AC 311 Exam 1 Study Guide PDF

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AC 311 Exam 1 Study Guide Journal entry, important concept, do not forget this, tips for success I am asking him for clarification on this topic Chapter 18: Shareholder’s Equity 

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Issuing stock and treasury stock o Cost method  Issue common stock  Dr. cash (A+) o Cr. Common stock (SE+) for par value o Cr. Additional paid in capital (SE+)  Reacquire common stock  Dr. treasury stock (SE-) for cost to acquire o Cr. Cash (A-)  Treasury stock reissued  Dr. cash (A+) o Cr. Treasury stock (SE+) for cost to acquire  Additional Paid in capital o if the treasury stock is reissued for a higher price than cost to acquire, credit APIC – treasury stock  dr. cash (A+)  cr. Treasury stock (SE+) for cost to acquire  cr. APIC – treasury stock (SE+) to balance o if the treasury stock is reissued for a lower price than cost to acquire, debit APIC – treasury stock  dr. cash (A+)  dr. APIC – treasury stock (SE-)  cr. Treasury stock (SE+) for cost to acquire o APIC – treasury stock account can only be debited to the extent there is a credit balance. Excess is debited to retained earnings for that amount.  Keep T-account records for issuing stock problems.  Dr. cash (A+)  Dr. retained earnings (SE-)  Cr. Treasury stock (SE+) Common vs. preferred cash dividends o Cumulative vs. noncumulative  Cumulative means that if preferred stockholders do not receive dividends for the year, the annual dividend amount rolls over to a later date. The amount of div accumulates over time. Not a liability until declared.  Date declared and paid  Dr. retained earnings (SE-) o Cr. Dividends payable (L+)  Dr. dividends payable (L-) o Cr. Cash (A-)

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o When will common shareholders receive dividends and how much  Preferred shareholders receive dividends first – their cumulative and current year DIV are paid before common shareholders receive any Stock dividends (small and large) and stock splits o Account for a small stock dividend on date declared and date distributed  Need to know  Shares outstanding  Par value  FV on date of dividend declaration  Dividend percentage  Date of declaration – similar to creating a liability; still only SE accounts  Dr. retained earnings (SE-) = (# shares o/s * div % * FMV) o Cr. Common stock distributable (SE+) = (par value * # shares to be distributed) o Cr. Paid in capital (SE+) = to balance  Date of distribution – reverse the common stock distributable JE on date of declaration  Dr. common stock distributable (SE-) = (par value * # shares to be distributed) o Cr. Common stock (SE+) = same as debit o Account for a large stock dividend on the date declared and the date distributed  Need to know  Shares outstanding  Par value  % dividend  # shares to be distributed  Accounted for as a % stock dividend  Date of declaration; (# shares o/s * %DIV * par value) o Dr. retained earnings (SE-)  Cr. Common stock distributable (SE+)  Date of distribution; (# shares o/s * %DIV * par value) o Dr. common stock distributable (SE-)  Cr. Common stock (SE+)  Accounted for as not effected in the form of a stock dividend  X: Y * # shares o/s  Y/X * par value  Then account for it the same way but with the new par value / shares o/s?

Chapter 19: Share based compensation and earnings per share 

Stock options o Need to know  Grant date  # options  MV per option on grant date  # of years to be worked

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 Par value per share o Calculating and accounting for total and yearly compensation expense  Total compensation expense = # options * MV per option on grant date  Annual compensation expense = total compensation expense / # years to be worked  Annual JE = (annual comp. exp. * # months so far/12) o Dr. compensation expense (SE-)  Cr. PIC – stock op. (SE+) o Note: If options are granted on 3/1/18, in 2018 only 10 months’ worth of compensation expense to account for so the calculation would be (annual comp. exp. * 10/12) o Account for options getting exercised  When options are exercised, the employee pays the company for stated option price and receives shares of stock; must transfer PIC balance from PIC – stock options to APIC for common stock issued  JE on exercise date  Dr. cash (A+) = (# shares exercised * stated option price)  Dr. PIC – SO (SE-) = (# shares exercised * MV on grant date) o Cr. Common stock (SE+) = (# shares exercised * par value) o Cr. APIC (SE+) = to balance o Account for the options expiring Restricted stock o Need to know  issue date  # years to be worked  # shares to be issued  Par value  Market value on issue date o Calculate and account for total and yearly compensation expense  Total compensation expense = (# shares to be issued * MV on issue date)  Annual compensation expense = (total compensation expense / # years to be worked)  Annual JE: (annual compensation exp. * (# months/12))  Dr. Compensation expense (SE-) o Cr. PIC – RS (SE+) o Account for the company granting restricted stock to employees granted none of the shares are forfeited  Dr. PIC – RS (SE-) = (# shares * MV on issue date)  Cr. Common stock (SE+) = (# shares * par value)  Cr. APIC (SE+) = to balance o Account for the company granting restricted stock to employees granted some of the shares are forfeited Earnings per share o Compute basic earnings per share  Basic EPS = NI – DIV / # shares o/s  Cumulative vs. noncumulative

Cumulative – NI - what they actually paid in DIV Noncumulative – NI – (compute the yearly DIV amount)  Calculate current number of shares outstanding  Weighted average method - If you have trouble understanding this section, text me at 770-367-1770. I will try to explain with an example. o Make sure to create a timeline. Dates are important for calculating weighted average # of shares outstanding. o For each addition or repurchase of shares o/s (or stock splits), adjust the number of shares outstanding for the months of the year before a change was made. Do this by multiplying # shares * fraction of the year as we did for annual compensation expense calculations o Retroactively account for stock splits. I.e. treat them as if the split was in effect all year – even the periods before the split. o Compute diluted earnings per share  To compute diluted EPS,  First begin with the basic EPS fraction = NI – DIV / # shares outstanding.  Next, you will calculate how one of the three (or all or some) will affect the basic eps fraction. o If the stock options/convertible bonds/convertible stock REDUCES the basic eps equation ratio, it is dilutive. o If the stock options/convertible bonds/convertible stock INCREASES the basic eps equation, it is anti-dilutive, and you will not use it in the last step.  Finally, you will add to the equation one by one (but cumulatively), each piece that was dilutive in order of most dilutive (smallest) to least dilutive (largest) o Note: you stop adding these pieces if at any point the diluted ratio becomes a higher number than before (this would be an antidilutive step and you will not use it in calculating diluted EPS)  Convertible preferred stock  Numerator effect o Add: Dividends that would not have been paid if the preferred stock was converted to common stock  Cumulative: add what the yearly amount should be  = # shares * par value * % dividend  Noncumulative: add what the company paid in dividends  Denominator effect o Add: number of common shares the preferred stock can be converted to  = Number of preferred shares * number of common stock each share converts to  Convertible bonds  Numerator effect o Add: interest expense*(1-tax rate)  Denominator effect o Add: number of shares the bonds can be converted to  Stock options  

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Numerator effect o Always zero Denominator effect o 1. Add: number of shares that can be purchased o 2. Subtract amount of treasury stock that could be repurchased by the company at the exercise price

Chapter 14: Bonds  Calculate cash interest o Cash interest = FV * stated(face) interest  Calculate annual interest expense o Annual payment  Date of payment  Dr. Accounts Payable (for fraction of period left to be accrued; reverse 12/31 AP credit)  Dr. interest expense (fraction of period left to be expensed * interest expense from table)  Dr. premium (if applicable) (to balance) o Cr. Discount (if applicable) (to balance) o Cr. Cash (cash interest; always the same)  12/31 JE  Dr. interest expense (for fraction of year since last payment *  Dr. premium o Cr. Discount o Cr. Interest payable (for fraction of year since last payment*cash interest) o Semiannual payment  Date of payment 1  Dr. Accounts Payable (for fraction of period left to be accrued; reverse 12/31 AP credit)  Dr. interest expense (fraction of period left to be expensed * interest expense from table)  Dr. premium (if applicable) (to balance) o Cr. Discount (if applicable) (to balance) o Cr. Cash (cash interest; always the same)  Date of payment 2 – all amounts are directly from amortization table  Dr. interest expense  Dr. premium o Cr. Discount o Cr. Cash  12/31 JE  Dr. interest expense (for fraction of year since last payment *  Dr. premium (if applicable) o Cr. Discount (if applicable)

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o Cr. Interest payable (for fraction of year since last payment*cash interest) o Add the interest expense amounts for each payment date and the amount debited in December (year-end)  Bonds issued at market price o Date issued JE  Dr. cash  Cr. Bonds payable o Following JE’s  Dr. interest expense  Cr. Cash interest  Or (12/31 entry)  Dr. interest expense  Cr. Accounts payable  Or (first payment of year entry)  Dr. accounts payable  Dr. interest expense  Cr. Cash interest Bonds issued at a discount – stated rate < market rate; therefore, have to sell at a lower price o Date issued JE  Dr. cash  Dr. discount  Cr. Bonds payable Bonds issued at a premium – stated rate > market rate; therefore, can sell at a higher price o Date issued JE  Dr. cash  Cr. Premium  Cr. Bonds payable Amortization tables o Formulas  Interest expense = market rate * carrying value  PV – carrying value = unamortized discount  Interest expense – cash interest = discount amortized o Carrying value  Increases down a table if discount  PV < FV  Decreases down a table if premium  PV > FV  Higher price = higher PV because PV = sales price Callable bonds o Company’s decision to “call” bonds o Essentially it is compensating the bondholder for buying the bond back early o Need to know  How much you paid for a bond

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BV of the bond The difference is a gain or a loss

o JE Dr. bonds payable = book value Dr. loss (if applicable)  Cr. Gain (if applicable)  Cr. Cash = how much you paid to retire it Convertible bonds o It is the bondholder’s decision to convert a bond to shares of stock or not o NEVER a gain or loss on conversion o Stock goes on the books for the book value of the bond  Dr. bonds payable  Cr. Common stock  Cr. APIC Bonds with detachable stock warrants  

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