Intermediate II Exam 1

Asset

A present right to an economic benefit.

Preemptive right

Right to buy a proportionate share of new common stock; protects existing ownership from dilution.

Par / stated value

Par is an arbitrary legal amount per share. Stated value is a minimum value assigned to no-par stock and is treated like par for accounting.

Stock issued for noncash property/services

Use the fair value of the stock issued or the property/services received, whichever is more clearly determinable. Do not use par, stated, or book value to value the exchange.

Mezzanine / temporary equity

Section between liabilities and permanent equity for certain redeemable preferred stock with both debt and equity characteristics.

Treasury stock key rules

Treasury stock is a contra-equity account, not an asset; record purchases at cost; treasury shares receive no dividends; transactions in treasury stock do not create gains/losses in net income.

Constructive retirement

Treat reacquired shares as retired by removing the related stock and APIC rather than maintaining Treasury Stock; used when shares are not expected to be reissued.

Cash dividend

Declaration: Dr Retained Earnings, Cr Dividends Payable. Record date: no entry. Payment: Dr Dividends Payable, Cr Cash.

Property dividend

Remeasure the property to fair value and recognize gain/loss, then record the dividend at fair value. Net assets and equity ultimately decrease by the property's old carrying amount.

Small vs. large stock dividend

Small (

Stock dividend vs. stock split

Stock dividend transfers Retained Earnings to contributed capital and requires entries. Stock split changes shares and par/stated value per share but requires no journal entry.

Purpose of stock split

Change the market price per share and improve marketability. Normal split increases shares and lowers price per share; reverse split does the opposite.

Stock dividend/split effect on total equity

No change in total stockholders' equity.

Convertible security book-value method

At conversion, remove the carrying value of the convertible security and issue common stock; normally no gain or loss.

Warrant

Right to buy common stock at a specified exercise price. Detachable warrants are accounted for separately from the related debt; nondetachable warrants are not.

Stock compensation: compensatory vs. noncompensatory

Compensatory plans provide employee compensation. Noncompensatory plans generally allow broad employee participation, have a small discount (generally 5% or less), and lack a substantive option feature.

Fair value method for stock compensation

Required method in the course notes; measure compensation using the award's fair value and recognize expense over the service period.

Intrinsic value method

Exception when fair value cannot be reasonably estimated; intrinsic value is generally market price minus exercise price and is remeasured through settlement.

Stock-option valuation models

Basic: option price = current stock price - PV of exercise price; Black-Scholes; lattice.

Cliff vesting

The entire award vests at one point after completion of the required service period.

Basic EPS

(Net income - applicable preferred dividends) / WACSO.

WACSO

Weighted-average common shares outstanding; weight shares by the fraction of the year outstanding.

EPS retroactive adjustment

Stock dividends, stock splits, and reverse splits are treated retroactively. Prior-year EPS/shares presented must be restated.

Dilutive vs. antidilutive securities

Dilutive securities decrease EPS when assumed converted/exercised. Antidilutive securities increase EPS or reduce loss per share and are excluded.

If-converted method

For convertibles: assume conversion at beginning of period or issuance date if later. Bonds: add back after-tax interest and add conversion shares. Preferred: add back preferred dividends and add conversion shares.

Treasury-stock method

For options/warrants: assume exercise, use proceeds to repurchase shares at average market price, and add only incremental shares to diluted EPS.

Equity security

Security representing an ownership interest, such as common/preferred stock or rights/warrants/options to acquire ownership.

Debt security

Security representing a creditor relationship, such as government securities, corporate bonds, convertible debt, or commercial paper.

Debt security classifications

HTM = amortized cost. Trading = fair value with unrealized G/L in net income. AFS = fair value with unrealized G/L in OCI/AOCI.

Effective-interest method

Interest revenue = beginning carrying amount x effective/market rate. Cash interest = face value x stated rate. Difference amortizes premium or discount.

Debt premium vs. discount

Discount amortization increases carrying amount; premium amortization decreases carrying amount. GAAP requires effective-interest unless straight-line is not materially different.

Fair value

Exit price: amount received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Market participants

Independent, knowledgeable, able, and willing buyers/sellers who are not forced to transact.

Fair value option

Eligible financial instrument is measured at fair value with changes in fair value reported in NET INCOME.

Equity investment methods

Hedges

Cash flow hedge: effective gain/loss -> OCI/AOCI. Fair value hedge: gains/losses -> NET INCOME