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Chapter 15: Q15-1ISTQ (page 830)

1. Which of the following does not represent a pair of GAAP/ IFRS-comparable terms?

(a) Additional paid-in capital/Share premium.

(b) Treasury stock/Repurchase reserve.

(c) Common stock/Share capital—ordinary.

(d) Preferred stock/Preference shares.

Short Answer

Expert verified

Answer

The correct option is(b) Treasury stock/Repurchase reserve.

Step by step solution

01

Step-By-Step SolutionStep 1: Definition of Treasury Shares

Previous outstanding shares that are reacquired by a business entity are known as treasury shares. Such an account is a contra-equity account and, therefore, reduces the overall amount of equity.

02

Explanation for the correct answer

Option (b) Treasury stock/Repurchase reserve is the correct answer.

Reason: Treasury stock represents a contra-equity account arising due to the repurchase of shares. The repurchase reserve is maintained for liability that will arise in the future due to the repurchase agreement. Therefore, both of these do not represent comparable items, and therefore, it is the correct option.

03

Explanation for incorrect answers

(a) It is an incorrect option because the amount received over the issued price of the shares is reported as additional paid-in-capital under GAAP, and share premium under IFRS.

(c) It is an incorrect option because equity shares issued by the business entity are reported as common stock under GAAP and ordinary shares under IFRS.

(d) Under GAAP preference shares are reported as preferred stock, and under IFRS, these are reported as preference shares. Therefore, it is an incorrect option.

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Most popular questions from this chapter

(Stock Dividends and Stock Split) Oregon Inc. \(10 par common stock is selling for \)110 per share. Four million shares are currently issued and outstanding. The board of directors wishes to stimulate interest in Oregon common stock before a forthcoming stock issue but does not wish to distribute capital at this time. The board also believes that too many adjustments to the stockholders’ equity section, especially retained earnings, might discourage potential investors. The board has considered three options for stimulating interest in the stock:

The board has considered three options for stimulating interest in the stock:

  1. A 20% stock dividend.
  2. A 100% stock dividend.
  3. A 2-for-1 stock split.

Instructions

Acting as financial advisor to the board, you have been asked to report briefly on each option and, considering the board’s wishes, make a recommendation. Discuss the effects of each of the foregoing options.

(Stock Dividends) Kulikowski Inc., a client, is considering the authorization of a 10% common stock dividend to common stockholders. The financial vice president of Kulikowski wishes to discuss the accounting implications of such an authorization with you before the next meeting of the board of directors.

Instructions

  1. The first topic the vice president wishes to discuss is the nature of the stock dividend to the recipient. Discuss the case against considering the stock dividend as income to the recipient.
  2. The other topic for discussion is the propriety of issuing the stock dividend to all “stockholders of record” or to “stockholders of record exclusive of shares held in the name of the corporation as treasury stock.” Discuss the case against issuing stock dividends on treasury shares.

The term reserves is used under IFRS with reference to all of the following except:

(a) gains and losses on revaluation of property, plant, and equipment.

(b) capital received in excess of the par value of issued shares.

(c) retained earnings.

(d) fair value differences.

(Stock Dividend, Cash Dividend, and Treasury Stock) Mask Company has 30,000 shares of \(10 par value common stock authorized and 20,000 shares issued and outstanding. On August 15, 2017, Mask purchased 1,000 shares of treasury stock for \)18 per share. Mask uses the cost method to account for treasury stock. On September 14, 2017, Mask sold 500 shares of the treasury stock for \(20 per share.

In October 2017, Mask declared and distributed 1,950 shares as a stock dividend from unissued shares when the market price of the common stock was \)21 per share.

On December 20, 2017, Mask declared a $1 per share cash dividend, payable on January 10, 2018, to shareholders of record on December 31, 2017.

Instructions

  1. How should Mask account for the purchase and sale of the treasury stock, and how should the treasury stock be presented in the balance sheet on December 31, 2017?
  2. How should Mask account for the stock dividend, and how would it affect the stockholders’ equity at December 31, 2017? Why?
  3. How should Mask account for the cash dividend, and how would it affect the balance sheet at December 31, 2017? Why?

Hatch Company has two classes of capital stock outstanding: 8%, \(20 par preferred and \)5 par common. At December 31, 2017, the following accounts were included in stockholders’ equity.

Preferred Stock, 150,000 shares \( 3,000,000

Common Stock, 2,000,000 shares 10,000,000

Paid-in Capital in Excess of Par—Preferred Stock 200,000

Paid-in Capital in Excess of Par—Common Stock 27,000,000

Retained Earnings 4,500,000

The following transactions affected stockholders’ equity during 2018.

Jan.1 30,000 shares of preferred stock issued at \)22 per share.

Feb.1 50,000 shares of common stock issued at \(20 per share.

June 1 2-for-1 stock split (par value reduced to \)2.50).

July 1 30,000 shares of common treasury stock purchased at \(10 per

share. Hatch uses the cost method.

Sept.15 10,000 shares of treasury stock reissued at \)11 per share.

Dec.31 The preferred dividend is declared, and a common dividend of 50¢

per share is declared.

Dec. 31 Net income is $2,100,000.

Instructions

Prepare the stockholders’ equity section for Hatch Company at December 31, 2018. Show all supporting computations.
See all solutions

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