Ch 5 HW

Litke Corporation issued at a premium of $10,000 a $200,000 bond issue convertible into 4,000 shares of common stock (par value $20). At the time of the conversion, the unamortized premium is $4,000, the market value of the bonds is $220,000, and the stock is quoted on the market at $60 per share. If the bonds are converted into common, what is the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds? A. $124,000 B. $130,000 C. $144,000 D. $120,000

A. $124,000

The following information is available for Barone Corporation: -January 1, 2021 Shares outstanding 4,000,000 -April 1, 2021 Shares issued 640,000 -July 1, 2021 Treasury shares purchased 240,000 -October 1, 2021 Shares issued in a 100% stock dividend 4,400,000 The number of shares to be used in computing earnings per common share for 2021 is A. 8,720,000. B. 8,760,000. C. 9,041,600. D. 5,460,000.

A. 8,720,000.

Compensation expense resulting from a compensatory stock option plan is generally A. allocated to the periods benefited by the employee's required service. B. allocated over the periods of the employee's service life to retirement. C. recognized in the period of the grant. D. recognized in the period of exercise.

A. allocated to the periods benefited by the employee's required service.

When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair value of the warrants, the excess should be credited to A. premium on bonds payable. B. retained earnings. C. additional paid-in capital from stock warrants. D. a liability account.

A. premium on bonds payable.

On January 1, 2021 Reese Company granted Jack Buchanan, an employee, an option to buy 300 shares of Reese Co. stock for $40 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $4,800. Buchanan exercised his option on September 1, 2021, and sold his 300 shares on December 1, 2021. Quoted market prices of Reese Co. stock during 2021 were: -January 1 $40 per share -September 1 $48 per share -December 1 $54 per share The service period is for two years beginning January 1, 2021. As a result of the option granted to Buchanan, using the fair value method, Reese should recognize compensation expense for 2021 on its books in the amount of A. $5,600. B. $2,400. C. $4,800. D. $0.

B. $2,400.

At December 31, 2020 Pine Company had 200,000 shares of common stock and 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2020 or 2021. On February 10, 2022, prior to the issuance of its financial statements for the year ended December 31, 2021, Pine declared a 100% stock dividend on its common stock. Net income for 2021 was $960,000. In its 2021 financial statements, Pine's 2021 earnings per common share should be A. $4.54. B. $2.25. C. $1.33. D. $4.27.

B. $2.25.

On June 30, 2018, Norman Corporation granted compensatory stock options for 75,000 shares of its $20 par value common stock to certain of its key employees. The market price of the common stock on that date was $36 per share and the option price was $30. The Black-Scholes option pricing model determines total compensation expense to be $900,000. The options are exercisable beginning January 1, 2021, provided those key employees are still in Norman's employ at the time the options are exercised. The options expire on June 30, 2022. On January 4, 2021, when the market price of the stock was $42 per share, all 75,000 options were exercised. What should be the amount of compensation expense recorded by Norman Corporation for the calendar year 2020 using the fair value method? A. $0. B. $360,000. C. $900,000. D. $450,000.

B. $360,000.

Milo Co. had 800,000 shares of common stock outstanding on January 1, issued 126,000 shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued 54,000 shares on November 1. The weighted average shares outstanding for the year is A. 851,000. B. 872,000. C. 914,000. D. 893,000.

B. 872,000.

Lang Co. issued bonds with detachable common stock warrants. Only the warrants had a known market value. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported as A. Common Stock Subscribed. B. Discount on Bonds Payable. C. Premium on Bonds Payable. D. Paid-in Capital in Excess of Par—Stock Warrants.

B. Discount on Bonds Payable.

The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee A. may first exercise the option. B. is granted the option. C. has performed all conditions precedent to exercising the option. D. exercises the option.

B. is granted the option.

On December 31, 2020, Gonzalez Company granted some of its executives options to purchase 180,000 shares of the company's $10 par common stock at an option price of $50 per share. The Black-Scholes option pricing model determines total compensation expense to be $1,350,000. The options become exercisable on January 1, 2021, and represent compensation for executives' services over a three-year period beginning January 1, 2021. At December 31, 2021 none of the executives had exercised their options. What is the impact on Gonzalez's net income for the year ended December 31, 2021 as a result of this transaction under the fair value method? A. $ 450,000 increase. B. $ 0. C. $ 450,000 decrease. D. $1,350,000 decrease.

C. $ 450,000 decrease.

On March 1, 2021, Ruiz Corporation issued $2,000,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2041. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2021, the fair value of Ruiz's common stock was $40 per share and the fair value of the warrants was $2.00. What amount should Ruiz record on March 1, 2021 as paid-in capital from stock warrants? A. $100,000 B. $85,200 C. $104,000 D. $73,600

C. $104,000

On July 1, 2021, an interest payment date, $150,000 of Parks Co. bonds were converted into 3,000 shares of Parks Co. common stock each having a par value of $45 and a market value of $54. There is $6,000 unamortized discount on the bonds. Using the book value method, Parks would record A. no change in paid-in capital in excess of par. B. a $12,000 increase in paid-in capital in excess of par. C. a $9,000 increase in paid-in capital in excess of par. D. a $18,000 increase in paid-in capital in excess of par.

C. a $9,000 increase in paid-in capital in excess of par.

When computing diluted earnings per share, convertible bonds are A. assumed converted whether they are dilutive or antidilutive. B. assumed converted only if they are antidilutive. C. assumed converted only if they are dilutive. D. ignored.

C. assumed converted only if they are dilutive.

At December 31, 2021, Hancock Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2021. Net income for the year ended December 31, 2021, was $1,700,000. What should be Hancock's 2021 earnings per common share, rounded to the nearest penny? A. $3.78 B. $4.25 C. $36 D. $4.00

D. $4.00

What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? A. Increase and decrease B. Decrease and no effect C. Increase and no effect D. Decrease and increase

D. Decrease and increase

Companies recognize a gain or loss when stockholders exercise convertible preferred stock. True False

False

If an employee fails to exercise a stock option before its expiration date, the company should decrease compensation expense True False

False

Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise. True False

False

The FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense. True False

True