Module 15: Stockholders' Equity

Define liquidating dividends

Dividends that are based on funds other than retained earnings are considered to be liquidating dividends

What if dilutive > basic

Don't show dilutive just show the basic then. Remember we can't have dilutive being greater than basic

Where does EPS go on the financial statement?

EPS goes on the income statement

In a compensatory stock option plan for which the grant, measurement, and exercise date are all different, the stock options outstanding account should be reduced at the

Exercise date. Stock options would be issued and credited to "paid in capital, stock options", usually at the grant date. Upon exercise of such options by the option holders, the paid in capital, stock options account would be reduced at the exercise date by the corporation.

How to convert from preferred stock to common stock

Issued preferred stock that's convertible to common Cash _____preferred stock _____APIC Preferred stock APIC _____Common stock _____APIC

What is the purpose of the basic EPS formula

It helps monitor a company's performane over an entire reporting period

What does it mean to be fully participating

It means that out of the total amount of dividends declared (PS & CS) after CS AND PS paid their annual dividends then any leftover of the total amount dividend declared would need to be allocated between the the fully participating CS & PS

A property dividend should be recorded in retained earnings at the property's

Market value at date of declaration. Where a property dividend is declared, the market value at the date of declaration is used to reduce retained earnings.

What is the diluted EPS

Measures the performance of the entity over the reporting period same as EPS but also into account the effect of all convertible securities that can be converted into common stock diluted EPS is usually lower than basic EPS goal is to make diluted EPS to look low

In the basic EPS formula how do you calculate the numerator portion Net income available to common stockholders

Net income - dividends declared in the period on the NONCUMULATIVE preferred stock - dividends accumulated for the current period only on the CUMULATIVE Preferred stock whether declared or not

What is a share-based payment and what are the different kinds

Share-based payment is when an entity acquires goods/services by issuing shares (stock) to employees or nonemployees a. Share-based payments to nonemployees = measured at FV for equity instrument or FV of servies whichever is more reliable b. Share-based payments to employees = Cost of employee service measured at the grant-date FV of equity instruments issued

What is a strategy for calculating diluted EPS

Start off by calculating the basic EPS part

What is the bankruptcy law requirement?

Bankrupcy law requires that the claims of secured creditors be satisfied before any unsecured claims are paid liquidation value = cash paid to lender if borrower goes bankrupt

Elaine Corporation was organized on January 1, 20X9, with an authorization of 1,000,000 shares of common stock with a par value of $5 per share. During 20X9, the corporation had the following capital transactions: January 4 - issued 200,000 shares @ $5 per share. April 8 - issued 100,000 shares @ $7 per share. June 9 - issued 30,000 shares @ $10 per share. July 29 - purchased 50,000 shares @ $4 per share. December 31 - sold 50,000 shares held in treasury at $8 per share. Elaine used the cost method to record the purchase and reissuance of the treasury shares. What should be the balance in the account "capital in excess of par value" as of December 31, 20X9?

350k answer Under the COST METHOD of accounting for treasury stock (as opposed to the "par value" method), the purchase and subsequent sale of treasury stock are viewed as one transaction. On the date of purchase of treasury stock, the amount paid is debited to an account entitled treasury stock. If a subsequent sale results in a gain, the gain is credited to an account entitled Paid-in-capital-Treasury stock and not to retained earnings. If a loss results, the loss is charged to the Paid-in-capital-Treasury stock account to the extent of prior gains on sales or retirements of the same class of stock. Any loss in excess of prior gains is charged to retained earnings. In this question, since the par value of the stock is $5 per share, the account "capital in excess of par" would have been affected as follows: January 4 sale: Stock sold at par value; no effect. April 8 sale: Stock sold at $7 per share. Capital in excess of par increased $200,000 (100,000 × $2). June 9 sale: Stock sold at $10 per share. Capital in excess of par increased $150,000 (30,000 × $5). July 29 purchase: No effect results from purchase of stock. Dec. 31 sale: Treasury stock sold at $4 above cost. Paid-in-capital-Treasury stock increased $200,000 for the gain (50,000 × $4). The gain on the sale of treasury stock does not go into the paid in capital section of the balance sheet as capital in excess of par value. It goes into the paid-in capital section as paid-in capital from treasury stock.

In the basic EPS formula how do you calculate the demoninator portion the number of common shares year 1

COMMON Shares outstanding in the BEGINNING OF THE YEAR and Stocks issued as a result of stock dividends or splits should be considered outstanding for the ENTIRE period in which they were issused and If shares are issued in the middle of the year NOT result of stock dividends/splits then take into account the months and Convertible shares converted into common stock and Contingent shares that must be issued at a later year

What is the journal entry for a retirement of stock using cost method

Common stock (par) 20k APIC 180k RE 100k (reacquisition price > par) ____treasury stock 300k * for gains on retirement credit APIC-RETIREMENT OF STOCK What's going on here is the company originally issued stock and then reacquired it but then suddenly the board of directors want to cancel them so they won't get reissued and this is the transaction.

Dividends in arrears disclosed in F/S vs. accrued liabiity

Dividends in arrears are disclosed in F/S ---> if the company has NOT DECLARED Dividends in arrears are considered accrued liability ---> if the company declared them

How to record scrip dividends? How to record their extinguishment by payment?

scrip dividends are promises to pay dividends in the future (and may bear interest) instead of cash retained earnings _____scrip dividends payable script dividends are liability which is extinguished by payment scrip dividends payable interest expense (maybe) ____cash

How are stock splits handled?

stock splits aren't only handled in the current year but ALSO retrospectively for comparability purposes

When preferred stock gets converted to common stock what method gets applied market or book and why?

the book value gets used because it's argued that when the convertible securities were first issued, the value of the securities were equal to the face value of the bond or the shares of common stock, if converted. For this reason, strict theorists believe the company should not record a gain or loss when converted. if book value is used no loss or gain will flow into the I/S

How to calculate the compensation expense for share based payment?

the company would calculate their compensation expense like this compensatory stock options to buy 1k shares x stock options with same terms at $28 this is recorded immediately ASSUMING the options are exercisable immediately after the grant date

in stock options based compensation what interest rate is used to discount both the exercise price of the option and the future dividends stream?

the risk-free interest rate is used because this is the rate of return on an investment with no risk of financial loss and it applies to stock based compensation because your employer allows you to buy the option at a FIXED price NOT Market and you can convert when the market price is high

divdiends from Nonconvertible cumulative preferred stock should be deducted from net income whether declared or not because

there are dividends in arrears that must be paid to preferred shareholders first before common shareholders

How are financial instrument that impose an obligation on the issuer to transfer assets or issue liability classified on the balance sheet?

they are classified as a liability. Therefore, mandatorily redeemable preferred stock must be classified as liabilities on balance sheet

How are dividends in arrears recorded on B/S

they are not recorded on B/S as liability because they ARE NOT DECLARED they just accumulate due to cumulative preferred stock They are disclosed as a note

divdiends from convertible cumulative preferred stock should not be deducted from NI why?

they should not be deducted from NI because they can be converted to common stock anytime

What is the BV/share of common stock

total shareholders' equity to/common stock outstanding

What is entry for acquiring treasury stock using the par method for an amount exceeding the issue price the following journal entry is made

treasury stock (par) APIC (excess of original issue price over par) retained earnings (excess of acquisition price over issue price) _____cash

100 shares ($50 par) are originally sold at $60, reacquired at $70, and subsequently resold at $75 What is the JE for this in par value method?

treasury stock 5k paid in capital - common stock 1k (60-50) retained earnings 1k (60-50) _____cash cash 7.5k _____treasury stock 5k _____paid in capital common stock 2.5k

Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment?

$100 Intrinsic value is the difference between an underlying stock's market price and its exercise price, times the number of shares that can be purchased. You take the fair market value of the $10 per share, minus the exercise price of $9 per share, resulting in a difference of $1 per share, times the number of shares in the option of 100. This gives an intrinsic value of $100. If the difference in the market price and the exercise price is negative, intrinsic value is given a zero value because it can never be negative.

The stockholders of Meadow Corp. approved a stock-option plan that grants the company's top three executives options to purchase a maximum of 1,000 shares each of Meadow's $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted?

$100,000 In this question, the examiners provide the fair value of the compensation, which is $300,000. At the time of grant, Meadow Corp. will debit deferred compensation expense $300,000 and credit paid-in-capital - stock options for $300,000. The deferred compensation expense of $300,000 is a contra account to the paid-in-capital - stock options. Because the employees cannot exercise until the vesting period is over, the deferred compensation expense must be amortized over a 3 year period, or the number of years until the employee vests in the stock option plan. Since the deferred compensation is $300,000, divide the $300,000 by 3 years and record the following entry for the next three years. Debit compensation expense $100,000 and credit deferred compensation expense for $100,000. Resulting in the compensation expense that Meadow should record in the year the option was granted is $100,000.

Jason Corporation's stockholders' equity at December 31, 20X5, consisted of the following: Preferred stock, $50 par value, 10% noncumulative, 10,000 shares issued and outstanding $500,000 Common stock, $10 par value; 80,000 shares issued and outstanding $800,000 Retained earnings $300,000 The preferred stock has a liquidating value of $55 per share. At December 31, 20X5, the book value per share of common stock is

$13.13 Book value per common share is computed by dividing total common stockholders' equity by the number of common shares outstanding. Where there is more than one class of stock outstanding, total stockholders' equity must be apportioned among the various classes in accordance with the claims that would be effective in case the company liquidated. In our situation, we are given that the preferred shares have a liquidating value of $55. Thus, we have as follows: Total stockholders' equity = $1,600,000 Less: Liquidating value of preferred stock: 10,000 shares × $55 = $550,000 Common stockholders' equity $1,050,000 Since there are 80,000 common shares issued and outstanding, the book value per share is $1,050,000/80,000 shares = $13.13 (rounded).

Cox Corporation had 1,200,000 shares of common stock outstanding on January 1 and December 31, 20X5. In connection with the acquisition of a acquiree company in June 20X4, Cox is required to issue 50,000 additional shares of its common stock on July 1, 20X6, to the former owners of the acquiree. Cox paid $200,000 in preferred stock dividends in 20X5, and reported net income of $3,400,000 for the year. Cox's diluted earnings per share for 20X5 should be

$2.56 Numerator: Net income for 20X5 $3,400,000 - Preferred stock dividends 200k =$3,200,000 Denominator: 1/1-12/31 1.2M shares CONTINGENTLY ISSUABLE 50k =1,250,000 3,200,000/1,250,000=2.56

On June 30, 20X1, Harper, Inc., had outstanding 8%, $1,000,000 face value, convertible bonds maturing on June 30, 20X6. Interest is payable on June 30 and December 31. The unamortized balance in the bond premium account was $50,000 on June 30, 20X1. On this date all of these bonds were converted into 40,000 shares of $20 par value common stock. Harper incurred expenses of $30,000 in connection with the conversion. Under the book value method, the total amount by which additional paid-in-capital should increase is

$220,000 convertible bonds 1m unamortized premium 50k _____common stock (830k) par + expenses _____APIC 220k (plug) *book value method = record cs at par *market value method = record cs and APIC at market

On January 1, 20X5, Baxter Corporation granted John Elliot, the president, an option to purchase 10,000 shares of Baxter's $20 par value common stock at $30 per share, The option is intended as additional compensation to Elliot for the next two years. The option is exercisable within a four-year period beginning January 1, 20X7. The market price of Baxter's common stock, with similar terms and conditions, was $35 per share on January 1, 20X5, and $37 per share on December 31, 20X5. As a result of the stock option, Baxter should charge compensation expense in 20X5 of

$25,000 The compensation expense in this stock option plan is measured by the difference between the market price and the exercise price on the date the grant is made. In this situation, on January 1, 20X5, the common stock had a market price of $35 per share, with similar terms and conditions, while the exercise price to Elliot is $30 per share. Therefore, the total compensation expense over the period benefitted is $50,000 (10,000 shares × $5). Since the option is intended as additional compensation for two years, there would be additional compensation expense of $25,000 in 20X5 and $25,000 in 20X6. The journal entries are: 1/1/X5: Deferred compensation expense $50,000 _____Paid in capital stock options $50,000 12/31/X5: Compensation expense $25,000 _____Deferred compensation expense $25,000 12/31/X6: Compensation expense $25,000 _____Deferred compensation expense $25,000

company had the following outstanding shares as of January 1, year 2: Preferred stock, $60 par, 4%, cumulative 10,000 shares Common stock, $3 par 50,000 shares On April 1, year 2, the company sold 8,000 shares of previously unissued common stock. No dividends were in arrears on January 1, year 2, and no dividends were declared or paid during year 2. Net income for year 2 totaled $236,000. What amount is basic earnings per share for the year ended December 31, year 2?

$3.79 To calculate basic earnings per share for the year ended December 31, year 2, the numerator is the net income available to common stockholders divided by the weighted average number of common shares. To calculate the numerator, take the net income for year 2 of $236,000 and subtract one year of dividends to preferred stockholders if the preferred stockholders are cumulative. The preferred dividends are $24,000 (10,000 shares x $60 par x 4%). After preferred dividends, the income available to common stockholders is $212,000 ($236,000 - $24,000). On April 1, year 2, the company sold 8,000 shares of previously unissued common stock. In the weighted average number of shares calculation, 6,000 (9/12 x 8,000) of these 8,000 shares are used (April 1, year 2 through December 31, year 2 is 9 months). The total weighted average number of common shares is 56,000 (50,000 + 6,000). Therefore, the basic earnings per share is $3.79 ($212,000 / 56,000).

On September 30, 1982, Grey Company issued 3,000 shares of its $10 par common stock in connection with a stock dividend. No entry was made on the stock dividend declaration date. The market value per share immediately after issuance was $15. Grey's stockholders' equity accounts immediately before issuance of the stock dividend shares were as follows: Common stock, $10 par; 50,000 shares authorized; 20,000 shares outstanding $200,000 Additional paid-in capital $300,000 Retained earnings $350,000 What should be the retained earnings balance immediately after the stock dividend?

$305,000 The question is about distinguishing between what is referred to as small and large stock dividends. When the proportion of the additional shares issued is small in relation to the total shares previously outstanding (generally 15% or less), the market value of the additional shares should be capitalized. Therefore, since the market value per share is $15 and 3,000 additional shares are being issued as a stock dividend, a total of 5,000 would be capitalized ($15 × 3,000); that is, retained earnings is reduced by $45,000, common stock is increased by $30,000 (3,000 shares × $10 par value per share) and additional-paid-in capital is increased by $15,000 (the difference between the full market and par values). Thus, the balance in retained earnings after recognition of the stock dividend would be $305,000 ($350,000 - $45,000), Had this stock dividend been in the area of 20% or more, then it would have been considered to be a "large" stock dividend, and retained earnings would have been reduced only by the par value of the additional shares issued, not their market value.

Jensen performed legal services to assist Balm Co. in accomplishing its initial organization. Jensen accepted 1,000 shares of $5 par common stock in Balm as payment for his services. The Balm shares were not yet publicly traded, but they had a book value of $4 per share. Jensen provided 48 hours of service, which is normally billed at $125 per hour. By what amount should the common stock account increase?

$5,000 The common stock account would increase by the number of shares Jensen accepted, times the par value per share. 1,000 shares × $5 par per share = $5,000.

As of December 15, 20X3, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for 2002 of $100,000 have not yet been declared. The board of directors plans to declare cash dividends on its preferred and common stock on January 16, 20X4. Aviator paid an annual bonus to its CEO based on the company's annual profits. The bonus for 20X3 was $50,000, and it will be paid on February 10, 20X4. What amount should Aviator report as current liabilities on its balance sheet at December 31, 20X3?

$50,000 If cash dividends declared are legal obligations due within one year, they are reported as current liabilities until paid. Dividends in arrears on cumulative preferred stock are not liabilities until they are declared and until that time, they must be disclosed in the notes to the financial statements. Since no dividends were declared at December 31, no liability is recorded. The CEO's bonus of $50,000 is the only current liability at December 31, 20X3.

During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma's basic earnings per share for the current year?

$7.36 Income available to common shareholders/Weighted-average number of common shares outstanding. Income available to common shareholders is equal to the $200,000 net income minus the preferred dividends $16,000 (8,000 × $20 × 10%) or $184,000. The 25,000 shares of common stock was the only common stock related information provided in the question, so it is the same as the weighted-average number of common shares outstanding. The basic earnings per share is: 184000/25000=7.36

Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred stock. No dividends on common stock were declared during the year. Net income was $2,000,000. What was Jen's basic earnings per share?

$9.00 For basic earnings per share, the numerator is the net income applicable to common stockholders divided by the weighted average number of shares. To calculate the numerator, take the net income of $2,000,000 and because the preferred stock is cumulative, subtract one year of preferred dividends from net income. To calculate one year of preferred dividends, multiply the 20,000 shares of preferred stock times the par value per share, times the annual fixed dividend rate of 10%. This results in the annual preferred dividend of $200,000 (20,000 shares × $100 par × 10% fixed dividend rate). The numerator is the net income of $2,000,000 minus the preferred dividend for one year of $200,000, which equals $1,800,000. The denominator is the weighted average number of common shares outstanding, which are 200,000 shares. To calculate basic earnings per share, take the numerator of $1,800,000 and divide it by the denominator of 200,000 shares, to arrive at basic earnings per share of $9.00.

Formula for diluted EPS

(NI available to common shareholders + after-tax interest on convertible debt)/(Weighted-average common shares oustanding + potentially dilutive common shares + contingent issue of agreements) *add back the after tax interest on convertible debt because you assume all the convertible bonds payable got converted into shares of CS *potentially dilutive common shares make sure that you convert them into CS

What is the basic EPS formula

(Net income - Preferred dividends)/Weighted average common shares outstanding

How to apply the treasury method for dilutive stock option

(average market price - exercise price)/avg. market price) x # option/warrant shares

What are the steps to calculating diluted EPS

1) Calculate BASIC EPS SIDE FIRST 2) after the basic EPS side of the equation has been filled leave it alone and then fill out the diluted side

What are the 3 things that quasi reorganization generally involve?

1) revaluing assets 2) reducing par 3) writing the deficit off against additional paid-in capital

1/1/Y1 Common stock outstanding 30k 2/1/Y1 Issued a 10% common stock dividend 7/1/Y1 Issued common stock for cash

1/1/Y1 Common stock outstanding 30k x 12/12 fraction 2/1/Y1 3k shares x 12/12 fraction 7/1/Y1 8k shares x 6/12 fraction the fraction represents how long it's going to take to get to 12/31. The common stock dividends are treated as if they were issued at the beginning of the year

Deck Co. had 120,000 shares of common stock outstanding at January 1, 2014. On July 1, 2014, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to calculate 2014 earnings per share?

140k The number of shares that Deck should use to calculate 2014 earnings per share is the weighted average number of common share outstanding for the year. The calculation is as follows: January 1, 2014 shares outstanding all 12 months = 120k July 1, 2014 40,000 common shares issued × 6/1 = 20k Weighted average commons share outstanding = 140k

Carroll, Inc., accomplished a quasi-reorganization effective December 31, 20X5. Immediately prior to the quasi-reorganization the stockholders' equity was as follows: Common stock, par value $10 per share; authorized, issued and outstanding 400,000 shares =$4,000,000 Additional paid-in capital $600,000 Retained earnings (deficit) $(900,000) Under the terms of the quasi reorganization: (1) the par value of the common stock was reduced from $10 per share to $5 per share, and (2) plant and equipment (net) was written down by $1,200,000. Immediately after the quasi-reorganization, the total stockholders' equity should be

2,500,000 A reduction in the par value of common stock as part of a quasi-reorganization has no effect on the total stockholders' equity; it only results in a redistribution of the balances within the components of stockholders' equity. However, a write down of assets would result in a corresponding reduction in stockholders' equity. Thus, if plant and equipment are written down by $1,200,000, then total stockholders' equity would be reduced from $3,700,000 to $2,500,000. RE 1.2m _____assets 1.2m debit RE because

At December 31, 1979, Richmond Company had 100,000 shares of $10 par value common stock issued and outstanding. There was no change in the number of shares outstanding during 1980. Total stockholders' equity at December 31, 1980, was $2,800,000. The net income for the year ended December 31, 1980, was $800,000. During 1980 Richmond paid $3.00 per share in dividends on its common stock. The quoted market value of Richmond's common stock on a national stock exchange was $24 on December 31, 1980. What was the price-earnings ratio on common stock for 1980?

3.0 The price-earnings ratio measures a company's current share price relative to its basic earnings per share. The formula for the price-earnings ratio is: Market price per share / Basic earnings per Share Richmond's price-earnings ratio on common stock for 1980 is calculated as follows: Market price per share / Basic earnings per Share $24 / $8 3.0

December 31, 20X5 and 20X4, Gravin Corporation had 90,000 shares of common stock and 20,000 shares of convertible preferred stock outstanding, in addition to 9% convertible bonds payable in the face amount of $2,000,000. During 20X5, Gravin paid dividends of $2.50 per share on the preferred stock. The preferred stock is convertible into 20,000 shares of common stock. The 9% convertible bonds are convertible into 30,000 shares of common stock. Net income for 20X5 was $970,000. Assume an income tax rate of 40%. How much is the fully diluted earnings per share for the year ended December 31, 20X5?

7.70 For step 1: Common shares outstanding 90,000 Add: From conversion of preferred stock 20,000 Additional shares to be issued upon conversion of 9% bonds 30,000 Total common shares for fully diluted earnings per share 140,000 For step 2: Net income reported for 1981 $970,000 Add: Interest on 9% convertible bonds: 9% × $2,000,000 $180,000 Less: Income tax on above: 40% × $180,000 $72,000 $108,000 Net income for fully diluted EPS $1,078,000 * add back the aftertax interest on bond because after converting the convertible bonds into common stock it was as if these convertible bonds were never issued so you need to add back the aftertax interest to your net income

How do you know if a stock option is dilutive?

A stock option is dilutive only if the exercise price is LESS than the market value then apply the TREASURY METHOD to compute the shares issued IF THEY WERE EXERCISED

How would a stock split in which the par value decreases in proportion to the number of shares issued affect the additional paid in capital and retained earnings

A stock split does not affect either the balance of the APIC or the retained earnings account. The number of shares outstanding and the par value per share merely change in proportion to each other. When this occurs, only a memorandum entry is made

what does APIC apply to?

APIC ONLY applies to common and preferred shares

How to record stock dividends at declaration? How to record stock dividends at issuance?

At declaration Retained earnings (FV of shares) _____Stock dividend distributable (par) _____Paid-in capital in excess of par (plug) At issuance Stock dividend distributable _____Common stock

What is the JE for stock subscriptions?

At subscription Cash (any cash received) Suscription receivable (stock balance) _____CS subscribed (Par) _____APIC excess par * think of Exelon ESP where your money gets taken out first from pay check every 2 weeks and eventually paid to the company every quarter *we DEBIT CASH because some investors will prepay a portion of their money ahead of time like a downpayment for a certain stock and the subscription receivable means they still need to collect more money before issuing the stock

How to record liquidating dividends

Paid-in capital ______cash we do not debit retained earnings because there is none to support dividends since the company is liquidating

What is the difference between par value method and cost method

Par value method treasury stock gets RECORDED AT PAR VALUE cost method---> treasury stock gets recorded at cost (aka. reacquisition cost of CS issued)

What is Par value of a stock mean?

Par value of a stock means the ORIGINAL VALUE of the stock when it was FIRST ISSUED

What is the difference between stated value and par value?

Par value of a stock means the ORIGINAL VALUE of the stock when it was FIRST ISSUED Stated value is assigned with there is no par value the purpose of having this is solely for accounting purposes

define dividends in arrear

Past omitted dividends on cumulative preferred stock. Generally these omitted dividends were not declared and, therefore, do not appear on the corporation's balance sheet as a liability. However, they must be disclosed in the notes to the balance sheet. When a corporation has dividends in arrears on its cumulative preferred stock, it must first pay the past omitted preferred dividends and then the current year's preferred dividends before it can pay its common stockholders any dividends.

What does the OPtion & warrant affect in the diluted EPS fraction? What does Preferred stock & Bonds payable affect diluted EPS which one affects numerator and which one affects denominator

Preferred stock & bonds payable affects the numerator and denominator Option & warrant affects the denominator ONLY

What is the JE for small stock dividend

RE FMV _____common stock (par value of stock) _____APIC

What is the JE for large stock dividend?

RE par _____ CS distributable par

What is the entry record the declaration of dividend liability and the payment date the liability is paid

Retained earnings (dividends) _____Dividends (payable) Dividends payable _____cash

What are stock subscriptions?

Stock subscriptions are a mechanism for allowing employees and investors to consistently purchase shares of company stock over a long period of time, usually at a price that does not include a broker commission. Because there is no commission, the price at which shares are purchased represents a good deal for buyers. Stock subscriptions can reduce shareholder and employee turnover, since they have an interest in remaining with the company to continue to take advantage of the subscription deal. The arrangement also represents a modest increase in the amount of funding available to the company.

When a company issues a stock with a detachable warrant how do you allocate the two?

The allocation is based on the relative fair values of both the stock and the warrants at the time of issuance. However, in instances where only ONE of the FV is known, the known FV will be used to allocate proceeds to the security in the which the FV is determinable. The remainder is then allocated to the security for which the FV is unknown

How is Share-based payments to employees recorded (aka. stock compensation expense)

The cost of employee service is measured at the grant-date FV of equity instruments issued (the FV of an equity share option is meausred based on the observable market price of an option with the same or similiar terms or conditions If you can't measure the FV then you have to use the intrinsic value (Difference between the MV of the stock and the price the employee must pay)

Quoit, Inc. issued preferred stock with detachable common stock warrants. The issue price exceeded the sum of the warrants' fair value and the preferred stocks' par value. The preferred stocks' fair value was not determinable. What amount should be assigned to the warrants outstanding?

The fair value of the warrants. The portion of the proceeds of preferred stock issued with detachable stock purchase warrants should be allocated based on a proration of the relative fair market values of the preferred stock and the fair market value of the warrants at the time of issuance. In this question, we know the fair market value of the warrants but, not the fair market value of the preferred stock. Therefore, the amount allocated to the warrants is the fair market value of the warrants. The amount that is allocated to the preferred stock is the total proceeds, at time of issuance of the preferred stock with detachable warrants, minus the amount allocated to the warrants, which is the fair market value of the warrants.

What is the measurement date for a share-based payment to employees that is classified as a liability

The final measurement date is the settlement date for share-based payments to employees classified as liabilities because that is the date on which a trade (bond, equities, etc) settles

What is the Par Value method of accounting for treasury

The following entry is made using the par method for an amount exceeding the issue price Treasury stock (Par) APIC (original issue price > par) RE (Acquisition price > issue) _____Cash

The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the

The if-converted method of computing earnings per share assumes that convertible securities are converted at the beginning of the earliest period reported for convertible securities or, if later, at the time of convertible securities issuance issuance

In a stock subscription when does the stock actually get issued? what is the JE for this

The stock gets issued when the full payment has been received cash receipt and issuance cash (balance) _____subscription receivable Common stock subscribed _____Common stock

If a security is antidilutive it must be EXCLUDED from the diluted EPS calculation because it'll cause diluted EPS to increase. How do we know if a share is antidilutive?

This is why when you calculate the diluted EPS, you must first calculate basic EPS and then compute diluted and compare the 2. Diluted EPS MUST BE LOWR THAN BASIC EPS

100 shares ($50 par) are originally sold at $60, reacquired at $70, and subsequently resold at $75 What is the JE for this in cost method?

Treasury stock 7k _____cash 7k cash 7.5k _____treasury stock 7k _____paid in capital - treasury stock 500

dividends from Nonconvertible NONCUMULATIVE preferred stock should be deducted from net income ONLY if declared true or false?

True this is because there is no dividends in arrears and they can never be converted to CS so if they've been declared then the company incurs a liability and gets ready to issue them.

if a convertible security never got converted into common stock then how would this be incorporated into the weighted average formula

We assume the "what if" scenario and we assume they were converted at the beginning of the year so 12/12

When calculating EPS why do we need to subtract the preferred dividends

We need to subtract preferred dividends from EPS because we assume the preferred shareholders already go their dividends FIRST so their excluded form the weighted shares calculating in the denominator

Treasury method ONLY applies to options and warrants that give the shareholder an opportunity to convert to C/S correct?

YES

If a company issues its stock options to employees and the employee actually uses the options to buy stocks then how does a company record an entry for this

company records Deferred compensation _____paid-in capital stock options exercised compensation expense _____deferred compensation Cash received paid in capital stock options _____common stock _____paid in capital (plug)

Wood Co.'s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?

cumulative preferred stock = must pay dividend every day noncumulative = company can choose to pay dividends whenever they decide to declare The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss. If a corporation had a net income, we would have to subtract on the cumulative preferred stock, one year of dividends, whether declared or not, and it is irrelevant whether they are paid or not. On the non-cumulative preferred stock, we would only subtract dividends if they had been declared (whether they are paid or not). In this question, Wood has a net loss per share. Therefore, instead of subtracting the one year dividend on the cumulative preferred stock, we would then add it back to the net loss to increase the loss. We would also add to the net loss the dividend on the non-cumulative preferred stock because the dividend has been declared.

How to record property dividends at declaration? How to record property distribution at the date of distribution?

declaration date Trading securities _____Gain on disposition of securities retained earnings (dividends) _____Property dividends payable at the date of distribution Property dividends payable _____trading securities after accounts are closed at end of the year then net the gain on disposition and retained earnings

What is the difference between small vs. large stock dividend

declaring small stock dividend less than 20-25% small stock dividend declaring large stock dividend more than 25%

during a quasi reorganization its balance sheet carrying amount is stated at what?

fair value because the company goes through the quasi reorganization during a period of declining price levels

When is interest expense recorded

interest expense is recorded annually because it uses an annual interest rate

What is quasi-reorganization

it basically means fresh start. When a company is close to bankruptcy and its retained earnings is in a deficit and its assets are overvalued we write down to the assets because overvalued assets RESULTS IN HIGH DEPRCIATION HENCE HIGHER LOSSES RE ____Assets Then RE is in a deficit so you take the APIC acct and increase the RE to 0 so it can have a fresh start

What happens during the date of record

no entries are made at the date of record. Those owning stock at the date of record will be PAID THE PREVIOUSLY DECLARED DIVIDENDS. During this time the a memo is being written on who is getting the cash dividend

The effect of possible exercise of common stock options would have increased earnings per share by $0.10. Would you include this $.10 in your diluted earnings per share calculation

no this cannot be included in the diluted EPS calculation bcause it is antidilutive since it increases the earnings/share

What is the common stock dividends? 30k shares of 5% cumulative preferred stock, par value $10/share, fully participating as to dividends. No dividends were in arrears 200k shares of common stock, par value $1/share

notice how the CS dividends % weren't given. In this case use the 5% from the preferred stock

What does retirement of stock refer to?

retirement of stock refers to company will NOT RESSUE ITS ACQUIRED TREASUREY STOCK approved by board of directors

What is weighted average and why do we use it in EPS calculations

weighted average takes into account EACH individual group/component's importance. We use this in EPS because common stock will be issued at different times throughout the year and you need to take into account. for example if you issued common stock on October 2011 then you need to take 2/12 x the common shares because they were only outstanding for 2 months. You need to be accurate in your financial reporting and not throw off investors. The denominator can change the EPS calculation significantly throwing off investors

It possible to pay cash dividend on preferred stock and pay the cumulative dividend on the same date ?

yes and this is how cumulative preferred stock works. They pay cash dividends for lets say year 3 and then pay the cumulative dividend % on the same year so basically they make 2 dividend payments