Flash Review for AC 322 Exam #2

CHAPTER 15 STOCKHOLDERS' EQUITY

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CHAPTER 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE

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

Add. Paid in Cap. Retained Earnings b. Decrease Decrease

How would the declaration and subsequent issuance of a 10% stock dividend by the issuer affect each of the following when the fair value of the shares exceeds the par value of the stock?

Common Stock Add. Paid in Cap. d. Increase Increase

The distribution of stock rights to existing common stockholders will increase paid-in capital at the

Date of Issuanceof the Rights: c. No Date of Exercise of the Rights c. Yes

A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is

Dilutive Antidilutive b. Yes No

A corporation was organized in January 2009 with authorized capital of $10 par value common stock. On February 1, 2012, shares were issued at par for cash. On March 1, 2012, the corporation's attorney accepted 7,000 shares of common stock in settlement for legal services with a fair value of $90,000. Additional paid-in capital would increase on

February 1, 2012 March 1, 2012 d. No Yes

What effect does the issuance of a 2-for-1 stock split have on each of the following?

ParValue per Share Retained Earnings c. Decrease No Effect

Due to the importance of earnings per share information, it is required to be reported by all

Public Companies: b. Yes Nonpublic Companies: b. No

At its date of incorporation, Sauder, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Sauder acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?

Retained Earnings Add. Paid in Cap. c. Decrease No Effect

Direct costs incurred to sell stock such as underwriting costs should be accounted for as 1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset

a. 1

In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?

a. Annual preferred dividend

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. Discount on Bonds Payable.

With regard to recognizing stock-based compensation

a. IFRS and U.S. GAAP follow the same model.

With regard to contracts that can be settled in either cash or shares

a. IFRS requires that share settlement must be used.

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

a. Note disclosure

At the date of declaration of a small common stock dividend, the entry should not include

a. a credit to Common Stock Dividend Payable.

Porter Corp. purchased its own par value stock on January 1, 2012 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from

a. additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings.

Noncumulative preferred dividends in arrears

a. are not paid or disclosed.

In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants

a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.

Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?

a. authorized shares

Assume common stock is the only class of stock outstanding in the Manley Corporation. Total stockholders' equity divided by the number of common stock shares outstanding is called

a. book value per share.

In January 2012, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2012, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares

a. decreased total stockholders' equity.

The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the

a. fair value of the shares issued.

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. is granted the option.

A dividend which is a return to stockholders of a portion of their original investments is a

a. liquidating dividend.

The rate of return on common stock equity is calculated by dividing

a. net income less preferred dividends by average common stockholders' equity.

The date on which total compensation expense is computed in a stock option plan is the date

a. of grant.

"Gains" on sales of treasury stock (using the cost method) should be credited to

a. paid-in capital from treasury stock.

Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2012, Houser distributed these shares of stock as a dividend to its stockholders. This is an example of a

a. property dividend.

When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be

a. reflected currently in income, but not as an extraordinary item.

The pre-emptive right enables a stockholder to

a. share proportionately in any new issues of stock of the same class.

How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?

b. As paid-in capital from treasury stock transactions.

The primary IFRS reporting standards related to financial instruments, including dilutive securities, is

b. IAS 39.

Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements?

b. Liquidation preferences

Quirk Corporation issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued?

b. Par value

Which dividends do not reduce stockholders' equity?

b. Stock dividends

Which of the following is not a legal restriction related to profit distributions by a corporation?

b. The amount distributed in any one year can never exceed the net income reported for that year.

A "secret reserve" will be created if

b. a capital expenditure is charged to expense.

A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to

b. a paid-in capital account.

The balance in Common Stock Dividend Distributable should be reported as a(n)

b. addition to capital stock.

When applying the treasury stock method for diluted earnings per share, the market price of the common stock used for the repurchase is the

b. average market price.

The conversion of preferred stock may be recorded by the

b. book value method.

The payout ratio can be calculated by dividing

b. cash dividends by net income less preferred dividends.

An entry is not made on the

b. date of record.

The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding

b. decreases retained earnings but does not change total stockholders' equity.

Dilutive convertible securities must be used in the computation of

b. diluted earnings per share only.

When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, the sweetener is accounted for as a(n)

b. expense.

An executive pays no taxes at time of exercise in a(an)

b. incentive stock option plan.

According to the FASB, redeemable preferred stock should be

b. included as a liability.

The accounting for treasury stock retirements under IFRS

b. may have the excess charged to paid-in capital, depending on the original transaction related to the issuance of the stock.

With regard to recognizing stock-based compensation under IFRS the fair value of shares and options awarded to employees is recognized

b. over the fiscal periods to which the employees' services relate.

When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the

b. par value of the shares issued.

The cumulative feature of preferred stock

b. requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.

The pre-emptive right of a common stockholder is the right to

b. share proportionately in any new issues of stock of the same class.

A company estimates the fair value of SARs, using an option-pricing model, for

b. share-based liability awards.

If management wishes to "capitalize" part of the earnings, it may issue a

b. stock dividend.

The current project of the IASB and the FASB related to financial statement presentation indicates

b. that the IFRS statement of recognized income and expenses will probably be eliminated.

A feature common to both stock splits and stock dividends is

b. that there is no effect on total stockholders' equity.

The major difference between convertible debt and stock warrants is that upon exercise of the warrants

b. the holder has to pay a certain amount of cash to obtain the shares.

In a corporate form of business organization, legal capital is best defined as

b. the par value of all capital stock issued.

Horton Co. was organized on January 2, 2012, with 500,000 authorized shares of $10 par value common stock. During 2012, Horton had the following capital transactions: -January 5—issued 375,000 shares at $14 per share. -July 27—purchased 25,000 shares at $11 per share. -November 25—sold 20,000 shares of treasury stock at $13 per share. Horton used the cost method to record the purchase of the treasury shares. What would be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2012?

c. $40,000.

When $5,000,000 in convertible bonds are issued at par with $800,000 in value of the equity option embedded in the bond, the IFRS journal entry will include a debit of

c. $800,000 to Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.

What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively?

c. Decrease and increase

Which of the following best describes a possible result of treasury stock transactions by a corporation?

c. May decrease but not increase retained earnings.

With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure?

c. Ownership interest consisting solely of common stock

Which of the following features of preferred stock makes the security more like debt than an equity instrument?

c. Redeemable

Which of the following statements about property dividends is not true?

c. The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred.

When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?

c. Treasury stock for the purchase price.

Which of the following is not a characteristic of a noncompensatory stock option plan?

c. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company.

Total stockholders' equity represents

c. a claim against a portion of the total assets of an enterprise.

Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as

c. a footnote.

Compensation expense resulting from a compensatory stock option plan is generally

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

Under the intrinsic value method, compensation expense resulting from an incentive stock option is generally

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

Stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders

c. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.

The residual interest in a corporation belongs to the

c. common stockholders.

Cash dividends are paid on the basis of the number of shares

c. outstanding.

At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the

c. purchase of treasury stock.

The IFRS statement of recognized income and expenses

c. reports the items that were charged directly to equity such as revaluation surplus.

Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is

c. that many corporations can obtain financing at lower rates

Younger Company has outstanding both common stock and nonparticipating, non-cumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by

c. the payment of a previously declared cash dividend on the common stock.

Dividends are not paid on

c. treasury common stock.

Under IFRS compliance requirements the Revaluation Surplus is

c. utilized to record the changes in property, plant, and equipment.

Which of the following is not a characteristic of a noncompensatory stock purchase plan?

d. All of these are characteristics.

On January 2, 2012, Farr Co. issued 10-year convertible bonds at 105. During 2012, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Farr's common stock was 50 percent above its par value. On January 2, 2012, cash proceeds from the issuance of the convertible bonds should be reported as

d. a liability for the entire proceeds.

When computing diluted earnings per share, convertible bonds are

d. assumed converted only if they are dilutive.

A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably

d. based on the relative market values of the two securities involved.

In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would

d. be antidilutive.

The conversion of bonds is most commonly recorded by the

d. book value method.

A primary source of stockholders' equity is

d. both income retained by the corporation and contributions by stockholders.

In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are

d. considered outstanding at the beginning of the earliest year reported.

The Revaluation Surplus of IFRS is

d. different than U.S. GAAP in that it allows the increase in valuation.

Stockholders' equity is generally classified into two major categories:

d. earned capital and contributed capital.

The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the

d. either the proportional method or the incremental method.

Treasury shares are

d. issued but not outstanding shares.

Convertible bonds

d. may be exchanged for equity securities.

In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the

d. none of these.

Stock warrants outstanding should be classified as

d. none of these.

For stock appreciation rights, the measurement date for computing compensation is the date

d. of exercise.

Stock that has a fixed per-share amount printed on each stock certificate is called

d. par value stock.

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 market value of the warrants, the excess should be credited to

d. premium on bonds payable.

Antidilutive securities

d. should be ignored in all earnings per share calculations.

Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings per share is the security with the

d. smaller earnings per share adjustment.

Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when

d. the warrants issued with the debt securities are nondetachable.

The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be

d. treated as a direct reduction of retained earnings.