Intermediate Ch 16&17&18

Recovery of impairment is prohibited by US GAAP for held-to-maturity securities. A. True B. False

A. True

The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues. True False

True The method of recording convertible bonds at the date of issue follows the same method used to record straight debt issues.

Trading securities are generally held for less than: A. 3 weeks. B. 3 months. C. 6 months. D. 12 months.

B. 3 months.

The conversion of preferred stock may be recorded by the A. incremental method B. book value method C. market value method D. par value method

B. book value method The conversion of preferred stock may be recorded by the book value method.

A requirement for a security to be classified as held-to-maturity is A. ability to hold the security to maturity. B. positive intent. C. the security must be a debt security. D. All of these answer choices are correct.

D. All of these answer choices are correct.

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 A. cost method. B. fair value method. C. divesture method. D. equity method.

D. equity method.

An ownership interest of 15% in another company's voting stock should be accounted for using the: A. consolidation method. B. equity method. C. cost method. D. fair value method.

D. fair value method.

Earnings per share is reported for both common and preferred stock. True False

False Earnings per share is reported for common stock only.

If there are multiple potentially dilutive securities, the one that should be used first to recalculate earnings per share is the one that is least dilutive. True False

False When there are multiple dilutive securities, the security which is most dilutive should be used first to recalculate earnings per share.

GAAP requires that the issuer of convertible debt record the liability and equity components separately. True False

False. Under GAAP, the issuer of convertible debt records the only liability.

During 2014, Jackson Company purchased 17,000 shares of Monticello Corp. common stock for $382,500 as an available-for-sale investment. The fair value of these shares was $373,150 at December 31, 2014. Jackson sold all of the Monticello stock for $27.25 per share on July 3, 2015, incurring $15,000 in brokerage commissions. Jackson Company should report a realized gain on the sale of stock in 2015 of A. $65,750. B. $75,100. C. $80,750. D. $90,100.

A. $65,750.

A fair value hedge may be used to offset the exposure to changes in the fair value of an unrecognized commitment. A. True B. False

A. True

An option to convert a convertible bond into shares of common stock is a(n)embedded derivative. A. True B. False

A. True

Both IFRS and U.S. GAAP use the same test to determine whether the equity method of accounting should be used. A. True B. False

A. True

Both the FASB and the IASB believe that reporting fair values for financial assets and liabilities provides more useful and relevant information relative to historical cost. A. True B. False

A. True

Derivatives should be recognized in the financial statements as assets and liabilities. A. True B. False

A. True

Gains and losses on cash flow hedges are recorded in equity as part of other comprehensive income. A. True B. False

A. True

Holdings between 20% and 50% of another company's voting stock are accounted for using the equity method. A. True B. False

A. True

In a variable-interest entity, stockholders may not absorb losses or receive the returns of a normal stockholder. A. True B. False

A. True

One required disclosure for financial instrument is that a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges must be presented. A. True B. False

A. True

The fair value and related carrying value of the instrument is a required disclosures related to financial instruments. A. True B. False

A. True

IFRS requires that the issuer of convertible debt record the liability and equity components separately. A. True B. False

A. True Under IFRS, the issuer of convertible debt records the liability and equity components separately.

Unrealized holding gains or losses are recognized as other comprehensive income for: A. available-for-sale securities. B. held-to-maturity securities. C. long-term securities. D. trading securities.

A. available-for-sale securities.

Kelley Co. has $2,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2014, the holders of $500,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $112,500. Kelley should record, as a result of this conversion, a A. credit of $78,125to Paid-in Capital in Excess of Par. B. credit of $421,875 to Paid-in Capital in Excess of Par. C. credit of $28,125 to Premium on Bonds Payable. D. loss of $540,000.

A. credit of $78,125to Paid-in Capital in Excess of Par. The book value of convertible bonds is transferred to common stock and additional paid-in capital when they are converted: $500,000 + ($112,500 × .25) - (500 × 30 × $30) = $78,125.

Accounting for stock option plans must be based on: A. the fair value method. B. the intrinsic value method. C. either the fair value method or the intrinsic value method. D. the option-pricing method.

A. the fair value method. The FASB requires a company to use the fair value method in accounting for stock options.

Lake Norman Corporation offered detachable 5-year warrants to by one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32). The price paid for 2,000, $1,000 bonds with the warrants attached was $205,000. The market price of the warrants without the bonds was $20,000. What amount should be allocated to the warrants? A. $20,000 B. $20,500 C. $24,000 D. $25,000

B. $20,500 The amount allocated to the warrants is: [$20,000/($20,000+ $180,000)]*$205,000= $20,500.

Pesca Company had 820,000 shares of common stock outstanding on January 1, issued 360,000 shares on April 1 and purchased 24,000 shares of treasury stock on December 1. The weighted average shares outstanding for the year is A. 888,000. B. 1,088,000. C. 1,156,000. D. 1,178,000.

B. 1,088,000. The weighted average shares outstanding for the year is:820,000 + (360,000 × 9/12) - (24,000 × 1/12) = 1,088,000.

Olive Branch Inc. had 400,000 shares of common stock issued and outstanding at December 31, 2013. On July 1, 2014 an additional 200,000 shares were issued for cash. Olive Branch also had stock options outstanding at the beginning and end of 2014 which allow the holders to purchase 60,000 shares of common stock at $28 per share. The average market price of Olive Branch's common stock was $35 during 2014. The number of shares to be used in computing diluted earnings per share for 2014 is A. 288,000 B. 312,000 C. 612,000 D. 660,000

B. 312,000 The weighted average number of shares outstanding is: (400,000 × 6/12) + (200,000 × 6/12) + [((35 - 28)/ 35) × 60,000] = 312,000.

Derivatives should be reported at amortized cost. A. True B. False

B. False

Derivatives such as fair value hedges are recorded at amortized cost. A. True B. False

B. False

In a variable-interest entity all stockholders have decision-making rights. A. True B. False

B. False

Investments are reported at market value on the balance sheet under the equity method. A. True B. False

B. False

To qualify for special accounting for hedges treatment, the hedging transaction must be at least moderately effective. A. True B. False

B. False

Unrealized gains and losses on held-to-maturity securities are reported on the income statement. A. True B. False

B. False

The measurement date for stock appreciation rights is the date of grant. A. True B. False

B. False The measurement date for stock appreciation rights is the date of exercise.

Which of the following statements related to impairments of investments is not correct? A. A bankruptcy being experienced by an investee is an example of a permanent loss in value. B. If the decline in value is considered temporary, the cost of the individual security is written down to a new cost basis. C. The amount of any write-down in value is accounted for as a realized loss. D. Subsequent increases/decreases in the fair value of impaired available-for-sale securities are included as other comprehensive income.

B. If the decline in value is considered temporary, the cost of the individual security is written down to a new cost basis.

If preferred stock is cumulative, and dividends have not been declared in the past two years or in the current year, what amount should be deducted from net income in the EPS calculation? A. Only the dividends in arrears. B. Only the current year's dividend. C. Both the current year's dividend and the dividends in arrears. D. Nothing should be deducted because no dividends were declared.

B. Only the current year's dividend. When preferred stock is cumulative and dividends aren't declared in the current year, the amount equal to the dividend that should have been declared for the current year only should be deducted from net income.

On June 30, 2014, an interest payment date, $1,000,000 of Greenville Co. bonds were converted into 25,000 shares of Greenville Co. common stock each having a par value of $5 and a market value of $54. There is $350,000 unamortized discount on the bonds. Using the book value method, Greenville would record A. no change in paid-in capital in excess of par. B. a $525,000 increase in paid-in capital in excess of par. C. a $135,000 increase in paid-in capital in excess of par. D. a $350,000 increase in paid-in capital in excess of par.

B. a $525,000 increase in paid-in capital in excess of par. The increase to paid-in capital in excess of par is $1,000,000 - (25,000 x $5) - $350,000 = $525,000.

Convertible bonds are usually converted into: A. preferred stock B. common stock C. other bonds at a lower interest rate D. stock warrants

B. common stock Convertible bonds are usually convertible into a specified number of common shares.

Dilutive convertible securities must be used in the computation of A. basic earnings per share only. B. diluted earnings per share only. C. diluted and basic earnings per share. D. non of these answer choices is correct.

B. diluted earnings per share only. Dilutive convertible securities must be used in the computation of 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) A. extraordinary item B. expense C. loss D. none of these answer choices is correct

B. expense A sweetener is accounted for as an expense.

A correct valuation is A. available-for-sale securities at amortized cost. B. held-to-maturity securities at amortized cost. C. trading securities at amortized cost. D. none of these answer choices are correct.

B. held-to-maturity securities at amortized cost.

The unrealized gains and losses on available-for-sale securities are: A. reported on individual securities. B. reported on the portfolio of investments. C. not reported at all. D. None of these answer choices are correct.

B. reported on the portfolio of investments.

In 2014, Chartres Inc., issued for $105 per share, 60,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Chartre's $25 par value common stock at the option of the preferred stockholder. In April 2015, 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 total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock? A. $60,000 B. $900,000 C. $1,800,000 D. $2,300,000

C. $1,800,000 The preferred stock's par value and any additional paid-in capital is transferred to Common Stock and Additional Paid-in Capital when preferred stock is converted: $6,300,000 - (60,000 × 3 × $25) = $1,800,000.

At December 31, 2014, Twin Rivers Company had 450,000 shares of common stock issued and outstanding, 350,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on September 1, 2014. Net income for the year ended December 31, 2014, was $1,160,000. What should be Twin Rivers' 2014 earnings per common share, rounded to the nearest penny? A. $2.58 B. $2.73 C. $3.10 D. $3.32

C. $3.10 $1,160,000/[350,000 + (100,000 × 4/12) = $3.10.

Foucault Company. owns 40,000 of the 100,000 outstanding shares of Mango Inc. common stock. During 2015, Mango earns $640,000 and pays cash dividends of $480,000. If the beginning balance in Foucault's investment account was $430,000, the balance at December 31, 2015 should be A. $366,000. B. $430,000. C. $494,000. D. $686,000.

C. $494,000.

On January 1, 2014, Western Carolina Company granted Andy Eggers, an employee, an option to buy 2,000 shares of Western Carolina Co. stock for $25 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $21,000. Eggers exercised his option on September 1, 2014, and sold his 2,000 shares on December 1, 2014. Quoted market prices of Western Carolina Co. stock during 2014 were January 1 - $25 per share September 1 - $30 per share December 1 - $34 per share The service period is for three years beginning January 1, 2014. As a result of the option granted to Eggers, using the fair value method, Western Carolina should recognize compensation expense for 2014 on its books in the amount of A. $15,000 B. $21,000 C. $5,000 D. $4,200

C. $5,000 The compensation expense of $21,000 over the three year service period results in an annual expense of $7,000.

Which earnings per share amounts are reported in a complex capital structure? A. Basic EPS only. B. Diluted EPS only. C. Basic and diluted EPS. D. Basic and simple EPS.

C. Basic and diluted EPS. Both basic and diluted earnings per share are reported in a complex capital structure.

What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? A. Decrease and no effect B. Increase and no effect C. Decrease and increase D. Increase and decrease

C. Decrease and increase The acquisition of treasury stock will decrease stockholders' equity and increase earnings per share.

What will the numerator of the diluted EPS calculation consist of when convertible preferred stock is being included? A. Net income + Preferred dividends (Net of tax effect). B. Net income + Preferred dividends. C. Net income. D. Net income - Preferred dividends.

C. Net income. Only net income because it is assumed that the convertible preferred shares have been converted and are outstanding as common shares.

The proceeds from the sale of debt with detachable stock warrants should be allocated between the two securities based on the: A. face value of the bonds. B. fair market of the bonds. C. aggregate fair market value of the bonds and the warrants. D. face value of the bonds and market value of the warrants.

C. aggregate fair market value of the bonds and the warrants. The proceeds from the sale of debt with warrants should be allocated based on the aggregate fair market value of the bonds and the warrants.

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. allocated to the periods benefited by the employee's required service. Compensation expense resulting from a compensatory stock option plan is generally allocated to the periods benefited by the employee's required service.

When convertible debt is retired: A. only losses on retirement are recognized. B. only gains on retirement are recognized. C. either a gain or a loss on retirement is recognized. D. neither gains nor losses are recognized.

C. either a gain or a loss on retirement is recognized. Both gains and losses are recognized when convertible debt is retired.

An ownership interest of 30% of the common stock of another corporation should be accounted for using the: A. consolidated method. B. cost method. C. equity method. D. fair value method.

C. equity method.

Recovery of impairment A. is not permitted by IFRS for held-for-collection securities. B. is permitted by US GAAP for held-to-maturity securities. C. is permitted by IFRS for held-for-collection securities but prohibited by US GAAP for held-to-maturity securities. D. is prohibited by both IFRS and US GAAP for any debt security.

C. is permitted by IFRS for held-for-collection securities but prohibited by US GAAP for held-to-maturity securities.

Investments in debt securities should be recorded on the date of acquisition at A. lower of cost or market. B. market value. C. market value plus brokerage fees and other costs incidental to the purchase. D. face value plus brokerage fees and other costs incidental to the purchase.

C. market value plus brokerage fees and other costs incidental to the purchase.

The unrealized holding gain or loss on trading securities is reported as: A. other comprehensive income. B. a separate component of stockholders' equity. C. part of net income. D. an addition to (deduction from) the trading securities account balance.

C. part of net income.

Under the equity method, if an investee company generates net income, the investor company: A. does not recognize any share of the net income. B. records its proportionate share of the net income as dividend income. C. records its proportionate share as an increase in its investment account. D. records its proportionate share as an unrealized gain.

C. records its proportionate share as an increase in its investment account.

The treasury stock method of computing incremental shares applies to: A. convertible bonds only. B. convertible preferred stock only. C. stock options and warrants. D. All convertible securities.

C. stock options and warrants. The treasury stock method is used to compute incremental shares from the assumed exercise of stock options and warrants.

Unrealized holding gains or losses which are recognized in income are from securities classified as A. held-to-maturity. B. available-for-sale. C. trading. D. none of these answer choices are correct.

C. trading.

In 2013, Newton Inc. issued for $105 per share, 100,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Newton's $30 par value common stock at the option of the preferred stockholder. In August 2014, 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 total amount should be credited to additional paid-in capital, common stock as a result of the conversion of the preferred stock into common stock? A. $375,000 B. $780,000 C. $1,250,000 D. $1,500,000

D. $1,500,000. The preferred stock has a value of ($105 X 100,000 shares) $10,500,000. The common stock has a par value of ($30 X 300,000 shares) $9,000,000. The difference, $1,500,000, represents additional paid-in capital, common stock.

Savannah Corporation purchased 35,000 shares of common stock of the Boulet Corporation for $50 per share on January 2, 2014. During 2014, Boulet Corporation had 140,000 shares of common stock outstanding, paid cash dividends of $120,000, and reported net income of $320,000. Savannah Corporation should report revenue from investment for 2014 in the amount of A. $0. B. $30,000. C. $50,000. D. $80,000.

D. $80,000.

Debt securities may be classified as: A. held-to-maturity. B. trading. C. available-for-sale. D. All of these answer choices are correct.

D. All of these answer choices are correct.

All of the following statements are true regarding IFRS and their treatment of financial instruments, including dilutive securities, except: A. under IFRS, convertible bonds are "bifurcated". B. under IFRS, the fair value of shares and options awarded to employees is recognized over the period to which the employees' services relate. C. a significant difference in IFRS and U.S. GAAP exists with respect to the accounting for convertible debt. D. IFRS records combined bond issue's debt with equity components.

D. IFRS records combined bond issue's debt with equity components. IFRS records separately the bond issue's debt and equity components.

Which of the following is not one of the commonly used stock compensation plans? A. Stock option plans. B. Stock appreciation rights plans. C. Restricted-stock plans. D. Stock conversion plans.

D. Stock conversion plans. Stock option plans, stock appreciation rights plans, and restricted-stock plans are all commonly used stock compensations plans.

Select the correct statement regarding the impact on stockholders' equity of a transfer from available-for-sale to trading. A. The unrealized gain or loss at the date of transfer is recognized in income. B. The unrealized gain or loss at the date of transfer carried as a separate component of stockholders' equity is amortized over the remaining life of the security. C. The separate component of stockholders' equity is increased or decreased by the unrealized gain or loss at the date of transfer. D. The unrealized gain or loss at the date of transfer increases or decreases stockholders' equity.

D. The unrealized gain or loss at the date of transfer increases or decreases stockholders' equity.

A debt security is transferred from one category to another. Generally accepted 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? A. Transfer from trading to available-for-sale B. Transfer from available-for-sale to trading C. Transfer from held-to-maturity to available-for-sale D. Transfer from available-for-sale to held-to-maturity

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

On its December 31, 2014, balance sheet, Estes Co. reported its investment in trading securities, which had cost $500,000, at fair value of $475,000. At December 31, 2015, the fair value of the securities was $492,500. What should Estes report on its 2015 income statement as a result of the increase in fair value of the investments in 2015? A. $0. B. Unrealized loss of $7,500. C. Realized gain of $17,500. D. Unrealized gain of $17,500.

D. Unrealized gain of $17,500.

Under the fair-value method of recording stock options, companies will report A. a lower compensation cost relative to the intrinsic- value method. B. the same compensation expense relative to the intrinsic-value method. C. no increase in compensation expense. D. a higher compensation cost relative to the intrinsic-value method.

D. a higher compensation cost relative to the intrinsic-value method. The fair-value method results in greater compensation costs relative to the intrinsic-value method.

Disclosure for compensation plans should include all of the following except the: A. number of shares under option. B. weighted average fair value of options granted during the year. C. significant assumptions used to estimate the fair values of the stock options. D. all of these answer choices are required disclosures.

D. all of these answer choices are required disclosures. Disclosure for compensation plans should include the number of shares under option, the weighted average fair value of options granted during the year, and significant assumptions used to estimate the fair values of the stock options.

The diluted EPS computation considers all of the following except the impact of: A. convertible securities. B. stock options. C. stock warrants. D. antidilutive securities.

D. antidilutive securities. Antidilutive securities are never considered in any EPS computation.

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 A. fairly present diluted earnings per share on a prospective basis. B. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis. C. reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share. D. be antidilutive

D. be antidilutive. If the exercise price of the options or warrants exceeds the average market price, the computation would be antidilutive.

Debt securities that are bought and held primarily for sale in the near term are reported at: A. cost. B. amortized cost. C. net realizable value. D. fair value.

D. fair value.

The issuance of warrants arise under all of the following situations except to: A. make different types of securities more attractive to new investors. B. give existing stockholders a preemptive right to purchase stock. C. provide compensation to executives. D. give bondholders the preemptive right to purchase additional stock.

D. give bondholders the preemptive right to purchase additional stock. All of the answer choices are correct except to give bondholders the preemptive right to purchase stock.

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 (0ne minus the income tax rate). C. annual preferred dividend times (one minus the income tax rate). D. none of these answer choices is correct.

D. none of these answer choices is correct. In a simple capital structure an amount equal to the dividend that should have been declared for the current year only is subtracted from net income.

An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as A. an extraordinary item shown as a direct increase to retained earnings. B. a current gain resulting from holding securities. C. a note or parenthetical disclosure only. D. other comprehensive income and included in the equity section of the balance sheet.

D. other comprehensive income and included in the equity section of the balance sheet.

Detachable stock warrants outstanding should be classified as A. contingent liabilities. B. reductions of capital contributed in excess of par value. C. prepaid expenses. D. paid-in capital.

D. paid-in capital. Detachable stock warrants outstanding should be classified as paid-in capital.

Complex capital structures require all of the following disclosures except: A. a description of pertinent rights of the various securities outstanding. B. a reconciliation of the numerators and denominators of the basic and diluted per share computations. C. the effect given preferred dividends in determining income available to common stockholders. D. the effect of conversions before year-end.

D. the effect of conversions before year-end. All of the options are required disclosures except the effect of conversions before year-end.

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 A. reflected currently in income, but not as an extraordinary item. B. reflected currently in income as an extraordinary item. C. treated as a prior period adjustment. D. treated as a direct reduction of retained earnings.

D. treated as a direct reduction of retained earnings. When preferred stock is converted to common, any excess of the par value of the common shares issued over the carrying amount of the preferred being converted reduced retained earnings.

When a company has cumulative preferred stock outstanding, the preferred dividend is subtracted from net income in the earnings per share calculation whether the dividend has been declared or not. True False

True Dividends on cumulative preferred stock are subtracted from net income in the earnings per share calculation whether the dividend has been declared or not.

In a complex capital structure, diluted earnings per share is not reported when the securities included in the capital structure are antidilutive. True False

True If the securities are antidilutive, the diluted earnings per share is not reported.

Nondetachable warrants do not require an allocation of the proceeds between the bonds and the warrants. True False

True Similar to accounting for convertible bonds, companies record the entire proceeds from nondetachable warrants as debt.

Companies remeasure compensation expense each period for liability-based stock appreciation rights. True False

True Compensation expense is remeasured each period for liability-based stock appreciation rights.