Stockholders' Equity

Question 1

Retained earnings

Answer 1

Accumulated, undistributed P/L to date

Question 2

Rule for appropriated R/E

Answer 2

When the purpose of the appropriation has been achieved, it should be restored to unappropriated R/E

Question 3

Gain or loss from treasury stock under cost method

Answer 3

Any gain or loss associated with treasury stock is accounted for upon reissuance

Question 4

At what date would retained earnings decrease by the amount of dividends?

Answer 4

On the date of declaration

Question 5

Date of declaration

Answer 5

The date the board of directors formally approves a dividend

Dr. RE
Cr. Dividends payable

Question 6

Why are stock splits usually not applied to treasury stock?

Answer 6

Because such stock is not considered outstanding

Question 7

When would stock splits apply to treasury stock?

Answer 7

1. When the company is maintaining a ratio of treasury shares to shares outstanding in order to meet stock option or other contractual commitments
2. State law requires that treasury stock be protected from dilution

Question 8

What JE is made when the rights to purchase unissued C/S are given (without consideration)?

Answer 8

No JE because no consideration given

Question 9

How does the redemption of stock option rights affect equity?

Answer 9

It reduces equity by the amount paid

Question 10

Stock right

Answer 10

Provides an existing shareholder with the opportunity to buy additional shares

Usually carries a price below stock’s market price on date the rights are granted

Question 11

How should stock issued for outside services be recorded?

Answer 11

At FV of the stock (trading price = best evidence of FV)

Question 12

What is the rule for the purchase and/or sale of treasury stock?

Answer 12

There is no gain or loss on the purchase/sale

Any “difference” goes to “PIC” or if there is not enough PIC to absorb loss, the loss would be debited from RE

Question 13

What is the primary purpose of a quasi-reorganization?

Answer 13

To eliminate a RE deficit so that future earnings will be available for dividends rather than limited to offsetting the RE deficit

Question 14

Scrip dividends

Answer 14

A special form of N/P whereby a corporation commits to paying a dividend at some later date (used when there is a cash shortage)

Dr. RE
Cr. N/P
Cr. Accrued interest

Question 15

Liquidating dividend

Answer 15

When dividends to S/H exceed RE

Dr. APIC (first)
Dr. C/S or P/S

Question 16

What should a property dividend be recorded in RE at?

Answer 16

The property’s market value at date of declaration

Question 17

Preferred stock

Answer 17

Equity security with preferences and features no associated with common stock

Question 18

Cumulative preferred stock

Answer 18

All or part of the preferred dividend not paid in any year accumulates and must be paid in the future before dividends can be paid to common s/h

Question 19

When are stock options outstanding reduced in a compensatory stock option plan?

Answer 19

At the exercise date

Question 20

Computation of book value per common share

Answer 20

Book value per common share = Common stockholders’ equity / Common shares outstanding

Question 21

On what date is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on FMV of the award?

Answer 21

The date of grant

Question 22

Participating preferred stock

Answer 22

Preferred s/h share (participate) with common s/h in dividends in excess of a specific amount

Share equally then pro rata

Question 23

How is compensation expense calculated?

Answer 23

Calculated at the grant date of the option and allocated over the vesting period

Question 24

In a stock dividend, if it is small (<20%), how is it treated?

Answer 24

The FMV of stock dividend at the date of declaration is transferred from RE to capital stock and APIC

Question 25

In a stock dividend, if it is large (>25%) how is it treated?

Answer 25

The par/stated value of the stock dividend is normally transferred from RE to capital stock (number of shares issued x par value)

Question 26

How is the intrinsic value of options calculated?

Answer 26

Number of share options x Market price of stock on date of grant less exercise price of share option

Question 27

How should c/s that contains an unconditional redemption feature be accounted for?

Answer 27

As a liability on the date of issuance b/c there is an obligation of cash outflow in the future that the company has no ability to prevent

Question 28

Madatorily redeemable preferred stock (liability)

Answer 28

Issued with a maturity date

Must be bought back by the company on the maturity date (similar to debt)