Equity

Share-based compensation payments classified as equity (eg, stock options) are designed to be part of an employee's compensation. In accordance with the matching principle, compensation expense is recognized as the services are performed.

GAAP requires this type of share-based payment to be measured at the fair value of the equity instruments on the grant date (ie, measurement date).

Property dividends (nonreciprocal transfers to owners) are recorded at the fair value (FV) of the property on the date of declaration.

If the FV differs from the net carrying value, a gain or loss is recognized.

Treasury stock (T/S) is repurchased company stock that is normally held for future reissuance. However, a company may buy back its stock with the intention of immediately retiring the shares. When shares are repurchased and retired, the entry essentially reverses the original entry at issuance. The amounts initially credited to common stock (C/S) and APIC-C/S (if any) are removed (ie, debited) from the books.

An issue arises when the cash paid to reacquire and retire the stock does not equal the amount received when the shares were originally issued. If reacquired for less than the original issue price, the difference is recorded as a credit (ie, increase) to APIC-retired stock

Declared dividends may not reduce retained earnings below zero. A liquidating dividend is any amount of a dividend that is in excess of the current retained earnings balance.

As a result, a liquidating dividend is recorded as a reduction to contributed capital, reducing additional paid-in capital first.

Declared dividends may not reduce retained earnings below zero. A liquidating dividend is any amount of a dividend that is in excess of current retained earnings balance.

As a result, a liquidating dividend is recorded with a decrease to additional paid-in capital rather than retained earnings.

Occasionally, a company may want to set aside (ie, restrict) some of the retained earnings for specific business situations (eg, certain contingent liabilities, future plant expansion) rather than dividends. Restricting RE is done through an appropriation (ie, a reserve). A journal entry reclassifies unappropriated RE as appropriated RE. When the appropriation is no longer required, the entry is reversed.

Dividends in arrears are not recorded or appropriated but are disclosed in the notes to the financial statements

If preferred stock is cumulative, any dividends in arrears accumulate and are paid before any other dividends.

If preferred stock is participating, the common stockholders are paid an equivalent percentage of par value (eg, 5%) dividend, and any excess dividends are allocated between the two classes of stock based on relative par value.

When a company reacquires and then permanently retires its stock, the original amounts credited to common stock and APIC-common stock are removed from the books.

If the cash paid to reacquire the stock is more than the original issue price, the difference decreases any APIC existing from previous stock retirements, then retained earnings (if needed); if the cash paid is less, the APIC-retired stock is increased.

Property dividends (nonreciprocal transfers to owners) are recorded at the fair value of the property near (or at) the time of distribution, which is normally the date of declaration.

If the property's fair value differs from the net carrying value, a gain or loss is recognized as if the asset were sold.

Under the par value method, treasury stock (T/S) is recorded at the stock's par value. A repurchase removes (decreases) APIC-C/S associated with the original stock issuance.

If the repurchase price is greater than the original issuance price, a debit (decrease) to APIC-T/S and/or retained earnings is required. IMPORTANT: if no transactions occurred that would have created APIC-T/S, the debit will be charged to (ie, decrease) retained earnings.

At the date of issuance of warrants, a journal entry is not required. The exercise date of the warrants, the company will receive cash of $x per share and common stock will be increased by par value per share and the remaining price per share would be recorded as an increase to additional paid-in capital. Net income is not affected.

Important difference than when issuing stock options to employees, when the issue date is the date in which a deferred compensation account is recorded and an offset to APIC

Treasury stock (T/S) is repurchased company stock that is normally held for future reissuance. When the cost method is used to account for T/S, the repurchase is recorded at the reacquisition cost.

A company may buy back its stock with the intention of immediately retiring the shares. When shares are repurchased and retired, the entry essentially reverses the original entry at issuance.

small stock dividend

A stock dividend of less than 20% to 25% of the issued and outstanding stock. Recorded at Fair Value. Debit: Retained Earnings (at FV) Credit: Common Stock at Par Credit: APIC - C/S

There are many forms of Additional Paid-in Capital

APIC - Common Stock APIC - Preferred Stock APIC - Retired Stock APIC - Treasury Stock APIC - Warrants Companies may give the shareholder the right to buy stock at an established price for a specific period of time.

Book value per common share is calculated as common stockholders' equity divided by common shares outstanding. The purchase of treasury stock at a cost less than book value decreases total equity proportionally less than the decrease to the number of shares outstanding.

Accordingly, book value per common share will increase.

GAAP requires nonreciprocal transfers of the property to be recorded at the asset's fair value (FV) and any gain/loss to be recognized as if the asset was sold. To achieve this, recording a property dividend requires a two-step process.

Adjust the asset to its FV near or at the time of distribution (typically the date of declaration). If the FV differs from the net carrying value (ie, net book value), a gain or loss is recognized. Any change in the property's FV between the dates of declaration and distribution is ignored. Record the liability (ie, dividends payable) and reduce retained earnings for the property's FV.

GAAP requires share-based transactions with employees to be measured at the fair value (FV) of the equity instrument on the grant date.

All share-based compensation plans (eg, stock options) result in the recognition of compensation expense equal to the fair value of the equity instrument, determined on the grant date. When the options are not immediately exercisable, compensation expense is recognized pro rata over the vesting period.

In a compensatory stock option plan, stock options outstanding, an additional paid-in capital account, is increased for the amount of compensation expense.

At the time the options are exercised, common stock and additional paid-in capital are increased while cash is increased for the amount received and the stock options outstanding account is decreased for the amount that relates to the options being exercised.

On the date cash dividends are declared, an entry is prepared recognizing a liability for the amount of the dividend and a reduction to stockholders' equity in the form of an account entitled dividends declared.

At year-end, dividends declared will be closed into retained earnings, but there is no net effect on stockholders' equity. When the dividend is paid the following year (say January 12), the entry will eliminate the liability and reduce cash without affecting stockholders' equity.

When a dividend is declared, a liability is incurred. For cumulative preferred stock, any undeclared dividend in the previous year(s) accumulates (ie, dividends in arrears).

Because dividends in arrears represent undeclared dividends, they are not a liability and not accrued. However, they are disclosed in the notes to the financial statements.

What are the three methods to account for treasury stock under IFRS?

Cost Method Par Value Method Constructive Retirement Method

An unconditional redemption feature allows the holder to exchange the shares for cash, which makes them equivalent to a liability, which how shares with such a feature are reported.

Cumulative preferred stock, convertible common stock, and common stock issued at a discount are all reported as equity.

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

Fair value at date of decleration

Treasury stock is categorized as issued, but not outstanding because it is held by the company (not stockholders).

However, if treasury stock is subsequently reissued (ie, resold), it becomes outstanding again.

When a company repurchases and retires its stock, the original amounts credited to common stock (C/S), and APIC-C/S are removed from the books.

If the cash paid to reacquire the stock to be retired is more than the original issue price, the difference decreases any APIC existing from previous stock retirements, then retained earnings (if required).

Dividends are distributions to shareholders of accumulated earnings (ie, retained earnings). When any type of dividend is declared, retained earnings are decreased.

Instead of giving a cash or stock dividend, a company may choose to distribute one of its assets (ie, real estate, marketable securities). This type of distribution, a property dividend, is considered a nonreciprocal transfer to the shareholders.

The issuance of stock rights to shareholders does not reduce retained earnings.

It is recorded for disclosure purposes but no assets, liabilities, or equity accounts are affected.

Stock dividends represent a reclassification of capital and are recorded by decreasing retained earnings and increasing contributed capital accounts (eg, common stock, additional paid-in capital).

Large stock dividends (ie, greater than 20-25% of the outstanding shares) are recorded at par value. There is no effect on total stockholders' equity.

When fair value cannot be determined with any degree of reliability, an entity will value stock options using the intrinsic method.

Options are measured on the basis of the difference between the exercise price and the fair value of the share on the measurement date. If FV is greater than EP, treat as compensation expense. If FV is less than EP, no compensation expense.

Quasi-reorganization

Purpose: Eliminate deficit in retained earnings, giving the company a fresh start. Steps: (1) Revalue assets and liabilities to fair value, if required. (2) Eliminate deficit in retained earnings. (3) Net adjustments against paid-in capital, but not below zero

Large Stock Dividend A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend?

Retained earnings is debited for $300. Stock dividends represent a reclassification of capital and are recorded by decreasing retained earnings and increasing contributed capital accounts (eg, common stock, APIC). Since large stock dividends (ie, greater than 20-25%) are recorded at par value, there is no effect on APIC.

When issuing stock for services rendered from a consultant

Services received are accounted for at the fair value of property (stock) given in exchange for the services. At the time the arrangement was made (value is not determined at the date the payment for services is made)

To calculate number of shares outstanding

Shares issues less treasury stock

A nominal account is an account that you close at the end of each accounting period. Nominal accounts are also called temporary accounts. Note: Carefully read the question requirements. Often on the exam, the "net" effect of transactions will be asked.

Temporary or nominal accounts include revenue, expense, and gain and loss accounts. Note: Carefully read the question requirements. Often on the exam, the "net" effect of transactions will be asked.

When a company liquidates, preferred stockholders are paid first, based on the amount of their liquidation preference. The remaining amount that each outstanding common share is entitled to receive is known as book value per common share.

The calculation is (Common shareholders' equity / Common shares outstanding). Treasury stock is not considered outstanding.

The three methods of accounting for treasury stock that are available under IFRS are the cost method, the par value method, and constructive retirement method.

The constructive retirement method is similar to the par value method except common stock is debited for the par value of treasury shares acquired, rather than treasury stock. This method is generally used when the company does not intend to reissue the shares.

The grant date is the date on which an understanding of the terms of a share-based payment are reached by the employer and employee.

The employer is obligated on the grant date to issue the equity instruments according to the service or performance requirements.

What value is used to determine compensation expense for compensatory stock options.

The fair value of the stock option at date of grant.

Stock dividends are transfers of capital from retained earnings to contributed capital accounts (eg, common stock, additional paid-in capital).

The number of shares outstanding is increased, but there is no monetary effect on any component of stockholders' equity; therefore, total stockholders' equity is unchanged.

Large stock dividends (ie, greater than 20-25% of the outstanding shares) are recorded at par value whereas small stock dividends (ie, less than 20-25%) are recorded at fair value.

The reason for the different treatment is that the fair value of the stock is not deemed to be a realistic estimate after a large stock dividend occurs since a large dividend will normally cause a reduction in the selling price of the shares.

When a company liquidates, preferred stockholders are paid first, based on their liquidation preference.

The remaining amount that each outstanding common share is entitled to receive is known as book value per common share, calculated as Common stockholders' equity / Common shares outstanding.

Dividends paid out of earnings are recognized as reductions of retained earnings. Distributions that are not paid out of earnings are considered liquidating dividends.

They reduce additional paid-in capital, not retained earnings.

If accounted for under the cost method, the sale of treasury stock at less than cost will always result in an overall increase in stockholders' equity.

Treasury stock is a contra account (ie, debit balance) to equity and is therefore shown as a reduction to stockholders' equity.

All dividends reduce stockholders' equity except for stock dividends and stock splits

True

Convertible preferred stock (into common stock) is not considered common stock until the conversion takes place.

True

A stock dividend less than 20-25% of the outstanding shares is considered a small stock dividend and recorded at fair value; a large stock dividend (ie, greater than 20-25%) is recorded at par value.

When recording a small stock dividend, retained earnings is decreased (ie, debited) for fair value and the contributed capital accounts (eg, common stock, APIC) are increased (ie, credited). The common stock is always increased by its par or stated value.

Compensatory stock options result in compensation expense equal to the fair value of the equity instrument, determined on the grant date.

When the options are not immediately exercisable, compensation expense is recognized pro rata over the vesting period.

Important - if you get a question about a stock dividend, remember to first evaluate if it's a small stock dividend or large stock dividend (less than 20-25% or greater than 20-25% respectively)

a small stock dividend is recorded at fair value (FV) on the date of declaration a large stock dividend is recorded at par (debit retained earnings and credit common stock, both at par value) and is recorded on the date of decleration

The amount that each outstanding common share is entitled to receive is known as

book value per common share. The calculation is Common shareholders' equity / Common shares outstanding.

A share based transaction with a party other than an employee is recorded at

either the fair value of the goods, services, or other consideration received, or the fair value of the equity securities being issued, whichever is more readily determinable.

When a corporation issues common or preferred stock, it records the stock at its

par or stated value

Stock Options - compensatory

Compensation expense is valued at difference between FV of shares at grant date less exercise price. Realized over the service period prior to vesting.

Share-based compensation plans, such as qualified stock options, allow an employee the right to purchase a specified number of shares of company stock at a predetermined price for a stated period.

The stock options are designed to be part of an employee's compensation and are recognized as the services are performed in accordance with the matching principle.

Share-based compensation payments, which are classified as equity, result in the recognition of compensation expense equal to the fair value of the equity instrument, determined on the grant date.

The vesting date is when the employee has a right to receive the equity award whereas the exercise date is when the equity award is executed.

Dividends are distributions to stockholders of accumulated earnings (ie, retained earnings). Instead of giving a cash or stock dividend, a company may choose to distribute one of its assets (ie, inventory, marketable securities).

This type of distribution, a property dividend, is considered a nonreciprocal transfer to the stockholders. GAAP requires nonreciprocal transfers of the property to be recorded at the asset's fair value (FV) and any gain/loss recognized as if the asset were sold

GAAP requires nonreciprocal transfers of the property to be recorded at the asset's fair value (FV) and any gain/loss recognized as if the asset were sold

To achieve this, recording a property dividend requires a two-step process on the date of declaration. Adjust the asset to its FV near or at the time of distribution. If the FV differs from carrying value, a gain or loss is recognized on the income statement. Record the liability (ie, dividends payable) and reduce retained earnings for the property's FV

A stock split increases the number of outstanding shares by the split ratio; per-share par value is decreased by the reverse split ratio.

Total equity is unchanged in a stock split

Share-based compensation plans (eg, stock options) result in the recognition of compensation expense equal to the fair value of the equity instrument, determined on the grant date.

When the options are not immediately exercisable, compensation expense is recognized pro rata over the vesting period.

Stock may be sold on a subscription basis, allowing the investors to make payments over time.

When the subscription is recorded, cash and subscriptions receivable are increased. (careful, test question will ask if recognition occurs on the issue date or on the date of record)

Stock dividends, stock splits, and treasury stock transactions affect the number of outstanding shares. Stock dividends and splits both increase the number of shares, either by the stated percentage (ie, 10%) or proportionally (ie, 2-for-1).

When treasury stock is repurchased, the number of shares outstanding decreases; when treasury stock is reissued, that number increases.