Legal Capital Definition
*amount of capital that must be retained by the corporation for the protection of creditors (cannot pay out dividends from this amount)
Book Value per Common Share
= (Common Shareholder’s Equity)/(Common Shares Outstanding)
Convertible vs. Callable Preferred Stock
Convertible = investor has this right Callable = option of the entity
Mandatorily Redeemable Preferred Stock
*must be treated as a liability since it is more of a debt instrument
Participating Preferred Stock
- shares in remaining dividends
- common shareholders must be accounted for after preferred using the same return %
- then divide the remaining dividends pro rata based upon legal capital proportions
Quasi-Reorganization
- used to reduce retained earnings back down to zero
- also used to restate overvalued assets to their lower fair values
*credit any excess after reducing par value to APIC
Methods of Accounting for Treasury Stock
- cost method
- par method
Cost Method = G/L upon reissuance
Par Method = G/L upon acquisition
- special APIC account will be used for G/L
- *otherwise it will be plugged to R/E for losses
Par Value Method of Treasury Stock
- only recognize APIC - T/S upon repurchasing the treasury stock
- plug to APIC - C/S when the treasury stock is reissued
Par Value Method Retirement
DR: C/S
CR: T/S
*both have equivalent par values so they cancel one another out
Sale of Subscriptions
DR: Subscriptions Receivable
CR: Common Stock subscribed
CR: APIC
Collection
DR: Cash
CR: Subscriptions Receivable
Issuance of Stock Previously Subscribed
DR: Subscriptions Receivable
CR: Common Stock (issued)
Property Dividends
*remove A/D and old cost and recognize new asset at FMV along with a gain or a loss
Liquidating Dividend
- when dividends exceed R/E
- first go to APIC
- then go to common stock
Scrip Dividends
- shortage of cash so notes are issued instead
* CR: Notes Payable instead of Dividend Payable
Journal Entry for Large Dividend
R/E
Common Stock Distributable
Common Stock Distributable
Capital stock, $10 par common
Noncompensatory vs. Compensatory Stock Issued to Employees
Noncompensatory: no J/E until the stock is purchased
**under IFRS, all stock options are compensatory
Compensatory: accrue an expense over the vesting term
Does the fair value of the stock for compensatory options matter?
No; no gain or loss
Statement of Changes in Shareholder’s Equity: GAAP vs. IFRS
GAAP allows it to be a primary financial statement or be put in the notes
IFRS and SEC require it to be a financial statement
Basic EPS Formula
Basic EPS = (Net Income - Preferred Dividends)/(Weighted Average Common Stock Outstanding)
Basic EPS Formula: Preferred Stock Issues
Noncumulative: only subtract if declared
Cumulative: always subtract out that year’s rate
How are stock splits and stock dividends treated for EPS?
- treat them as though they occurred at the beginning of the year
- may have to go back and restate the prior year’s financials for comparative purposes
Examples of Dilutive Securities
- convertible securities
- warrants and other options
- contracts that may be settled in cash or stock
- contingent shares
When using the Treasury Stock Method for Dilution due to Options and Warrants, which price should you use for the theoretically reacquired stock?
- the average market price
* do not add back the proceeds since they are used to theoretically reacquire stock
Options and Dilutive EPS
- must have intrinsic value to be dilutive
* no addition to the numerator since all proceeds are hypothetically used to reacquire shares at the market average rate
Contingent Shares That Are Dilutive
INCLUDED IN BASIC EPS; already accounted for in diluted EPS
