 Hello and welcome to this session in which we would look at CPA exam questions that deal with the stockholders equity or shareholders equity or simply equity on the CPA exam. These questions they could appear on the CPA exam they could also you could also see them in in your intermediate accounting textbook. You cannot be prepared for the exam without knowing in depth the stockholders equity section. Basically the stockholders equity is a major component of the balance sheet remember the balance sheet you have assets on one side liabilities and equity on the other. So we're going to be dealing with questions that deals with this section the equity section is if you want to think about it one third of the balance sheet that's a huge component of your knowledge for the CPA exam. I'm not saying this is equally weighted but the point is you're not going to pass the exam if you're if you're not comfortable 100% with the equity section of the balance sheet otherwise you will fail the exam. 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Please connect with me on LinkedIn if you haven't done so. And you can read other people's reviews other people recommendation when they took my material and how they liked it how it helped them. Please like this recording connect with me on Instagram, Facebook, Twitter and Reddit. Let's take a look at the first question and usually I will start with easy questions then I will, you know, I will start to give you questions with numbers and more challenging the first one is common shareholders usually have the following rights except. For example, if you get this questions on the exam and the exam could ask you a question like this. This should be, I would say 10 seconds questions. Okay. First of all, do they have, can they share in the profit of course that's why their shareholders they can share in the profit to share in assets upon liquidation sure if there's any liquidation if the company got out of business or they liquidate. Yes, they can share in the assets they're the last group to get anything but they can share to elect the board of directors of course they can elect the board of directors that's one of their main features to participate in day to day operation do they have this right and the answer is no. Think about it if you own shares and Apple stocks, can you go to Apple stores in your local area and say you know what I own you know 500 shares I would like to run the store with you because I'm an owner. Not really they will call security on you so therefore you cannot participate. Now you can be a shareholder and in management and a shareholder and employee that's different. So you are participating as an employee or as a manager but just by the by the mere fact you are a shareholder. It doesn't give you the right to participate in day to day operation. Well you can elect the board of directors, which in turn hire managers that that run the company on day to day basis. Let's take a look at this question. The part amount of the common stock. What is the part amount. So you need to know because the stock will have a part amount and that's important and you're going to see how important it is in the next questions when we look at numbers. What is the part amount of the common stock and it gives students a lot of problems. Well, I'm going to tell you what the part amount is. It's an arbitrary amount. It's like your name. You were named. Somebody named you a person. What is your name? Well, well your parents named you a name. It's an arbitrary letters put together. That's why it represents something for them. But it's just a name. So the part amount is an arbitrary dollar amount assigned to the share of stocks. So the part amount could be a dollar. The shop. The part amount could be $2 could be $5 could be a penny could be 100 of a penny could be 1000s of a penny. So just an arbitrary amount assigned to the dollar. Now, do we know do we need to know about the part amount? Yes, because when we are preparing journal entries, we have to take the part the part amount into consideration. So let's take a look at a question that involves figures and the power value. So Adam Corporation was organized on January 3. The firm was authorized to issue 87,000 shares. The power value is $5. So notice here they signed the power value during 2021. Adam had the following transaction related to the stockholders equity. They issued 25,000 shares at 660. They issued 20,000 shares at 930. Reported income paid dividend. And the question is what is the total paid in capital at the end of 2021? Well, what is the total paid in capital? Simply put, how much cash did they receive? Well, simply put, they issued stocks and received cash. Now you might be asked to journalize the entry. So here's how you journalize this entry. What you do is you debit cash. So this is important. This is important. So let's use a calculator to show you how you would how you would journalize this entry. And by journalizing the entry, you will need to learn all you need to learn about the entries for stockholders equity. So we issued, first we issued 25,000 shares, 25,000 shares. We multiplied by 666.666. And this is going to give us the total amount of cash we received, which is 165,000. Now we're going to credit common stock. Common stock is credited for number of shares times the par value. Okay, this is where we use the par value. Well, the par value is $5. We have a par value of five and we issued 25,000 shares. And that's going to give us common stock, 125,000. And anything that's left is called additional paid in capital or I'm going to abbreviate APIC. Again, these topics, I have them in depth covered in my on forehead lectures minus 165. And what's left in paid in capital is 40,000. So, so, so look, this number is always a plug. This number is a plug. So if you're doing a journal entry, keep APIC loss and it will be a plug. Now this is one entry. So we raised 165,165,000. This is paid in capital. But what's the total paid in capital? Well, we issued another 20 shares at 20,000 shares at $9.30, $9.30, which is what's going to give us 186. We credit common stock number of shares times the par value and the remaining is APIC. Now how much did paid in capital in total? Those two together. So 186 plus 165 is the total paid in capital, which is 351,000. They could ask you what is the common stock? The common stock is 125 and the common stock here, number of shares, which is 20,000 shares times five. So you have to be careful or they can only ask you about additional paid in capital, which is this is the additional paid in capital. Here they're asking you what is the total paid in capital? How much did the investors contributed to the company? It's 351,000. Let's take a look at this question and I guess we're going to need the calculator here as well. So let's keep the calculator. Adam Enterprise reported the following as of December 31st. All accounts, they have a normal balance starting with the deficit and retained earning. That's not really normal, but they said that they want us to use a deficit. So this is a deficit. Common stock 2000. We all know how to do we get common stock paid in capital shares repurchase. We have paid in capital from repurchasing shares 1000. This deals with treasury stock. Again, these topics, if you want to learn more about them, go to farhatlectures.com. We have treasury stock. Treasury stock is a contra equity. It's negative paid in capital during 2022. So this is as of the end of 2021. During 2022 net income was 9,025% of the treasury stock will result for 450 cash dividend declared were 600 and cash dividend paid was 500. And the question is, what's the shareholders equity? Okay, so they want us to know what is the shareholders equity? Well, as of a year later. So first, to know what's your shareholder equity a year later, you need to start with a balance. Well, what is your balance? Well, let's start with 2021. Let's start with the positives. We have common stock of 2000. We have paid in capital. I'm going to call it pick. Common stock pick paid in capital. It doesn't matter. It's share repurchase, but it's paid in capital. We have 1000 of that. We have paid in capital and access of power, which is a pick 30,000. So we took care of this one. And remember, the other numbers are negatives. So we do have retained earning usually retained earning is positive. But in this problem, the company over the years, they incur losses and they pay dividend more than profit. So it's negative. Be careful. This is a deficit. This is actually not normal. Okay, although they're telling you that's their normal balances deficit retained earning should be a credit, but it could be a deficit. It could be either or. But the thing is, if a company exists, you would assume they're making money. Okay, then we have treasury stock. Remember what I told you, treasury stock is counter equity. Now, let's see what was the end of 2021. If we net them out, equity was 29,600 if my math is right. Now we're going to take 29,600 and find out what happened in 2022 to find out the ending balance. Well, first thing is we had net income of 9000. That's going to increase equity because it's going to increase retained earnings, which is now we're back to positive retained earning. Then we paid dividend of 600 dividend were declared. So we're going to deduct the dividend. It doesn't matter how much cash we paid. Okay, the dividend was declared that's going to reduce equity by 600. At least now we are positive retained earnings. And what I mean by positive retained earnings kind of it's very important to understand how retained earnings work. We had 3000 debit net income is going to increase it then dividend will reduce it, but overall we're going to have a positive balance whatever that balance is 9000 minus minus 3000 6000 minus 600 is 5400. Now we have a normal credit balance. If you were asked to, to compute retained earnings. And what else? What else? Oh, we purchased treasury stock. We resold treasury stock when we when we resold treasury stock. So this treasury stock and we resold them. We have at 400 but we resold them at 450. Therefore, it's going to give us an additional 450 plus 450. Then in total, if we net these out starting 29,600 net them out, we should have 38,450. And the answer is 38,450. So this was 2021 balance and this was 2022 and they're asking us for 2022. It's very important that you understand, you know, they're giving you here the stockholders equity account, a bunch of them, not in order. Now you need to understand you need to know how to prepare a stockholders equity statement properly. That's not that's not the question, but something you need to know. Again, for had lectures dot com. This question doesn't require computation. The preemptive right refer to the shareholders right to what so what is the preemptive right and the first thing I want you to remember if you think of the preemptive right. Think of social company social media, the Facebook movie. Now I forgot about the name of it. It was it called social media or social. Let me see if I can look it up real quick. Social media Facebook movie. Let me see if I can. So, so it's called. Let me see. What is it called. I'm looking up on my the social network neither think of the Facebook the social network that's the that's the that's the movie about Facebook the social network and if you haven't watched it. You should and in the social network, they deal with this issue the preemptive right of one of the owners of one of the owners, you know, Mark Zuckerberg and the new and the investors. There's something you want to you know the there's Justin Timberlake in that movie, and they deal with the, the preemptive right of the existing shareholders the co founder of the company in addition to Mark Zuckerberg. I can't think of his name now as well. So what he what he did he they made him lose his preemptive right so what is the preemptive right well the preemptive right is to keep your own the same ownership in the company. The company issue new shares. So what does that mean, maintain a proportional ownership and interest in the corporation this way let's assume you own 10% of the company the company has right now. You own 1000 out of a total of 10,000 shares, which is equal to 10% of the company decides to issue an additional 5000 shares. Okay, which is now the total is 15,000. You have the right you have a preemptive right to get 5% of 1010% of the shares. This way, the preemptive right you don't have to buy them at least you should have that option. Now the company is just issuance here without selling them, they have to issue them to you in proportion to your ownership. And what they did to, I can't think of his name. I can't think of his name, he's, you know, he's, it's, he was originally from Brazil, I can't think of his name it doesn't matter whatever his name is, they took away that they took away the preemptive right from him without him knowing. Okay, so this is what the preemptive right is so a is it vote for members of the board know all shareholders can vote to the board, receive a share of dividend all shareholder could receive dividend share. Share in the profit proportionally with all stockholders, that's, that's a shareholder, right, but the preemptive right, refer to you maintaining the proportion ownership interest in the company when new shares are issued. And basically this is a, this is what I'm going to end with this equity section of the CPA questions again, take a look at my website for hat lectures calm, I can help you pass your CPA exam. Just give me a try. Your risk is one month. Give it a try. Your investment in your career is 30 to 40 years. You know, don't shortchange yourself. Good luck. Study hard. And most importantly, stay safe.