Equity / EPS / Acc. for I/T

Question 1

A company issues 100,000 shares of common stock and 10,000 shares of preferred stock with a $2 cumulative dividend. In the first year, no dividends are paid or declared. Which of the following statements are true?

a. All dividends in arrears on the preferred stock must be paid before any dividends can be paid on common stock.
b. The preferred stockholders are guaranteed to receive this $20,000 at some point in the future.
c. The company should report a $20,000 liability on its year-end balance sheet.
d. By not paying the cumulative dividend, the company will be forced into bankruptcy within 90 days of the beginning of the new year.

Answer 1

a. All dividends in arrears on the preferred stock must be paid before any dividends can be paid on common stock.

Question 2

A company declares a cash dividend on its common stock on December 24, Year One, payable to owners of record on January 2, Year Two, with checks to be mailed on January 9, Year Two. Which of the following statements is true?

a. This dividend is recorded by the company as an operating expense on its income statement.
b. The owners will record the revenue from this transaction in Year Two but the company will record the effect of the dividend in Year One.
c. Both the revenue and the dividend paid will be recorded by the two companies on January 9, Year Two when payment is made.
d. The company will have a liability on its December 31, Year One balance sheet and the owners will record a receivable on their December 31, Year One balance sheet.

Answer 2

b. The owners will record the revenue from this transaction in Year Two but the company will record the effect of the dividend in Year One.

Question 3

The Mills Corporation was started several years ago and incorporated in the state of Delaware. The company was granted the authorization to issue 250,000 shares of $10 per share par value common stock. At that time, 30,000 shares were issued for cash of $12 per share. Last year, another 10,000 shares were issued for cash of $19 per share. Early in the current year, the company issued 12,000 shares of this common stock as a stock dividend when the fair value was $30 per share. For the 52,000 shares that are now outstanding, what amount should be reported in stockholders’ equity as additional paid-in capital?

a. $390,000
b. $220,000
c. $310.000
d. $150,000

Answer 3

d. $150,000

Question 4

The Larson Company has 100,000 shares of $10 par value common stock outstanding that was originally issued for $18 per share. In the current year, when the price of this stock increased to $60 per share, the company’s board of directors issued a two-for-one stock split. The price of the stock immediately fell to $30 per share. By what amount should the company reduce its Retained Earnings balance as a result of this split?

a. $3,000,000
b. $6,000,000
c. $0.00
d. $1,000,000

Answer 4

c. $0.00

Question 5

The Lara Company has 100,000 shares of common stock outstanding with a $10 per share par value. In addition, the company has 30,000 shares of preferred stock outstanding with a $100 par value. On this preferred stock, there is a 5 percent annual dividend that is cumulative. No dividend is paid on the preferred stock during Year One. Which of the following statements is true?

a. The company has to report an amount within stockholder’s equity for this $150,000.
b. The company has to report a current liability of $150,000.
c. The company has to report a non-current liability of $150,000.
d. The company must disclose information about the nature of this missed dividend.

Answer 5

d. The company must disclose information about the nature of this missed dividend.

Question 6

A company is started in Year One and has 100,000 shares of common stock authorized with a par value of $10 per share. The company issues 20,000 shares of this stock for $21 per share in Year One and another 10,000 shares for $24 per share in Year Two. What is recorded in the company’s Common Stock account at the end of Year Two?

a. $660,000
b. $300,000
c. $1,000,000
d. $240,000

Answer 6

b. $300,000

Question 7

The Monroe Corporation has 100,000 common shares issued and outstanding. This stock was issued several years ago at a price above the $10 per share par value. During the current year, the board of directors declared a 30 percent stock dividend so that 30,000 new shares were issued to the stockholders when the price of the stock was $30 per share. As a result of this dividend, what reduction was recorded in the reported amount of retained earnings?

a. $900,000
b. $0.00
c. $600,000
d. $300,000

Answer 7

d. $300,000

Question 8

A company issues 10,000 shares of $10 par value common stock for $22 in cash per share. Later, the company buys back 1,000 shares of this stock for the same $22 per share and records it using the par value method. Subsequently, the company sells 100 shares of this treasury stock for $23 per share. What should the company report as additional paid-in capital in the stockholders’ equity section of its balance sheet?

a. $121,300
b. $108,100
c. $120,000
d. $109,300

Answer 8

d. $109,300

Question 9

A company issues 10,000 shares of its own $10 par value common stock to the public for $19 per share. Later, 1,000 of these shares are bought for $21 per share as treasury stock. Which of the following statements is true?

a. The par value method and the cost method have the same total impact on stockholder’s equity.
b. Because this is a stock transaction, retained earnings cannot be affected by a re-issuance of these shares.
c. The cost of the treasury stock is reported by the company as an asset on its balance sheet.
d. Losses on the resale of these shares would impact reported net income for the year although gains would not

Answer 9

a. The par value method and the cost method have the same total impact on stockholder’s equity.

Question 10

The board of directors for the Carson Corporation declares a $1 per share cash dividend on April 1, Year One, to be paid to owners of record on April 17, Year One, with the checks being distributed on April 29, Year One. Prior to April 1, the company had issued 100,000 shares of common stock but held 10,000 treasury shares. Another 10,000 shares were repurchased on April 4, Year One. What is the decrease in retained earnings created by this dividend?

a. $80,000
b. $0.00
c. $90,000
d. $100,000

Answer 10

a. $80,000

Question 11

The Anna Company has 100,000 shares of common stock outstanding with a $10 per share par value. In addition, the company has 20,000 shares of preferred stock outstanding with a $100 par value. On this preferred stock, there is a 4 percent annual dividend that is cumulative. What does the term “cumulative” mean in this situation?
a. The current and any missed dividends must be paid on the preferred stock shares before any dividends can be paid to the owners of the common stock.

Answer 11

a. The current and any missed dividends must be paid on the preferred stock shares before any dividends can be paid to the owners of the common stock.

Question 12

The Mulieri Company was authorized to issue 100,000 shares of common stock with a $10 par value. The company issued 30,000 shares for cash of $15 per share. Later, when the shares were selling for $20 per share on a stock exchange, the company issued another 9,000 shares as a stock dividend. Which of the following statements is true about the recording of the stock dividend?

a. The total amount of stockholders’ equity is not effected but retained earnings is reduced by $180,000.
b. Stockholders’ equity is reduced by $90,000 and retained earnings is reduced by $135,000.
c. The total amount of stockholders’ equity is not affected but retained earnings is reduced by $90,000.
d. Stockholders’ equity is reduced by $180,000 and retained earnings is also reduced by $180,000.

Answer 12

c. The total amount of stockholders’ equity is not affected but retained earnings is reduced by $90,000.

Question 13

The Parson Company has 100,000 common shares issued and outstanding. This stock was issued several years ago at a price above the $10 per share par value. During the current year, the board of directors declared a 10 percent stock dividend so that 10,000 new shares were issued to the stockholders when the price of the stock was $24 per share. As a result of this dividend, what reduction was recorded reduction in total stockholders’ equity?

a. $100,000
b. $240,000
c. $140,000
d. $0.00

Answer 13

d. $0.00

Question 14

A company issues 10,000 shares of $10 par value common stock for $23 in cash per share. Later, the company buys back 1,000 shares of this stock for $25 per share and records it using the cost method. Subsequently, the company sells 100 shares of this treasury stock for $26 per share. What should the company report as additional paid-in capital in the stockholders’ equity section of its balance sheet?

a. $130,000
b. $118,500
c. $117,000
d. $130,100

Answer 14

d. $130,100

Question 15

The initial number of authorized shares specified in the company’s articles of incorporation is 25,000 shares of $10 par value per share common stock. A few weeks later, the company issues 10,000 shares of this common stock for $26 in cash per share. Later, the company buys back 1,000 shares of this stock for the same $26 per share and retires these shares. What is reported in this company’s balance sheet in its Common Stock account?

a. $100,000
b. $90,000
c. $250,000
d. $74,000

Answer 15

b. $90,000

Question 16

The XYZ partnership has inventory (book value of $200,000 and fair value of $220,000) and fixed assets (book value of $800,000 and fair value of $880,000). It has no other assets. The partnership also has liabilities with both a book value and fair value of $300,000. Partnership capital is recorded as $700,000. The three partners are currently incorporating this business and plan to issue 10,000 shares of $10 par value common stock to each individual. In setting up the opening account balances for the new corporation, what should be reported as additional paid-in capital?

a. $0.00
b. $500,000
c. $100,000
d. $400,000

Answer 16

b. $500,000

Question 17

The board of directors for the Blank Corporation declares a $1 per share cash dividend on April 1, Year One, to be paid to owners of record on April 17, Year One, with the checks being distributed on April 29, Year One. Prior to April 1, the company had issued 100,000 shares of common stock but held 10,000 treasury shares. Another 10,000 shares were repurchased on April 25, Year One. On what date should the company decrease its working capital as a result of this dividend?

a. April 25, Year One
b. April 29, Year One
c. April 1, Year One
d. April 17, Year One

Answer 17

c. April 1, Year One

Question 18

A company has both common stock authorized and preferred stock authorized. What is the basic difference between these two types of ownership interest?

a. Common stock has a par value but preferred stock does not.
b. The owners of common stock have voting rights whereas the owners of preferred stock do not have voting rights.
c. Common stock has a set dividend rate but preferred stock does not.
d. The owners of common stock have rights that are set by the state of incorporation whereas the owners of preferred stock have rights that are set by the stock contract.

Answer 18

d. The owners of common stock have rights that are set by the state of incorporation whereas the owners of preferred stock have rights that are set by the stock contract.

Question 19

A company ends each year with the following deferred balances:
20X1 20X2
Deferred income tax liability, noncurrent $40,000 $59,000
Deferred income tax asset, noncurrent $18,000 $17,000
There is a valuation allowance on the deferred asset for $6,000 at the end of 20X1 but there is no similar balance at the end of 20X2. On its 20X2 income statement, what is reported as Income Tax Expense-Deferred?
a. $18,000
b. $14,000
c. $9,000
d. $23,000

Answer 19

b. $14,000

Question 20

In Year One, a company has revenues of $500,000 and expenses of $300,000. Of the expenses, $50,000 represents a warranty on a company product. However, the company only paid $10,000 as a result of this warranty. The remainder is expected to be paid in a future year in which company officials believe there is a 46 percent chance that the company will have taxable income to be reduced by this warranty cost. The enacted tax rate is 30 percent for Year One and 32 percent in periods after that. What is the total amount of income tax expense to be recognized in Year One?

a. $72,000
b. $60,000
c. $59,000
d. $59,200

Answer 20

a. $72,000

Question 21

The FGCC Company had an enacted income tax rate of 28 percent. The company ended Year One with a deferred income tax liability of $40,000, a deferred income tax asset of $50,000 and a valuation allowance of $19,000. The enacted tax rate was raised at the start of Year Two to 30 percent. The company ended Year Two with a deferred income tax liability of $70,000, a deferred income tax asset of $40,000, and a valuation allowance of $24,000. On the company’s Year Two income statement, what is the amount of income tax expense (deferred) that is reported?

a. $15,000
b. $35,000
c. $25,000
d. $45,000

Answer 21

d. $45,000

Question 22

At the end of Year One, a company has an enacted tax rate of 30 percent. During Year One, the company reported a $110,000 gain for financial reporting purposes that would not be taxed until Year Two. Then, during Year Two, the company earned another gain, this one for $180,000, that would not be taxed until Year Three. Near the end of Year Two, Congress changed the enacted tax rate from 30 percent to 36 percent. On its Year Two income statement, what amount should be reported as the company’s income tax expense-deferred?

a. $64,800
b. $33,000
c. $39,600
d. $31,800

Answer 22

d. $31,800

Question 23

The Lancaster Corporation reports net income for Year One of $600,000. Within that income, a $50,000 expense cannot be taken legally as a tax deduction. Of the company’s revenues, $60,000 will not be taxed until Year Two while a final $70,000 will be taxed in Year Three. The enacted tax rate for Years One and Two is 27 percent. After that, the enacted tax rate is 30 percent. On the company’s Year One income statement, what is the total amount reported as income tax expense for the year?

a. $175,500
b. $177,600

Answer 23

b. $177,600

Question 24

Which of the following is a temporary tax difference that typically results in the recognition of a deferred income tax asset?

a. Expenses incurred due to the violation of federal laws.
b. Depreciation expense.
c. Rent revenue collected in advance.
d. Use of the installment sales method for tax purposes.

Answer 24

c. Rent revenue collected in advance.

Question 25

A deferred tax liability may result from which of the following items?

a. Penalties paid for legal violations.
b. Interest on municipal bonds.
c. Life insurance proceeds received on the death of key employees.
d. Depreciation of tangible assets.

Answer 25

d. Depreciation of tangible assets.

Question 26

A company ends Year One with a noncurrent deferred income tax liability of $42,000 and a noncurrent deferred income tax asset of $45,000. The noncurrent asset also has a valuation allowance of $4,000. On its Year One balance sheet, what is shown for deferred income taxes?

a. A deferred income tax liability—noncurrent of $26,000, a deferred income tax asset—noncurrent of $14,000, a deferred income tax liability—current of $16,000, and a deferred income tax asset—current of $27,000.
b. A $12,000 deferred liability-noncurrent and a $11,000 deferred asset-current.
c. A $1,000 deferred income tax liability.
d. A $42,000 deferred liability and a $41,000 deferred asset.

Answer 26

c. A $1,000 deferred income tax liability.

Question 27

Which of the following creates a temporary tax difference in the recognition of deferred income taxes?

a. Use of the installment sales method for tax reporting purposes.
b. The receipt by a corporation of cash dividends from another domestic corporation.
c. The collection of life insurance on the death of an individual.
d. The payment of federal income taxes

Answer 27

a. Use of the installment sales method for tax reporting purposes.

Question 28

At the end of Year One, Omaka Corporation is preparing its balance sheet. Depreciation of the company’s equipment has created a $200,000 temporary difference for tax purposes. Because of the large amount of depreciation that was deducted this year for tax purposes, the company will have a $150,000 smaller deduction in Year Two than for financial reporting and a $50,000 smaller deduction in Year Three.
Omaka also has a second temporary difference. This one is also for $200,000 but results from a warranty that was given out to customers. In Year Two, Omaka expects to have $140,000 more warranty expense for tax purposes than for financial reporting. In Year Three, the warranty for tax purposes is expected to be $60,000 higher than for financial reporting.
Assume a tax rate of 20 percent. What is reported for deferred taxes on the company’s balance sheet?
a. A current deferred income tax asset of $28,000 is reported as well as a non-current deferred income tax liability of $28,000.
b. Nothing is reported because the amounts offset each other.
c. A current deferred income tax asset of $2,000 is reported as well as a non-current deferred income tax liability of $2,000.
d. A current deferred income tax asset of $40,000 is reported as well as a noncurrent deferred income tax liability of $40,000.

Answer 28

b. Nothing is reported because the amounts offset each other.

Question 29

A publicly-owned company reports net income of $900,000 and pays a $200,000 dividend on its common stock and a $100,000 dividend on its preferred stock. The company started the year with 20,000 shares of preferred stock outstanding but issued an additional 8,000 shares on July 1. The company started the year with 100,000 shares of common stock outstanding but issued an additional 20,000 shares on July 1. The company had nothing outstanding during the year that could be converted into common stock. What should be reported as earnings per share?

a. $5.00
b. $5.45
c. $6.72
d. $7.27

Answer 29

d. $7.27

Question 30

The Pacioli Corporation reports net income for Year One of $800,000. The company had 155,000 shares of common stock outstanding for the entire year as well as 90,000 shares of preferred stock. The common stock was paid $1 per share as a dividend while the preferred shareholders received $2 per share. The common stock had an average price for the year of $40 per share while the preferred stock had an average price of $60 per share. The company also had 20,000 stock options outstanding for the year. For $10, each option could be converted into a share of common stock. The effective tax rate is 25 percent. What should the company report as its diluted earnings per share (rounded) for Year One?

a. $3.77
b. $3.54
c. $3.65
d. $3.81

Answer 30

c. $3.65

Question 31

The Simmons Company started the year with 20,000 shares of common stock outstanding. On May 1, a 10 percent stock dividend was issued to the shareholders. Finally, on October 1, another 8,000 shares were issued to the public so that the company finished the year with 30,000 shares outstanding. If the company reported net income for the year of $100,000, what should be reported as basic earnings per share?

a. $4.17
b. $4.20
c. $4.00
d. $4.13

Answer 31

a. $4.17

Question 32

A company reports net income in the current year of $600,000. During the year, the company declares and pays $20,000 in cash dividends on its common stock and $80,000 in dividends on its convertible preferred stock. The company has 20,000 shares of the preferred stock outstanding all year and each is convertible into three shares of common stock. The company starts the year with 170,000 shares of common stock outstanding. On July 1 of that year, 20,000 additional shares of common stock were issued as a stock dividend so that the company had 190,000 shares for the last six months of the year. What should the company report as its basic earnings per share figure (rounded)?

a. $2.63
b. $2.78
c. $2.74
d. $2.89

Answer 32

c. $2.74

Question 33

Officials for the Lexington Company are preparing financial statements for Year One. The company is reporting net income of $900,000. The company had 100,000 shares of common stock outstanding at the beginning of the year but a stock split on October 1 doubled that number to 200,000. In the previous year, the company issued 10,000 convertible bonds with a face value of $1,000 each that will come due in ten years. Each bond is convertible into 15 shares of common stock (adjusted for the stock split). These bonds pay 4 percent interest but were sold for 93 percent of face value to generate a higher interest rate for the buyers. The tax rate for the company is assumed to be 30 percent. The bond discount is being amortized by the straight-line method. What should the company report as its diluted earnings per share (rounded)?

a. $3.55
b. $3.81
c. $3.67
d. $3.51

Answer 33

d. $3.51

Question 34

The Pfeiffer Corporation reports net income in the current year of $800,000. Pfeiffer had a nonconvertible preferred stock paying $70,000 in cash dividends. Another $2.00 per share in dividends was paid to the common stockholders. There are 190,000 shares of this common stock outstanding throughout the year. In addition, the company has 20,000 stock options outstanding. For $2, each option can be converted into one share of common stock. The average price of the stock during the year was $8. The company has an effective tax income rate of 20 percent. What is Pfeiffer’s diluted earnings per share (rounded)?

a. $3.68
b. $3.56
c. $3.76
d. $3.48

Answer 34

b. $3.56

Question 35

The Johnson Company is computing diluted earnings per share for the current year. The company has convertible bonds outstanding that have been judged as being anti-dilutive. What is the significance of anti-dilution?

a. Inclusion of the bonds in the computation will cause the reported figure to increase so that the potential conversion of the bonds should be excluded.
b. Inclusion of the bonds in the computation must be made using the most conservative method.
c. The bonds must be included in the computation of diluted earnings per share.
d. Because of the high rate of interest on these bonds, the impact must be separately disclosed within the computation.

Answer 35

c. The bonds must be included in the computation of diluted earnings per share.