Accounting chapters 15, 16, 17

Presented below is information related to Hale Corporation: Common Stock, $1 par $3,500,000 Paid-in Capital in Excess of Par—Common Stock 550,000 Preferred 8 1/2% Stock, $50 par 2,000,000 Paid-in Capital in Excess of Par—Preferred Stock 400,000 Retained Earnings 1,500,000 Treasury Common Stock (at cost) 150,000 The total stockholders' equity of Hale Corporation is

$7,800,000

The total paid-in capital (cash collected) related to the common stock is

4,050,000

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

It is not open to almost all full-time employees

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

Ownership interest consisting solely of common stock

Which one of the following is not a right of common stockholders?

To share proportionately in all management decisions

On September 1, 2017, Valdez Company reacquired 30,000 shares of its $10 par value common stock for $15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit

Treasury Stock for $450,000

Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes

a debit to Debt Investments at $315,000

Use of the effective-interest method in amortizing bond premiums and discounts results in

a varying amount being recorded as interest income from period to period

Before declaring a cash dividend, management must consider the

availability of funds.

The conversion of bonds is most commonly recorded by the

book value method

A primary source of stockholders' equity is

both income retained by the corporation and contributions by stockholders

The type of preferred stock that would generate a dividend in arrears is:

cumulative preferred stock

The accounting for fair value hedges records the derivative at its

fair value

Treasury shares are shares

issued but not outstanding.

Which of the following does not represent a pair of GAAP/IFRS-comparable terms?

treasury stock/Repurchase reserve.

Characteristics of the corporate form of organization include all of the following except:

unlimited liability of stockholders

All of the following are features of preferred stock except:

voting rights

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

yes, dilutive no, antidilutive

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

Decrease and increase

Which of the following is not a debt security?

Loans receivable

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

May decrease but not increase retained earnings.

How should cumulative preferred dividends in arrears be shown in a corporation's balance sheet?

Note disclosure

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investment

Which of the following is not correct in regard to trading securities?

They are held with the intention of selling them in a short period of time. Unrealized holding gains and losses are reported as part of net income. Any discount or premium is amortized They are all correct

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

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

Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as

a reduction of the carrying value of the investment

The conversion of preferred stock is recorded by the

book value method

the Revaluation Surplus of IFRS is

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

According to the FASB, redeemable preferred stock should be

included as a liability

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

is granted the option

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

of exercise

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

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

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

urchase of treasury stock.

Norton Company issues 4,000 shares of its $5 par value common stock having a fair value of $25 per share and 6,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $205,000. What amount of the proceeds should be allocated to the preferred stock?

$111,818

Wheeler Company issued 5,000 shares of its $5 par value common stock having a fair value of $25 per share and 7,500 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $253,000. The proceeds allocated to the preferred stock is

$138,000

Glavine Company issues 6,000 shares of its $5 par value common stock having a fair value of $25 per share and 9,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $310,000. The proceeds allocated to the common stock is

$140,909

Manning Company issued 10,000 shares of its $5 par value common stock having a fair value of $25 per share and 15,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $520,000. How much of the proceeds would be allocated to the common stock?

$236,364

Berry Corporation has 100,000 shares of $10 par common stock authorized. The following transactions took place during 2017, the first year of the corporation's existence: Sold 20,000 shares of common stock for $13.50 per share. Issued 20,000 shares of common stock in exchange for a patent valued at $300,000.

$570,000

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.

1

Jordan Company purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for

20 periods and 4% from the present value of 1 table

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)?

Annual preferred dividend

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

As paid-in capital from treasury stock transactions.

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

Authorized shares

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

Discount on Bonds Payable

Under IFRS, a company records a revaluation surplus when it experiences an increase in the price of its common stock

False

Dublin Company holds a 30% stake in Club Company which was purchased in 2018 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2018 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2018? I. $3,000,000 II. $3,040,000 III. $3,120,000

II or III only

Which of the following are considered equity securities? I. Convertible debt. II. Redeemable preferred stock. III.Call or put options.

III only

Which of the following is correct about the effective-interest method of amortization?

It must be used to amortize a discount or premium unless some other method yields a similar result

Which of the following is an advantage of a restricted-stock plan?

It never becomes completely worthless

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?

Liquidation preferences

Stock warrants outstanding should be classified as

Paid-in capital-stock warrants

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?

Par value

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

Redeemable

Under IFRS, the amount of capital received in excess of par value would be credited to:

Share Premium.

Which dividends do not reduce stockholders' equity?

Stock dividends

Which of the following are requirements of the declaration of a cash dividend?

Sufficient cash. Sufficient retained earnings. Declaration by the Board.

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

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

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

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

Which of the following is not generally correct about recording a sale of a debt security before maturity date?

The entry to amortize a premium to the date of sale includes a credit to the Premium on Debt Investments

A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described

Transfer from available-for-sale to held-to-maturity

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?

Treasury stock for the purchase price

judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2018, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

Understate, understate, understate

A "secret reserve" will be created if

a capital expenditure is charged to expense.

Total stockholders' equity represents

a claim against a portion of the total assets of a company

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

a credit to Common Stock

Cumulative preferred dividends in arrears should be shown in a corporation's financial statements as

a footnote

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

a footnote.

On January 2, 2018, Farr Co. issued 10-year convertible bonds at 105. During 2018, 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, 2018, cash proceeds from the issuance of the convertible bonds should be reported as

a liability for the entire proceeds

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

a paid-in capital account

A requirement for a security to be classified as held-to-maturity is

ability to hold the security to maturity. positive intent. the security must be a debt security

When investments in debt securities are sold between interest payment dates, preferably the

accrued interest is credited to Interest Revenue

Held-to-maturity securities are reported at

acquisition cost plus amortization of a discount

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

addition to capital stock

Porter Corp. purchased its own par value stock on January 1, 2017 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

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.

Compensation expense resulting from a compensatory stock option plan is generally

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

Common stock dividends distributable is reported on the balance sheet as:

an addition to common stock.

Under IFRS, a purchase by a company of its own shares results in

an increase in treasury shares. a decrease in assets. a decrease in equity.

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

annual preferred dividend

In accounting for investments in debt securities,

any discount or premium is amortized

Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called

arbitrageurs

Transfers between categories

are accounted for at fair value for all transfers

Noncumulative preferred dividends in arrears

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

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

When computing diluted earnings per share, convertible bonds are

assumed converted only if they are dilutive

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are

available-for-sale debt securities

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

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

be antidilutive

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

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

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

book value per share

When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment

by using the fair value method

The term reserves is used under IFRS with reference to all of the following except:

capital received in excess of the par value of issued shares

The payout ratio can be calculated by dividing

cash dividends by net income less preferred dividends

the book value per share is based on

common shares outstanding

In every corporation the one class of stock that represents the basic ownership interest is called

common stock

the residual interest in a corporation belongs to the

common stockholders

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

considered outstanding at the beginning of the earliest year reported

Investments in debt securities are generally recorded at

cost including brokerage and other fees

an entry is not made on the

date of record.

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a

debit to Debt Investments

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

decrease par value per share no effect on retained earnings

in January 2017, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2017, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares

decreased total stockholders' equity.

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

decreases retained earnings but does not change total stockholders' equity

Dilutive convertible securities must be used in the computation of

diluted earnings per share only

Stockholders' equity is generally classified into two major categories:

earned capital and contributed capital

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

earnings are reported by the investee in its financial statements

GAAP specifies that, regarding the amortization of a premium or discount on a debt security, the

effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained

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

either the proportional method or the incremental method.

An option to convert a convertible bond into shares of common stock is a(n)

embedded derivative

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the

equity method

Impairments are

evaluated using the CECL model similar to receivables

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

fair value of the shares issued

All of the following statements regarding accounting for derivatives are correct except that

gains and losses resulting from speculation should be deferred

A correct valuation for debt securities is

held-to-maturity at amortized cost

Debt securities that are accounted for at amortized cost, not fair value, are

held-to-maturity debt securities

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

incentive stock option plan

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as

income, fair value method a reduction of the investment, equity method

When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be

its fair value at the date of the transfer

When an investment in an available-for-sale debt security is transferred to trading because the company anticipates selling the security in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be

its fair value at the date of the transfer

When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must

make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date

Investments in debt securities should be recorded on the date of acquisition at

market value plus brokerage fees and other costs incident to the purchase

Convertible bonds

may be exchanged for equity securities

Securities which could be classified as held-to-maturity are

municipal bonds

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

net income less preferred dividends by average common stockholders' equity

The rate of return on common stock equity is computed by dividing:

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

Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?

no effect, fair value method decrease, equity method

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

no, date of issuance of the rights yes, date of exercise of the rights

Additional paid-in capital is not affected by the issuance of:

no-par stock

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

not recognized if the market price does not exceed the option price at the date of grant

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

outstanding

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

outstanding.

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

paid-in capital from treasury stock.

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

par value of the shares issued.

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

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 value of the warrants, the excess should be credited to

premium on bonds payable

Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2017, Houser distributed these shares of stock as a dividend to its stockholders. This is an example of a

property dividend

The preemptive right enables a stockholder to

receive the same amount of dividends on a percentage basis as the preferred stockholders

Gains or losses on cash flow hedges are

recorded in equity, as part of other comprehensive income

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

reflected currently in income

The fair value option allows a company to

report most financial instruments at fair value at any point of time

All of the following are characteristics of a derivative financial instrument except the instrument

requires a large investment at the inception of the contract

The cumulative feature of preferred stock

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

Stockholders' equity is generally classified into two major categories:

retained earnings and contributed capital.

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are

securities where a company has holdings of less than 20%

"Gains trading" involves

selling securities whose value has increased since acquisition (winners) while holding those whose value has decreased since acquisition (losers)

The preemptive right of a common stockholder is the right to

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

share-based liability awards

Antidilutive securities

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

smaller earnings per share adjustment

A reclassification adjustment is reported in the

statement of comprehensive income as other comprehensive income

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

stock dividend

If a company offers additional considerations to convertible bondholders in order to encourage conversion, it is called a(an):

sweetener

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

that many corporations can obtain debt financing at lower rates

A feature common to both stock splits and stock dividends is

that there is no effect on total stockholders' equity

A company uses income from continuing operations to determine whether potential common stock is dilutive or antidilutive, and this is referred to as

the control number

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

the par value of all capital stock issued.

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

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

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

the warrants issued with the debt securities are nondetachable

Unrealized holding gains or losses which are recognized in income are from debt securities classified as

trading

Dividends are not paid on

treasury common stock

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

treated as a direct reduction of retained earnings

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

yes, public companies no, nonpublic companies