Ch 16 MC

At the beginning of 2020 Bradley Company established a stock appreciation rights (SAR) program where executives receive cash at the date of exercise (any time in the next 3 years) for the difference between the market price of the stock and the pre-established price of $15 on 5,000 SARs. The fair value of the SARs on December 31, 2020 is $5. The service period runs for 2 years (2020- 2021). If the fair value of the SARs on December 31, 2021 is $2, the journal entry to be made for 2021 by Bradley Company for the SARs is: A. DR - Liability Under Stock Appreciation Plan 2,500 CR- Compensation Expense 2,500 B. Dr- Compensation Expense 10,000 CR-Liability Under Stock Appreciation Plan 10,000 C. DR-Liability Under Stock Appreciation Plan 10,000 CR-Compensation Expense 10,000 D. DR-Compensation Expense 12,500 CR- Liability Under Stock Appreciation Plan 12,500

A

Kasravi Co. had net income for 2020 of $200,000. The average number of shares outstanding for the period was 100,000 shares. The average number of shares under outstanding options (although not exercisable at this time), at an option price of $30 per share is 6,000 shares. The average market price of the common stock during the year was $36. What should Kasravi Co. report for earnings per share for the year ended 2020? Basic Earnings Per Share Diluted Earnings Per Share A. $2.00 $1.98 B. $2.00 $1.88 C. $1.90 $1.88 D. $1.92 $1.90

A

Schieble Corporation offered detachable 5-year warrants to buy one share of common stock (par value $2) at $30 (at a time when a share was selling for approximately $45). The price paid for 2,000, $1,000 bonds with the warrants attached was par, or $200,000. Assuming the fair value of the Schieble bonds was known to be $180,000, but the fair value of the warrants without the bonds cannot be determined, what are the amounts that should be allocated to the warrants and the bonds? Warrants Bonds A. $20,000 $180,000 B. $0 $200,000 C. $20,000 $200,000 D. $0 $180,000

A

When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be: A. reflected currently in income, but not as a net-of-tax amount. B. reflected currently in income as a net-of-tax amount. C. treated as a prior period adjustment. D. treated as an adjustment of additional paid-in capital.

A

Due to the importance of earnings per share information, it is required to be reported by all: Public Companies Nonpublic Companies A. Yes Yes B. Yes No C. No No D. No Yes

B

Mohamed Corporation has net income for the year of $360,000 and a weighted average number of common shares outstanding during the period of 125,000 shares. The company has a convertible debenture bond issue outstanding. The bonds were issued two years ago at par ($1,500,000), carry a 7% interest rate, and are convertible into 25,000 shares of common stock. The company has a 40% tax rate. Diluted earnings per share are: A. $3.10. B. $2.82. C. $2.68. D. $2.42.

B

On December 31, 2020, the Granados Company granted some of its executives options to purchase 100,000 shares of the company's $10 par common stock at an option price of $50 per share. The Black-Scholes option pricing model determines total compensation expense to be $400,000. The options become exercisable on January 1, 2021, and represent compensation for executives' services over a two-year period beginning January 1, 2021. At December 31, 2021 none of the executives had exercised their options. What is the impact on Granados' net income for the year ended December 31, 2021 as a result of this transaction under the fair value method? A. $400,000 decrease. B. $200,000 decrease. C. $0. D. $200,000 increase.

B

The major difference between convertible debt and detachable stock warrants is that upon exercise of the warrants: A. the stock is held by the company for a 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. C. the stock involved is restricted and can only be sold by the recipient after a set period of time. D. no paid-in capital in excess of par can be a part of the transaction.

B

Which of the following is not an advantage of restricted stock plans? A. Restricted stock better aligns the employee incentives with the companies' incentives. B. Restricted stock can be sold before vesting occurs. C. Restricted stock never becomes completely worthless. D. Restricted stock generally results in less dilution to existing stockholders.

B

Wiebe Inc. purchased Mobley Co. and agreed to give stockholders of Mobley Co. 10,000 additional shares in 2021 if Mobley Co.'s net income in 2020 is$300,000; in 2019 Mobley Co.'s net income is $290,000. Wiebe Inc. has net income or 2019 of $100,000 and has an average number of common shares outstanding for 2019 of 100,000 shares. What should Wiebe report as earnings per share for 2019? Basic Earnings Per Share Diluted Earnings Per Share A. $1.00 $1.00 B. $ .91 $1.00 C. $1.00 $ .91 D. $ .91 $ .91

B

Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is: A. the ease with which convertible debt is sold even if the company has a poor credit rating. B. the fact that equity capital has issue costs that convertible debt does not. C. that many corporations can obtain financing at lower rates. D. that convertible bonds will always sell at a premium.

C

During 2020 Clark Company had a net income of $50,000 and 50,000 shares of common stock and 10,000 shares of preferred stock outstanding. Clark declared and paid dividends of $.50 per share to common and $6.00 per share to preferred. For 2020 Clark Company should report diluted earnings (loss) per share of: A. $.83-1/3. B. $1.00. C. ($.20). D. $.50.

C

On January 1, 2020, Kihnley Corporation had 25,000 shares of its $5 par value common stock outstanding. On March 1, the Corporation sold an additional 50,000 shares on the open market at $25 per share. The Corporation issued a 20% stock dividend on May 1. On August 1, the Corporation purchased 28,000 shares and immediately retired the stock. On November 1, 40,000 shares were sold for $30 per share. What is the weighted average number of shares outstanding for 2020? A. 51,667 B. 71,667 C. 75,000 D. 102,000

C

On January 2, 2020, Terry Co. issued at par $500,000 of 7% convertible bonds. Each $1,000 bond is convertible into 10 shares of common stock. No bonds were converted during 2020. Terry had 50,000 shares of common stock outstanding during 2020. Terry's 2020 net income was $600,000 and the income tax rate was 30%. Terry's diluted earnings per share for 2020 would be (rounded to the nearest penny): A. $12.49. B. $12.00. C. $11.35. D. $10.46.

C

On July 1, 2020, Dombrink Company granted Gil Geis, an employee, an option to buy 400 shares of Dombrink Co. stock for $20 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 $1,200. Geis exercised his option on October 1, 2020 and sold his 400 shares on December 1, 2020. Quoted market prices of Dombrink Co. stock during 2020 were: July 1 $20 per share October 1 $24 per share December 1 $27 per share The service period is for three years beginning January 1, 2020. As a result of the option granted to Geis, using the fair value method, Dombrink should recognize compensation expense for 2020 on its books in the amount of: A. $ 0. B. $300. C. $400. D. $1,200.

C

On June 30, 2020, Vila Corporation granted compensatory stock options for 10,000 shares of its $24 par value common stock to certain of its key employees. The market price of the common stock on that date was $31 per share and the option price was $28. Using a fair value option pricing model, total compensation expense is determined to be $32,000. The options are exercisable beginning January 1, 2022, providing those key employees are still in the employ of the company at the time the options are exercised. The options expire on June 30, 2023. On January 4, 2022, when the market price of the stock was $36 per share, all options for the 10,000 shares were exercised. The service period is for two years beginning January 1, 2020. Using the fair value method, what should be the amount of compensation expense recorded by Vila Corporation for these options on December 31, 2020? A. $ 0. B. $ 7,500. C. $16,000. D. $32,000.

C

Tierra Linda Co. issued 5,000 shares of common stock (par value $2) upon conversion of 5,000 shares of preferred stock (par value $1) that was originally issued for a $400 premium. The entry would include a debit to retained earnings for: A. $5,400. B. $5,000. C. $4,600. D. -0-

C

Warrants exercisable at $20 each to obtain 10,000 shares of common stock were outstanding during a period when the average market price of the common stock was $25. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding common shares by: A. 10,000. B. 1,667. C. 2,000. D. 8,000.

C

Warrants exercisable at $25 each to obtain 30,000 shares of common stock were outstanding during a period when the average market price of the common stock was $30. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding shares by: A. 30,000. B. 25,000. C. 5,000. D. 0.

C

Which of the following is not a characteristic of a noncompensatory stock option plan? A. Substantially all full-time employees may participate on an equitable basis. B. The plan offers no substantive option feature. C. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company. D. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others.

C

Binder Corporation issued at a premium of $50 a $1,000 bond convertible into 200 shares of common stock (par value $3). At the time of the conversion the unamortized premium is $40, the market value of the bond is $1,200, and the stock is quoted on the market at $6. If the bond is converted into common, what is the amount of the gain or loss to be recorded on redemption of the bonds payable? A. $240 B. $200 C. $160 D. $0

D

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 a net-of-tax amount. B. reflected currently in income as a net-of-tax amount. C. treated as a prior period adjustment. D. treated as a direct reduction of retained earnings

D

With respect to stock appreciation rights, the measurement date for measuring compensation is the date: A. of grant. B. the stock appreciates above a predetermined amount. C. the rights mature. D. of exercise.

D