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Notecards I made from Wiley's 2012 CPA Exam Review
|If preferred stock is issued, what does the participating feature mean? cumulative?
|1. fully participating mean if the common shareholders get a greater % dividend then the stated preferred amount, preferred stock holders would get the higher amount 2. if skip dividends a year, made up to preferred holders before common get dividends
|If preferred stock is issued, what does the convertible feature mean? callable?
|1. stockholders have option of exchanging preferred stock for common stock at a specified ratio 2. entity has option to repurchase stock at a specified price
|Do redeemable preferred stock have to be classified on the balance sheet?
|Yes as a liability b/c its an instrument that may force entity to transfer assets/issue equity shares
|What is the journal entry for a stock subscription?
|Debit: Cash (amount received), subscription receivable (balance) Credit: common stock subscribed (par), paid-in capital in excess of par (subscription price > par)
|When is a stock subscription considered issued stock? journal entry?
|1. When the total subscription price is received 2. Debit: Cash, Credit: Subscription receivable (clear balance) Debit: Common stock subscribed, Credit: Common stock (at par to show stock is now issued)
|What happens if a stock subscription is defaulted?
|company can either return the money, keep it, or hold to cover any losses on resale and then return the balance
|When stock is issued at a par for services performed, what values are used to determine the paid in excess of capital amount?
|Market value for the stock - Par
|When stock is issued with other securities for a lump sum, when is the incremental method used? (as opposed to the proportional method) How allocate and Where would additional paid in capital be allocated if there is any?
|1. when the FV of all classes of securities is not determinable 2. known FV security is allocated only FV amount, rest is allocated to other security and excess to additional paid in capital of the security
|When stock is issued with other securities for a lump sum, how is the proportional method calculated?
|Find proportion of total FV of all securities and multiply by lump sum
|In issuance of stock that contains detachable warrants, what is the allocation of the proceeds based on? If only one FV is known?
|1. the relative FV of stock and warrants 2. use FV of known amount and remaining is allocated to the remaining security (usually resulting in additional paid in capital allocated to that security)
|Par/ stated value is the assumed worth of the stock, collecting below Par is thought of as a loss and above par results in additional paid in capital
|Define Treasury stock
|a firm's own stock repurchased on the open market - not an asset (owning shares of itself!) serves as reduction of stockholders equity
|What is the cost method for accounting for treasury stock?
|treasury stock is debited for the cost of treasury stock - difference between cost and resale price recognized at resale - above cost, credit paid-in capital from treasury stock - below cost, charge same or paid in capital retired stock if exist
|What is the par value method for accounting for treasury stock?
|debit treasury stock at par value - excess > par value debit PIC- CS up to original issue price - excess > original issue price debit to RE - acquire > par < original price debit PIC-CS to paid amount, PIC-TS to original price - resale same as issuanc
|How is the retirement of stock handled?
|Debit Common stock at par value If loss- Debit RE: amount over issue price, PIC- excess of par: remove from books, use original issue price. Credit Treasury Stock (Cash if not already Treasury Stock) Gains credited to PIC- from retirement account
|What balance sheet category does treasury stock serve to counter balance?
|Stockholders is decreased by treasury stock. RE is an account underneath stockholders equity, and is not affected by treasury stock.
|On the date of declaration, what is the entry to record dividends? On payment?
|Debit- RE (dividends) Credit- Dividends payable Debit- Dividends payable Credit- Cash
|What are property dividends? How are they recorded?
|1. Dividends paid out in an asset other than cash 2. at FV of transferred asset. Gain or loss is recognized based on difference of BV of transferred asset
|What are liquidating dividends? What is debited?
|1. dividend not based on earnings, are a return of capital to stockholders 2. Debit reduce paid-in capital amount of dividend
|What are scrip dividends? How recorded?
|1. promise to pay dividends in future, may bear interest 2. Same as regular dividends with possibility of interest expense on payment date
|When stock certificates are given as a dividend, does the proportion of ownership change? What's the entry on the declaration date? at issuance?
|1. No 2. Debit- RE: FV of stocks (< 25% increase in stocks) or RE: par of stocks (> 25% increase in stocks) Credit- Stock dividend distributable: Par of stocks, PIC-excess of par 3. Debit- Stock dividend distributable Credit- Common stock
|How is the amount of a dividend distributed between preferred and common share holders? Assume preferred fully participates in dividends
|take preferred % amount and multiply by total par value for common and preferred stocks outstanding. this gives the amount for only preferred. Subtract it from total dividend, allocate remaining based on proportion of total par values for preferred/common
|What does dividends in arrears mean? how is it calculated? how is it reported?
|1. unpaid dividends from prior years owed to preferred stockholders 2. calculate amount owed preferred stockholders (% given x total par value) for each year unpaid and subtract by dividends paid 3. as a disclosure
|What does a stock split do? How is the par value affected?
|1. change number of shares outstanding and the par value per share 2. reduced in proportion to the increase in number of shares, total par value does not change, so RE is unaffected
|What is the purpose for the Reserve for RE (or Appropriated RE) account?
|restricts RE to show that assets in the amount of the appropriation are not available for dividends Debit- RE Credit- Reserve for RE Reverse when reserve no longer needed
|What are share based payments?
|entity acquires goods/services by issuing shares, share options, or other equity instruments
|What are share based payments to nonemployees measured on?
|1. FV of the equity instrument or FV of the goods/services. whichever is more reliable
|Define requisite service period. service inception date.
|1. period the employee is required to provide services (usually vesting period) 2. beginning of the requisite service period
|When are share-based payments, classified as equity, measured? How? How is compensation expense allocated?
|1 Grant date FV equity instrument 2 Observable market price op option with similar terms or estimate with pricing model or intrinsic value (market value stock- $ employee pay). All net of amount employee pays 3 straight line over requisite service perio
|When are share-based payments, classified as a liability, measured? How? How is compensation expense allocated?
|1. each reporting period. Final measurement is on settlement date 2. FV of liability incurred 3. straight line over requisite service period
|What are the accounting entries for share-based payments classified as equity?
|At grant date Db- Deferred compensation expense Cd- Stock options outstanding Amortization (straight-line) Db- Compensation expense Cd- Def Comp exp. Option exercised Debit- Cash (option price), Stock options outstanding Credit- CS (par), Addtl PI
|What is a stock appreciation right?
|share based payment classified as a liability- allows employees to receive stock or cash equal to the difference between the MV and some predetermined amount per share for a certain amount of shares
|What are the accounting entries for share-based payments classified as a liability?
|readjust each year. Increase Debit- Compensation expense Credit- Liability under SAR plan Deduction Reverse above When redeemed in CS Replace liability with Stock rights outstanding
|What are the sources of income that require a basic EPS calculation?
|Income from continuing operations Net income
|How is basic EPS calculated for net income?
|Net income available to common stockholders/ weighted-avg number of common shares outstanding - Numerator calculated by taking Net income - dividend declared on noncumulative preferred stock- dividends accumulated on cumulative preferred stock
|How is basic EPS calculated for net income from continuing operations?
|Net income available to common stockholders/ weighted-avg number of common shares outstanding - Numerator calculated by NI -income/+loss from discontinued operations, extraordinary items - take # and - dividends as in basic EPS for net income
|What is the difference between basic EPS and diluted EPS on convertible equity?
|Diluted EPS adds common shares held that would be outstanding (convertible preferred stock or bonds) to denominator. - pretend convert on 1st of year add some interest expense back to numerator (NI)
|Under what situation would the exercise of options, warrants, etc. be dilutive? anti dilutive? anti dilutive means?
|1. average market price > exercise price 2. average market price <= exercise price 3. EPS would stay the same or increase
|How are the dilutive affects of options and warrants calculated?
|(average market price- exercise price)/average market price * # shares of options and warrants - no affect on the numerator
|In calculating diluted EPS, what happens if convertible bonds or stock werent outstanding the whole year but issued during it? If converted?
|1. time sensitive so multiply by % of year was around 2. net result is the same as if not converted
|What happens if preferred stock is redeemed in regards to the calculation of diluted EPS?
|difference of FV and carrying amount of preferred stock treated the same as a dividend
|When calculating diluted EPS how are shares to be issued in the future with no restrictions but time figured in?
|considered issued and treated as outstanding
|In a bankruptcy procedure, what is the statement of affairs?
|presents the current market values of the assets and the status of the various categories of the equity interests of the corporation
|In what order are classified equity interests put (from highest to lowest) for a bankruptcy procedure?
|preferred claims, fully secured creditors, partially secured creditors, unsecured creditors, stockholders equity
|What goes in to the statement of affairs for bankruptcy?
|starts with the present BV of the assets, then relate the projected proceeds from the liquidation of the assets to the equity interests, finishes with the estimated deficiency
|In reorganizations, what happens to the balance sheet?
|distinguish between events related to reorganization and ongoing operations. Classify liabilites like this at expected amounts on BS
|When is an entity considered a new entity for reporting purposes after bankruptcy?
|value of assets before confirmation < liabilties incurred and voting shareholders before confirmation receive < 50% of the voting shares of the entity
|What is a quasi reorganization?
|allow companies to avoid formal bankruptcy proceedins through informal proceedings. ELIMINATES DEFECIT in RE
|What happens in a quasi reorganization?
|authorization from stockholders & creditors, revaluate assets to current values, eliminate deficit by charging paid-in capital, write down adjustments go directly to RE
|What is it meant by stock rights?
|when more stock is issued existing shareholders have preemptive privalage to keep the same % of voting rights
|What is an employee stock ownership plan? what happens if payment is secured by employeer?
|bonus plan designed to invest in employeers equity securities. sometimes ESOP borrows $ to acquire stock, can be garunteed by employer. debt to liability reduces shareholders equity. amt employer contribute/commit employer puts in compensation expense
|What is a dividend payout? How is it calculated?
|1. measures percentage of earnings distributed as dividends 2. Dividends Per Share/ Earnings Per Share
|What is BV of common stock? How is it calculated?
|1. not a meaningful measure because assets are carried at historical costs 2. Common Stockholders Equity/ Common Shares outstanding
|What is rate of return on common stockholders equity? How is it calculated?
|1. measures return earned on stockholders ivestments in firm 2. NI available to common stockholders/common stockholders equity
|What is debt to equity? How is it calculated?
|1. shows companys ability to sustain losses 2. total debt, all liabilities/ stockholders equity
|What are the IFRS set of requirements for reporting shareholders equity?
|accounting influenced by the laws of a country so there is no set of requirements