares)
CR T/S (Repurchase Price * #shares)
DR/CR Plug: APIC-T/S

Retire-->

COST METHOD:
RETIRE STOCK=No Longer Issued or Outstanding
-Refer back to initial Issuance of Stock JE

RETIRE STOCK
DR C/S (Par*#SharesRetired)
DR APIC-C/S [(Issue Price-Par)*#SharesRetired]
CR T/S (Repurchase Price * #shares retired)
CR Plug APIC T/S

29

T/S PAR METHOD JEs:
Issue Stock
DR Cash
CR C/S
CR APIC-C/S

Repurchase Stock
DR T/S
DR APIC-C/S
CR Cash
CR APIC-T/S

Resell Stock - Like New Issuance
(see above)

Retire Stock
DR C/S
CR T/S

T/S PAR METHOD JEs:
Issue Stock
DR Cash (Issue Price * #shares)
CR C/S (Par * #shares)
CR APIC-C/S [(Issue-Par) * #shares]

Repurchase Stock
DR T/S (Par * #shares)
DR APIC-C/S [(Issue-Par) * #shares]
CR Cash (Repurch Price * #shares)
CR Plug: APIC-T/S

Resell Stock - Like New Issuance
(see above)

Retire Stock
DR C/S (Par * #shares)
CR T/S (same)

30

Dividend Dates and JEs

1. Declare Dividend=Liability Exists
DR R/E
CR Dividend Payable
2. Date of Record=Who Gets $
No JE
3. Date of Distribution
DR Dividends Payable
CR Cash

31

Cash Dividend JE

1. Declared
DR R/E
CR Div Pay

3. Distributed
DR Div Pay
CR Cash

32

Scrip Dividend JE

Scrip=Give Dividend as Note Payable
1. Declared
DR R/E
CR Dividend Payable

3. Distributed
DR Dividend Payable
CR NOTE PAYABLE

33

Small Stock Div < 25% @ FMV

DR R/E
CR C/S
CR APIC-C/S

34

Large Stock Div > 25% @ PAR

DR R/E
CR C/S
@ Par so no APIC

35

Stock Split JE

DR C/S (10shares * $10 Par)
CR C/S (20 shares * $5 Par)

36

TRICK QUESTION:
Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. What amount should Onal report in its income statement for these transactions?

$0 because No Gain/Loss is recognized on the Purchase, Reissue, or Retirement of T/S.

37

Calc Intrinsic Value of Call Option

(Mkt Price - Exercise Price) * #shares

38

Property Dividend (FMV)
1. Declare
DR R/E
CR Div Payable

3. Distribute
DR Dividend Payable
CR Asset
CR Gain

+R/E
-Gain
=Net Effect on S/E

Think:
DR RE
CR Asset
CR Gain

39

How is the issuance of stock rights recorded?

Disclosure Only
No Effect on Assets, Liab, Equity