Bisk chapter 10 - Equity

1. Bisk chapter 10 - Equity

2. Agenda • Definition of owners equity • Comprehensive income • Treatment of issuance of stock • Legal capital limitations • Stated in articles • Creditors

3. Agenda ….. • Journal entries • Subscription • Barter • On incorporation of going concern • Lump sum purchase shares issued

4. Agenda …. 3 • Statement of Changes in Retained Earnings – 2 presentations – separate statement or notes or with P L.

5. Elements of Stockholders' Equity

6. OH – 2 Preferred Stock • Cumulative • No dividends can be paid on common stock until all accumulated dividends are paid • Participating • Stockholders can share in an extra dividend above their fixed rate • Callable • Corporation has the option to repurchase the preferred stock at a specified price • Convertible • Shareholder has the option to convert to common stock at a specified conversion ratio

7. OH –3 In September of year 2, 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 1/100 of a share of West's $50 variable rate preferred stock at an exercise price of $80 per share. On March 20 of year 6, none of the rights had been exercised, and West redeemed them by paying each stockholder $0.10 per right. As a result of this redemption, West's stockholders' equity was reduced by:                 a $ 120                 b  $ 2,400                 c $12,000 d $36,000

8. OH – 4 Issues of Capital Stock Issues for cash Dr. Cash Cr. Common Stock-Par Value Additional Paid-In Capital Issues Pursuant to Subscription: Dr. Cash Cr. Subscriptions Receivable Common Stock Subscribed-Par Additional Paid-In Capital

9. Cont… Issues for Property or Services Dr. Property (FV) Cr. Common Stock-Par Value Additional Paid-In Capital

10. OH –5 The stockholders' equity section of Brown Co. 's December 31, year 1 balance sheet consisted of the following: Common stock, $30 par, 10,000 shares authorized and outstanding -- $300,000 Additional paid-in capital - $150,000 Retained earnings (deficit) - $ (210,000) On January 2, year 2, Brown put into effect a stockholder-approved quasi­reorganization by reducing the par value of the stock to $5 and eliminating the deficit against additional paid-in capital. Immediately after the quasi-reorganization, what amount should Brown report as additional paid-in capital? …… >

11. Oh – 5 Cont …. • a.                 $ (60,000) • b.                 $150,000 • c.                 $190,000 d. $400,000

13. OH - 7 In the current year, 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 current year retained earnings, after all nominal accounts are closed? a.            a      $0 b.            b     $18,000 increase c.             c    $60,000 decrease d $78,000 decrease

14. OH -8 On May 18 of the current year, Sol Corp.'s board of directors declared a 10% stock dividend. The market price of Sol's 3,000 outstanding shares of $2 par value common stock was $9 per share on that date. The stock dividend was distributed on July 21 of this year, when the stock's market price was $10 per share. What amount should Sol credit to additional paid-in capital for this stock dividend? a.          A       $2,100 b.          B     $2,400 c.          C      $2,700 D $3,000

16. OH-10 (MC #35) In the previous year, Seda Corp. acquired 6,000 shares of its $1 par value common stock at $36 per share. During the current year, Seda issued 3,000 of these shares at $50 per share. Seda uses the cost method to account for its treasury stock transactions. What accounts and amounts should Seda credit in the current year to record the issuance of the 3,000 shares? Calculate treasury stock, Paid in Capital and Retained Earnings changes.

18. OH -12 Asp Co. was organized on January 2 with 30,000 authorized shares of $10 par common stock. During the year, the corporation had the following capital transactions: January 5 - issued 20,000 shares at $15 per share. July 14 - purchased 5,000 shares at $17 per share. Dec 27 - reissued the 5,000 shares held in treasury at $20 per share. Asp used the par value method to record the purchase and reissuance of the treasury shares. In its December 31 balance sheet, what amount should Asp report as additional paid-in capital in excess of par? A.$100,000 b.    B.             $125,000 • $140,000 • $150,000

19. OH 13 On June 1 of the previous year, Oak Corp. granted stock options valued at $8,000 to certain key employees as additional compensation for the year. The options were for 1,000 shares of Oak's $2 par value common stock at an option price of $15 per share. Market price of this stock on June 1 of the previous year was $20 per share. The options were exercisable beginning January 2 of the current year and expire on December 31 of next year. On April 1 of the current year, when Oak's stock was trading at $21 per share, all the options were exercised. What amount of pretax compensation should Oak report in the previous year in connection with the options? • $8k C $2.5K • $5k D. $2K

20. OH 14 Avers and Smith formed a partnership. Avers contributed cash of $50,000. Smith contributed property with a $36,000 carrying amount, a $40,000 original cost, and a fair value of $80,000. The partnership assumed the $35,000 mort­gage attached to the property. What should Smith's capital account be on the partnership formation date? a.                A   $36,000 b.                B   $40,000 c.                C $45,000 D $80,000

21. OH 15 Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets. Under the bonus approach to adjust the capital accounts, Carr's unidentifiable asset should be debited for a.                 A $46,000 b.                 B $16,000 c.                 C $ 8,000 D $0

22. OH - 16 Cor-Eng Partnership was formed on January 2 of the current year. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, while Eng contributed $20,000 in cash. Eng's initial capital balance in Cor-Eng is? • $20K • $25K • $40K • $60K

23. OH 17

24. OH 18

25. Reporting Comprehensive Income (Issued 6/97) • http://www.allbusiness.com/finance/660309-1.html • http://www.fasb.org/st/summary/stsum130.shtml • http://findarticles.com/p/articles/mi_m4325/is_9_42/ai_n25024696/pg_3

26. This Statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement.

27. This Statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position.

28. This Statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required.

29. The end ch 10