Chapter 15 MCQs

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 be added as an adjustment to the numerator (net earnings)? a. annual preferred dividend b. annual preferred dividend times (one minus the income tax rate) c. annual preferred dividend times the income tax rate d. annual preferred dividend divided by the income tax rate

A

The date on which to measure the compensation element in a stock option granted to a corporate employee is ordinarily the date on which the employee a. is granted the option .b. has performed all conditions precedent to exercising the option. c. can first exercise the option. d. exercises the option.

A.

The if-converted method of computing earnings per share data assumes the conversion of convertible securities as of the a. beginning of the earliest period reported (or at the time of issuance, if later). b. beginning of the earliest period reported (regardless of the time of issuance). c. middle of the earliest period reported (regardless of the time of issuance). d. ending of the earliest period reported (regardless of the time of issuance)

A.

At December 31, 2024, Tatum Company had 2,000,000 shares of common stock outstanding. On January 1, 2025, Tatum issued 500,000 shares of preferred stock which were convertible into 1,000,000 shares of its common stock. In 2025, Tatum declared and paid $1,200,000 cash dividends on the common stock and $400,000 cash dividends on the preferred stock. Net income for the year ended December 31, 2025, was $5,000,000.Assuming an income tax rate of 30%, what was diluted earnings per share for the year ended December 31, 2025? (Round to the nearest penny.) a. $1.50 b. $1.67 c. $2.50 d. $2.07

B

Kasravi Co. had net income for 2025 of $600,000. The average number of shares outstanding for the period was 200,000 shares. The average number of shares under outstanding options, at an option price of $30 per share, is 12,000. The average market price of the common stock during the year was $36. What should Kasravi report for diluted earnings per share for the year ended 2025? a. $3.00 b. $2.97 c. $2.86 d. $2.83

B

Nolte Co. has 4,800,000 shares of common stock outstanding on December 31, 2024. An additional 200,000 shares are issued on April 1, 2025, and 480,000 more on September1. On October 1, Nolte issued $6,000,000 of 9% convertible bonds. Each $1,000 bond is convertible into 40 shares of its common stock. No bonds have been converted. The numbers of shares to be used in computing basic earnings per share and diluted earnings per share, respectively, on December 31, 2025 are a. 5,110,000 and 5,110,000. b. 5,110,000 and 5,170,000. c. 5,110,000 and 3,050,000. d. 5,880,000 and 5,320,000.

B

Information concerning the capital structure of Pepper Corporation is as follows: December 31,2025: Common Stock 150,000 shares Convertible Preferred Stock 15,000 shares 6% convertible Bonds $2,400,000 December 31, 2024 Common Stock 150,000 shares Convertible Preferred Stock 15,000 shares 6% convertible bonds $2,400,000 In 2025, Pepper paid dividends of $0.80 per share on its common stock and $2.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 6% convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2025, was $400,000. Assume that Pepper's income tax rate was 30%.What should Pepper report for diluted earnings per share for the year ended December31, 2025, rounded to the nearest penny? a. $2.09 b. $1.96 c. $1.78 d. $2.23

B.

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. 893,000. d. 914,000.

B.

On January 1, 2025, Ellison Company granted Sam Wine, an employee, an option to buy 1,000 shares of Ellison Co. stock for $30 per share, with the option exercisable for 5 years from the date of grant. Using a fair value option pricing model, total compensation expense is determined to be $6,000. Wine exercised his option on October 1, 2025 and sold his1,000 shares on December 1, 2025.Quoted market prices of Ellison Co. stock in 2025 were: July 1 $30 per share October 1 $36 per share December 1 $40 per share The service period is three years, beginning January 1, 2025. As a result of the option granted to Wine, using the fair value method, Ellison should recognize compensation expense for 2025 in the amount of a. $6,000. b. $2,000. c. $1,500. d. $0.

B.

On January 1, 2025, Gridley Corporation had 375,000 shares of its $2 par value common stock outstanding. On March 1, Gridley sold an additional 750,000 shares on the open market at $20 per share. Gridley issued a 20% stock dividend on May 1. On August 1, Gridley purchased 420,000 shares and immediately retired the stock. On November 1,600,000 shares were sold for $25 per share. What is the weighted-average number of shares outstanding for 2025? a. 1,530,000 b. 1,125,000 c. 716,665 d. 516,666

B.

On July 1, 2025, an interest payment date, $150,000 of Parks Co. bonds were convertedinto 3,000 shares of Parks Co. common stock, each having a par value of $45 and amarket value of $54. There is $6,000 of unamortized discount on the bonds. If the book value method is used, Parks would record a. no change in paid-in capital in excess of par. b. a $9,000 increase in paid-in capital in excess of par. c. an $18,000 increase in paid-in capital in excess of par. d. a $12,000 increase in paid-in capital in excess of par.

B.

At December 31, 2024, Emley Company had 1,200,000 shares of common stock outstanding. On October 1, 2025, an additional 400,000 shares of common stock were issued. In addition, Emley had $14,000,000 of 6% convertible bonds outstanding atDecember 31, 2024 that are convertible into 800,000 shares of common stock. No bonds were converted into common stock in 2025. The net income for the year ended December31, 2025, was $5,250,000. Assuming an income tax rate of 30%, what is diluted earnings per share for the year ended December 31, 2025, rounded to the nearest penny?a. $2.22 b. $2.89 c. $2.78 d. $4.02

C

Fultz Company had 300,000 shares of common stock issued and outstanding atDecember 31, 2024. In 2025, no additional common stock was issued. On January 1, 2025, Fultz issued 400,000 shares of nonconvertible preferred stock. During 2025, Fultz declared and paid $180,000 cash dividends on the common stock and $150,000 on the nonconvertible preferred stock. Net income for the year ended December 31, 2025, was $960,000. What is Fultz's 2025 earnings per share (rounded to the nearest cent)? a. $1.15 b. $2.10 c. $2.70 d. $3.20

C

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

C.

On December 31, 2024, Houser Company granted executives options to purchase 150,000 shares of the company's $50 par common stock at an option price of $60 per share. The Black-Scholes option-pricing model determined total compensation expense to be $3,000,000. The options become exercisable on January 1, 2025 and represent compensation for executives' past and future services over a three-year period beginningJanuary 1, 2025. What is the impact on Houser's total stockholders' equity for the year ended December 31, 2024, as a result of this transaction under the fair value method? a. $3,000,000 decrease b. $1,000,000 decrease c. $0 d. $1,000,000 increase

C.

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 a. preferred dividends in arrears. b. preferred dividends in arrears times (one minus the income tax rate). c. annual preferred dividend times (one minus the income tax rate). d. annual preferred dividend.

D

When computing diluted earnings per share, convertible bonds are a. ignored. b. assumed converted whether they are dilutive or antidilutive. c. assumed converted only if they are antidilutive. d. assumed converted only if they are dilutive.

D

In 2024, Eklund, Inc. issued 90,000 shares of $100 par value convertible preferred stock for $103 per share. Each share of preferred stock can be converted into three shares of Eklund's $25 par value common stock at the option of the preferred stockholder. In August 2025, 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 amount will be credited to additional paid-in capital from common stock as a result of the conversion? a. $1,530,000 b. $1,170,000 c. $2,250,000 d. $2,520,000

D.

The conversion of bonds is most commonly recorded by the a. incremental method. b. proportional method. c. market value method. d. book value method.

D.