INTER ACCT- Gleim Ch 18 SE

An entity declared a cash dividend on its common stock on December 15, Year 1, payable on January 12, Year 2. How would this dividend affect equity on the following dates? December 15, Year 1 December 31, Year 1 January 12, Year 2

December 15, Year 1 (decrease) December 31, Year 1 (No effect) January 12, Year 2( No effect)

Treasury stock was acquired for cash at a price in excess of its par value. The treasury stock was subsequently reissued for cash at a price in excess of its acquisition price. Assuming that the cost method of accounting for treasury stock transactions is used, what is the effect of the subsequent reissuance of the treasury stock on each of the following? Additional Paid-In Capital Retained Earning Total Equity

Additional Paid-In Capital ( Increase) Retained Earning (no effect) Total Equity(Incease) When the cost method of accounting for treasury stock transactions is used, the acquisition of treasury stock is recorded as a debit to a treasury stock account and a credit to cash. Retained earnings is unaffected. When the treasury stock is subsequently reissued for cash at a price in excess of its acquisition cost, the difference between the cash received and the carrying value (acquisition cost) of the treasury stock is credited to additional paid-in capital. Again, retained earnings is unaffected. Thus, the transactions increase additional paid-in capital and total equity but have no effect on retained earnings.

During the current year, 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. The firm uses the cost method to account for treasury stock. What amount should Onal report in its income statement for these transactions?

$0 This answer is correct.An entity's transactions in its own stock do not affect net income or the results of operations.

At December 31, Year 3, Eagle Corp. reported $1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in Year 4 at a total cost of $1.5 million. In Year 4, Eagle appropriated $1.2 million of retained earnings for the construction of a new plant. Also, $2 million of cash was restricted for the retirement of bonds due in Year 5. In its Year 4 balance sheet, Eagle should report what amount of appropriated retained earnings?

$1,200,000 This answer is correct.Appropriating retained earnings is a formal way of marking a portion of retained earnings for other uses. A journal entry is used to move the amount from one account to the other. When the appropriation is no longer necessary, the entry is reversed, even if the full appropriation is not needed. Eagle appropriated only $1.2 million. The cash restriction is not included in appropriated retained earnings. If the amount is material, the restriction will require separate reporting of the cash item in the balance sheet, disclosure in the notes, and, possibly, reclassification as noncurrent.

On incorporation, Dee, Inc., issued common stock at a price in excess of its par value. No other stock transactions occurred except that treasury stock was acquired for an amount exceeding this issue price. If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following? Net Common Stock Additional Paid-in Capital Retain Earnings

Net Common Stock -Decrease Additional Paid-in Capital -Decrease Retain Earnings -Decrease This answer is correct. Under the par value method, treasury stock is debited at par value, and the amount is reported as a reduction of common stock. The purchase also results in the removal of the additional paid-in capital associated with the original issue of the shares. Given that no other stock transactions occurred and that treasury stock was acquired for an amount exceeding the issue price, the balancing debit for the excess of the acquisition price over the issue price is to retained earnings. If paid-in capital from treasury stock had been previously recorded, the balancing debit would be to that account but only to the extent of its credit balance. Thus, retained earnings is also decreased.

Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total equity and the book value per common share? Total Equity Book Value per share

Total Equity (Decrease) Book Value per share (Increase) This answer is correct. Under the cost method, the acquisition of treasury stock is recorded as a debit to treasury stock and a credit to cash equal to the amount of the purchase price. This transaction results in a decrease in both total assets and total equity because treasury stock is a contra-equity account. Moreover, if the acquisition cost is less than book value, the book value per share will increase. For example, if equity is $100, 10 shares are outstanding, and 5 shares are purchased for $45, the book value per share will increase from $10 ($100 ÷ 10) to $11 [($100 - $45) ÷ 5].

Asp Co. was organized on January 2, Year 4, with 30,000 authorized shares of $10 par common stock. During Year 4, the corporation had the following capital transactions: January 5 -- Issued 20,000 shares at $15 per share July 14 -- Purchased 5,000 shares at $17 per share December 27 -- Reissued the 5,000 shares held in treasury at $20 per share Asp used the par-value method to record the purchase and reissuance of the treasury shares. It had no prior treasury stock transactions. In its December 31, Year 4, balance sheet, what amount should Asp report as additional paid-in capital?

$125,000 This answer is correct.Under the par-value method, additional paid-in capital is debited for $25,000 (5,000 shares × $5 excess of the issue price over par) when the treasury stock is acquired. Treasury stock is debited for the $50,000 par value (5,000 shares × $10), and retained earnings is debited for $10,000 [5,000 shares × ($17 - $15)]. When the stock is reissued, additional paid-in capital is credited for $50,000 (5,000 shares × $10 excess over par). Thus, ending additional paid-in capital is $125,000 ($100,000 - $25,000 + $50,000).

On July 1, Year 4, 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 record for additional paid-in capital on the issuance of the stock? $55,000 $45,000 $75,000 $65,000

$65,000 This answer is correct.The proceeds of the combined issuance of different classes of securities should be allocated based on the relative fair values of the securities. Since the fair value of the stock is not known, the bonds should be recorded at their fair value ($40,000), with the remainder of the proceeds ($110,000 - $40,000 = $70,000) credited to common stock at par value (1,000 shares × $5 = $5,000) and additional paid-in capital ($70,000 - $5,000 par = $65,000).

Garland Corporation, a public company, has declared a property dividend of one share of its investment in Marlowe, Inc., for every 10 shares of its common stock outstanding. The Marlowe shares were originally purchased by Garland for $50 per share; on the date the dividend was declared, the market value was $75 per share. As a result of this declaration, Garland should recognize A gain of $25 per share to be distributed. An appropriate gain or loss based on the market value on the date of distribution. A loss of $25 per share to be distributed. No gain or loss.

A gain of $25 per share to be distributed. This answer is correct.When a property dividend is declared, the property is remeasured at its fair value as of the declaration date ($75 - $50 = $25).

The par-value method of accounting for treasury stock differs from the cost method because It reverses the original entry to issue the common stock, with any difference between carrying amount and purchase price being shown as a gain or loss. It does not recognize any gain or loss on a subsequent resale of the stock. No gains or losses are recognized on the issuance of treasury stock using the par-value method. It reverses the original entry to issue the common stock, with any difference between carrying amount and purchase price adjusted through paid-in capital or retained earnings. It treats a subsequent reissuance as a new issuance of common stock. Any gain is recognized upon repurchase of stock, but a loss is treated as an adjustment to retained earnings.

It reverses the original entry to issue the common stock, with any difference between carrying amount and purchase price adjusted through paid-in capital or retained earnings. It treats a subsequent reissuance as a new issuance of common stock. This answer is correct. The par-value method treats the acquisition of treasury stock as a constructive retirement and the resale as a new issuance. Upon acquisition, the entry originally made to issue stock is reversed by offsetting the common stock account with treasury stock at par value and removing the paid-in capital recorded when the stock was originally issued. Any difference between the original issuance price and the reacquisition price is ordinarily adjusted through paid-in capital accounts and retained earnings. The subsequent reissuance removes the treasury stock at par value and reestablishes paid-in capital in excess of par for any excess of par value over the reissuance price. By contrast, the cost method does not treat the acquisition and reissuance of treasury stock as a constructive retirement and new issuance.