 Hello and welcome to this session. This is Professor Farhad in which we would look at CPA questions that deal with stockholders' equity, a topic that's covered on the FAR section of the CPA exam, also covered in my intermediate accounting course. Stockholders' equity is an important part of the exam. Simply put, if you cannot pass stockholders' equity, there's a good chance you may not get 75% grade. What is the difference between my services, my website, and a CPA prep course? In a CPA prep course, they might spend 40 to 50 minutes talking about stockholders' equity. Let's just say, let's assume an hour. I spent four hours discussing stockholders' equity accounts, giving you examples, showing you how to solve problems. That's the difference between my website and a review course where they simply review with you the material. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance lectures that deals with all these courses as well as Excel tutorials. If you like my lectures, please like them, share them, subscribe to the channel. If they help you, it means they might help other people, share the wealth, connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources to supplement your accounting education or to pass your CPA exam. For example, in my intermediate accounting too, I cover stockholders' equity very heavily. If you're looking to pass your CPA exam and would like to add 10 to 15 points to secure a passing grade, check out my website. So let's take a look at this question and see if we can answer these questions. Basically, the questions I'm going to be asking you today, I would consider them basic. In other words, you have to know them. Those are basic questions. If you find difficulty, that's why I suggest I'm going to keep suggesting to check out my website because I do have additional resources that could help you. A company has common stock with the $10 power value and a fair market value of 15. The company exchanged 1,000 shares of this common stock for an acre of land. Let's just kind of visually see what happened. The company gave up 1,000 stocks. The fair value of each stock is $15. In return, they got a piece of land. And they don't tell us the piece of land. It's an acre of land, but they don't tell us the value of the land. But they told us the value of the stocks. Now, the question is, the land will be debited for $10,000. So what they're asking you is, do you know what journal entry do we have to do when we, if this transaction took place? In other words, they're asking you, how much do you capitalize land? So this is what the entry would look like. We're going to debit land. We're going to credit common stock and we're going to credit additional paid in capital. This is what the entry would should look like. Debit land for certain amount, credit common stock for the stock issued and the remainder is paid in capital. So first they're asking us, do we debit land $10,000? That's the first question. Okay. How do we deal with this type of question? How much do we value the land? Well, simply put, you value the land based on the fair value of the asset you gave up. So let's assume you paid, let's just keep it simple. Let's assume rather than you gave them 1,000 shares of stocks with a fair value of 15, you gave them $20,000. Well, if you gave them $20,000, that's easy. $20,000 equal to $20,000. Here, what you gave them is 1,000 shares of stock. Each stock is $15. What does that mean? It means you gave them $15,000 worth of value. Simply put, the land will be debited at 15,000. So the rule, you need to know the rule. The rule is this. If you are exchanging stock for something else, how do you determine what's the value of the asset or the expense that you are incurring? Well, if you know the fair value of the asset that you are giving up, which we know in this situation, the fair value of each stock is $15, you would use this. Therefore, would the land be debited for 10,000? The answer is no. Once I take out 1, I will take out A, I will take out C. All what I have to know now, if 2 is a correct part of the journal entry or not the correct part of the journal entry, if not, if 2, B will be the answer. If not, D is the answer. The common stock account will be credited for 10,000. Yes, it will be credited for 10,000. If we stop here, yes, we're going to credit common stock for the number of shares times the power value. This is how much you credit common stock, 10,000. And no additional paid in capital will be recorded. That's not true. We have 5,000 additional paid in capital will be recorded. Therefore, the second part of this statement will make answer D, answer B incorrect, which in turn make answer D as the correct answer. Neither one nor two are the correct answer. So this is a basic journal entry. So here you have to know your basic journal entries. You have to know how do we deal with stocks issued for something other than cash. So if you issued stocks and you received $15,000 in cash, that's easy. You debit cash, credit common stock, credit APIC. Here they told you you got the land. So the question is how much do you value the land. This is how you will deal with this question. Again, this topic is covered in my website in detail. Which is correct regarding a cumulative preferred stock? So simply put, do you know what cumulative preferred stock is? That's the question. One, cumulative means if the preferred stock dividend is not declared, it will have to be paid before holders of the common stock can receive any dividend. Is this a correct statement about cumulative stock? Yes it is. Cumulative means whether it's declared or not, we're still going to have to pay you and we're still going to have to pay you before we pay the common stockholder. That's what cumulative is. It's a good thing for the person who's holding the stock. Therefore, I have one. One is a correct statement. So I'll keep A, I will take out B, I'll keep C, take out D. All what I have to find out now, if two also a correct statement, if that's the case, C is the answer. If not, A is the answer. The issue and company report a liability on the balance sheet for dividend that are in a rear. What are dividend in a rear? Dividend in a rear are for dividend that's not declared. Basically, we owe them. We owe them the stock. We owe them the dividend, not the stock. We owe them the dividend. So do we consider dividend in a rear as a liability? That's the question. Simply put, here what they're asking is, if you owe them preferred dividend, is this a liability? And the answer is no, it's not a liability. You disclose it in the notes, but it's not a liability. Therefore, if it's not a liability, two is out. Once two is out, C is out, we're left with A. So A is the correct answer for this question. Let's take a look at this question. Marco was organized on January 2nd with 50,000 shares authorized, $5 per common stock. During the year 2013, the company had the following capital transaction. January 14, July 28, and December 5. So let's see what you're being asked. Under US GAAP, how much additional paid-in capital is recorded by Marco on January 14? So on January 14, we issued those shares, 20,000 shares for $11. The best way to do this is to real quick go through the transaction, I'm sorry, go through the journal entry. Well, if I issued 20,000 shares and I issued each share for $11, this is how much cash I will be receiving, which is cash, we'll have to debit cash. Simply put, first, if you're not comfortable with the journal entry, make sure you know what the journal entry is. You're going to debit cash, you're going to credit common stock for the power value, and you're going to credit additional paid-in capital for the remainder. So simply put, let's start with this transaction by computing the cash. By computing the cash, we're going to take 20,000 shares of stocks times $11. So let's take 20,000 times 11, and that's going to give us cash of 220,000. Notice 220,000 is an answer, but that's not what they're asking us. They're asking us about this account, additional paid-in capital. So the 220 is the 20,000 shares times $11. Now how much do we credit common stock? Make sure you know this by heart. If you don't know how much we credit common stock, it's an issue. How much do we credit common stock? The number of shares times the power value. The number of shares is 20,000 times the power value $5 times the power value of $5. So if we take 20,000 shares, that's how much we issued, times $5, and that's going to give us $100,000. Notice $100,000 is also an answer, but that's not what we are being asked. What we are being asked is the remainder, the additional paid-in capital, and usually this number is a plug. So 120, this is a plug, and the answer is D. That's what they're asking us. So you have to be very careful what are you being asked. I could have asked you about the cash. I could have asked you about the common stock, but they ask about additional paid-in capital. Let's take a look at this question. It's the same question, and now we need to take a look at the transaction that took place on July 28. On July 28, we repurchased 5,000 shares at $16. So if we're using the cost method, what do we do? Well, we're going to record the transaction at cost. So assuming the cost method is used, how do we do this? Well, we paid 5,000, for 5,000 shares, we paid $16 per piece. So we're going to debit Treasury stock for $80,000, which is $16 per share, times $5,000. And we're going to credit, obviously, cash $80,000. So what's the question? Using the cost method, how much would they be debit? Would we record the Treasury stock? Treasury stock is $80,000. The answer is B. The answer is B. So make sure you are comfortable with Treasury stock. Treasury stock is when we buy back our own stock. Notice here we sold the stock. Now we sold or issued. Sold or issued. Here we purchased back the stock. Purchased it as Treasury stock. We purchased back the stock. And how much did we purchase? We purchased 5,000 shares. Assume Marco uses the cost method to account for the Treasury stock under US GAAP. The entry to record the issuance of 5,000 shares would be what? Now we went back. Remember those 5,000 shares we purchased each share at $16? $16 is the cost. It's very important to keep track of your cost. Now you turned around and you sold them at $19. Again, what do you have to know here? We have to know the journal entry. We have to know the journal entries. And this is using the cost method. I'm going to show you all the journal entry and also kind of take this opportunity as a learning session for you. So what you do is you debit cash. You debit cash. How much do you debit cash? Well, you sold 5,000 shares at $19. The amount of cash. So we take 9,000 shares times $5 and you would receive cash of $95,000. That's how much cash you would receive. You are going to remove the Treasury stock. So you're going to have to credit Treasury stock. Since we are using the cost method, we're going to determine how much we purchased the shares. We purchased the shares. The cost is 16. Remember I said this was your cost. This is important now. So we're going to remove the Treasury stock at cost and the cost is 80,000. Notice here the cost is 80,000. So we're going to credit the Treasury stock at 80,000. Now what's left is 15,000. And that's what they're asking about. Okay. We would include the credit of 15,000 of what? A. Is it a gain on the sale and the amount of 18,000? No way, Jose. Okay. You cannot credit gain for selling and buying your own Treasury stock, your own stock. Therefore, a gain is out. Credit retained earnings. No way. It's A and B are the same. A and B are the same. Why? Because if you credit gain, it means you're crediting retained earnings. So if A is acceptable, B should be acceptable. Okay. Because if you don't know this, make sure you know this because gains are closed into retained earnings. B and out. So any basic knowledge, you're down to 50, 50. Okay. So would you credit Treasury stock? No, I'm not going to credit Treasury stock because I'm going to credit Treasury stock for cost for 80,000 because I'm using the cost method. D is out. Well, what do I credit? I will credit an account called additional paid in capital Treasury stock of 15,000. So basically what happened is you reissued those stocks. It's additional paid in capital Treasury stock and the amount is 15,000. As if you're issuing stocks, simply put, you are reissuing Treasury stock to be more specific. Now, these topics, what you saw in this recording, issuing stocks for non-cash, issuing stocks for cash, buying back your own Treasury stock, reselling your Treasury stock, stock options, stock rights, stock appreciation. So basically these topics are covered on my website, foreheadlectures.com, Intermedia 2. I strongly suggest you check out the website, like this recording, share it, and for sure, stay safe during those coronavirus days. Good luck.