CPA FAR Equity

Under international standards when is Pref. Stock classified as a Liability?

(1) preferred stock provides for mandatory redemption for a fixed or determinable amount at a fixed or determinable date, or (2) gives the holder the right to require the issuer to redeem the stock at or after a particular date for a fixed or determinable amount

Redeemable preferred stock may require the issuing firm to

(1) redeem the stock (purchase the stock from the shareholder) at a specified future date at a specified price, or (2) redeem the stock at the option of the shareholder

Fully Partcipating

1. After any dividends in arrears are allocated, the remaining dividends are allocated based on the total par value of the preferred and common stock outstanding. 2. If total dividends are not sufficient to provide common with a matching amount equal to the preferred percentage times total par value of common, then there is no participation and common receives all the dividends after the current year preferred dividend requirement and any dividends in arrears are allocated.

Requirements for a quasi-reorganization

1. Approval 2. RE Balance becomes zero after 3. No contributed capital account can have a negative balance after 4. Assets written down to market 5. RE dated for period 3-10 years after quasi reorg.

Unappropriated retained earnings -- 3 catagories

1. Available for declaration 2. No specific purpose 3. Not all are paid

Appropriated retained earnings --

1. Declared off-limits for Financial planning, a legal requirement or contractial obligation

Two Main OE Categories

1. Earned; and 2. Contributed.

Quasi Reorganization Conditions

1. Operating losses have created a deficit in retained earnings (negative balance) and certain asset values are overstated. 2. the firm has positive prospects for the future but will be unable to pay dividends until the deficit is absorbed by future income. 3. Rather than continue with unrealistic asset values and negative retained earnings, a quasi-reorganization will provide an updated balance sheet with no retained earnings deficit.

Allocating methods

1. Proportional 2. Incremental

Hybrid organizations

1. S corporation. This is a classification for tax purposes. If the relevant tax rules are followed, limited liability is retained but the income is taxed only once, at the owner level. 2. Limited liability companies allow all owners to be involved in the management of the business with each being liable only to the extent of their investment. Double taxation is avoided. 3. Limited liability partnerships are less generous with respect to the limited liability feature.

True no par stock -- When the stock is true no-par stock (without stated value),

1. The entire proceeds from issuance of stock are credited to the common stock account; 2. No contributed capital account is recorded.

Partially participating

1. The preferred stock receives dividends up to an additional percentage. a. Common stock receives a matching amount equal to the preferred percentage times total par of common stock outstanding before the preferred stock receives its additional allocation. b. Common stock receives any dividends in excess of the additional amount allocated to common.

Accounting steps for for a quasi-reorganization

1. write assets down to market 2. Reduce contributed capital to absorb RE deficit 3. Change value/ number of shares

Book value per share outstanding

= Common stockholders' equity/ending common shares of common stock outstanding

Common stockholder's equity

= Total OE − liquidation preference of preferred stock − preferred stock dividends in arrears

Restriction on Retained Earnings

A constraint placed on a certain portion of retained earnings by an external party. It has the same effect as an appropriation and may be accompanied by an appropriation.

Quasi Reorganization

An alternative to bankruptcy in some cases, quasi-reorganization allows a firm a fresh start and new, more conservative asset values.

The stockholders' equity section for a firm's balance sheet shows: 6% noncumulative preferred stock, $100 par (liquidation value $105 per share) $10,000 Common stock 33,000 Retained earnings 12,500 Treasury stock (6,000) Total OE $49,500 At the end of the period, the firm has 100 shares of preferred stock outstanding, 3,300 shares of common stock issued, 3,000 shares of common are outstanding and 300 common treasury shares. calculate book value per share

Book value per share is $13.00 = ($49,500 − 100($105)) / 3,000. Only 3,000 shares of common are outstanding.

Disclosure of restrictions and appropriations or RE

Both restrictions and appropriations are disclosed in the notes to the financial statements.

Book Value per Share Ratio Equals

Common stockholders' equity per share of outstanding common stock at the end of the period.

How to determine the value of Stock issued in exchange for nonmonetary consideration for a Significant number of shares

If the number of shares issued is significant, then the market value of the consideration received may be a better measure

In many states, treasury stock may not be purchased in excess of

In many states, treasury stock may not be purchased in excess of the amount of unrestricted or unappropriated retained earnings.

Mandatorily redeemable financial instruments (such as redeemable preferred stock) must be classified as

Mandatorily redeemable financial instruments (such as redeemable preferred stock) must be classified as debt (rather than owners' equity) unless the redemption is required to occur only if the issuing firm goes out of business.

JE If rights lapse:

No entry is made if the shareholder does not exercise the rights.

How are gains and losses recognized on callable preferred stock

No gain or loss is recognized for these events because the transactions are between the firm and its owners.

JE At issuance of stock rights:

No journal entry is made. No resources have been transferred.

Stock rights issued to outside parties for services At issuance of rights:

Record an expense and owners' equity account equal to the difference between the market price and exercise price, times the number of shares under option.

Stock rights issued to outside parties for services At exercise of rights:

Record the stock issuance at the exercise price and remove the OE account credited at issuance of the rights.

Preemptive rights

The preemptive rights of common shareholders allow current shareholders to maintain their existing percentage of the firm in the event of a new stock issuance by the firm.

Purpose Statement of Retained Earnings

The purpose of the Statement of Retained Earnings is to provide the reader of the financial report with a detailed account of increases and decreases in retained earnings that were recorded in a given accounting period.

how is the statement of retained earning s shown?

The retained earnings statement may be shown separately, or more frequently, as part of the statement of changes in equity

JE At exercise of rights:

The usual entry to record the issuance of stock is made. The issue price is the exercise price as specified in the stock warrant, not the market price on the date of exercise.

A firm purchased treasury shares at a cost exceeding the original issuance but less than book value per share. what is the effect of the transaction on total stockholders' equity & book value?

This transaction reduces total stockholders' equity but increases book value.

Proportional method

When both securities have established market values, the allocation will be based on their respective fair market values.

Incremental method

When only one security has an established fair market value, that security is assigned proceeds equal to the known fair market value. Any incremental proceeds are allocated to the remaining security sold.

When stock is sold on a subscription basis, the implication is that the selling price of the stock will be received

When stock is sold on a subscription basis, the implication is that the selling price of the stock will be received in a series of payments from the shareholder. Once the full amount is received, the stock will be issued.

How to determine the value of Stock issued in exchange for nonmonetary consideration for Small number of shares

When the stock is actively traded, and the number of shares issued is small in relation to the number of shares already outstanding, generally the market price of the issued shares is the more reliable of the two measures.

Stock Issue Costs are Treated as

a Reduction in the Proceeds of the Stock Issuance

Stock subscriptions receivable is classified as?

a contra account to common stock subscribed. However, if the subscription is fully paid before the financial statements are issued or available to be issued, then the account is classified as an asset.

the date of record

a cut-off date. The shareholders of record on this date will be the recipients of the dividend payments.

Partially participating -- The steps in the allocation are:

a. Preferred: Any dividends in arrears; b. Preferred: Current period dividend; c. Common: Matching amount: preferred percentage x total par of common outstanding; d. Preferred: Additional percentage; e. Common: Remainder.

If a preferred stock issue does not explicitly meet either of the two criteria to be classified as a liability but is expected to meet one later during its term, how is it classified?

as a liability

At this date, the firm recognizes a liability and a reduction in retained earnings for a dividend

declaration date

treatment of dividends in arrears

disclosed in the footnotes, no liability recognized until dividend declaration

hen treasury stock is purchased, what is the impact on EPS?

earnings per share increases because the denominator of EPS is reduced with no effect on the numerator.

Stock not discounted

in most states, stock cannot be sold at a discount. If stock is sold at a discount, a contingent liability equal to the difference between the par or stated value and the acquisition cost of the stock is borne by the original shareholder.

Scrip Dividends

is first distributed in note payable (scrip) form because the firm does not have the cash at the date of declaration to pay the dividend but wants to assure the shareholders that the dividend is forthcoming.

debt issuance costs treated as

must be recorded in a deferred charge, and amortized over the debt term. Offsetting against the proceeds is not allowed for debt.

the dividends are actually distributed to the shareholders.

payment date

When preferred stock is participating

the stock may receive dividends in addition to the annual current dividend requirement. When preferred participates, common receives a matching amount

How to determine the value of Stock issued in exchange for nonmonetary consideration

the transaction will be based on the fair market value of the stock sold or the fair market value of the asset received whichever can be most clearly determined.