Chapter 16 Quiz

In order to retain certain key executives, Smiley Corporation granted them incentive stock options on December 31, 2017. 150,000 options were granted at an option price of $35per share. Market prices of the stock were as follows: December 31, 2018 $46 per share December 31, 2019 51 per share The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2018. The Black-Scholes option pricing model determines total compensation expense to be $1,500,000. What amount of compensation expense should Smiley recognize as a result of this plan for the year ended December 31, 2018 under the fair value method? a) $750,000 b) $1,500,000 c) $2,625,000 d) $1,650,000

a) $750,000 1500000/2=750000

On July 1, 2018, 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) a $9,000 increase in paid-in capital in excess of par b) a $12,000 increase in paid-in capital in excess of par c) a $18,000 increase in paid-in capital in excess of par d) no change in paid-in capital in excess of par

a) $9,000 increase in paid-in capital in excess of par 150000-6000-(3000*45)= $9000

Stine Inc. had 1,000,000 shares of common stock issued and outstanding at December 31, 2017. On July 1, 2018 an additional 1,000,000 shares were issued for cash. Stine also had stock options outstanding at the beginning and end of 2018 which allow the holders to purchase 300,000 shares of common stock at $28 per share. The average market price of Stine's common stock was $35 during 2018. The number of shares to be used in computing diluted earnings per share for 2018 is a) 1,560,000 b) 2,060,000 c) 1,740,000 d) 2,240,000

a) 1,560,000 1,000,000 * 6/12 + 2,000,000 * 6/12 + [( 35 - 28 ) / 35 ] * 300,000 = 500,000 + 1,000,000 + 60,000 = 1,560,000 shares

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

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

Convertible bonds a) may be exchanged for equity securities b) have priority over other indebtedness c) pay interest only in the event earnings are sufficient to cover the interest d) are usually secured by a first of second mortgage

a) may be exchanged for equity securities

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2017 at 96.1 plus accrued interest. The bonds were dated April 1, 2017 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2018, $1,200,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion. What should be the amount of the unamortized bond discount on April 1, 2018 relating to the bonds converted? a) $44,400 b) $43,200 c) $46,800 d) $23,400

b) $43,200

The following information is available for Barone Corporation: January 1, 2018 Shares outstanding 4,000,000 April 1, 2018 Shares issued 640,000 July 1, 2018 Treasury shares purchased 240,000 October 1, 2018 Shares issued in a 100% stock dividend 4,400,000 The number of shares to be used in computing earnings per common share for 2018 is a) 5,460,000 b) 8,720,000 c) 9,041,600 d) 8,760,000

b) 8,720,000 shares outstanding = 4,000,000*2*.25=2,000,000 issued shares = 4,640,000*2*.25= 2,320,000 reacquired treasury shares = 4,400,000*2*.25= 2,200,000 stock dividend=8,800,000*.25=2,200,000 2,000,000+ 2,320,000+ 2,200,000+ 2,200,000= 8,720,000

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

b) annual preferred dividend

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 disregarded in the computation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common stock. b) are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share c) are not used to calculate the number of common shared repurchased at the average market price, when computing diluted earnings per share d) are added, net of tax, to the numerator of the calculation for diluted earnings per share

b) 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 a) ignored b) assumed converted only if they are dilutive c) assumed converted only if they are antidilutive d) assumed converted whether they are dilutive or antidilutive

b) assumed converted only if they are dilutive

The major difference between convertible debt and stock warrants is that upon exercise of the warrants a) the stock involved is restricted and can only be sold by the recipient after a set period of time b) the holder has to pay a certain amount of cash to obtain the shares c) no paid-in capital in excess of par can be a part of the transaction d) the stock is held by the company for defined period of time before they are issued to the warrant holder

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

In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are a) considered outstanding at the beginning of the year. b. ) weighted by the number of days outstanding weighted by the number of days outstanding c) considered outstanding at the beginning of the earliest year reported d) weighted by the number of months outstanding

c) considered outstanding at the beginning of the earliest year reported

An executive pays no taxes at the time of exercise in a(an) a) taxes would be paid in all of these b) stock appreciation rights plan c) incentive stock option plan d) nonqualified stock option plan

c) incentive stock option plan

On March 1, 2018, Ruiz Corporation issued $2,000,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2038. 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, 2018, 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, 2018 as paid-in capital from stock warrants? a) $85,200 b) $100,000 c) $73,600 d) $104,000

d) $104,000

Fultz Company had 300,000 shares of common stock issued and outstanding at December 31, 2017. During 2018, no additional common stock was issued. On January 1, 2018, Fultz issued 400,000 shares of nonconvertible preferred stock. During 2018, 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, 2018, was $960,000. What should be Fultz's 2018 earnings per common share, rounded to the nearest penny? a) $1.15 b) $2.10 c) $3.20 d) $2.70

d) $2.70 960000-15000/300000= 2.70

Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when a) the market value of the warrants is not readily available b) exercise of the warrants within the next few fiscal periods seems remote c) the allocation would result in a discount in the debt security d) the warrants issued with the debt securities are nondetachable

d) the warrants issued with the debt securities are nondetachable