Test II Multiple Choice Flashcards
(26 cards)
Credit losses would be correctly be calculated as the difference between the amortized cost of debt and:
a. current cash flows multiplied by the expected future discount rate.
b. expected future cash flows multiplied by the expected future discount rate.
c. expected future cash flows multiplied by the effective interest rate that existed when the investment was acquired.
d. current cash flows multiplied by the effective interest rate the existed when the investment was acquired.
c. expected future cash flows multiplied by the effective interest rate that existed when the investment was acquired.
Credit losses capture declines in customer’s credit quality that have occurred since the investment was ACQUIRED.
Which of the following is NOT a reason why an investor might record at least some amount of credit loss from an AFS investment in net income?
a. the investor intends to sell the investment.
b. the investor believes it is “more likely than not” that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the current year.
c. the investor determines that a credit loss exists on the investment.
d. the investor believes it is “more likely than not” that there is a non credit loss on the investment.
d. the investor believes it is “more likely than not” that there is a non credit loss on the investment.
There is no “more likely than not” credit loss criterion.
An impairment loss has the effect of:
a. decreasing total assets
b. decreasing net income
c. decreasing retained earnings
d. all of the above
d. all of the above
An impairment loss is typically recorded by reducing accumulated depreciation to zero and decreasing the asset’s recorded amount to fair value. Both of these adjustments reduce total assets. In addition, an impairment loss is reported in the income statement, reducing the company’s reported net income and therefore retained earnings.
Which of the following approaches CANNOT be used to determine the fair value of an impaired asset?
a. prices of similar assets
b. the market price of the asset
c. the sum of the discounted expected future cash flows
d. the sum of the undiscounted expected cash flows
d. the sum of the undiscounted expected cash flows
Undiscounted cash flows do not represent fair value as the measure ignores the time value of money.
A company reports the following information at year-end:
Building: BV = $500,000, EFCF’s = $380,000, FV = $360,000
Patent: BV = $35,000, EFCF’s = $40,000, FV = $38,000
Copyright: BV = $40,000, EFCF’s = $38,000, FV = $39,000
Machine: BV = $100,000, EFCF’s = $120,000, FV = $85,000
Based on the above information, what is the total amount of impairment loss that the company should record at year end?
a. $141,000
b. $126,000
c. $123,000
d. $122,000
a. $141,000
Impairment = EFCF’s < BV
Building: YES
Patent: NO
Copyright: YES
Machine: NO
Impairment loss = BV - FV
Building: 500,000 - 360,000 = 140,000
Copyright: 40,000 - 39,000 = 1,000
Total impairment loss = $141,0000
The difference in testing for impairment of a finite-life versus indefinite life intangible asset is:
a. the measure of an impairment loss of an indefinite life intangible asset is not based on book value.
b. subsequent recovery of an impairment loss is allowed for a finite life intangible asset.
c. the cash flow recoverability test is omitted for an indefinite life intangible asset.
d. companies are not required to recognized impairment losses on finite life intangible assets.
c. the cash flow recoverability test is omitted for an indefinite life intangible asset.
Declarmen Company owns a factory in the United Kingdom. A change in business climate indicates that Declarmen should investigate for possible impairment. Below is data that related to the factory’s assets ($ in millions):
Book value: $570
Undiscounted sum of future estimated cash flows: $630
Present value of future cash flows: $525
Fair value less cost to sell (determined by appraisal): $540
The amount of impairment loss that Declarmen should recognize according to US GAAP is:
a. $0
b. $30 million
c. $60 million
d. $45 million
a. $0
Step 1 of the impairment test is to see if EFCFs < BV
630 < 570, no impairment.
Declarmen Company owns a factory in the United Kingdom. A change in business climate indicates that Declarmen should investigate for possible impairment. Below is data that related to the factory’s assets ($ in millions):
Book value: $570
Undiscounted sum of future estimated cash flows: $630
Present value of future cash flows: $525
Fair value less cost to sell (determined by appraisal): $540
The amount of impairment loss that Declarmen should recognize according to IFRSP is:
a. $0
b. $30 million
c. $60 million
d. $45 million
b. $30 million
Under IFRS, the impairment equals book value ($570) less the greater of (a) present value of future cash flows of $525 and (b) fair value less cost to sell of $540. Impairment loss = $570 − $540 = $30.
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If the fair value of a HTM investment declines below cost, and the company believes it may eventually need to sell the investment before fair value recovers:
a. the investment is not written down to fair value, but any credit losses are recognized in net income.
b. the investment is written down to fair value, and the entire impairment loss is recognized in net income.
c. the investment is written down to fair value, and the entire impairment loss is recognized in other comprehensive income.
d. credit losses and other changes in fair value are not recognized for held to maturity investments.
a. the investment is not written down to fair value, but any credit losses are recognized in net income.
If the fair value of an AFS investment declines below cost, and the company intends to sell the investment before fair value recovers:
a. the investment is not written down to fair value, but any credit losses are recognized in net income.
b. the investment is written down to fair value, and the entire impairment loss is recognized in net income.
c. the investment is written down to fair value, and the entire impairment loss is recognized in other comprehensive income.
d. the investment is written down to fair value, the credit loss is recognized in net income, and any remaining impairment is recognized in other comprehensive income.
b. the investment is written down to fair value, and the entire impairment loss is recognized in net income.
If the fair value of an AFS investment declines below cost, and the company does NOT beleive that it is more likley than not that it will have to sell the investment before fair value recovers:
a. the investment is not written down to fair value, but any credit losses are recognized in net income.
b. the investment is written down to fair value, and the entire impairment loss is recognized in net income.
c. the investment is written down to fair value, and the entire impairment loss is recognized in OCI.
d. the investment is written down to fair value, the credit loss is recognized in net income, and any remaining impairment is recognized in OCI.
b. the investment is written down to fair value, and the entire impairment loss is recognized in net income.
When calculating basic EPS, net income is reduced by dividends on nonconvertible cumulative preferred stock:
a. whether declared or not
b. only if declared
c. whether dilutive or not
d. under no circumstance
a. whether declared or not
Since cumulative preferred dividends carry over as dividends in arrears and will eventually be paid, the current year’s dividends, whether paid or not, are deducted from the current year’s net income when calculating basic EPS.
When calculating the weighted average number of shares outstanding, the number of shares are NOT time weighted by the fraction of the reporting period they are (are not) outstanding for:
a. common shares retired
b. common shares issued during the period as a stock dividend
c. shares obtainable in executive stock options granted in mid year
d. new common shares sold during the period
b. common shares issued during the period as a stock dividend
The existing shares are adjusted for the effects of the stock dividend.
A business is deemed to have a complex capital structure when it has outstanding:
a. three types of securities or more besides common stock
b. executive stock options
c. bonds payable
d. cumulative preferred stock
b. executive stock options
Stock options have the potential to increase the number of shares outstanding and therefore create a complex capital structure.
To incorporate the effect of outstanding stock options in the calculation of diluted EPS:
a. would be inappropriate because options are considered only when calculating basic EPS.
b. we would never increase or decrease the numerator of the EPS fraction.
c. we assume common shares are issued at the average market price and repurchased at the exercise prince.
d. we assume the options were exercised at mid year.
b. we would never increase or decrease the numerator of the EPS fraction.
The only impact of stock options in the calculation of diluted EPS is on the denominator of the EPS fraction. (The denominator increases by the number of shares assumed issued, and decreases by the number of shares repurchased at the average price, using the amount received from the exercise of the options.)
When calculating earnings per share, the effect of after-tax interest expense paid on convertible bonds that are dilutive is to:
a. Increase net income for diluted earnings per share and not for basic earnings per share.
b. Decrease net income for basic earnings per share and not for diluted earnings per share.
c. Increase net income for both basic earnings per share and diluted earnings per share.
d. Decrease net income for both basic earnings per share and diluted earnings per share
a. Increase net income for diluted earnings per share and not for basic earnings per share.
Basic EPS does not assume convertible bonds have been converted and therefore the after-tax interest expense is not added back. Diluted EPS assumes the bonds have been converted, if dilutive, and therefore add back to net income the after-tax interest expense.
Common stock options that are antidilutive generally affect the calculation of:
a. Basic - YES, Diluted - YES
b. Basic - YES, Diluted - NO
c. Basic - NO, Diluted - NO
d. Basic - NO, Diluted - YES
c. Basic - NO, Diluted - NO
Common stock options are not considered in basic EPS but are added to the number of shares if they are dilutive. Antidilutive stock options are ignored.
Common shares that are dilutive generally affect the calculation of:
a. Basic - YES, Diluted - YES
b. Basic - YES, Diluted - NO
c. Basic - NO, Diluted - NO
d. Basic - NO, Diluted - YES
d. Basic - NO, Diluted - YES
Convertible bonds are not considered when calculating basic EPS. For diluted EPS, the after-tax interest is added back to net income and the number of shares resulting from the assumed conversion is added to the weighted average number of shares outstanding.
Executive stock options are outstanding all year that permit executives to buy 12 million common shares at $50. The average market price of the common stock was $60. when calculating diluted EPS, the assumed exercise price of these options will increase the weighted average number of shares outstanding by:
a. zero shares
b. 2 million shares
c. 8 million shares
d. 10 million shares
b. 2 million shares
12 − [(12 × $50) / $60].
Which of the following statements is true regarding diluted earnings per share?
a. It is assumed that stock options are exercised at the beginning of the period (or at the time the options are issued, if later) and the cash proceeds received are used to buy back (as treasury stock) as many of those shares as can be acquired at the closing market price for the period.
b. To incorporate convertible bonds into the calculation, the denominator of the EPS fraction is decreased by the additional common shares assumed.
c. To incorporate convertible securities into the calculation, the numerator is decreased by the interest (after-tax) that would have been avoided in the event of conversion.
d. Contingently issuable shares are considered outstanding in the computation of diluted EPS when any conditions for issuance are currently being met.
d. Contingently issuable shares are considered outstanding in the computation of diluted EPS when any conditions for issuance are currently being met.
Contingently issuable shares are considered to be outstanding in the computation of diluted EPS if the target performance level already is being met.
At December 31, 2021, the balance sheet of Darwin Corporation included 8 million common shares and 4 million nonconvertible preferred shares. On July 1, 2022, Darwin issued a 5 for 4 stock split on its common shares and paid $10 million cash dividends on the preferred stock. Net income for the year ended December 31, 2022, was $40 million. Darwin’s 2022 EPS should be:
a. $3.00.
b. $4.00.
c. $5.00.
d. $5.55
a. $3.00.
($40 − $10) / (8 × 5/4)
At December 31, 2021, the balance sheet of Goode Corporation included 80 million common shares. On October 1, 2022, Goode retired 4 million shares as part of a share repurchase program. Net income for the year ended December 31, 2022, was $400 million. Goode’s 2022 EPS should be:
a. $4.94.
b. $5.00.
c. $5.06.
d. $5.26
c. $5.06.
$400 / [80 − (4 × 3/12)]
