CPA F7 M6 Study Spring 2020
East Co. issued 1,000 shares of its $5 par-value common stock to Howe as compensation for 1,000 hours of legal services performed. Howe usually bills $160 per hour for legal services. On the date of issuance, the stock was trading on a public exchange at $140 per share. By what amount should the additional paid-in capital account increase as a result of this transaction?
1,000*$5=5,000 1,000 hours * 140 = 140,000 difference: 135,000 the fair market value surrendered for the legal services equals 140,000 (140*1,00 shares). The billing rate is similar to a list price and would be used for valuation purposes if no other information was available. The par value of the stock is 5,000 (5*1,000) and the additional paid in capital equals 135,000 (140,000-5,000)
Long Co. had 100,000 shares of common stock issued and outstanding at January 1, Year 2. During Year 2, Long took the following actions: -March 15: declared a 2 for 1 stock split, when the fair value of the stock was $80 per share -December 15: declared a 50 cent per share cash dividend In Long's statement of stockholders' equity for Year 2, what amount should Long report as dividends?
1/1: 100,000 3/15: 100,000 total: 200,000 *50 cents = 100,000 dividends declared
An entity authorized 500,000 shares of common stock. At January 1, Year 2, the entity had 110,000 shares of common stock issued and 100,000 shares of common stock outstanding. The entity had the following: -March 1: issued 15,000 shares of common stock -June 1: resold 2,500 shares of treasury stock -September 1: completed a 2 for 1 common stock split What is the total number of shares of common stock that the entity has outstanding at year end for Year 2?
100,000 +15,000 +2,500 =117,500 *2 =235,000 when treasury stock is resold, it counts
In September, Year 1, West Corp. made a dividend distribution of one right for each of its 120,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100th of a share of West's $50 variable rate preferred stock at an exercise price of $80 per share. On March 20, Year 5, none of the rights had been exercised, and West redeemed them by paying each stockholder 10 cents per right. As a result of this redemption, West's stockholders' equity was reduced by:
12,000 120,000 shares outstanding * 10 cents per share = 12,000 in Year 1 no dividend was recorded since none of the rights were exercised and no value was assigned. In year 5, redemption reduced equity by 12,000
Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12, Year 1. Cobb received a stock dividend of 2,000 shares on March 31, Year 1, when the carrying value per share was $35 on Roe's books and the market value per share was $40. Roe paid a cash dividend of $1.50 per share on September 15, Year 1. In Cobb's income statement for the year ended 10/31/Year 1, what amount should Cobb report as dividend income?
18,000 10,000+2,000=12,000*1.50=18,000 stock dividends are not reported as income on the books of the recipient. The total number of shares increases in a stock dividend and the subsequent cash dividend is 1.50 on 12,000 shares = 18,000
Godart Co. issued $4,500,000 notes payable as a scrip dividend that matured in five years. At maturity, each shareholder of Godart's three million shares will receive payment of the note plus interest. The annual interest rate was 10%. What amount should be paid to the stockholders at the end of the fifth year?
4,500,000*10%= 450,000 *5 years= 2,250,000 principal + interest: 4,500,000 + 2,250,000 = 6,750,000
total income since incorporation: 420,000 total cash dividends paid: 130,000 total value of property dividends distributed: 30,000 excess of proceeds over cost of treasury stock sold, accounted for using the cost method: 110,000 In its 12/31/Year 5 financial statements, what amount should they report as retained earnings?
420,000 -130,000 -30,000 =260,000 the excess proceeds from the sale of treasury stock is considered additional paid in capital
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 will increase by the number of shares issued multiplied by the par value of the shares themselves (1,000*5)
Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The par value of the stock is $1 per share. During January of the current year, Porter bought back 500 shares at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were reissued later in the current year at $10 per share . Porter used the cost method to account for its equity transactions. What amount should Porter report as paid-in capital related to its treasury stock transactions on its balance sheet for the current year?
500 * 6 = 3,000 500*10=5,000 5000-3000 = 2,000 using the cost method, the treasury stock transaction include the reissuance of the treasury shares at $10 per share. The additional paid in capital from the original issuance of the stock is not paid in capital related to the treasury stock and is not included
Mio Corp was the sole stockholder of Plasti Corp. On September 30, Mio declared a property dividend of Plasti's 2,000 outstanding shares of $1 par value common stock, distributable to Mio's stockholders. On that date, the book value of Plasti's stock was 1,50 per share. Immediately after the distribution, the market value of Plasti's stock was 4.50 per share. What amount should Mio report in its financial statements as gain on disposal of Plasti stock?
6,000 2,000*1.50=3,000 2,000*4.5=9,000 difference: 6,000 RULE: the difference between book value and fair market value of the property dividend should be recorded as gain/loss on disposal of asset
A corporation was organized in January 1, Year 1 with authorized capital of $10 par value common stock. ON February 1, Year 1, shares were issued at par for cash. On March 1, Year 1, the corporation's attorney accepted 5,000 shares of the common stock in settlement for legal services with a fair value of $60,000. Additional paid in capital would increase on:
February 1, Year 1: NO March 1, Year 1: YES
Aldrich Co. distributes cash dividends to its shareholders during the current year. The dividends are declared on March 9 and are payable to shareholders as of the date of record which is April 15. The dividends are actually paid on May 19. At which of the following dates would the dividends become a liability to Aldrich?
March 9 dividends become a liability on the books of the issuing company (along with a charge to retained earnings) on the date the dividend is declared (march 9)
When collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as:
additional paid in capital when the subscription is recorded when collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as additional paid in capital when the subscription is received
A corporation declared a dividend, a portion of which was liquidating. How would this distribution affect each of the following?
additional paid in capital: DECREASE retained earnings: DECREASE RULE: a liquidating dividend is a return of capital (which decreases additional paid in capital) and not a distribution of earnings (which decreases retained earnings)
How would the 5% stock dividend affect the additional paid-in capital and retained earnings amounts reported in Gee's Year 2 statement of owners' equity?
additional paid in capital: INCREASE retained earnings: DECREASE a 5% stock dividend is a true stock dividend, as opposed to a stock split effect in the form of a dividend. The fair market value of the stock dividend at declaration date is capitalized from retained earnings to capital stock and paid in capital
On November 2, Year 1, Finsbury Inc. issued warrants to its stockholders giving them the right to purchase additional $20 par value common shares at a price of $30. The stockholders exercised all warrants on March 1, Year 2. The shares had market prices of $33, $35, and $40 on November 2, Year 1, 12/31/Y1, and March 1, Year 2 respectively. What are the effects of the warrants on Finsbury's additional paid in capital and net income?
additional paid in capital: INCREASED IN YEAR 2 net income: NO EFFECT RULE: that portion of proceeds in excess of stocks' par vlaue is credited to additional paid in capital at the time the rights are exercised
How would a 5% stock dividend affect each of the following?
assets: NO EFFECT total stockholders' equity: NO EFFECT retained earnings: DECREASE RULE: a stock dividend (less than 20 - 25% of the stock outstanding) transfers the FMV of the stock dividend at declaration date from retained earnings to capital stock and paid in capital. There is no effect on total stockholders' equity because all the transfers take place within stockholders' equity
A company issued rights to its existing shareholders without consideration. The rights allowed recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased?
common stock: NO additional paid in capital: NO no entry is made when the rights are issued since no consideration is given. If the rights are exercised and stock is issued, then common stock and additional paid in capital increase
investment stock rights
cost of stock rights: (FMV of rights/FMV of rights + FMV of stock ex-rights) * cost of stock the purchase price of the stock should be allocated between the stock and the stock rights using a pro rata allocation based on the relative fair values of the stock and the stock rights
Stock dividends on common stock should be recorded at their fair market value by the investor when the related investment is accounted for under which for the following methods?
cost: NO equity: NO RULE: stock dividends and stock splits are not considered income to the recipient thus, investors do not record stock dividends at fair market value, they simply reallocate the investment account balance over more shares so that the value per share decreases
When to decrease retained earnings by the amount of the dividend?
date of declaration is the date the board of directors formally approves a dividend, thus a liability is created and retained earnings is reduced
East Corp., a calendar year company, had sufficient retained earnings in Year 1 as a basis for dividends, but was temporarily short of cash. East declared a dividend of 100,000 on April 1, Year 1, and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, Year 1 had a maturity date of March 31, Year 2 and a 10% interest rate. How should East account for the scrip dividend and related interest?
debit retained earnings for 100,000 on April 1, Year 1, and debit interest expense for 7,500 on December 1, Year 1 retained earnings April 1, Year 1 100,000 notes payable to stockholders 100,000 interest expense 12/1/Y1 7,500 accrued interest payable 7,500 100,000*10% = 10,000 10,000*3/12 = 2,500 10,000-2,500=7,500
When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of:
declaration
Bal Corp. declared a $25,000 cash dividend on May 8 to shareholders of record on May 23, payable on June 3. As a result of this cash dividend, working capital
decreased on May 8th working capital is decreased on the declaration date, per the rule that the liability for a cash dividend is incurred and recorded on the declaration date
Plack Co. purchased 10,000 shares (2o/o ownership) of Ty Corp. on February 14, Year 1. Plack received a stock dividend of 2,000 shares on April 30, Year 1, when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15, Year 1. In its Year 1 income statement, what amount should Plack report as dividend income?
dividend income = number of shares * dividend per share =12,000 * 2 =24,000 receipt of a stock dividend is not revenue. It increases the number of shares held and decreases the cost basis per share
Pott Co. owned shares in Rose Co. On December 1, Pott declared and distributed a property dividend of Rose shares when their fair value exceeded the carrying amount. As a consequence of the dividend declaration and distribution, the accounting effects would be:
dividend recorded at: FAIR VALUE retained earnings: DECREASED property dividends are recorded at fair value. Retained earnings are decreased when property dividends are declared RULE: use FMV of asset (not cost) to reduce retained earnings when property dividend is declared. The cost of asset will be adjusted to FMV (difference treated as gain or loss on disposal of asset) when a property dividend is declared. Retained earnings is reduced for both cash and property dividends
When a property dividend is declared and the market value of the property exceeds its book value, the excess...
increases net income for the period a property dividend is recorded at the fair value of the property to be distributed. The property has to be adjusted to fair value with the adjustment affecting earnings for the period. Additional paid in capital is not affected
A property dividend should be recorded in retained earnings at the property's
market value at date of declaration
Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole's:
paid in capital: YES retained earnings: NO by definition a liquidating dividend is one in which the company is returning a portion of capital originally contributed to the company in excess of retained earnings. A liquidating dividend implies that there is no retained earnings left to decrease
Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise's carrying amount over its market value should be:
reported as a reduction in income before income from continuing operations a loss is recognized for the merchandise's carrying amount over its market value. This results in a reduction in income from continuing operations RULE: dividends declared and paid in the form of assets other than cash (ie: property) are recorded by the distributing corporation at fair market value at date of declaration
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 (30% of (1,000*$1)) a 30% stock dividend would be classified as a large stock dividend, thus retained earnings is debited for the par value of the additional shares issued.
How would the declaration of a 15% stock dividend by a corporation affect each of the following?
retained earnings: DECREASE total stockholders' equity: NO EFFECT RULE: a stock dividend is treated by transferring the FMV of the stock dividend at declaration date from retained earnings to capital stock and paid in capital. There is no effect on total shareholders' equity because all the transfers take place within shareholders' equity
Tem Co. issued rights to its existing stockholders without consideration. A stockholder received a right to buy one share for each 20 shares held. The exercise price was in excess of par value, but less than the current market price. Retained earnings decreases when:
rights are issued: NO rights are exercised: NO when stock rights are issued without consideration, no entry is made by either the issuer or the recipient at the time the rights are exercised, additional paid in capital would be credited if the purchase price of the stock exceeded the par value. Retained earnings is not affected because this is a capital transaction, not operations transaction
All of the following distributions to stockholders are considered asset or capital distributions, except:
stock splits stock split increases the number of shares. Only the number of shares changes. The capital stock and retained earnings do not change. It is not considered a capital or asset distribution
Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30o/o stock dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 per share. By what amount will Universe decrease stockholders' equity for the dividend?
the net effect on Universe's stockholders equity is zero, as the reduction in retained earnings is offset by an equal increase in common stock retained earnings 1,500,000 common stock 1,500,000 500,000 shares * 30% * $10 = 1,500,000
On January 2, Year 2, Lake Mining Co.'s board of directors declared a cash dividend of 400,000 to stockholders on record at 1/18/Y2 payable on 2/10/Y2. The dividend is permissible under law in this state. Selected balances from 12/31/Y1 BS are as follows: accumulated depletion: 100,000 capital stock: 500,000 additional paid in capital: 150,000 retained earnings: 300,000 The 400,000 dividend includes liquidating dividend of:
total cash dividend declared: 400,000 - retained earnings: 300,000 =100,000 a liquidating dividend is the amount in excess of retained earnings balance
On December 1, Nilo Corp. declared a property dividend of marketable securities to be distributed on December 31 to stockholders of record on December 15. On December 1, the marketable securities had a carrying amount of 60,000 and a fair value of 78,000. What is the effect of this property dividend on Nilo's retained earnings, after all nominal accounts are closed?
two factors will affect retained earnings as a result of this transaction. Nilo will recognize a gain on disposition of marketable securities as well as a dividend: gain on marketable securities: 18,000 property dividend: (78,000) impact on retained earnings=60,000 decrease . note that the question asks for the effect on retained earnings after all nominal accounts (income and expense accounts) are closed
