ACC 312 CH 16
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.
Which type of stockholders must companies calculate available income for?
Common stockholders
Where should companies present per share amounts for discontinued operations?
Either on the face of the income statement or in the notes
Which method of reporting stock-based compensation is supported by the FASB?
Fair value method
How should the proceeds from the sale of debt with detachable stock warrants be allocated between the two securities?
How should the proceeds from the sale of debt with detachable stock warrants be allocated between the two securities?
In which situation(s) are dilutive convertible securities used?
In the computation of diluted earnings per share only.
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 as income.
Several of Merlin Corporation's employees have forfeited their stock options because they failed to satisfy the associated service requirements. How should Merlin adjust its books to reflect this forfeiture?
It should debit Paid-in Capital—Stock Options and credit Compensation Expense.
Accounting for which of the following is similar to that for convertible bonds?
Nondetachable warrants
Which of the following are often granted with an exercise price that is equal to the market price of the stock when it is granted?
Option awards
When stockholders for Goldstein Treasures converted 1,000 shares of $5 par value preferred stock to 2,000 shares of $5 par value common stock, the company recorded a credit of $10,000 to Common Stock, a debit of $5,000 to Preferred Stock, and a debit of $2,300 to Paid-in Capital in Excess of Par—Preferred Stock. The remaining $2,700 should be debited to
Retained Earnings.
What is the term used to describe long-term options to buy common stock at a fixed price that are sold with other securities?
Stock warrants
The presence of which of the following would prevent a company from having a simple capital structure?
Stock warrants that expire in five years
When considering stock compensation plans, what is intrinsic value?
The difference between the market price of the stock and the exercise price of the options at the grant date
For a company with common stock outstanding only, what can be determined by dividing the net income by the weighted average number of shares outstanding?
The earnings per share
What happens when stock-based compensation expense is left out of income?
The reported income is biased.
If a warrant is issued with a very short rate of duration, which of the following assumptions can be made?
The warrant was issued to grant a preemptive right to purchase common stock.
How are convertible bonds treated when computing diluted earnings per share?
They are assumed converted only if they are dilutive.
In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, which of the following is true of the additional shares?
They are considered outstanding at the beginning of the earliest year reported.
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.
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 of the following statements is accurate with regard to compensation expense resulting from a compensatory stock option plan?
This expense is generally allocated over the periods benefited by the employee's required service.
In computing earnings per share for a simple capital structure, which of the following is the amount that should be used as the denominator?
Weighted-average number of common shares outstanding
When should the proceeds from an issue of debt securities having stock warrants not be allocated between debt and equity features?
When the warrants issued with the debt securities are nondetachable.
Securities that increase earnings per share upon conversion or exercise are called ________ securities.
antidilutive
A company with a complex capital structure will likely report __________ in their financial statements.
basic and diluted EPS
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%
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
The if-converted method is often used when calculating the diluted EPS for
convertible securities.
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
If the effect of inclusion of a convertible bond issue is __________, it should be included in the diluted earnings per share computation.
dilutive
At the time of conversion from 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.
When a preferred stock is convertible, the number of shares stockholders receive when they convert is
fixed
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 considering stock compensation plans, the difference between the market price of the stock and the exercise price of the options at the grant date is known as ________ value.
intrinsic
A company issued convertible debt securities. Over the life of the bonds, 75% of the bondholders decided to exercise their conversion option. Therefore, the company will have journal entries for
issuance, conversion, and retirement.
Warrants issued with other securities are best described as
long-term options to buy common stock at a fixed price.
The earnings per share can be found with which of the following equations?
net income / weighted average number of shares
Companies should classify _______ as equity because the issuer has no obligation to pay dividends or repurchase the stock.
nonredeemable common shares
If a firm notes that its stock price has risen since the grant date for an employee stock option plan, it should ________ associated with that plan.
not make any adjustments to the compensation expense
Which of the following is a correct formula to determine weighted average number of shares outstanding?
outstanding shares X fraction of the year
One advantage of a restricted-stock plan is that
restricted stock never becomes completely worthless.
A corporation's capital structure is ________ if it consists only of common stock or includes no potential common stock that upon conversion or exercise could dilute earnings per common share.
simple
When additional consideration is given to convertible bondholders to encourage conversion, it is called a(n)
sweetener
Which of the following is most similar to a stock warrant issued with debt?
the conversion privilege in a convertible bond
Milton Company had 300,000 shares of common stock issued and outstanding at December 31, 2020. During 2021, no additional common stock was issued. On January 1, 2021, Milton issued 400,000 shares of nonconvertible preferred stock. During 2021, Milton declared and paid $150,000 cash dividends on the common stock and $125,000 on the nonconvertible preferred stock. Net income for the year ended December 31, 2021, was $800,000. The 2021 earnings per common share, rounded to the nearest penny will be
$2.25
Houghton Entertainment issued 5,000 stock options in 2019. The stock option states that the holder can purchase one share of common stock for $22 between 2019 and 2023. By the end of 2020, none of the stock options had yet been exercised. When calculating the diluted EPS, with which of the following average market values for common stock would the stock options be excluded from the calculation?
$20.50
Margot purchased a unit comprising one share of stock and one detachable warrant on May 4, 2019. The warrant was exercisable at $22.40 per share, good for five years, and trading at $2 per warrant. On September 9, 2020, Margot exercised her warrant. At that time, the stock was selling for $26 per share. How much cash did Margot pay per share of stock on 9/9/2020?
$22.40
At December 31, 2020, the Riley Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2020. The net income for the year ended December 31, 2020, was $1,360,000. The 2020 earnings per common share, rounded to the nearest penny would be
$3.20
On April 1, 2020, RL Enterprises issued $150,000 of 8% nonconvertible bonds at 104. Bonds are due on March 31, 2040. Each $1,000 bond was issued with 25 detachable stock warrants entitling the bondholder to purchase one share of common stock (par value $25) for $50. On the date of issue, the fair value of the stock was $40 per share and the fair value of the warrants was $2. If RL's bonds sell at 95 without the warrant, how much should RL record as paid-in capital from the warrants?
$7,800
Which of the following pieces of information is included in the disclosure for a compensation plan? 1. The method of estimating the fair value of the goods or services rendered, or the fair value of the equity granted, during the period. 2. The cash flow effects resulting from share-based payment arrangements. 3. The nature and terms of any compensation plans that existed during the period and the potential effects of those arrangements on shareholders.
1, 2, and 3
Which of the following are commonly used stock compensation plans? 1. stock conversion plans 2. stock appreciation rights plans 3. restricted-stock plans
2 and 3 only
Fultz Chiropractic acquired the Colby Massage Parlor in August 2018. As part of the transaction, they promised Colby stockholders 5,000 additional shares in August 2020, which coincides with the two-year anniversary of the acquisition. In which year should they add the promised shares to the diluted EPS calculation?
2020
In June 2019, Choate Outdoor Equipment bought out Devore Hunting Supplies. As part of the transaction, they promised Devore stockholders 50,000 additional shares in June 2024, which coincides with the five-year anniversary of the acquisition. In which year should they add the promised shares to the diluted EPS calculation?
2024
On January 1, 2020, the Marcy Corporation had 250,000 shares of its $2 par value common stock outstanding. On March 1, Marcy sold an additional 500,000 shares on the open market at $20 per share. On May 1st, Marcy issued a 20% stock dividend. On August 1, Marcy purchased 280,000 shares and immediately retired the stock. On November 1, 400,000 shares were sold for $25 per share.The weighted-average number of shares outstanding for 2020 is
750,000
Robin Company had 700,000 shares of common stock outstanding on January 1. It 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. What is the weighted average number of shares outstanding for the year?
772,000
In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, which of the following is the amount that should be deducted as an adjustment to the numerator (earnings)?
Annual preferred dividend
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.
How should detachable stock warrants outstanding be classified?
As paid-in capital