Account For Common And Preferred Stock
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CPA Financial Accounting and Reporting (FAR) › Account For Common And Preferred Stock
A company issues 5,000 shares of $2 par value common stock for $18 per share. What is the correct journal entry?
Debit Cash $90,000; Credit Common Stock $90,000.
Debit Cash $10,000; Credit Common Stock $10,000.
Debit Cash $90,000; Credit Common Stock $10,000; Credit Retained Earnings $80,000.
Debit Cash $90,000; Credit Common Stock $10,000; Credit Additional Paid-In Capital $80,000.
Explanation
When stock is issued above par, cash is debited for total proceeds (5,000 x $18 = $90,000), Common Stock is credited at par value (5,000 x $2 = $10,000), and Additional Paid-In Capital (APIC) is credited for the excess ($90,000 - $10,000 = $80,000). Answer A is correct. Answer B credits the full proceeds to Common Stock, overstating the par value account. Answer C credits Retained Earnings instead of APIC. Answer D records only the par value component.
Which of the following correctly describes participating preferred stock?
Preferred stockholders receive dividends only if declared; unpaid dividends do not accumulate.
Preferred stockholders may vote on all corporate matters in proportion to their ownership percentage.
After common stockholders receive a specified dividend, preferred stockholders share in additional dividends beyond their stated rate.
Preferred stock may be converted into common stock at the holder's option.
Explanation
Participating preferred stock allows preferred holders to share in additional dividends beyond their stated rate, once common stockholders have received a specified return. Answer B is correct. Answer A describes voting rights, not participation features. Answer C describes noncumulative preferred stock. Answer D describes convertible preferred stock.
A corporation issues 1,000 shares of no-par common stock for $25 per share. The board of directors assigns a stated value of $5 per share. What is the correct journal entry?
Debit Cash $25,000; Credit Common Stock $5,000; Credit Additional Paid-In Capital $20,000.
Debit Cash $5,000; Credit Common Stock $5,000.
Debit Cash $25,000; Credit Common Stock $5,000; Credit Retained Earnings $20,000.
Debit Cash $25,000; Credit Common Stock $25,000.
Explanation
For no-par stock with an assigned stated value, the stated value ($5 x 1,000 = $5,000) is credited to Common Stock, and the excess ($25,000 - $5,000 = $20,000) is credited to Additional Paid-In Capital. Answer C is correct. Answer A credits the full proceeds to Common Stock. Answer B credits Retained Earnings instead of APIC. Answer D records only the stated value amount.
A company issues 2,000 shares of $50 par value, 8% preferred stock for $55 per share. What is the annual preferred dividend obligation per share?
$50.00 per share
$8.00 per share
$4.00 per share
$4.40 per share
Explanation
The dividend rate on preferred stock is applied to par value, not the issuance price. Annual dividend = $50 par x 8% = $4.00 per share. Answer A is correct. Answer B applies 8% to the $55 issuance price. Answer C uses the rate without applying it to par value. Answer D confuses par value with the dividend amount.
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?
A financial liability, presented in the liabilities section.
Mezzanine equity, always disclosed separately in the equity section.
Temporary equity, presented between liabilities and permanent equity.
Permanent equity, presented after common stock.
Explanation
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.
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?
Debit Retained Earnings $100,000; Credit Common Stock $5,000; Credit Additional Paid-In Capital $95,000.
Debit Retained Earnings $5,000; Credit Common Stock Distributable $5,000.
Debit Retained Earnings $100,000; Credit Common Stock Distributable $5,000; Credit Additional Paid-In Capital $95,000.
Debit Retained Earnings $50,000; Credit Common Stock Distributable $5,000; Credit Additional Paid-In Capital $45,000.
Explanation
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.
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?
$10,000
$11,500
$12,203
$15,000
Explanation
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.
Which of the following correctly describes convertible preferred stock at the time of conversion into common stock under the book value method?
The conversion is recorded at the fair value of the common stock issued, with any excess charged to Retained Earnings.
The preferred stock is retired and a new common stock issuance is recorded at par.
A gain or loss is recognized based on the difference between the fair value of common stock issued and the carrying amount of preferred stock converted.
No gain or loss is recognized; the carrying amount of the preferred stock is reclassified to common stock and APIC.
Explanation
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.
A company has 20,000 shares of $5 par value common stock authorized, 15,000 shares issued, and 2,000 shares held as treasury stock. How many shares are outstanding?
20,000
15,000
13,000
17,000
Explanation
Shares outstanding = Shares issued - Treasury shares = 15,000 - 2,000 = 13,000. Answer A is correct. Answer D is authorized shares, which represents the maximum shares the company is permitted to issue, not the shares currently held by investors. Answer B is issued shares, which includes treasury shares still held by the company. Answer C adds treasury shares to issued shares instead of subtracting them.
Which of the following is a characteristic that distinguishes preferred stock from common stock?
Preferred stockholders generally have priority over common stockholders in dividend distributions and in liquidation.
Preferred stockholders always have greater voting rights than common stockholders.
Preferred stock dividends are tax-deductible by the issuing corporation.
Preferred stock always carries a mandatory redemption feature.
Explanation
The defining characteristic of preferred stock is its preferential treatment: preferred stockholders receive dividends before common stockholders and have priority claims on assets in liquidation. Answer A is correct. Answer B is incorrect - preferred stockholders typically have limited or no voting rights. Answer C is incorrect - mandatory redemption is a feature of some preferred stock but not all. Answer D is incorrect - dividends on preferred stock are not tax-deductible (unlike interest); this is a key distinction between debt and equity financing.