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Flashcards in STK Deck (120):
1

The following is the stockholders' equity section of Harbor Co.'s balance sheet at December 31 :

Common stock $10 par, 100,000 shares

authorized, 50,000 shares issued of

which 5,000 have been reacquired,

and are held in treasury                                   $450,000

Additional paid-in capital common stock          1,100,000

Retained earnings                                              800,000

Subtotal                                                           2,350,000

Less treasury stock                                            (150,000)

Total stockholders' equity                                2,200,000

Harbor has insignificant amounts of convertible securities, stock warrants, and stock options. What is the book value per share of Harbor's common stock?

$49 

2

Kent, Inc. has been forced into bankruptcy and has begun to liquidate. Unsecured claims will be paid at the rate of 40 cents on the dollar. Apex Co. holds a noninterest-bearing note receivable from Kent in the amount of $100,000, collateralized by machinery with a liquidation value of $25,000. The total amount to be realized is 

$55,000

3

In determining basic earnings per share, dividends on nonconvertible cumulative preferred stock should be

Deducted from net income whether declared or not.

4

A company issued rights to its existing shareholders to purchase shares of common stock. When the rights are exercised, additional paid-in capital would be credited if the purchase price 

Exceeded the par value. 

5

Compensatory stock options were granted to executives on January I, year I, for services to be rendered during year I, year 2, and year 3. The options are accounted for under ASC Topic 718. The fair value of the option was measured at the grant-date fair value using the observable market price of an option with similar terms. The fair value of the options was in excess of the amount the executives must pay for the stock. The stock options were exercised on December 30, year 3. Compensation expense should be recognized in the income statement in Which of the following years?

a. year 3

b. year 2 and year 3

c. year 1

d. year 1, year 2, and year 3

 year 1, year 2, and year 3

6

Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred stock. No dividends on common stock were declared during the year. Net income was $2,000,000.  What was Jen's basic earnings per share?

$9.00

7

A company with a substantial deficit undertakes a quasi reorganization. Certain assets will be written down to their present fair market value. Liabilities will remain the same. How would the entries to record the quasi reorganization affect each of the following? 

   Contributed capital     Retained earnings

a. Increase                      Decrease

b. Decrease                    No effect

c. Decrease                    Increase

d. No effect                    Increase

Decrease                    Increase

8

Boe Corp.'s stockholders' equity at December 31, year 2, was as follows:

6% noncumulative preferred stock,

$100 par (liquidation value $105 per

share)                                                      $100,000

Common stock, $10 par                            300,000

Retained earnings                                       95.000

At December 31, year 2, Boe's book value per common share was 

 $13.00

9

If corporation sells some of its treasury stock at price that exceeds its cost, this excess should be 

Credited to additional paid-in capital. 

10

Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The par value of the stock is $1 per share. During January of the current year, Porter bought back 500 shares at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were reissued later in the current year at $10 per share. Porter used the cost method to account for its equity transactions. What amount should Porter report as paid-in capital related to its treasury stock transactions on its balance sheet for the current year? 

$2,000

11

The Amlin Corporation was incorporated on January I, year I, with the following authorized capitalization:

20,000 shares of common stock, no par value, stated value $40 per share.

5,000 shares of cumulative preferred stock, par value $10 per share.

During year I Amlin issued 12,000 shares of common stock for a total of $600,000 and 3,000 shares of preferred stock at $16 per share. In addition, on December 20, year I, subscriptions for 1,000 shares of preferred stock were taken at a purchase price of $17. These subscribed shares were paid for on January 2, year 2. What should Amlin report as total contributed capital on its December 31, year I balance sheet? 

$665,000 

12

Effective April 27, year 2, the stockholders of Bennett Corporation approved a two-for-one split of the company's common stock, and an increase in authorized common shares from 100,000 shares (par value $20 per share) to 200,000 shares (par value $10 per share). Bennett's stockholders' equity accounts immediately before issuance of the stock split shares were as follows:

Common stock, par value $20; 100,000

shares authorized; 50,000 shares outstanding   $1,000,000

Additional paid-in capital (premium of $3 per

share on issuance of common stock)                       150,000

Retained earnings                                                 1,350,000

What should be the balances in Bennett's additional paid-in capital and retained earnings accounts immediately after the stock split is effected?

   Additional paid-in capitaI    Retained earnings

a. $0                                      $500,000

b. $ 150,000                          $350,000

c. $ 150,000                           $1,350,000

d. $1,150,000                          $350,000

 

 

$ 150,000                           $1,350,000

13

On July I, year I, Say Corp., a closely held corporation, issued 6% bonds with a maturity value of $60,000, together with 1,000 shares of its $5 par value common stock, for a combined cash amount of $110,000. The market value of Say's stock cannot be ascertained. If the bonds were issued separately, they would have sold for $50,000 on an yield to maturity basis. What amount should Say report for additional paid-in capital on the issuance of the stock? 

$55,000

14

On May I, year I, Rhud Corp. declared and issued a common stock dividend. Prior to this dividend, Rhud had 100,000 shares of $1 par value common stock issued and outstanding.  The fair value of Rhud's common stock was $30 per share on May I, year I.  As a result of this stock dividend, Rhud's total stockholders' equity 

Did not change. 

15

How should cumulative preferred dividends in arrears be shown in corporation's statement of financial position?

Footnote. 

16

Georgia, Inc. has an authorized capital of 1,000 shares of $100 par, 8% cumulative preferred stock and 100,000 shares of $10 par common stock. The equity account balances at December 31, year 2, are as follows:

Cumulative preferred stock                           $ 50,000

Common stock                                                 90,000

Additional paid-in capital                                     9,000

Retained earnings                                              13,000

Treasury stock, common—100 shares at cost     (2.000)

                                                                     $ 160,000

Dividends on preferred stock are in arrears for the year, year 2. The book value of a share of common stock at December 31, year 2, should be 

11.91 

17

The senior accountant for Carlton Co., a public company with a complex capital structure, has just finished preparing Carlton's income statement for the current fiscal year. While reviewing the income statement, Carlton's finance director noticed that the earnings per share data has been omitted. What changes will have to be made to Carlton's income statement as a result of the omission of the earnings per share data? 

Carlton's income statement will only have to be revised to include the earnings per share data

18

On January 2, year 3, Morey Corp. granted Dean, its president, 20,000 stock appreciation rights for past services. Those rights are exercisable immediately and expire on January I, year 4. On exercise, Dean is entitled to receive cash for the excess of the stock's market price on the exercise date over the market price on the grant date. Dean did not exercise any of the rights during year 3. The market price of Morey's stock was $30 on January 2, year 3, and $45 on December 31, year 3. Morey should recognize compensation expense under the stock appreciation rights plan for year 3 of 

$300,000

19

On January I, year 2, Pall Corp. granted stock options to key employees for the purchase of 40,000 shares of the company's common stock at $25 per share. The options are intended to compensate employees for the next 2 years. The options are exercisable within a 4-year period beginning January I, year 3, by grantees still in the employment of the company. The market price of Pall's common stock was $25 per share at the date of grant. The value of each option under the Black- Scholes model was $8.00. No stock options were terminated during the year. What amount should Pall charge to compensation expense for the year ended December 31, year 2?

$160,000 

20

How would the declaration of stock dividend by corporation affect each of the following on its books?

     Retained earnings (RE)    Total stockholders ' equity (TSE)

a.   Decrease                         No effect

b.   Decrease                         Decrease

c.   No effect                          Decrease

d.   No effect                          No effect

 Decrease                         No effect

21

Ian Co. is calculating earnings per share amounts for inclusion in Ian's annual report to shareholders. Ian has obtained the following information from the controller's office as well as shareholder services:

Net income from January I to December 31    $125,000 

Number of outstanding shares:                           

January I to March 31                                           15,000

April I to May 31                                                    12,500

June I to December 31                                          17,000

What amount In addition, Ian has issued 10,000 incentive stock options with an exercise price of $30 to its employees and a year-end market price of $25 per share. What amount is Ian's diluted earnings per share for the year ended December 31?

$7.94

22

Treasury stock was acquired for cash at more than its par value, and then subsequently sold for cash at more than its acquisition price. Assuming that the cost method of accounting for treasury stock transactions is used, what is the effect on additional paid-in capital from treasury stock transactions?

    Purchase of treasury stock   SaIe of treasury stock

a. No effect                               No effect 

b. No effect                               Increase

c. Decrease                               Increase

d. Decrease                              No effect

No effect                               Increase

23

Livingston Corporation has incurred losses from operations for several years. At the recommendation of the newly hired president, the board of directors voted to implement a quasi reorganization, subject to stockholder approval. Immediately prior to the restatement, on June 30, year 5, Livingston's balance sheet was as follows:

Current assets                                      $ 550,000

Property, plant, and equipment (net)     1,350,000  

Other assets                                           200,000

                                                            $2,100,000

Total liabilities                                       $ 600,000

Common stock                                     1,600, 000

Additional paid-in capital                          300,000

Retained earnings (deficit)                      (400.000)

                                                            $2,100,000  

The stockholders approved the quasi reorganization effective July I, year 5, to be accomplished by a reduction in other assets of $150,000, a reduction in property, plant, and equipment (net) of $350,000, and appropriate adjustment to the capital structure. To implement the quasi reorganization, Livingston should reduce the common stock account in the amount of

$600,000

24

On May 18, year I, Sol Corp's board of directors declared a 10% stock dividend. The market price of Sol's 3,000 outstanding shares of $2 par value common stock was $9 per share on that date. The stock dividend was distributed on July 21, year I, when the stock's market price was $10 per share. What amount should Sol credit to additional paid-in capital for this stock dividend? 

 $2,100

25

Mag, Inc.'s December 31, year 2 unadjusted current assets and stockholders' equity sections are as follows:

Current assets :                                         Stockholders ' equity: 

Cash                                 $ 15,000 Common stock  $556,000

Investments in MES (including        Retained 

$75,000 of Mag, Inc.                       earnings (deficit)  (56.000)

common stock)         100,000           Total                  $500,000

Trade accounts

receivable            85,000 

Inventories            37,000

Total                     $237,000    

The investments and inventories are reported at their costs, which approximate market values. Mag's stockholders' equity at 12/31/Y2 should be 

$425,000

26

The following information pertains to Ali Corp. as of and for the year ended December 31, year I:

Liabilities                                       $60,000

Stockholders' equity                      500,000

Shares of common stock issued

and outstanding                                10,000

Net income                                      30,000

During year I, Ali's officers exercised stock options for I,000 shares of stock at an option price of $8 per share.  What was the effect of exercsing the stock options? 

 Debt-to-equity ratio decreased to 12%. 

27

Asp Co. was organized on January 2, year I, with 30,000 authorized shares of $10 par common stock. During year I the corporation had the following capital transactions:

January 5—lssued 20,000 shares at $15 per share.

July 14—Purchased 5,000 shares at $17 per share.

December 27—Reissued the 5,000 shares held in treasury at $20 per share.

Asp used the par value method to record the purchase and reissuance of the treasury shares. In its December 31, year I balance sheet, what amount should Asp report as additional paid-in capital in excess of par?

$125,000

28

In year I Newt Corp. acquired 6,000 shares of its own $1 par value common stock at $18 per share. In year 2, Newt issued 3,000 of these shares at $25 per share. Newt uses the cost method to account for its treasury stock transactions. What accounts and amounts should Newvt credit in year 2 to record the issuance of the 3,000 shares?

  Treasury stock  APIC        Retained earnings   Common stock

a. $54,000                          $21,000

b. $54,000         $21,000                                   

c.                        $72,000                                   $3,000

d.                        $51,000   $21,000                   $3,000 

$54,000         $21,000     

29

An investment in equity securities was carried in an available-for-sale portfolio. There was a credit balance in the stockholders' equity account, Accumulated other comprehensive income—unrealized gain on available-for-sale securities, because of market changes in these securities. These securities were distributed to stockholders as a property dividend in a nonreciprocal transfer. The dividend should be reported at the

Fair value of the asset transferred. 

30

Munn Corp.'s records included the following stockholders' equity accounts:

Preferred stock, par value $15,

authorized 20,000 shares                               $255,000

Additional paid-in capital, preferred stock             15,000

Common stock, no par, $5 stated value,

10,000 shares authorized                                  300,000

In Munn's statement of stockholders' equity, the number of issued and outstanding shares for each class of stock is

   Common stock   Preferred stock

a. 60,000               17,000

b. 60,000               18,000

c. 63,000                17,000

d. 63,000                18,000

 60,000               17,000

31

Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy reacquired 30,000 of those shares at a cost of $15 per share, and recorded the transaction using the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share, and recognized a $50,000 gain on its income statement on May 20. Which of the following statements is correct?

a. Murphy's net income for the current year is understated.

b. Murphy should have recognized a $50,000 loss on its income statement for the current year.

c. Murphy's comprehensive income for the current year is correctly stated.

d. Murphy's net income for the current year is overstated. 

 Murphy's net income for the current year is overstated.

32

On which of the following dates is public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?

a. Date of grant. 

b. Date of exercise.

c. Date of vesting.

d. Date of restriction lapse.

Date of grant. 

33

A clearly identified appropriation of retained earnings for reasonably possible loss contingencies should be

Shown within the stockholders' equity section of the balance sheet. 

34

During the current year, Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost method to account for treasury stock. What amount should Onal report in its income statement for these transactions? 

$0

35

 A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?

a. $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.

b. Cumulative 8%, $50 par preferred stock.

c. 7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.

d.10% convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock.

7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.

36

Cash dividends on the $10 par value common stock of Ray Company were as follows:

1st quarter of year I       $ 800,000

2nd quarter of year I       900,000

3rd quarter of year I      1,000,000

4th quarter of year I      1,100,000

The 4th quarter cash dividend was declared on December 20, year I, to stockholders of record on December 31, year I. Payment of the 4th quarter cash dividend was made on January 9, year 2. In addition, Ray declared a 5% stock dividend on its $10 par value common stock on December I, year I, when there were 300,000 shares issued and outstanding and the market value of the common stock was $20 per share. The shares were issued on December 21, year I. What was the effect on Ray's stockholders' equity accounts as a result of the above transactions?

   Common stock      APIC                      Retained earnings

a. $0                         $0                          $3,800,000 debit 

b. $150,000 credit    $0                          $3,950,000 debit 

c. $150,000 credit    $150,000 credit      $4,100,000 debit

d. $300,000 credit   $300,000 debit      $3,800,000 debit 

$150,000 credit    $150,000 credit      $4,100,000 debit

37

West Co. issued 1,000 shares of its $5 par common stock to Howe as compensation for 1,000 hours of legal services performed. Howe usually bills $200 per hour for legal services. On the date of issuance, the stock was trading on a public exchange at $180 per share. By what amount should the additional paid-in capital account increase as a result of this transaction?

$175,000 

38

Ashe Corp. was organized on January I, year I, with authorized capital of 100,000 shares of $20 par value common stock. During year I Ashe had the following transactions affecting stockholders' equity:

January 10 — Issued 25,000 shares at $22 a share.

March 25  — Issued 1,000 shares for legal services when the fair value was $24 a share. 

September 30 — Issued 5,000 shares for a tract of land when the fair value was $26 a share.

What amount should Ashe report for additional paid-in capital at December 31, year I?

$84,000 

39

How is earnings per share used in the calculation of the following? 

   Dividend per share payout ratio    Price-earnings ratio

a. Numerator                                    Numerator

b. Denominator                                Numerator

c. Not used                                      Denominator

d. Denominator                                Denominator

Denominator                                Denominator

40

The following information pertains to Ceil company whose common stock trades in public market:    

Shares outstanding at 1/1    100,000

Stock dividend at 3/31         24,000

Stock issuance at 6/30          5,000

What is the weighted-average number of shares Ceil should use to calculate its basic earnings per share for the year ended December 31?

 126,500

41

Doe Corporation owned 1,000 shares of Spun Corporation. These shares were purchased in year I for $9,000. On December 15, year I, Doe declared a property dividend of one share of Spun for every ten shares of Doe held by a stockholder. On that date, When the market price of Spun was $14 per share, there were 9,000 shares of Doe outstanding. What gain and net reduction in retained earnings would result from this property dividend?

   Gain           Net reduction in retained earnings

a. $0              $8,100

b. $0              $12,600

c. $4,500       $3,600

d. $4,500       $8,100

 $4,500       $8,100

42

A company declared cash dividend on its common stock in December year I, payable in January year 2. Retained earnings would

 Not be affected on the date of payment. 

43

On December 31, year I, Case, Inc. had 300,000 shares of common stock issued and outstanding. Case issued a 10% stock dividend on July I, year 2. On October I, year 2, Case purchased 24,000 shares of its common stock for treasury, and recorded the purchase by the cost method. What is the number of shares that should be used in computing basic earnings per share for the year ended December 31, year 2? 

324,000 

44

On January I, year 2, Karwa Company granted James Dean, the president, an option to purchase 1,000 shares of Karva's $30 par value common stock at $40 per share. The option becomes exercisable on January I, year 4, after Dean has completed 2 years of service. Assume that the fair value at the grant date of Karva's options with similar terms and conditions is $15. As a result of the option granted to Dean, Karwa should recognize compensation expense in year 2 of 

$ 7,500

45

Treasury stock was acquired for cash at more than its par value, and then subsequently sold for cash at more than its acquisition price. Assuming that the cost method of accounting for treasury stock transactions is used, what is the effect of the subsequent sale of the treasury stock on each of the following?

   APIC          Retained earnings

a. Increase     Increase

b. Increase     No effect

c. No effect    No effect

d. No effcet    Increase 

 Increase     No effect

46

Of the 125,000 shares of common stock issued by Vey Corp., 25,000 shares were held as treasury stock at December 31, year I. During year 2, transactions involving Vey's common stock were as follows:

January I through October 31 13,000 treasury shares were distributed to officers as part of stock compensation plan.

November I—A 3-for-l stock split took effect.

December I—Vey purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not retired.

At December 31, year 2, how many shares of Vey's common stock were issued and outstanding?

               Shares

    Issued       Outstanding

a. 375,000      334,000 

b. 375,000      324,000 

c. 334,000      334,000

d. 324,000      324,000 

375,000      334,000 

47

A company with simple capital structure for purposes of computing earnings per share would include which of the following in the computation of basic earnings per share?

Dividends on nonconvertible cumulative preferred stock. 

48

Earnings per share data must be reported on the face of the income statement for

   Income from

   continuing operations   Discontinued operations

a. Yes                               Yes

b. Yes                               No

c. No                                No

d. No                                Yes

. Yes                               No

49

In September year I, Cal Corp. made a dividend distribution of one right for each of its 240,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of Cal's $50 variable rate preferred stock at an exercise price of $80 per share. On March 20, year 3, none of the rights had been exercised, and Cal redeemed them by paying each stockholder $0.10 per right. As a result of this redemption, Cal's stockholders' equity was reduced by 

$24,000

50

Jordon Corporation has 80,000 shares of $50 par value common stock authorized, issued and outstanding. All 80,000 shares were issued at $55 per share. Retained earnings of the company amounts to $160,000. If 1,000 shares of Jordon common stock are reacquired at $62 and the par value method of accounting for treasury stock is used, stockholders' equity would decrease by 

$62,000

51

Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was Stent's debt-to-equity ratio? 

1.08

52

Baker Co. issued 100,000 shares of common stock in the current year. On October I, Baker repurchased 20,000 shares of its common stock on the open market for $50.00 per share. At that date, the stock's par value was $1.00 and the average issue price was $40.00 per share. Baker uses the cost method for treasury stock transactions. On December I, Baker reissued the stock for $60.00 per share. What amount should Baker report as treasury stock gain at December 31? 

$0

53

Godart Co. issued $4,500,000 notes payable as a scrip dividend that matured in five years. At maturity, each shareholder of Godart's three million shares will receive payment of the note principal plus interest. The annual interest rate was 10%. What amount should be paid to the stockholders at the end of the fifth year?

$6,750,000

54

As of December 15, year 3, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for year 3 of $100,000 have not yet been declared. The board of directors plans to declare cash dividends on its preferred and common stock on January 15, year 4. Aviator paid an annual bonus to its CEO based on the company's annual profits. The bonus for year 3 was $50,000, and it will be paid on February 10, year 4. What amount should Aviator report as current liabilities on its balance sheet at December 31, year 3? 

 $ 50,000 

55

When treasury stock is purchased for more than its par value, treasury stock is debited for the purchase price under which of the following methods?

   Cost method   Par value method 

a. No                  No

b. No                  Yes

c. Yes                 No

d. Yes                 Yes

 Yes                 No

56

Wolf Co.'s grant of 30,000 stock appreciation rights enables key employees to receive cash equal to the difference between $20 and the market price of the stock on the date each right is exercised. The service period is year I through year 3, and the rights are exercisable in year 4 and year 5. The market price of the stock was $25 and $28 at December 31, year I and year 2, respectively. What amount should Wolf report as the liability under the stock appreciation rights plan in its December 31, year 2 balance sheet? 

$160,000

57

Timp, Inc. had the following common stock balances and transactions during year 2:

1/1/Y2      Common stock outstanding                  39,000

2/1/Y2     Issued a common stock dividend            3,000 

7/1/Y2      Issued common stock for cash               8,000

12/31/Y2  Common stock outstanding                  50,000

What was Timp's year 2 weighted-average shares outstanding? 

46,000

58

The stockholders' equity section of Peter Corporation's balance sheet at December 31, year I, was as follows:

Common stock ($10 par value,

authorized 1,000,000 shares,

issued and outstanding

900,000 shares)                               $9,000,000

Additional paid-in capital (APIC)           2,700,000

Retained earnings (RE)                         1,300,000

Total stockholders' equity                   13,000,000

On January 2, year 2, Peter purchased and retired 100,000 shares of its stock for $1,800,000. Immediately after retirement of these 100,000 shares, the balances in the APIC and retained earnings account should be

    APIC           Retained earnings

a. $900,000    $1,300,000

b. $1,400,000  $800,000

c. $1,900,000  $1,300,000

d. $2,400,000 $$800,000

$2,400,000 $$800,000

59

On September 30, year I, Grey Company issued 3,000 shares of its $10 par common stock in connection with a stock dividend. No entry was made on the stock dividend declaration date. The market value per share immediately after issuance was $15. Grey's stockholders' equity accounts immediately before issuance of the stock dividend shares were as follows:

Common stock $10 par; 20,000    

shares authorized outstanding         $200,000

Additional paid-in capital                    300,000

Retained earnings                              350,000

What should be the retained earnings balance immediately after the stock dividend? 

$305,000 

60

Weaver Company had 100,000 shares of common stock issued and outstanding at December 31, year I.  On July I, year 2, Weaver issued a 10% stock dividend. Unexercised stock options to purchase 20,000 shares of common stock (adjusted for the year 2 stock dividend) at $20 per share were outstanding at the beginning and end of year 2. The average market price of Weaver's common stock (which was not affected by the stock dividend) was $25 per share during year 2. Net income for the year ended December 31, year 2, was $550,000. What should be Weaver's year 2 diluted earnings per common share, rounded to the nearest penny? 

$4.82 

61

On January I, year I, Rodriguez Corp. granted stock options to corporate executives for the purchase of 10,000 shares of the company's $20 par value common stock at 70% of the market price on the exercise date, December 30, year I. On January I, year I, no market price or estimate could be made for the value of the options. All stock options were exercised on December 30, year I. The quoted market prices of Rodriguez Corp.'s $20 par value common stock were as follows:

January I, year I           $50 per share 

December 30, year I   $60 per share

As result of the exercise of the stock options and the issuance of the common stock, Rodriguez should record additional paid-in capital of

 $400,000

62

Heritage Corporation issues convertible bonds for $600,000. At the date of issuance, it is determined that the fair value of the bonds is $580,000. Heritage prepares its financial statements in accordance with IFRS. How should the issuance of the bonds be recognized?

As a bond liability for $580,000 and an equity component of $20,000. 

63

On January 5, year 2, Sardi Minerals Corp. declared a cash dividend of $600,000 to stockholders of record on January 21, year 2, and payable on February 11, year 2. The dividend is permissible under the laws of Sardi's state of incorporation. The following data pertain to year I:

Net income for year ended, 12/31/Y1       $190,000

Additional paid-in capital, 12/31/Y1             675,000

Retained earnings, 12/31/Y1                       425,000

The $600,000 dividend includes a liquidating dividend of

$175,000

64

Which of the following models for assigning values to options takes into account the volatility of stock prices?

a. Neither

b. Black-Scholes model and Lattice value model

c. Lattice value model

d. Black-Scholes model

Black-Scholes model and Lattice value model

65

At December 31, year I, the Merlin Company had 50,000 shares of common stock issued and outstanding. On April I, year 2, an additional 10,000 shares of common stock were issued. Merlin's net income for the year ended December 31, year 2, was $172,500. During year 2 Merlin declared and paid $100,000 cash dividends on its nonconvertible preferred stock. The basic earnings per common share, rounded to the nearest penny, for the year ended December 31, year 2, should 

$1.26

66

Cross Corp. had outstanding 2,000 shares of 11% preferred stock, $50 par. On August 8, year I, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross' additional paid-in capital from preferred stock totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts as follows:

    Preferred stock   APIC         Retained earnings

a. $25,000             $7,500      ($10,000)

b. $25,000                              ($ 2,500)

c. $25,000             ($2,500)

d. $22,500    

$25,000             ($2,500)

67

An entry to initially record cash dividend should be made on the date of

Declaration.

 

68

Which of the following is issued to shareholders by corporation as evidence of the ownership of rights to acquire its unissued or treasury stock?

a. Stock subscriptions.

b. Stock dividends.

c. Stock options.

d. Stock warrants. 

Stock warrants. 

69

Bonds with detachable stock warrants were issued by Flack Co. Immediately after issue the aggregate market value of the bonds and the warrants exceeds the proceeds. Is the portion of the proceeds allocated to the warrants less than their market value, and is that amount recorded as contributed capital?

a. Contributed capital

b. Less than warrants' market value

c. Less than warrants' market value and Contributed capital

d. Neither

 Less than warrants' market value and Contributed capital

70

For purposes of computing the weighted-average number of shares outstanding during the year, midyear event that must be treated as occurring at the beginning of the year is the

Declaration and payment of stock dividend. 

71

Normally, dividends are not paid on shares which have not been issued. However, an entity can choose to pay dividend equivalents on options. How are these dividend equivalents accounted for on options which vest, and how are they accounted for on options which do not vest?

   Vest                                            Not vest

a. Compensation expense             Compensation expense

b. Compensation expense             Charge against retained earnings

c. Charge against retained 

earnings                                        Compensation expense

d. Charge against retained

earnings                                        Charge against retained earnings 

Charge against retained 

earnings                                        Compensation expense

72

Authorized common stock is sold on subscription basis at price in excess of par value. Additional paid-in capital should be recorded when the common stock is 

Contracted for. 

73

Ten thousand (10,000) shares of common stock with a par value of $20 per share were initially issued at $25 per share. Subsequently, two thousand (2,000) of these shares were purchased as treasury stock at $30 per share. Assuming that the par value method of accounting for treasury stock transactions is used, what is the effect of the purchase of the treasury stock on each of the following?

   APIC             Retained earnings

a. Decrease       Increase

b. Decrease       Decrease

c. Increase        Decrease

d. Increase        No effect 

 Decrease       Decrease

74

The purchase of treasury stock 

Decreases common stock outstanding. 

75

In determining earnings per share, interest expense, net of applicable income taxes, on convertible debt which is dilutive should be 

Added back to net income for diluted earnings per share.

 

76

Seco Corp. was incorporated on January 2, year I. The following information pertains to Seco's common stock transactions:

   year I

January 2         Number of shares authorized         80,000     

February I        Number of shares issued                60,000

July 1               Number of shares reacquired            5,000

                        but not canceled

December I     2-for-l stock split year

At December 31, I, the number of shares of Seco's common stock outstanding is

110,000

77

In what circumstances is compensation expense immediately recognized for an employee share-based payment?

In circumstances when options are granted for prior service, and the options are immediately exercisable.

78

Earl was engaged by Farm Corp. to perform consulting services. Earl's compensation for these services consisted of 1,000 shares of Farm's $10 par value common stock, to be issued to Earl on completion of Earl's services. On the execution date of Earl's employment contract, Farm's stock had a market value of $40 per share. Six months later, When Earl's services were completed and the stock issued, the stock's market value was $50 per share. Farm's management estimated that Earl's services were worth $100,000 in cost savings to the company. As a result of this transaction, additional paid-in capital should increase by 

 $ 30,000 

79

When computing diluted earnings per share, potentially dilutive securities are 

Recognized only if they are dilutive.

80

Tyson Corp. purchased trading securities in March I, year I, for $200,000. Tyson uses a December 31 year-end.  The following information pertains to property dividend of the trading securities purchased

                                                                           Fair value

Declaration date—December 20, year I              $300,000

Record date—January 10, year 2                            310,000 

Distribution date—January 28, year 2                    305,000

How much gain should Tyson recognize in year I as result of this property dividend?

$100,000

81

Faucet Company has 2,500,000 shares of common stock outstanding on December 31, year I. An additional 500,000 shares of common stock were issued on April I, year 2, and 250,000 more on July I, year 2. On October I, year 2, Faucet issued 5,000, $1,000 face value, 7% convertible bonds. Each bond is convertible into 40 shares of common stock. No bonds were converted into common stock in year 2. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively, for the year ended December 31, year 2?

3,000,000 and 3,050,000

82

In determining diluted earnings per share, potentially dilutive security was antidilutive in year I and dilutive in year 2. The common stock equivalent would be included in the computation for 

a. year 1 and year 2

b. year 2

c. Neither

d. year 1

year 2

83

In accounting for stock-based compensation, what interest rate is used to discount both the exercise price of the option and the future dividend stream? 

The risk-free interest rate. 

84

On January I, year I, Rodriguez Corp. granted stock options to corporate executives for the purchase of 10,000 shares of the company's $20 par value common stock at 70% of the market price on the exercise date, December 30, year I. On January I, year I, no market price or estimate could be made for the value of the options. All stock options were exercised on December 30, year I. The quoted market prices of Rodriguez Corp.'s $20 par value common stock were as follows:

January I, year I           $50 per share 

December 30, year I   $60 per share

As result of the exercise of the stock options and the issuance of the common stock, Rodriguez should recognize compensation expense in year I of 

$180,000 

85

Selected information for Irvington Company is as follows:

                                                                 December 31 

                                                          year I             year 2

Preferred stock, 8%, par $100,

nonconvertible, noncumulative          $125,000       $125,000

Common stock                                    300,000         400,000

Retained earnings                                  75,000         185,000

Dividends paid on preferred stock

for year ended                                        10,000           10,000

Net income for year ended                    60,000         120,000    

Irvington's return on common stockholders' equity, rounded to the nearest peaentage point, for year 2 is 

23%

86

Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a stock dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 per share. By what amount will Universe decrease stockholders' equity for the dividend? 

$0

87

A company issued rights to its existing shareholders to purchase for par unissued shares of common stock with a par value of $10 per share. When the market value of the common stock was $12 per share, the rights were exercised. Common stock should be credited at $10 per share and

No credit made to additional paid-in capital or retained earnings. 

88

For company that has only common stock outstanding, total shareholders' equity divided by the number of shares outstanding represents the 

Book value per share.

89

The following capital stock information pertains to Palisades Corporation:

                                                            # of shares      Amount

Common stock, $10 par value;

300,000 shares authorized:

January I, year 2                          45,000            $450,000

Sold on May I, year 2                     3,000                30,000

Total, December 31, year 2          48,000              480,000

Preferred stock, 9% cumulative

nonconvertible, $100 par value;

10,000 shares authorized                       1,000               100,000    

The number of shares on which the year 2 basic earnings per share computation should be based is 

47,000

90

When property dividend is declared and the book value of the property exceeds its market value, the dividend is recorded at the 

Market value of the property at the date of declaration. 

91

Under IFRS, all of the following are acceptable method of accounting for treasury stock except: 

Fair value method. 

92

The par value method of accounting for treasury stock differs from the cost method in that

It records treasury stock at par and any difference between carrying value and purchase price adjusted through paid-in capital and/or retained earnings. 

93

When treasury stock is purchased for cash at more than its par value, what is the effect on total stockholders' equity under each of the following methods?

   Cost method    Par value method 

a. Increase          Increase

b. Decrease        Decrease 

c. No effect         Decrease

d. No effect        No effect

 Decrease        Decrease 

94

Sydney Corporation granted 1,000 stock options to its employees on January I, year I, for services performed during year I and year 2. At the date of the grant, the fair value of the stock options is $6,000. The options are exercisable on January I, year 3, and expire on June 30, year 3. On July I, year 3, it was determined that none of the options were exercised. On December 31, year 3, Sydney Corporation should 

Not adjust or reverse compensation expense. 

95

A company wishes to raise funds by issuing either bonds or cumulative preferred stock. How will the annual interest or dividend affect total liabilities each year? 

Interest is a current liability each year (until paid). 

96

How would the declaration and subsequent issuance of stock dividend by the issuer affect each of the following when the market value of the shares exceeds the par value of the stock?

   Common Stock    APIC

a. No effect             No effect

b. No effect             Increase

c. Increase              No effect

d. Increase              Increase

Increase              Increase

97

Newton Corporation was organized on January I, year I. On that date it issued 200,000 shares of its $10 par value common stock at $15 per share (400,000 shares were authorized). During the period January I, year I, through December 31, year 4, Newton reported net income of $750,000 and paid cash dividends of $380,000. On January 5, year 4, Newton purchased 12,000 shares of its common stock at $12 per share. On December 31, year 4, 8,000 treasury shares were sold at $8 per share. Newton used the cost method of accounting for treasury shares. What is the total stockholders' equity of Newton as of December 31, year 4? 

$3,290,000

98

Under IFRS, the method used when preferred shares are converted into ordinary shares is 

Book value method. 

99

How would stock split affect each of the following?

   Assets       Stockholders Equity    APIC

a. Increase    Increase                     No effect

b. No effect   No effect                    No effect

c. No effect   No effect                    Increase 

d. Decrease   Decrease                  Decrease 

No effect   No effect                    No effect

100

A company issued rights to its existing shareholders to purchase for $15 per share, 5,000 unissued shares of common stock with par value of $10 per share. Common stock will be credited at 

$10 per share when the rights are exercised. 

101

Antidilutive securities would generally be used in the calculation of    

a. Basic earnings per share and Diluted earnings per share

b. Diluted earnings per share

c. Neither

d. Basic earnings per share

 Neither

102

On January I, year 3, Fay Corporation established an employee stock ownership plan (ESOP). Selected transactions relating to the ESOP during year 3 were as follows:

On April I, year 3, Fay contributed $30,000 cash and 3,000 shares of its $10 par common stock to the ESOP. On this date the market price of the stock was $18 share.

On October I, year 3, the ESOP borrowed $100,000 from Union National bank and acquired 5,000 shares of Fay's common stock in the open market at $17 share. The note is for I year, bears interest at 10%, and is guaranteed by Fay.

In its year 3 income statement, how much should Fay report as compensation expense relating to the ESOP?

$ 84,000 p

103

On February I, year I, Kew Corp., newly formed company, had the following stock issued and outstanding.

Common stock, no par, $1 stated value, 10,000 shares originally issued for $15 per share.

Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share.

Kew's February I, year I statement of stockholders' equity should report

   Common stock    Preferred stock   APIC

a. $ 150,000           $30,000             $ 45,000

b. $ 150,000           $75,000

c. $ 10,000              $75,000             $ 140,000

d. $ 10,000              $30,000             $ 185,000

$ 10,000              $30,000             $ 185,000

104

During year I Bradley Corporation issued for $110 per share, 5,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Bradley's $25 par value common stock at the option of the preferred shareholder. On December 31, year 2 all of the preferred stock was converted into common stock. The market value of the common stock at the conversion date was $40 per share. What amount should be credited to the common stock account on December 31, year 2?

 $375,000 

105

Wood Corp., a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code, granted an equity interest to a creditor in full settlement of a $28,000 debt owed to the creditor. At the date of this transaction, the equity interest had a fair value of $25,000. What amount should Wood recognize as a gain on restructuring of debt? 

$ 3,000 

106

A company wishes to raise funds by issuing either bonds or cumulative preferred stock. How will the annual interest or dividend affect annual net earnings available to common stockholders each year?

Annual net earnings available to common stockholders are reduced by annual interest and preferred dividends.

107

How would retained earnings be affected by the declaration of each of the following?

   Stock dividend   Stock split

a. Decrease           Decrease

b. No effect            Decrease

c. No effect            No effect

d. Decrease           No effect 

 Decrease           No effect 

108

Dilutive stock options would be used in the calculation of

a. Neither

b. Diluted earnings per share

c. Basic earnings per share and Diluted earnings per share

d. Basic earnings per share

Diluted earnings per share

109

On July I, year I, Alto Corp. split its common stock 5-for-1 when the market value was $100 per share. Prior to the split, Alto had 10,000 shares of $10 par value common stock issued and outstanding. After the split, the par value of the stock

Was reduced to $2.

110

Elaine Corporation was organized on January I, year I, with an authorization of 1,000,000 shares of common stock with par value of $5 per share.  During year I, the corporation had the following capital transactions:

January 4—issued 200,000 shares $5 per share.

April 8—issued 100,000 shares $7 per share.

June 9—issued 30,000 shares $10 per share.

July 29—purchased 50,000 shares $4 per share.

December 31 —sold 50,000 shares held in treasury $8 per share.

Elaine used the cost method to record the purchase and reissuance of the treasury shares. What should be the balance in the account "capital in excess of par value" as of December 31, year I?

$550,000 

111

When collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as 

Additional paid-in capital when the subscription is received. 

112

The excess of the fair value of the consideration received over the stated value of no par common stock should be credited to 

Additional paid-in capital.

113

Treasury stock was acquired for cash at a price in excess of its original issue price. The treasury stock was subsequently reissued for cash at a price in excess of its acquisition price. Assuming that the par value method of accounting for treasury stock transactions is used, what is the effect on total stockholders' equity of each of the following events?

   Acquisition of treasury stock   Reissuance of treasury stock

a. Decrease                                No effect

b. Decrease                                Increase

c. Increase                                  Decrease

d. No effect                                No effect 

Decrease                                Increase 

114

The following information was abstracted from the accounts of the Oar Corporation at December 31, year 2:

Total income since incorporation             $840,000

Total cash dividends paid                          260,000 

Proceeds from sale of donated stock

(FV on date of donation was $30,000)        90,000 

Total value of stock dividends distributed    60,000 

Excess of proceeds over cost of treasury

stock sold                                                   140,000  

The donated stock was classified as trading security. What should be the current balance of retained earnings?

$520,000

115

The following information is relevant to the computation of Chan Co.'s earnings per share to be disclosed on Chan's income statement for the year ending December 31:

Net income for year S is $600,000.

$5.000.000 face value 10-year convertible bonds outstanding on January I. The bonds were issued four years ago at a discount which is being amortized in the amount of $20,000 per year. The stated rate of interest on the bonds is 9% and the bonds were issued to yield 10%. Each $1,000 bond is convertible into 20 shares of Chan's common stock.

Chan's corporate income tax rate is 25%.

Chan has no preferred stock outstanding, and no other convertible securities. What amount should be used as the numerator in the fraction used to compute Chan's diluted earnings per share assuming that the bonds are dilutive securities? 

$ 952,500 

116

During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and convertible. The bonds were originally issued at par, and each bond was convertible into thirty shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma's basic earnings per share for the current year?

$7.36 

117

Information concerning the capital structure of the Petrock Corporation is as follows:

                                                            year 1              year 2 

December 31 Common stock (CS)     90,000 shares  90,000 shares

Convertible preferred stock                 10,000 shares  10,000 shares

During year 2, Petrock paid dividends of $1.00 per share on its common stock and $2.40 per share on its preferred stock. The preferred stock is convertible into 20,000 shares of common stock. The net income for the year ended December 31, year 2, was $285,000. Assume that the income tax rate was 30%. What should be the diluted earnings per share for the year ended December 31, year 2, rounded to the nearest penny?

$2.59

118

A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, Which of the following accounts will be increased?

a. Common stock and APIC

b. Common Stock

c. Neither

d. APIC

Neither

119

A corporation declared dividend, a portion of which was liquidating. How would this declaration affect each of the following?

   APIC             Retained earnings

a. Decrease     No effect

b. Decrease     Decrease

c. No effect      Decrease

d. No effect      No effect
 

Decrease     Decrease 

120

In year I, Orlando, Inc. issued for $105 per share, 8,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Orlando's $25 par value common stock at the option of the preferred shareholder. In August year 2 all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What total amount should be credited to additional paid-in capital (APIC) as a result of the issuance of the preferred stock and its subsequent conversion into common stock?

$240,000