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Account For Common And Preferred Stock - CPA Far

  1. A company issues 1,000 shares of $100 par value, 7% cumulative preferred stock on January 1, Year 1. No dividends are declared in Year 1. On December 31, Year 2, the company declares dividends of $21,000. How much is paid to preferred stockholders?
    Answer: $14,000 Annual preferred dividend = 1,000 x $100 x 7% = $7,000. Year 1 dividends were not declared, creating $7,000 in arrears. Total preferred entitlement in Year 2 = $7,000 arrears + $7,000 current = $14,000. Total declared = $21,000. Preferred receives $14,000 and common receives $7,000. Answer B is correct. Answer A pays only the current year amount, ignoring arrears. Answer C pays all $21,000 to preferred, leaving nothing for common. Answer D pays nothing to preferred, which is incorrect.
  2. Which of the following correctly describes convertible preferred stock at the time of conversion into common stock under the book value method?
    Answer: No gain or loss is recognized; the carrying amount of the preferred stock is reclassified to common stock and APIC. Under the book value method for conversion of preferred stock, the carrying amount of the preferred stock (including any APIC related to the preferred) is simply reclassified to Common Stock (at par) and APIC. No gain or loss is recognized because this is an equity-to-equity transaction. Answer B is correct. Answer A recognizes a gain or loss, which is not permitted for transactions among stockholders. Answer C uses fair value, which is the market value method rather than the book value method. Answer D ignores APIC and treats it as a new issuance.
  3. A company has 10,000 shares of $100 par value, 6% cumulative preferred stock outstanding. No dividends were declared in Year 1 or Year 2. In Year 3, the company declares total dividends of $90,000. How much of the Year 3 dividend is available to common stockholders?
    Answer: $0 Annual preferred dividend = 10,000 x $100 x 6% = $60,000. Dividends in arrears: Year 1 = $60,000, Year 2 = $60,000. Total preferred claim = $120,000 arrears + $60,000 current Year 3 = $180,000. Since only $90,000 is declared, all $90,000 goes to preferred stockholders to partially satisfy the arrears. Common stockholders receive $0. Answer D is correct. Answer A gives everything to common. Answer B and C give partial amounts to common before satisfying the full preferred arrearage.
  4. Which of the following items, if declared, reduces retained earnings but does not reduce total stockholders' equity?
    Answer: A small stock dividend A small stock dividend reduces Retained Earnings (debited at fair market value) and increases Common Stock Distributable and APIC by the same total. The net effect on total stockholders' equity is zero - it is a reclassification within equity. Answer D is correct. Cash dividends (A) and property dividends (B) reduce total stockholders' equity by distributing assets. A liquidating dividend (C) reduces paid-in capital and also reduces total equity.
  5. Which of the following is NOT a component of stockholders' equity on the balance sheet?
    Answer: Dividends payable declared but not yet paid Once dividends are declared, they become a current liability (Dividends Payable) and are removed from stockholders' equity (as a reduction of Retained Earnings). They are no longer a component of equity after declaration. Answer C is correct. APIC (A), accumulated other comprehensive income (B), and retained earnings (D) are all components of stockholders' equity.
  6. Which of the following statements is correct regarding noncumulative preferred stock?
    Answer: If dividends are not declared in a given year, preferred stockholders lose the right to that year's dividend permanently. Noncumulative preferred stock does not carry forward unpaid dividends. If the board does not declare a dividend in a given year, preferred stockholders forfeit that year's dividend permanently. Answer D is correct. Answer A describes cumulative preferred stock. Answer B describes redeemable preferred stock. Answer C is incorrect; preferred stockholders typically have limited or no voting rights unless dividends are in arrears.
  7. A company issues 500 shares of $10 par value common stock and 200 shares of $50 par value preferred stock in a lump-sum issuance for $30,000. The common stock has a fair value of $35 per share and the preferred stock has a fair value of $60 per share. Using the proportional method, what amount is allocated to the preferred stock?
    Answer: $12,203 Total fair values: Common = 500 x $35 = $17,500; Preferred = 200 x $60 = $12,000; Total = $29,500. Preferred proportion = $12,000 / $29,500 = 40.68%. Amount allocated to preferred = $30,000 x 40.68% = $12,203. Answer C is correct. Answer A uses par value. Answer B uses an incorrect proportion. Answer D allocates the full par-based amount without applying proportional allocation.
  8. If Pacific Dynamics performs a 1-for-3 reverse stock split on December 31, 2024, what will be the par value per share and number of shares outstanding after the split?
    Answer: Par value $3 per share with 250,000 shares outstanding reflecting the mathematical reverse split conversion In a 1-for-3 reverse stock split, shareholders receive 1 new share for every 3 old shares held. Outstanding shares before split = 800,000 issued - 50,000 treasury = 750,000 shares. After reverse split: Outstanding shares = 750,000 ÷ 3 = 250,000 shares. The par value increases proportionally: $1 × 3 = $3 per share. Choice B incorrectly applies a regular split ratio. Choice C fails to adjust par value. Choice D incorrectly includes treasury shares in the calculation and gets the wrong number.
  9. At the time of a stock split effected in the form of a stock dividend (also called a stock split-up effected as a dividend), which of the following occurs?
    Answer: Retained Earnings is reduced by the par value of the new shares, with a corresponding credit to Common Stock. A stock split effected in the form of a stock dividend requires a formal journal entry: Retained Earnings is debited at par value of the new shares and Common Stock is credited. This differs from a conventional stock split (memorandum only) and from a small stock dividend (recorded at fair value). Answer B is correct. Answer A uses fair market value, which applies to small stock dividends. Answer C describes a conventional stock split, not one effected as a dividend. Answer D incorrectly increases APIC.
  10. A company has the following equity balances: Common Stock $50,000; APIC $200,000; Retained Earnings $120,000; Treasury Stock ($30,000). What is total stockholders' equity?
    Answer: $340,000 Total stockholders' equity = Common Stock + APIC + Retained Earnings - Treasury Stock = $50,000 + $200,000 + $120,000 - $30,000 = $340,000. Answer D is correct. Answer A sums all four without deducting Treasury Stock. Answer B deducts only $30,000 from $400,000 incorrectly. Answer C uses $350,000, omitting the Treasury Stock deduction from a different subtotal.
  11. Which of the following correctly describes the effect of issuing common stock on total stockholders' equity?
    Answer: Total stockholders' equity increases by the full proceeds received from the issuance. When a company issues common stock, it receives cash and credits equity components (Common Stock at par and APIC for the excess). Total stockholders' equity increases by the full proceeds received. Answer D is correct. Answer A confuses the balance sheet equation - issuing stock increases both assets (cash) and equity simultaneously. Answer B counts only par value. Answer C also counts only par value, ignoring APIC.
  12. Nexus Corporation has 1,000,000 authorized shares of $1 par value common stock. During 2024, the following transactions occurred: January 1 - 400,000 shares outstanding; March 15 - issued 100,000 shares for $12 per share; June 30 - declared and distributed a 2-for-1 stock split; September 10 - repurchased 50,000 shares for $8 per share. What is the weighted-average number of shares outstanding for 2024?
    Answer: 950,000 shares calculated as the weighted-average with retroactive adjustment for the stock split Stock splits must be applied retroactively to all periods. After the 2-for-1 split: Jan 1: 400,000 × 2 = 800,000 shares. Mar 15: issued 100,000 × 2 = 200,000 shares. Calculation: Jan 1 - Mar 15: 800,000 shares × 2.5/12 = 166,667. Mar 15 - Jun 30: (800,000 + 200,000) × 3.5/12 = 291,667. Jun 30 - Sep 10: 1,000,000 shares × 2.25/12 = 187,500. Sep 10 - Dec 31: (1,000,000 - 50,000) × 3.75/12 = 296,875. Wait, this doesn't seem right. Let me recalculate more carefully: Pre-split weighted average: Jan-Mar (2.5 months): 400,000; Mar-Jun (3.5 months): 500,000; Jun-Sep (2.25 months): 500,000; Sep-Dec (3.75 months): 450,000. Weighted average = (400,000×2.5 + 500,000×5.75 + 450,000×3.75)/12 = 475,000. Apply 2:1 split = 950,000.
  13. Which of the following is the correct classification of preferred stock on the balance sheet under U.S. GAAP when the stock is mandatorily redeemable at a fixed date?
    Answer: A financial liability, presented in the liabilities section. Under ASC 480, mandatorily redeemable preferred stock must be classified as a liability because the issuer is obligated to transfer assets (cash) at a fixed date. Answer C is correct. Answer A places it in permanent equity, which is incorrect for mandatorily redeemable instruments. Answer B describes mezzanine treatment used for conditionally redeemable stock. Answer D describes mezzanine equity, which applies to stock that is redeemable only upon certain contingent events, not mandatory redemption.
  14. A company declares a 10% stock dividend when it has 50,000 shares of $1 par value common stock outstanding. The market price on the declaration date is $20 per share. What journal entry is recorded on the declaration date?
    Answer: Debit Retained Earnings $100,000; Credit Common Stock Distributable $5,000; Credit Additional Paid-In Capital $95,000. A stock dividend of 10% or less (small stock dividend) is recorded at fair market value. New shares = 50,000 x 10% = 5,000. FMV = 5,000 x $20 = $100,000 debit to Retained Earnings. Common Stock Distributable is credited at par (5,000 x $1 = $5,000); APIC gets the excess ($95,000). Answer B is correct. Answer A uses only par value. Answer C credits Common Stock directly rather than Common Stock Distributable at declaration. Answer D uses $10 per share instead of $20.
  15. Preferred stock with a call price of $110 per share, a par value of $100, and $8 in dividends in arrears is called (redeemed) by the issuing corporation. Which of the following correctly describes the accounting treatment?
    Answer: The excess of the call price over the carrying amount of the preferred stock is charged to Retained Earnings. When preferred stock is redeemed above its carrying amount, the excess (call premium) reduces Retained Earnings. No gain or loss is recognized on transactions with stockholders. Answer D is correct. Answer A incorrectly records a gain - equity transactions do not produce income statement effects. Answer B is partially correct in direction but misstates the order of accounts used. Answer C is incorrect; dividends in arrears on cumulative preferred are not liabilities until declared.
  16. On January 1, 2024, Meridian Corp. issued 10,000 shares of $50 par value, 8% convertible preferred stock for $600,000. Each preferred share is convertible into 4 shares of $5 par value common stock. On July 1, 2024, when the common stock was trading at $18 per share, holders of 2,000 preferred shares exercised their conversion rights. What is the total impact on stockholders' equity from this conversion?
    Answer: Stockholders' equity remains unchanged as this is merely a reclassification between equity accounts When preferred stock is converted to common stock, it is a reclassification within stockholders' equity with no net change to total equity. The book value method is used: 2,000 preferred shares × $60 per share (original issue price) = $120,000 is removed from preferred stock accounts and transferred to common stock accounts. The market value of the common stock at conversion ($18 × 8,000 shares = $144,000) is not relevant for the accounting treatment. Choice A is incorrect because no loss is recognized. Choice B incorrectly uses market value. Choice D incorrectly suggests an increase when total equity is unchanged.
  17. Titan Enterprises issued 50,000 shares of $100 par value, 8% preferred stock that is callable at $105 and has a liquidation preference of $108 per share. The stock was issued at $110 per share. If Titan calls all the preferred stock for redemption, what is the total charge to stockholders' equity?
    Answer: $5,250,000 representing the total cash payment required for the redemption transaction When preferred stock is called for redemption, the total charge to stockholders' equity equals the call price paid. Call price = $105 per share × 50,000 shares = $5,250,000. This amount reduces total stockholders' equity. The original book value was $110 per share × 50,000 = $5,500,000 (consisting of $5,000,000 par value and $500,000 additional paid-in capital). Since the call price ($5,250,000) is less than book value ($5,500,000), the $250,000 difference increases additional paid-in capital, but the total charge to equity is still the full call price paid.
  18. Which of the following correctly describes the accounting when a company retires previously issued common stock by repurchasing it at a price above its original issuance price (using the par value method)?
    Answer: Common Stock is debited at par, APIC is debited for the original premium, and any remaining excess is charged to Retained Earnings. Under the par value method for retirement of stock, Common Stock is debited at par value, APIC is debited for the original premium received at issuance, and any excess of repurchase price over original issuance price is charged to Retained Earnings. No gain or loss is recorded on the income statement. Answer C is correct. Answer A records a loss, which is not permitted for equity transactions. Answer B credits rather than debits APIC. Answer D describes the cost method for treasury stock, not retirement.
  19. A company has $0.01 par value common stock. It issues 10,000 shares at an IPO price of $22 per share. What amount is credited to Additional Paid-In Capital?
    Answer: $219,900 Total proceeds = 10,000 x $22 = $220,000. Common Stock at par = 10,000 x $0.01 = $100. APIC = $220,000 - $100 = $219,900. Answer B is correct. Answer A credits the full proceeds to APIC, ignoring the par value credit to Common Stock. Answer C uses $20 per share as the APIC amount with no basis given. Answer D only records the par value credit.
  20. A company declares a large stock dividend (25%) when it has 80,000 shares of $1 par value common stock outstanding. The market price on the declaration date is $30 per share. How is the large stock dividend recorded?
    Answer: At par value: Debit Retained Earnings $20,000; Credit Common Stock Distributable $20,000. Stock dividends greater than 20-25% are considered large stock dividends and are recorded at par value, not market value. New shares = 80,000 x 25% = 20,000. Amount = 20,000 x $1 par = $20,000. Retained Earnings is debited and Common Stock Distributable is credited at par; no APIC entry is required. Answer C is correct. Answer A records at fair market value ($30 x 20,000 = $600,000), which applies only to small stock dividends. Answer B credits Common Stock directly rather than Common Stock Distributable; at the declaration date the distributable account is required, with the transfer to Common Stock occurring on the distribution date. Answer D uses the correct dollar amount but applies the fair market value label incorrectly.

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