M&D2 EXAM -- OWNER’S EQUITY

preferred stock

may have a dividends or liquidation preference

can be cumulative and/or convertible into common stock

dividends paid are not tax deductible

can be a fixed or floating rate

Treasury Stock

stock that has been repurchased by issuing firm from investors

acts as a means (other than dividends) or returning cash to shareholders because shareholders are compensated from selling stock

Excise Tax

imposed on treasury stock due to the Inflation Reduction Act

JE to record purchase of Treasury Stock

Dr. Treasury Stock
Cr. Cash

JE to record excise tax

Dr. Treasury Stock (0.01)(treasury stock tax)
Cr. Excise Tax Payable (0.01)(treasury stock tax)

JE to reissue above original treasury stock price

Dr. Cash xx
Cr. Treasury Stock repurchase price

Cr. Additional Paid In Capital difference

JE to reissue below original treasury stock price

Dr. Cash xx

Dr. Additional Paid in Capital until empty

Dr. Retained Earnings plug

Cr. Treasury Stock repurchase price

How are gains / losses treated from reselling treasury stock?

they are not recorded because they are transactions with shareholders

authorized shares definition

number of shares that can be issued according to articles of incorporation

issued shares definition

number of shares that have been exchanged for cash/assets/services

outstanding shares calculation

issued - treasury

Restricted stock plan

employees are awarded stock after vesting period, totally compensation expense is based initial value of restricted stock and amortizes over vesting period

JE to record annual compensation expense

Dr. Compensation Expense

Cr. Additional Paid In capital — restricted stock

When does the employer get a tax benefit from stock compensation?

After it vests

JE to record employer tax benefit

Dr. Deferred Tax Asset 0.21(compensation expense)
Cr. Deferred Income Tax Provision

Stock Option Program

contract allows employee to buy stock at a fixed price after a vesting period

total compensation expense found using Black Scholes model at a grant date and is amortized over vesting period

Black Scholes Model

Volatility ( current stock price - PV of exercise price - PVOA of dividends)

JE to record amortization of compensation expense

Dr. Compensation Expense
Cr. Additional Paid in Capital - Stock Option

JE to record stock exercise

Dr. Additional Paid in Capital - Stock Option comp expense
Dr. Cash cash paid
Cr. Common Stock amortization x par
Cr. Additional Paid In Capital plug

Basic EPS numerator

Net Income - Preferred Dividends

Basic EPS denominator

weighted average of common shares outstanding

Dilutive EPS numerator

Basic + convertible preferred stock dividends + after tax % expense on convertible bonds

Dilutive denominator

Image

basic + shares from convertible preferred stock + shares from convertible bonds + shares stock option