ACC 302 Exam#2 Ch. 15 and 16
What must be disclosed in the notes of financial statements pertaining to SH Equity?
- Dividend and liquidation preference - Participation rights - Call prices and dates - Conversion or exercise prices and dates - sinking fund requirements - Unusual voting rights - Significant terms of contracts to issue additional shares - Restrictions on RE
JE at Grant Date of Restricted Stock Options JE at end of the year JE If Employee forfeits the restricted stock
1. DR Unearned Compensation (Fair Value of Stock on Issuance Date) CR Common Stock (Par Value per share x # of restricted options issued) CR APIC-CS (Plug) 2. DR Compensation Expense (Total Unearned Compensation/Service Period) CR Unearned Compensation 3. DR CS (Amount of CS forfeited) DR APIC-CS (Amount of APIC-CS forfeited) CR Compensation Expense (plug) CR Unearned Compensation (Total Unearned Compensation/Service Period left)
A. How to calculate weighted average # of common shares outstanding. 1. Stock Split 2. Stock Dividend
1. Multiply any entries before the stock split by (stock split) x (# of months/12) 2. Multiply any entries before the stock dividend by (1 + stock dividend %) x (# of months/12) Note: Events afterward do not get multiplied by split or dividend. Just (#of months/12).
JE for Grant Date of Stock Options JE for End of year Compensation Expense JE for Termination of Stock Options due to employees leaving. JE for End of year Compensation Expense after termination of some options JE for Exercising of Stock Options
1. NO Entry 2. DR Compensation Expense CR APIC-Stock Options (Total Compensation Expense/Service Period) 3. DR APIC-Stock Options CR Compensation Expense (Total Compensation Expense for 1 year x [# of options terminated/Total # of options]) Note: Deduct this amount from the Compensation Expense for the year 4. DR New Compensation Expense CR APIC-Stock Options 5. DR CASH (Exercise Price x # of options exercised) DR APIC-Stock Options (Total Compensation Expense x [# of options exercised/Total # of options]) CR CS (# of common shares x par value) CR APIC-CS (plug)
For convertible preferred stock: 1. Numerator of Diluted EPS 2. Denominator of Diluted EPS
1. Net Income - $0 No preferred dividends 2. WA # of common shares outstanding from Basic EPS + (# of convertible PS x CS per PS)
For Stock Options: 1. Numerator of Diluted EPS 2. Denominator of Diluted EPS
1. Net Income - Preferred Dividends 2. WA # of common shares outstanding from Basic EPS + [(Avg Market Price - Option Price)/Avg Market Price] x # of stock options
Stock Rights: 1. True or False: After stock rights are issued they may normally be sold and purchased. 2. What journal entry, if any, would the issuing company make when it issues stock rights to its stockholders? 3. What journal entry, if any, would the issuing company make when the stock rights are exercised? 4. If Cash received is less than the par value of the stock, what is the journal entry?
1. TRUE 2. No Entry Note: Memorandum Entry - states the # of stock rights issued to existing SH to make sure that the company has unissued shares registered in case the rights are exercised. 3. DR Cash ([#of rights exercised/#of rights need per share] x Purchase price per share) CR CS ([#of rights exercised/#of rights need per share] x Par Value per share) CR APIC-CS (Plug) 4. DR Cash ([#of rights exercised/#of rights need per share] x Purchase price per share) DR APIC-CS (Plug) CR CS ([#of rights exercised/#of rights need per share] x Par Value per share)
LN #2 5 Reasons why a company would reacquire its own stock
1. To provide tax-efficient distributions of excess cash to SH. 2. To increase earnings per share and return on equity. 3. To provide stock for employee stock compensation or to meet potential new merger needs. 4. To thwart takeover attempts or to reduce the # of SH. 5. To make a market in the stock.
4 basic rights of common stockholders
1. To share proportionately in profits and losses 2. " " " in choosing management (voting for B.o.D.) 3. " " " in corporate assets upon liquidation 4. " " " in any new issues of stock of the same class. Note: This one is the most restricted by corporations.
A. JE for conversion of bonds B. JE for conversion of bonds with sweetner
A. DR Bonds Payable (FV) DR Premium on B/P (unamortized amt) or CR Discount on B/P (unamortized amt) CR Common Stock (# of bonds x # of CS per bond x Par Value per share) CR APIC-CS (Plug) B. DR Debt Conversion Expense (# of bonds x # of CS x Market Value per share) or (Cash amount) DR Bonds Payable (FV) DR Premium on B/P (unamortized amt) or CR Discount on B/P (unamortized amt) CR Common Stock (# of bonds x # of CS per bond x Par Value per share) CR APIC-CS (Plug) CR Cash (Sweetner)
A. What are two reasons for the issuance of no-par common stock? B. What are two reasons against the issuance of no-par common stock? C. T/F: If a company issues true no par common stock, it would not use an APIC - Common Stock account. D. T/F: If a company issues no par common stock with a stated value, it would not use an APIC - Common Stock account.
A. 1. Avoid the contingent liability that might occur if the corporation issued par value stock at a discount. 2. The questionable treatment of using par value as a basis for fair value never arises. B. 1. Some states levy a high tax on these issues. Ex. Property Tax 2. In some states the total issue price for no-par stock may be considered legal capital, reducing the flexibility in paying dividends. C. TRUE, because it has no stated value. Just DR Cash, CR Stock account for full amount of sale. D. FALSE, there is a stated value.
Preferred stock dividends A. 1. On noncumulative preferred stock - only consider when dividends are ___________________________ 2. On cumulative preferred stock
A. 1. DECLARED 2. a. Subtract from net income (or add to net loss) *the amount of dividends that should have been declared for the current year.* b. Therefore, you *do not consider dividends in arrears* since they should have been deducted in previous years' EPS calculations.
A. When a corporation sells its treasury stock two situations could occur: 1. The corporation could sell the treasury stock for greater than its cost. When this occurs the corporation will: 2. The corporation could sell the treasury stock for less than its cost.
A. 1. DR Cash (selling price of the treasury stock) CR Treasury Stock (original repurchase price of the treasury stock) CR APIC - Treasury Stock (excess of the treasury stock's selling price over its original price) 2. Two different journal entries could result depending on whether the excess of the total cost of the treasury stock sold over the cash received was less than or greater than the balance in the APIC - Treasury Stock account. *i.* The excess of the total cost of the treasury stock sold over the cash received was less than the balance in the APIC - Treasury Stock account. DR Cash (selling price of the treasury stock) DR APIC - Treasury Stock (excess of the total original price of the treasury stock sold over the cash received) CR Treasury Stock (original repurchase price of the treasury stock) *ii.* The excess of the total cost of the treasury stock sold over the cash received was greater than the balance in the APIC - Treasury Stock account. DR Cash (selling price of the treasury stock) DR APIC - Treasury Stock (current credit balance in the account) DR Retained Earnings (Total cost of the treasury stock sold on this date in excess of the cash received less - the credit balance in APIC - Treasury Stock) CR Treasury Stock (original repurchase price of the treasury stock)
Ch.15 HO #1 What is the effect on 1. Total paid-in capital 2. RE 3. TS 4. Total SH Equity if: A. Issuance of CS: B. Purchase of Treasury Stock: C. Sale of Treasury Stock for more than original repurchase price: D. Sale of Treasury Stock for less than original repurchase price when there is enough in APIC-TS: E. Sale of Treasury Stock for less than original repurchase when there is NOT enough in APIC-TS: F. Retire Treasury Stock:
A. 1. Inc. by total sale price 2. NE 3. NE 4. Inc. by total sale price. B. 1. NE 2. NE 3. Inc. by total purchase price. 4. Dec. by total purchase price. C. 1. Inc. by APIC-TS 2. NE 3. Dec by TS 4. Inc. by total cash received D. 1. Dec by APIC-TS 2. NE 3. Dec by TS 4. Inc by total cash received E. 1. Dec by APIC-TS 2. Dec by RE 3. Dec by TS 4. Inc. by total cash received F. 1. Dec by CS + APIC-CS + APIC-TS 2. Dec by RE (if any) 3. Dec by TS 4. NE
A. Calculate the weighted average number of shares outstanding. 1. Based on the .... 2. Treatment of treasury stock transactions a. Show the acquisition of treasury stock the same as the __________________________ of stock b. Treat the issuance of treasury stock in the same manner as the issuance of ______________________________ B. Stock dividends or stock splits a. Use retroactive treatment (as though the stock dividend or split occurred at the_______of the year). b. Warning: Watch the timing if issued before... c. Retroactively adjust all _____________financial statements. d. If a stock split or dividend occurred after the balance sheet date but before the financial statements are issued,____________ all financial statements.
A. 1. the average time that the shares have been outstanding during the period. 2. a. Retirement b. New shares of Stock B. a. beginning b. ...other stock transactions (for example, if a stock split or dividend occurred before a stock issuance). c. comparative d. restate
Stock-based Compensation: A. What are some of the performance measures used in stock-based compensation? B. Define grant date. C. What method does U.S. GAAP require for measuring stock-based compensation? D. True or False: Relating to stock-based compensation the fair-value method generally results in greater compensation expense than the intrinsic-value method. E. True or False: On the grant date a corporation would recognize compensation expense equal to the number of stock options awarded on the grant date multiplied by the fair value of the options determined on that date.
A. ?? B. The date the company awards the employees the stock options. C. Fair-Value Method D. TRUE E. FALSE. No Entry on the grant date.
A. Convertible preferred stock can be converted into ___________________________ at the option of the ________________________. B. What method is used if convertible preferred stock is converted into common stock? ___________________________________ C. T/F: If the issuance price of the convertible preferred stock is greater than the par value of the common stock at the time of conversion, the company would record a gain on the conversion.
A. A fixed # of Common stock; Preferred SH. B. Book Value Method C. FALSE. Credit APIC-CS for the excess amount.
A. Watered Stock B. Secret Reserves C. What is a lump-sum purchase of stock? D. Two methods of accounting for a lump-sum purchase of stock.
A. Recording stocks on the books for more value than they are = overvaluation of SH Equity resulting from inflated values. B. Undervalue of assets on the books at less than fair value as a result of the issuance of stock for property or services and GAAP. C. A corporation issues 2 or more classes of securities/stocks for a single payment (lump-sum). D. 1. *Proportional Method:* If Fair Value or another sound basis for measuring value is KNOWN/Available. 2. *Incremental Method:* If Fair Value of all securities is UNKNOWN.
A. What is a detachable stock warrant? B. T/F: A holder of a stock warrant will generally want to exercise the warrant when the exercise price is greater than the market price of the stock. C. T/F: When issuing a debt security with detachable stock warrants, the issuance price must be allocated between the debt and the stock warrants. D. T/F: Detachable stock warrants can be traded separately after being issued with the debt. E. What are the two methods of accounting for the issuance of debt with detachable stock warrants? F. When is each of these methods used? G. What is another name for the exercise price?
A. A stock warrant that can be detached from the stock and traded as a separate security at a predetermined amount. B. FALSE. When the exercise price is LESS than the market price of the stock. AKA want to purchase the stock at a price lower than what it's currently selling for on the market. C. TRUE. D. TRUE. E. (1) Proportional and (2) Incremental F. (1) Proportional: When a fair value can be determined for the bonds without the warrants and for the warrants. (2) Incremental: When the fair value canNOT be determined for either the warrants or the bonds. G. Option Price
Ch. 16 LN #1 A. What are stock options? B. What is one of the main reasons that stock options aren't as popular since 2005 with companies? C. What is one type of stock compensation that is currently replacing stock options? D. What are dilutive securities? E. Examples dilutive securities.
A. A type of stock-based compensation plan, employees can purchase company's common stock. B. Accounting rules that took effect in 2005 required expensing the fair value of stock options when granted. C. Restricted Stock Plan D. Securities that when exercised may reduce EPS because it increases the # of shares of CS. E. Convertible securities, options, and warrants.
LN #1 A. What document does a corporation use to incorporate? B. In how many states may a corporation incorporate?
A. Articles of Incorporation B. One
A. Under the proportional method the issuance price of the bond with the warrants is allocated using the fair values of __________ and ___________. B. Incremental: How to determine amount allocated to warrants and bonds? C. Proportional: How to determine amount allocated to warrants and bonds?
A. Bonds; the warrants. B. Bonds = Issue Price (Total Face Value of bonds x % selling for without warrants) Warrants = Total Issue Price of Bond plus warrant - Total Issue price of just bonds. Note: If given warrants fair value instead just do the same thing but backward. C. *1. Find the Fair Value of the bonds and warrants separately.* Bonds = Issue Price (Total Face Value of bonds x % selling for without warrants) Warrants = # of warrants x Fair Value per warrant *2. Add fair values together to get the total fair value.* *3. Calculated how much of the total issue price of the bonds + warrants is allocated to bonds and warrants.* Bonds = ((1)Issue Price of Bonds/(2)Total Fair Value) x Total issue price of bonds + warrants Warrants = ((1)Fair Value of warrants/(2)Total Fair Value) x Total issue price of bonds + warrants
A. What are examples of additional consideration to induce conversion of convertible bonds? B. The sweetener is shown as a/an ____________________________ on the issuing company's financial statements at the __________________________________ of the additional consideration. C. T/F: If a company retires its convertible debt prior to its maturity and without converting it to capital stock, the company should prepare the same journal entry it would have prepared if it had been the retirement of a nonconvertible bond. D. T/F: The retirement of convertible debt prior to maturity would have no effect on the company's net income.
A. Cash, Common Stock B. Expense; Fair Value C. TRUE D. FALSE. Would create a gain or loss. Same entry as extinguishment of debt for regular bonds.
Earnings Per Share (EPS): A. For what type of stock is earnings per share calculated? B. True or False: Nonpublic companies are required to report earnings per share. C. True or False: Public companies are required to report earnings per share. D. Where must earnings per share be reported on the financial statements? E. What is a simple capital structure? F. What is a complex capital structure? G. What is subtracted from net income in the numerator of the basic EPS calculation?
A. Common Stock B. FALSE. Only public companies. C. TRUE. D. On the face of the Income Statement E. 1. Has no securities in addition to common stock (denominator) that would create the possible issuance of additional common stock and therefore won't dilute EPS. 2. Present "Basic EPS" on the income statement F. 1. Has securities in addition to common stock (denominator) that would create the possible issuance of additional common stock. Therefore COULD dilute EPS. 2. Present "Basic EPS" and "Diluted EPS" on the income statement with equal prominence 3. Numerator and denominator of the Basic EPS must be reconciled to the numerator and denominator of the Diluted EPS. G. Dividends on Preferred Stock
A. Which class of stock generally has the voting rights of a corporation? B. T/F: A corporation may only have preferred stock as its class of stock. C. Preferred stock has a preference to _____________________ before common stockholders; however, preferred stockholders generally do not have ___________________________________________ . D. T/F: A stock's par value equals its fair value.
A. Common Stock B. False. Common stock. C. Dividends; voting rights. D. False.
A. If warrants are exercised, they would become ____________________________ and would _____________________ earnings per share. B. What is the biggest difference between convertible securities and warrants? C. What are the three situations relating to warrants:
A. Common Stock; decrease. B/c more stock increases denominator for EPS calculation. B. When the warrants are exercised (converted to CS), the holder of the warrant has to pay a predetermined amount of money to get the shares. Not the case with convertible bonds and PS. C. 1. Detachable stock warrants 2. Rights (as a result of the pre-emptive right) 3. Stock compensation plans (e.g., stock options)
A. What is the rule for stock issued for services or property (noncash transactions)? B. T/F: Par value may be used in determining the value of an exchange of stock for a noncash transaction. C. T/F: Assume a company receives a noncash item in exchange for common stock the company originally acquired as treasury stock. The company should not use the acquisition price of the treasury stock as the fair value of the noncash transaction. D. T/F: If the stock is publicly traded, the fair value of the stock price is more clearly evident in determining the value of services or property exchanged.
A. Company should record the stock issued for services or property other than cash at the fair value of the stock issued or the fair value of the noncash consideration received, whichever is more clearly evident.Ex. Land B. FALSE; fair value of stock or noncash consideration. C. TRUE; use fair value of non-cash item. D. TRUE.
A. The following journal entry is recorded on the declaration date of cash dividends: B. The journal entry to record the declaration of cash dividends would increase _________________________ and decrease __________________________________. C. On the dividend record date: D. JE on Payment date: E. The journal entry to record the payment of cash dividends would decrease _________________________ and decrease __________________________________. F. Is net income reduced at any date for cash dividends? G. Are cash dividends paid on treasury stock?
A. DR Cash dividends XX CR Dividends payable XX B. Liabilities; SH Equity Note: No liability for dividends until declaration date. C. No entry. Note: This date is used to determine who owns the stock and will thus be entitled to the cash dividends. D. DR Dividends Payable CR Cash E. Liabilities; Assets F. NO G. NO
A. Journal Entry if the company instead decides to retire the stock it reacquired. B. If the debit amounts in the journal entry are less than the credit amount in the journal entry,
A. DR Common Stock (par value) DR APIC - Common Stock (original issuance price of the stock - par value per share of stock) CR Treasury Stock (original repurchase price of the treasury stock) B. DR APIC - Treasury Stock up to the current balance in the account. If the debit amounts in the journal entry are still less than the credit amount in the journal entry, DR Retained Earnings for the difference.
SMALL Stock Dividend: A. With a small stock dividend Retained Earnings is reduced by the ____________________ per share of the stock. B. JE on the date of declaration: C. JE on date of distribution: Large stock dividends (pages 798 and 799): LARGE Stock Dividend: D. With a large stock dividend Retained Earnings is reduced by the _____________________ per share of the stock. E. JE on date of declaration: F. JE on date of distribution:
A. Fair Value B. Debit RE (# of shares of stock outstanding x % stk. div. X *Fair value* per share) Credit CS dividend distributable (# of shares of stk. outstanding x % stk. div. x Par value per share) Credit APIC-CS (# of shares of stk. outstanding x % stk. Div. x Fair value - par value per share) C. Debit CS dividend distributable (same amount as above) Credit Common stock D. Par Value E. Debit RE (# of shares of stock outstanding x % stk. div. x *Par value* per share) Credit CS dividend distributable (same as above amount debited to retained earnings) F. Debit CS dividend distributable (same amount as above) Credit Common stock
A. What method is used to calculate Diluted EPS? B. The if-converted method assumes the conversion of convertible ________and/or convertible _________ in the calculation of Diluted EPS. C. Assume that convertible securities are converted at the ________of the year or the convertible securities' _____________ date, if later. D. Convertible debt: 1. To the Diluted EPS's numerator ______________________ (add back, subtract) the amount of interest, net of ___________ ,that would no longer be paid if the bonds had been converted. 2. _____________________ (Increase, Decrease) the Diluted EPS's denominator by the number of shares of _______________ stock into which the convertible bonds would be converted under the "what-if" philosophy. 3. True or False: Convertible debt can never be antidilutive.
A. If-Converted Method B. Preferred Stock; Bonds C. Beginning; issuance D. 1. Add back; tax. 2. Increase; common 3. FALSE
A. Liquidating dividends are a return of the stockholders' ________________________________ . B. A liquidating dividend will reduce the ________________________________________________ account
A. Investments NOT profits of the company. B. company's APIC-CS
A. Why would a company issue stock at a low par value? B. What amounts go in the accounts Preferred Stock and Common Stock? C. What amounts go in the accounts APIC-Preferred Stock and APIC-Common Stock?
A. Main reason: Don't want large legal capital. - Helps companies avoid contingent liability associated with stock sold below par value. B. Par Value x # of issued shares C. Any excess over par value paid to purchase issues of stock per share x # of issued shares.
A. Examples of property dividends. B. JE for declaration of property dividends C. JE for distribution date of property dividends D. Where is the account Property Dividends Payable shown on the balance sheet?
A. Merchandise, Real Estate, Equity investments, gold bars, or any other asset decided by B.o.D. B. #1 Adjust Fair Value of asset. CR or DR CR or DR Gain or Loss on sale of ... OR if equity investments: CR or DR Unrealized Holding Gain or Loss. #2 DR Property Dividends Declared or RE (new fair value) CR Property Dividends Payable Note: No entry on Record Date. C. DR Property Dividends Payable CR Asset D. Current Liabilities
A. If the Dilutive EPS is greater than the Basic EPS, should it be shown on the income statement? B. How to calculate Numerator of the Basic EPS equation. C. How to calculate Numerator of the Diluted EPS equation. D. How to calculate Net Interest Savings.
A. NO; Just show the Basic EPS. B. Net Income - Preferred Dividends C. Net Income - Preferred Dividends - Net Interest Savings D. [Par Value of Bonds x Interest Rate x (1-Tax Rate)]
A. Both large and small stock dividends reduce retained earnings, but ______________total stockholders' equity. B. If the fair market value of the stock differs from the par value of the stock, large stock dividends and small stock dividends would have ________________effects on a company's Retained Earnings. C. With a stock dividend the total par value, i.e., balance in the account, Common Stock, or the account, Preferred Stock, ______________________; however, the par value per share ___________________________. D. Where is the account CS Dividend Distributable shown on a company's financial statements? E. Which of these dividends reduces SH Equity?
A. No Effect; Decrease RE, Increase CS B. Different C. Increases; Remains the same. D. SH Equity section of the balance sheet under Capital Stock heading and below CS. E. Cash dividends, property dividends, liquidating dividends. NOT stock dividends!!
Employee Stock-Purchase Plans (ESPP): A. What is an employee stock-purchase plan? B. What three conditions must be met to have a noncompensatory ESPP?
A. Permits all employees to purchase stock at a discounted price for a short period of time. B. 1. Substantially all full-time employees may participate on an equitable basis. 2. The discount from market is small. 3. The plan offers no substantive option feature. AKA can't look like a stock option.
A. Cumulative preferred stock B. Passed dividend on preferred stock C. Dividends in arrears D. Participating preferred stock E. Convertible preferred stock F. Who has the option of converting the preferred stock? G. Where is convertible preferred stock shown on a corporation's balance sheet? H. Callable preferred stock I. Who has the option of calling the preferred stock? J. Where is callable preferred stock shown on a corporation's balance sheet? K. T/F: If a corporation calls its cumulative preferred stock, it must pay the dividends in arrears on this preferred stock. L. Redeemable Preferred Stock M. Where is redeemable preferred stock shown on a corporation's balance sheet? N. T/F: If a corporation redeems its preferred stock, it must pay the dividends in arrears on this preferred stock. O. T/F: Dividends in arrears are not shown as liabilities; however, they are required to be disclosed in the corporation's notes to the financial statements.
A. Requires that if a company fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to CSH. B. If the directors fail to declare a dividend at the normal date for dividend action. C. Total passed dividends on cumulative PS. Note: In case of liquidation, dividends in arrears are not required to be paid unless they are redeemable. D. Holders of this stock share ratably with the CSH any profit distributions beyond the prescribed rate. So, after PSH paid, CSH get paid % of PS par value and divided leftover based on par value. E. Allows SH at their option to exchange PS for CS at a predetermined ratio. F. PSH G. SH Equity H. Permits the company at its option to call or redeem the outstanding PS at specified future dates and at stipulated prices. I. Issuing Company J. SH Equity K. TRUE. L. Has a mandatory redemption period or a redemption feature that the issuing company cannot control. Has a specific maturity date and amount. Note: Dividends in arrears on cumulative PS must be paid. M. Liabilities (Current or LT depending on maturity date.) N. TRUE. O. TRUE.
A. Define restricted stock. B. List three advantages of restricted stock: C. On the grant date what account does the corporation debit in its journal entry to record the issuance of the restricted stock? D. How is this amount calculated? E. What is Unearned Compensation? F. What is another name for Unearned Compensation? G. Where is Unearned Compensation shown in a corporation's financial statements?
A. Shares cannot be sold, transferred, or pledged until vesting occurs. -Employees don't have to pay for the stock, but they only receive the stock after the service period and then they can sell it. B. 1. Never becomes completely worthless. 2. Generally results in less dilution to existing SH. 3. Better aligns the employees' incentives with the companies' incentives. C. Unearned Compensation (Contra-equity acct) D. Common Stock + APIC-CS E. Represents the cost of services yet to be performed, NOT an asset. F. Deferred Compensation Expense G. SH Equity on Balance Sheet as contra-equity account under treasury stock.
A. True or False: If a company has a complex capital structure and dilutive securities, it will generally report both Basic Earnings Per Share and Diluted Earnings Per Share. B. Define antidilutive security. C. Antidilutive securities are securities that _____________________EPS. D. True or False: Antidilutive securities should be included in Earnings Per Share (EPS) calculations.
A. TRUE. B. Securities that upon exercise/conversion INCREASE EPS (or reduce the loss per share). C. INCREASE D. FALSE. Should NOT be included.
A. T/F: The retirement of treasury stock would reduce the number of shares of stock issued. B. Under what section of Stockholders Equity section would APIC - Treasury Stock be shown? C. T/F: APIC - Treasury Stock could have a debit balance.
A. TRUE. DR CS. B. APIC C. FALSE. only credit balance.
A. Define service period. B. Define vesting period. C. When is compensation expense recognized under the fair-value method? D. Where would the account Paid-in Capital - Stock Options (APIC-Stock Options) be shown on a company's financial statements? E. True or False: If stock options expire, compensation expense is adjusted on the date the stock options expire. F. True or False: If stock options are forfeited, compensation expense is adjusted in the period the options are forfeited. G. What is an example of an employee forfeiting a stock option? H. True or False: During the exercise period if the exercise price of the stock option is greater than the stock's market value, the holder will generally exercise the stock option. I. Compensation expense =
A. The period in which the employees perform the service (work) to earn the stock options. B. The time between the grant date and the vesting(exercise) date. Typically, Service Period = Vesting Period C. In the periods in which employees perform service. D. On the Balance Sheet under Stockholder's Equity: APIC E. FALSE. F. TRUE. DR APIC-Stock options CR Compensation Expense G. Leaves employment. H. FALSE. For the same reason as stock rights. I. # of options x Fair Value of Option Price
Stock splits A. Why do corporations generally have a stock split? B. There are two types of stock splits: C. T/F: The company does not make a formal journal entry to record a stock split. D. T/F: A stock split has no effect on the financial statement account balances of a company. E. After a stock split the total par value _______________________ and the par value per share will change __________________ with a stock split.
A. To reduce the market prices of stock shares so that more people will buy it. B. Normal stock splits (e.g., 3-for-1 stock split) and reverse stock splits (e.g., 1-for-3 stock split). C. TRUE; no entry D. TRUE because no accounts are changed E. does NOT change; proportionately
Definitions: A. Authorized B. Issued C. Outstanding D. Treasury
A. Total amount of shares a company can issue as stated on article of incorporation. B. The total amount of shares a company has sold. C. Issued shares - Treasury stock. Used to determine dividends. D. Total issued shares bought back by the company.
A. When a company reacquires its own stock it could either treat the shares of stock as ____________________ stock or _________________ them. B. What rights does the corporation not have as a holder of the treasury stock? C. Treasury stock has a normal ____________________ (debit or credit) balance and should be classified as a reduction to ____________________________________________ on a company's balance sheet. D. When treasury stock is purchased with cash the _______________________________ account is debited for the ___________ of the treasury stock and __________ is credited for the same amount.
A. Treasury; Retire B. 1. The right to vote. 2. To exercise preemptive rights. 3. To receive cash dividends. 4. To receive assets upon liquidation. C. Debit; SH Equity D. Treasury Stock; For repurchase price; Cash
A. What are examples of direct costs of issuing stock? B. Direct costs of issuing stock are debited to the _____________________________________________ account. C. What are examples of indirect costs of issuing stock? D. Indirect costs of issuing stock are debited to an ______________________ account. E. Preferred stock generally has preferences as to ____________________________________ and as to ____________________. F. What are two ways a company may express a dividend preference on preferred stock? G. What does a dividend preference on preferred stock assure?
A. Underwriting costs, printing costs, accounting and legal fees, taxes. B. APIC - CS C. Management salaries, legal counsel. D. Expense E. Payment of dividends; Assets upon liquidation. F. 1. Percentage of par value. 2. Specific dollar amount. G. Company must pay stated rate or amount applicable to Preferred SH before paying any dividends on the common stock.
A. Convertible bonds can be converted _______________. B. What are two reasons why a corporation would issue convertible bonds? C. T/F: On the date of issuance of convertible bonds the appropriate capital stock account is credited for the par value of the capital stock into which the bonds can be converted in the future. D. What method is used if convertible bonds are converted into capital stock? E. T/F: If the carrying value of a convertible bond is greater than the market value of the capital stock at the time of conversion, the company would record a gain on the conversion. F. Why would a company want to induce/encourage its bondholders to change the convertible bonds into capital stock?
A. by investors into other corporate securities during some specified period of time after issuance. B. 1. To raise equity capital without giving up more ownership control than necessary. 2. To obtain debt financing at cheaper rates. C. FALSE. Same JE as regular issuance of bonds. DR Cash DR Disct on B/P or CR Prem on B/P CR Bonds Payable D. Book Value Method E. FALSE. No gain or loss recorded. F. 1. To reduce interest costs 2. To improve its debt to equity ratio.
LN #3 A. Stock dividends involve the distribution of ____________________ as a dividend to a company's investors. B. T/F: A stockholder's ownership percentage will increase after the distribution of a stock dividend. C. According to U.S. GAAP, accounting for a stock dividend depends on whether the stock dividend is a large stock dividend or a small stock dividend. 1. Large stock dividend 2. Small stock dividend
A. stock B. FALSE C. 1. (in excess of 20% to 25% of the number of shares of stock outstanding at the time of the distribution); 2.(less than 20% to 25% of the number of shares of stock outstanding at the distribution)
JE for the Expiration of Stock Warrants
DR APIC-SW (Amount from issuance JE) CR APIC-Expired SW
JE for the Exercised Stock Warrants
DR Cash (# of SW exercised x Exercise Price) DR APIC-SW (Amount from Issuance JE) CR CS (#of SW exercised x Par Value per share) CR APIC-CS (Plug)
JE for the Issuance of Detachable Stock Warrants using Proportional Method
DR Cash (Total Issue price of bonds +warrants) DR or CR Discount or Premium on B/P (Cash - Face Value) CR B/P (Face Value of just bonds) CR APIC-SW (Allocation of warrants)
JE for the Issuance of Detachable Stock Warrants using Incremental Method
DR Cash (Total Issue price of bonds +warrants) DR or CR Discount or Premium on B/P (Face Value - Value allocated to bonds only) CR Bonds Payable (Face Value of bonds) CR APIC-SW (Value allocated to warrants only)
JE when Convertible PS is exercised
DR Preferred Stock (# of conv. stocks x Par Value) DR APIC-PS (# of conv. stocks x excess amount paid over par value) CR Common Stock (Total # of sh CS purchased from conversion x Par Value) CR APIC-CS (Plug) Note: Ignore fair value of CS.
JE when Convertible Bonds are retired before maturity
Debit Bonds Payable (FV) [Debit Loss on the Extinguishment of Bonds OR Credit Gain on the Extinguishment of Bonds] [Debit Premium on B/P (Unamortized Amount) OR Credit Discount on B/P (Unamortized Amount)] Credit Cash (Reacquisition Price)
E. Convertible preferred stock: 1. The applicable dividends of the convertible preferred stock _________be subtracted from the Diluted EPS's numerator. 2. ______________________ the denominator by the number of shares of common stock into which the convertible preferred stock would be converted under the "what-if" philosophy. 3. If the convertible securities are antidilutive, _______ consider them in the Diluted Earnings Per Share calculations.
E. 1. Should NOT 2. Increase 3. do NOT
What is Preemptive Rights?
Protects an existing stockholder from involuntary dilution of their ownership interest when new issues of the same stock are issued. - This is done by offering the current SH the opportunity to buy more shares of the newly issued stock to maintain their percentage ownership.
What is legal capital?
The amount of earnings that must be retained in SH Equity and cannot be paid as dividends. - For the protection of debtholders. - Typically equal to the total par value of the issued stock. - Each state determines the amount of legal capital.
