INT 2 Exam 2

When recording the conversion of bonds to common stock, there will always be a debit to ________ and a credit to

Bonds Payable; Common Stock.

How are shares of convertible preferred stock similar to convertible bonds?

Both cause an increase in the number of common stock shares upon conversion.

Thomas and Laura are both journalizing the conversion of convertible securities. Thomas is working with convertible bonds, and Laura is working with shares of convertible preferred stock. How will their journalizing processes be similar?

Both will record an increase in the number of common stock shares.

Common stock and additional paid-in capital will be affected in which of the following ways when a company declares and issues a 10% stock dividend? Assume that the fair value of the shares exceeds the par value of the common stock.

Common stock and additional paid-in capital will both increase.

Which of the following indicates a company has satisfied its performance obligation?

Company has transferred physical possession of the asset.

On the date of issuance, what is the main difference between recording convertible bonds and convertible preferred stock?

Convertible bonds are classified as a liability, while convertible preferred stock is classified as equity.

Which of the following companies is most likely to record its employee stock-purchase plan as non-compensatory?

Cormier Doors offered common stock to employees for $27.80 when the market price was $29.00.

Additional paid-in capital and retained earnings are both aspects of earned capital.

False

Stockholders have the right to vote for directors of the company due to the preemptive right.

False

What is the first step in the process for revenue recognition?

Identify the contract with customers.

In which situation(s) are dilutive convertible securities used?

In the computation of diluted earnings per share only.

How should the transaction price for multiple performance obligations be allocated?

It should be allocated based on what the company could sell the goods for on a standalone basis.

How should the difference between the cash acquisition price of retired convertible debt and the carrying amount of the debt be recorded by the issuer?

It should be recorded currently in income.

O'Brien Industries paid above par value to acquire treasury stock. They held the treasury stock for three months and then sold it again for a price higher than the acquisition price. If O'Brien uses the cost method to account for treasury stock transactions, what effect would the resale of the treasury stock have on additional paid-in capital, retained earnings, and total stockholders' equity?

It would increase both additional paid-in capital and total stockholders' equity and have no effect on retained earnings.

Which of the following demonstrates the share system of corporate stocks?

Jeffrey can sell his shares of stock in Gilbert Enterprises to anyone he wants without the knowledge or permission of Gilbert Enterprises.

Which of the following will result in Jones Company recording a contract asset?

Jones Company has delivered product A to Smith Company but will not receive payment until they also deliver product B.

On June 30, 2020, Dean & Associates paid a cash dividend to stockholders that was declared on June 10, 2020. On which date will the company make a journal entry crediting cash?

June 30, 2020 only

Great Visions Company entered into a contract with ABC Carpet Company on January 15, 2020. The delivery date of March 1 was specified in the contract, but Great Visions did not deliver until March 31, 2020. According to the contract, a full payment of $75,000 was due 30 days after delivery. When should this contract be recorded?

March 31, 2020

Which of the following parties will always sacrifice inherent rights in return for special preferences?

Preferred stock

Dailey Lighting and Lamps issued $1,000 par value convertible bonds at 103. Which of the following accounts will record a credit at the time of issuance? Select all that apply.

Premium on Bonds Payable Bonds Payable

How should a company record a property dividend?

Record the dividend by debiting retained earnings for an amount equal to the fair value of the property to be distributed.

Which of the following is an advantage of restricted stock plans?

Restricted stock better aligns the employee incentives with the companies' incentives.

Which of the following is an inaccurate statement about consignment arrangements?

Since the merchandise shipped remains the property of the consignor, the consignee has no legal obligation regarding any damage to the merchandise.

Which of the following is most likely to be declared as a result of the company's desire to reduce the unit market price per share?

Stock Split

Why does a stock dividend require a formal journal entry in the financial accounting records when a stock split does not?

Stock dividends represent a transfer from retained earnings to capital stock.

When additional consideration is given to convertible bondholders to encourage conversion, it is called a(n)

Sweetner

Preferred stock has no voting rights.

TRUE

Redeemable preferred stock should be classified as a liability on the balance sheet.

TRUE

When using the if-converted method for including convertible bonds in the diluted EPS calculation, what assumptions will you need to make?

The bonds were converted at the beginning of the period, so no interest was paid during the period.

Which of the following is a defining characteristic for securities classified as equity?

The issuer has no obligation to pay dividends or repurchase the securities.

Which of the following is one reason corporations issue convertible debt?

They can obtain financing at lower rates.

Which of the following is true about antidilutive securities?

They should be ignored in all earnings per share calculations.

When accounting for stock warrants issued with other securities, how should the warrant and the security be treated if the warrant is detachable?

They should be treated as two separate securities.

If a company has issued nonconvertible cumulative preferred stock, how should they treat the annual dividend from these preferred stocks when computing diluted earnings per share?

They should deduct the annual dividend from net income whether declared or not.

Winter Sports Apparel issued convertible debt securities. Which of the following statements is true regarding their journal entries as a result of this issuance?

They will have a single journal entry at issuance for all securities, separate entries each time bonds are converted to common stock, and a single entry at the end of the bond term to retire all non-converted bonds.

A company uses the treasury stock method to account for stock options and warrants when calculating dilutive EPS. How would they treat the proceeds assumed to be received upon exercise of the options and warrants in the dilutive EPS calculation?

They would use the proceeds to calculate the number of common shares assumed to be repurchased at the average market price.

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

To share proportionately in all management decisions.

Secret reserves are created when a corporation undervalues recorded assets as a result of the issuance of stock for property or services.

True

Which of the following is a major difference between convertible debt and stock warrants?

Upon exercise of the warrants, the holder has to pay a certain amount of cash to obtain the shares.

Total stockholders' equity represents which of the following?

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

Which of the following indicates a performance obligation exists?

a company provides a distinct product or service

CleanSoftware Company licensed software to technology firms for five years. The company also provides consulting services and support for their software. The company estimates standalone values for consulting services and support as $125,000 and for software licensing the value is $260,000, making the total transaction price $385,000. Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes

a credit to Sales Revenue for $260,000 and a credit to Unearned Service Revenue of $125,000.

Palmer Music manufactures and sells MP3 players and sound systems that include a 180-day warranty on product defects. The company also sells 2-year extended warranties. On May 10, Palmer sold a sound system for $3,850 and an extended warranty for another $1,200. What should be included in the journal entry used to record this transaction?

a credit to Unearned Service Revenue of $1,200

Which of the following is a characteristic of a non-compensatory stock option plan?

all full-time employees are allowed to participate on an equitable basis.

Securities that increase earnings per share upon conversion or exercise are called ________ securities.

antidilutive

Which of the following rights of common stockholders has been eliminated by many corporations? The right to share proportionately in

any new issues of stock of the same class.

If Jon wants to establish a corporation in Maryland, then he will need to submit

articles of incorporation.

If a public company has issued common stock, preferred stock, and convertible bonds, they should report ________ on their financial statements.

basic EPS and diluted EPS

A company with a complex capital structure will likely report __________ in their financial statements.

basic and diluted EPS

Because shareholders are residual owners, they

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

When computing diluted EPS, the if-converted method assumes that securities are converted as of the

beginning of the earliest period reported (or at time of issuance, if later).

Workman Dentistry has issued straight bonds at an interest rate of 7%, preferred stock at a dividend rate of 9%, and common stock at a price that suggested a 12% rate of return. If Workman decided to issue convertible bonds, you would expect the interest rate to be ________ percent.

below 7%

Which of the following is a primary source of stockholders' equity?

both income retained by the corporation and contributions by stockholders

When calculating diluted EPS based on the inclusion of convertible bonds, you will need to adjust

both the numerator and denominator.

Recognizing revenue from a contract with a customer

cannot occur until a contract exists.

Which of the following is considered an ownership interest in a corporation?

capital stock

When using the book value method to report conversion of bonds or preferred stock to common stock, all the journal entries are based on the ________ of the security being converted.

carrying amount

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

common stock

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

common stock.

Irby Paving Company has issued 3,000 stock warrants that have not been exercised. The stock warrant states that the holder can purchase one share of common stock for $37 between 2018 and 2023. If the average market price for Irby's common stock is $35.50 in 2020, the stock warrants would be

considered antidilutive.

Which of the following securities has characteristics similar to both debt and equity?

convertible bonds

Byers Flooring has $3,000,000 of 8% convertible bonds outstanding. Interest is paid semi-annually on January 31 and July 31, and each $1,000 bond is convertible into 30 shares of $30 par value common stock. On July 31, 2020, the holders of $960,000 bonds exercised the conversion privilege. On the date of conversion, the market price of the bonds was 105, the market price of the common stock was $36, and the total unamortized bond premium was $210,000. As a result of this conversion, Byers should record a

credit of $163,200 to Paid-in Capital in Excess of Par.

Sage Technology is a full-service technology company that provides equipment, installation services, and training. Products and services can be purchased separately or as a bundled package. Big Container Corporation purchased the bundled package from Sage for $120,000. Estimated standalone fair values are: Computer equipment ($75,000), installation ($50,000), and training ($25,000) on March 15, 2020. The journal entry to record the transaction on March 15, 2020 will include a

credit to Unearned Service Revenue of $20,000. allocate: 25,000/150,000*120,000= 20,000

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

cumulative preferred stock. **Correct! Any passed dividend on cumulative preferred stock constitutes a dividend in arrears.

If Kinney Railway offers to pay holders of convertible bonds $150,000 to convert their bonds to common stock, they should record a $150,000

debit to Debt Conversion Expense.

When calculating diluted EPS, only securities that ________ should be added to the calculation compared to securities used for the basic EPS calculation.

decrease earnings per share

After a stock split, a company's par value per share will __________ and the number of shares outstanding will __________.

decrease; increase

On January 1, 2020, Hanson Incorporated had an initial public offering of 10,000 shares of $10 par value common stock. The shares sold for $15 each. Six months later, Hanson reacquired 1,000 shares of its stock for $12 per share. The acquisition of these treasury shares

decreased total stockholders' equity.

Convertible bonds, convertible preferred stock, stock warrants, and stock options should all be considered in the calculation for

diluted EPS but not basic EPS.

At the time of conversion of convertible preferred stock to common stock, if the par value of the common shares exceeds the carrying amount of the preferred shares, the issuer must

directly reduce retained earnings for the amount of the difference.

Fuller Enterprises reports a credit balance in retained earnings. Because of this, if they have sufficient cash, they may decide to

distribute the assets to the stockholders.

Which of the following are two major categories into which stockholders' equity is generally classified?

earned capital and contributed capital

If the issuer has no obligation to pay dividends or repurchase the security, it is usually classified as

equity

Which method of reporting stock-based compensation is supported by the FASB?

fair value method

A transaction should be treated as a(n) ________ when a company has an obligation or right to repurchase an asset for an amount greater than or equal to its selling price.

financing transaction

Under what circumstances must a company account for a contract modification as a new contract?

if goods or services are distinct and the company has the right to receive the standalone price

When calculating the diluted EPS for convertible securities, most companies use the ________ method.

if-converted

When a company performs a stock split or stock dividend in the middle of the year, they must restate the weighted average number of shares to reflect a(n)

increased number of shares from the beginning of the year

When consigned goods are transferred from the consignor to the consignee, freight costs should be considered

inventoriable by the consignor.

Which of the following will affect the additional paid-in capital?

issuance of par-value stock at a price over par

The disclosures for __________ should be made in the equity section of the balance sheet rather than the notes to the financial statements.

liquidation preferences

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

no-par stock.

Donnelly Automotive recently issued convertible bonds at an interest rate of 3.87 percent. Based on this, you can expect Donnelly's ________ 3.87 percent.

nonconvertible bonds to have an interest rate higher than

Some states require that corporations restrict their legal capital from distribution to stockholders in order to protect against loss for creditors. As a result, very few companies

pay dividends in amounts equal to their legally available retained earnings.

The value of a single owner's investment in a corporation depends on the corporation's

profitability.

Which of the following are required to report earnings per share information?

public companies but not private companies

If investors want to determine if a company is profitable for its owners, which ratio should they calculate?

return on common stockholders' equity

Which of the following is an inaccurate representation regarding revenue recognition?

revenue from services rendered is recognized when cash is received or when services have been performed.

The adjusting entries for expected sales returns include a debit to

sales returns and allowances.

Which of the following are created if, as a result of the issuance of stock for property or services, a corporation undervalues recorded assets?

secret reserves

The presence of which of the following would prevent a company from having a simple capital structure?

stock warrants that expire in five years

The residual interest in a corporation belongs to

the common stockholders.

Which of the following is the dominant form of business organization in terms of people employed?

the corporation

Legal capital for a corporation is defined as

the par value of all capital stock issued.

When a corporation issues its capital stock in payment for services, which of the following would be the least appropriate basis for recording the transaction?

the par value of the shares issued

For revenue arrangements with multiple performance obligations, if an allocation is needed, the transaction price is allocated to the various performance obligations based on

the relative standalone selling prices.

Which of the following best describes the right to share proportionately in management of the corporation?

the right to vote for directors

When journalizing the sale of common stock, a debit to cash that is greater than the credit to the common stock account means that

the stated value of the common stock is less than the per share price investors were willing to pay.

Morrison Enterprises decided to issue preferred stock rather than common stock in order to obtain a higher rate of return on common stockholders' equity. Morrison is trying to

trade on the equity.

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

unlimited liability of stockholders.

Under which of the following conditions can companies use the expected value to estimate variable consideration?

when a company has a large number of contracts with similar characteristics

When should multiple performance obligations that exist in a contract be accounted for as a single performance obligation?

when each service is interdependent and interrelated

Sage Technology is a full-service technology company that provides equipment, installation services, and training. Products and services can be purchased separately or as a bundled package. Big Container Corporation purchased the bundled package from Sage for $120,000. Estimated standalone fair values are: Computer equipment ($75,000), installation ($50,000), and training ($25,000) on March 15, 2020. The transaction price allocated to equipment, installation, and training is

$60,000, $40,000 and $20,000 respectively.

Which of the following is the accurate way to determine the amount allocated to a stock using the proportional method?

(fair value of stock ÷ aggregate fair value) X lump sum

Which of the following are primary considerations management must make before declaring a cash dividend? 1. The tax impact on stockholders of the receipt of the dividends 2. The legal permissibility of the dividend 3. The availability of funds to pay the dividend

2 and 3 only

Addison Construction issued stock warrants that are exercisable at $20 each to obtain 10,000 shares of common stock. If the average market price of the common stock was $25, exercising the warrants would increase the weighted average number of shares outstanding by how much if Addison uses the treasury stock method?

2000 **10,000x20 (par)= 200,000 **200,000/25(market)= 8,000 **10,000-8,000= 2,000

Haskins Stone & Brick had the following security transactions in 2020: 1. Balance on January 1, 2020: 3,600,000 shares of common stock outstanding 2. Added on April 1, 2020: 800,000 shares of common stock 3. Added on July 1, 2020: 400,000 shares of common stock 4. Issued on October 1, 2020: 20,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in 2020. When they compute basic and diluted earnings per share, what will their weighted average number of shares be?

4,400,000 for basic EPS and 4,500,000 for diluted EPS. Calculations: (3,600,000 * 12/12) + (800,000 * 9/12) + (400,000 * 6/12) = 3,600,000 + 600,000 + 200,000 = 4,400,000 For the diluted earnings per share, they will also add (20,000 * 20 * 3/12) = 100,000 to the weighted average number of shares for a total of 4,500,000 shares

Under which of the following circumstances will total stockholders' equity increase?

After neither a stock dividend nor a stock split.

What is meant by the capital of a corporate organization?

Amounts paid-in and earned that represents stockholders' equity in the corporation.

On January 4, 2020, Newell Water Company issued 10-year convertible bonds at 105. On October 17, 2020, Newell encouraged bondholders to convert their bonds into common stock, with each investor receiving common stock with an aggregate par value equal to the total face amount of the bonds. Newell's common stock was selling at 50% above par value at the time of the conversion. How should the cash proceeds from the issuance of the convertible bonds on January 4, 2020 be reported?

As a liability for the entire proceeds.