Stockholders’ equity is classified and displayed on the Balance Sheet according to ______
Source
Capital Stock and APIC are [earned, contributed] capital, while Retained Earnings is [earned, contributed] capital.
Capital Stock and APIC = contributed
Retained Earnings = earned
What are other names for Capital Stock?
Legal, Common or Stated
True / False: The par value of the common stock can be used to pay a dividend.
False
The par value amount is legal capital and must be retained by the corporation for the protection of creditors.
What is the difference between shares of stock that are authorized, issued, and outstanding?
Authorized: the entity may issue up to this many shares
Issued: the amount that was sold to investors at one time or another, but some may have been bought back or retired
Outstanding: the number of shares that remain in control of investors. This is the (issued – treasury stock – retired stock)
How is the book value per common share calculated?
Step 1: calculate the common shareholders’ equity:
Total shareholders’ equity (assets – liabilities)
- Preferred stock outstanding (at the greater of call price or par value)
- Cumulative preferred dividends in arrears
= Common shareholders’ equity
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BV = Common shareholders’ equity / Shares of CS outstanding
What is cumulative preferred stock?
The dividends accrue regardless of whether a dividend is declared or not.
What is participating preferred stock? How is the dividend calculated?
The preferred stockholders get to participate in the residual dividends on a pro-rata basis. Share equally and then pro-rata.
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Dividend amount declared
- Preferred stock dividend in arrears
- Preferred stock dividend for the current year
- # CS outstanding x (same percentage used for preferred stock)
= Amount available for the participating portion
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Amount available for participating portion
x Preferred shares outstanding/total shares outstanding
x CS shares outstanding/total shares outstanding
If the preferred stock includes a preference upon liquidation, where is this preference disclosed?
In the equity section of the balance sheet
NOT in the footnotes
What is convertible preferred stock? Who has the right to exercise the conversion? What is the impact of an entity who issues this type of stock?
May be converted from preferred to common shares of stock at the option of the stockholder
Means the entity is complex and must calculate both basic and diluted earnings per share.
What is mandatorily redeemable preferred stock? How is this accounted?
This is a stock that must be repurchased on a particular date for a particular amount.
This type of stock is accounted as a liability and not in the equity section
What is callable preferred stock? What is another name for this stock? Who has the right to exercise the option?
The entity has the right to repurchase this stock at a specific price (but not on a specific date).
a.k.a. Redeemable Stock
APIC is the difference between the price received for the stock and the par value. What other types of transactions can affect APIC?
Sale of treasury stock at a gain (increase APIC)
Liquidating dividends (decrease APIC)
Conversion of bonds
Small stock dividends
What is the formula to calculate Retained Earnings at the end of the period?
Beginning RE
+ Net Income
- Dividends declared (cash, property at FMV, small vs large stock)
+/- prior period adjustments
+/- accounting changes reported retrospectively
= Ending RE
What journal entry accounts are used to appropriate RE? What JE accts and amounts are used once the appropriation is complete?
To appropriate RE
[DR] Retained Earnings – unappropriated
[CR] Retained Earnings – appropriated
When the appropriate is complete – USE THE SAME AMOUNTS THAT WERE ORIGINALLY APPROPRIATED REGARDLESS OF HOW MUCH WAS ACTUALLY PAID FOR THE APPROPRIATION. The actual appropriation will be apportioned from other accounts
[DR] Retained Earnings – Appropriated [USE THE SAME AMOUNT FROM THE ORIGINAL ENTRY]
[CR] Retained Earnings – Unappropriated
What are the major differences between using the Cost Method vs Par Value Method when accounting for treasury stock?
(1) When gains/losses are recognized (the timing of these events)
(2) The presentation of these items on the Balance Sheet
The cost method: recognizes gain/loss only if the treasury stock is resold or retired
The par value method: recognizes gain/loss immediately on purchase of the t-stock
