Chapter 15. 16.17

7. During 2017, Grambling Company purchased 10,000 shares of Southern Corp. common stock for $215,000 as an investment (no significant influence). The fair value of these securities was $289,000 at December 31, 2017. During 2018, Grambling sold all of the Southern stock for $226,000. Grambling Company should report a realized gain on the sale of stock in 2018 of (LO 2) (a)$11,000. (b)$25,000. (c)$26,000. (d)$37,000.

(a)$11,000. The difference between the selling price ($226,000) and the cost ($215,000) of available-for-sale securities is the gain (loss) on sale.

Blowing Rock Inc. has 5,000 shares of 5%, $100 par value, cumulative preferred stock and 30,000 shares of $1 par value common stock outstanding at December 31, 2017. There were no dividends declared in 2015. The board of directors declares and pays a $45,000 dividend in 2016 and in 2017. What is the amount of dividends received by the common stockholders in 2017? (LO 5) (a)$15,000 (b)$25,000 (c)$45,000 (d)$0

(a)$15,000 The annual preferred dividend is ($5 × 5,000) = $25,000. The $45,000 dividend payment in 2016 would leave $5,000 in arrears. In 2017, the preferred shareholders would get $30,000 and the common shareholders would get $15,000.

Durango Inc. had net income for 2017 of $2,120,000 and earnings per share on common stock of $5. Included in the net income was $300,000 of bond interest expense related to its long-term debt. The income tax rate for 2015 was 30%. Dividends on preferred stock were $400,000. The payout ratio on common stock was 25%. What were the dividends on common stock in 2017? (LO 4) (a)$430,000. (b)$530,000. (c)$482,500. (d)$645,000.

(a)$430,000. ($2,120,000 net income − $400,000 P/S dividends) × 25% equals $430,000 in common stock dividends.

10. During 2017, Jackson Company purchased 17,000 shares of Monticello Corp. common stock for $382,500 as an investment. The fair value of these shares was $373,150 at December 31, 2017. Jackson sold all of the Monticello stock for $27.25 per share on July 3, 2018, incurring $15,000 in brokerage commissions. Jackson Company should report a realized gain on the sale of stock in 2018 of (LO 2) (a)$65,750. (b)$75,100. (c)$80,750. (d)$90,100.

(a)$65,750. Net proceeds of ($463,250 less $15,000) $448,250 less $382,500 results in a realized gain of $65,750.

18. The following information relates to Boulder Company for 2017: Realized gain on sale of available-for-sale debt securities $45,000 ---------------------------------------------------------------- Unrealized holding gains arising during the period on available-for-sale debt securities 105,000 ---------------------------------------------------------------- Reclassification adjustment for gains included in net income 30,000 ----------------------------------------------------------------- Boulder's 2017 other comprehensive income is (LO 4) (a)$75,000. (b)$120,000. (c)$150,000. (d)$180,000.

(a)$75,000. $105,000 less $30,000 reclassification results in $75,000.

1. All of the following are key similarities between GAAP and IFRS with respect to accounting for investments except: (a)IFRS and GAAP require the same accounting for equity securities. (b)IFRS and GAAP apply the equity method to significant influence equity investments. (c)IFRS and GAAP have a fair value option for financial instruments. (d)the accounting for impairment of investments is similar, although IFRS allows recovery of impairment losses.

(a)IFRS and GAAP require the same accounting for equity securities.

2. Which of the following statements is correct? (a)IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component. (b)Both IFRS and GAAP assume that when there is choice of settlement of an option for cash or shares, share settlement is assumed. (c)IFRS separates the proceeds of a convertible bond between debt and equity, based on relative fair values. (d)Both GAAP and IFRS separate the proceeds of convertible bonds between debt and equity.

(a)IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component.

On September 14, 2017, Gayot Company reacquired 12,000 shares of its $1 par value common stock for $40 per share. Gayot uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit (LO 2) (a)Treasury Stock for $480,000. (b)Common Stock for $480,000. (c)Common Stock for $24,000 and Paid-in Capital in Excess of Par for $456,000. (d)Treasury Stock for $24,000.

(a)Treasury Stock for $480,000. Treasury Stock is debited for the cost of the stock: 12,000 × $40 = $480,000.

4. Unrealized holding gains or losses are recognized as other comprehensive income for: (LO 1) (a)available-for-sale debt securities. (b)held-to-maturity securities. (c)long-term securities. (d)trading securities.

(a)available-for-sale debt securities. Unrealized holding gains/losses are recognized as other comprehensive income for available-for-sale debt securities.

1. 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, 2017, 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 (LO 1) (a)credit of $78,125 to 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 $78,125 to 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 × 0.25) − (500 × 30 × $30) = $78,125.

The residual interest in a corporation belongs to (LO 1) (a)the common stockholders. (b)the preferred stockholders. (c)the Board of Directors. (d)Management.

(a)the common stockholders. The residual interest in a corporation belongs to the common stockholders.

3. IFRS requires companies to measure their financial assets at fair value except when based on: (a)whether the equity method of accounting is used. (b)whether the financial asset is a debt investment. (c)whether the financial asset is an equity investment. (d)whether an investment is classified as trading.

(a)whether the equity method of accounting is used.

Terpsichore Inc., has 1,000 shares of 5%, $100 par value, cumulative preferred stock and 200,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. No dividends were paid in 2016. In 2017, $75,000 of dividends are declared and paid. If the preferred stock is nonparticipating, what are the dividends received by the preferred stockholders in 2017? (LO 5) (a)$5,000. (b)$10,000. (c)$42,500. (d)$65,000.

(b)$10,000. The annual preferred dividend is ($5 × 1,000) = $5,000; so dividends in arrears at 12/31/2016 would be $5,000. 2017 preferred dividends would be $5,000 + $5,000 = $10,000.

7. Lake Norman Corporation offered detachable 5-year warrants to buy 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 Lake Norman bonds without the warrants was $180,000, and the market price of the warrants without the bonds was $20,000. What amount should be allocated to the warrants? (LO 2) (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.

Presented below is information related to Polaris Corporation: Common Stock, $1 par | $10,350,000 ---------------------------------------------------- Paid-in Capital in Excess | of Par—Common Stock 6,520,000 ---------------------------------------------------- Paid-in Capital in Excess of | Cost—Treasury Stock | 400,000 -------------------------------------------------- Retained Earnings | 9,543,000 __________________________________________________________________ Treasury Common Stock | (at cost) 695,000 __________________________________________________________________ The total stockholders' equity of Polaris Corporation is (LO 4) (a)$25,318,000. (b)$26,118,000. (c)$27,108,000. (d)$27,508,000.

(b)$26,118,000. $10,350,000 + $6,520,000 + $400,000 + $9,543,000 − $695,000 = $26,118,000.

Duszynski Company issues 20,000 shares of its $0.50 par value common stock having a market value of $25 per share and 6,000 shares of its $25 par value preferred stock having a market value of $50 per share for a lump sum of $750,000. The proceeds allocated to the common stock is (LO 1) (a)$450,000 (b)$468,750 (c)$500,000 (d)$705,000

(b)$468,750 ($500,000 / $800,000) × $750,000 = $468,750.

9. Rosenblum Company's equity securities portfolio which is appropriately included in current assets is as follows: December 31, 2017 ----------------------------------------------- Cost Fair Unrealized Value Gain (Loss) Boston Corp. $450,000 $421,000 $(29,000) Greening, Inc. 233,000 255,000 22,000 ------------------------------------------------------- $683,000 $676,000 $(7,000) Ignoring income taxes, what amount should be reported as a charge against income in Rosenblum's 2017 income statement if 2017 is Rosenblum's first year of operation? (LO 2) (a)$0. (b)$7,000. (c)$22,000. (d)$29,000.

(b)$7,000. The net unrealized loss on Rosenblum's portfolio of trading securities results in a charge against income of $7,000.

15. 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 (LO 4) (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.

18. Olive Branch Inc. had 400,000 shares of common stock issued and outstanding at December 31, 2016. On July 1, 2017 an additional 200,000 shares were issued for cash. Olive Branch also had stock options outstanding at the beginning and end of 2017 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 2017. The number of shares to be used in computing diluted earnings per share for 2017 is (LO 5) (a)288,000 (b)512,000 (c)612,000 (d)660,000

(b)512,000 The weighted average number of shares outstanding is: (400,000 × 6/12) + (600,000 × 6/12) + [((35 − 28)/ 35) × 60,000] = 512,000.

Which of the following does not represent a pair of GAAP/IFRS-comparable terms? (a)Additional paid-in capital/Share premium. (b)Treasury stock/Repurchase reserve. (c)Common stock/Share capital—ordinary. (d)Preferred stock/Preference shares.

(b)Treasury stock/Repurchase reserve.

4. On June 30, 2017, 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 (LO 1) (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 × $5) − $350,000 = $525,000.

3. Under IFRS, convertible bonds: (a)are separated into the bond component and the expense component. (b)are separated into debt and equity components. (c)are separated into their components based on relative fair values. (d)All of the above.

(b)are separated into debt and equity components.

8. 8. The conversion of preferred stock may be recorded by the (LO 1) (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.

The term reserves is used under IFRS with reference to all of the following except: (a)gains and losses on revaluation of property, plant, and equipment. (b)capital received in excess of the par value of issued shares. (c)retained earnings. (d)fair value differences.

(b)capital received in excess of the par value of issued shares.

2. Convertible bonds are usually converted into: (LO 1) (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.

17. Under the equity method, the investment account is decreased by all of the following except the investor's proportionate share of: (LO 3) (a)dividends paid by the investee. (b)declines in the fair value of the investment. (c)the losses of the investee. (d)All of these answer choices are correct.

(b)declines in the fair value of the investment. The investment account is not affected by changes in the investment's fair value under the equity method.

1. A correct valuation is (LO 1) (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. A correct valuation is held-to-maturity securities at amortized cost.

4. Select the investment accounting approach with the correct valuation approach: (a) Not Held-for-Collection Held-for-Collection ----------------------------------------------------------------- Amortized cost Amortized cost (b) Not Held-for-Collection Held-for-Collection ---------------------------------------------------------------- Fair value Fair value (c) Not Held-for-Collection Held-for-Collection ---------------------------------------------------------------- Fair value Amortized cost (d) Not Held-for-Collection Held-for-Collection ----------------------------------------------------------------- Amortized cost Fair value

(c) Not Held-for-Collection Held-for-Collection Fair value Amortized cost

3. In 2017, 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? (LO 1) (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.

14. At December 31, 2017, 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, 2017. Net income for the year ended December 31, 2017, was $1,160,000. What should be Twin Rivers' 2017 earnings per common share, rounded to the nearest penny? (LO 4) (a)$2.58 (b)$2.73 (c)$3.03 (d)$3.32

(c)$3.03 $1,160,000/[350,000 + (100,000 × 4/12) ] = $3.03.

McCaffrey Corporation owned 14,000 shares of Harper Corporation's $5 par value common stock. These shares were purchased in 2010 for $326,000. On May 4, 2017, McCaffrey declared a property dividend of one share of Harper for every twenty shares of McCaffrey stock held by a stockholder. On that date, when the market price of Harper was $34 per share, there were 280,000 shares of McCaffrey outstanding. What net reduction in retained earnings would result from this property dividend? (LO 3) (a)$150,000 (b)$176,000 (c)$326,000 (d)$476,000

(c)$326,000 The fair value of the shares distributed is: 280,000 McCaffrey shares / 20 = 14,000 shares of Harper issued, times $34 current market price equals $476,000. Retained earnings is increased by the unrealized gain of $150,000 ($476,000 − $326,000) and decreased by the fair value of the shares distributed for a net reduction of $326,000.

Hise Inc., has 4,000 shares of 9%, $100 par value, cumulative preferred stock and 200,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. The board of directors declared and paid a $25,000 dividend in 2016. In 2017, $74,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2017? (LO 3) (a)$11,000 (b)$36,000 (c)$47,000 (d)$74,000

(c)$47,000 The annual preferred dividend is ($9 × 4,000) =$36,000 so dividends in arrears at 12/31/2016 would be $11,000. 2017 preferred dividends would be $11,000 + $36,000 = $47,000.

15. Foucault Company owns 40,000 of the 100,000 outstanding shares of Mango Inc. common stock. During 2018, 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, 2018 should be (LO 3) (a)$366,000. (b)$430,000. (c)$494,000. (d)$686,000.

(c)$494,000. $430,000 plus ($640,000 × 40%) less ($480,000 × 40%) equals $494,000.

Presented below is information related to Schoenthaler Corporation: Common Stock , $5 par $1,100,000 Paid-in Capital in Excess of Par — Common Stock 400,000 Preferred 5 ½% Stock, $100 par 1,500,000 Paid-in Capital in Excess of Par — Preferred Stock 500,000 Retained Earnings 2,000,000 Paid-in Capital in Excess of Cost — Treasury Stock 150,000 The total stockholders' equity of Schoenthaler Corporation is (LO 4) (a)$3,650,000. (b)$5,350,000. (c)$5,650,000. (d)$5,500,000.

(c)$5,650,000. Total stockholders' equity is ($1,100,000 + $400,000 + $1,500,000 + $500,000 + $2,000,000 + $150,000) = $5,650,000.

10. On January 1, 2017, 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, 2017, and sold his 2,000 shares on December 1, 2017. Quoted market prices of Western Carolina Co. stock during 2017 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, 2017. As a result of the option granted to Eggers, using the fair value method, Western Carolina should recognize compensation expense for 2017 on its books in the amount of (LO 3) (a)$15,000. (b)$21,000. (c)$7,000. (d)$4,200.

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

Presented below is information related to Kaenzig Corporation: Common Stock , $1 par $2,100,000 Paid-in Capital in Excess of Par — Common Stock 550,000 Preferred 8 ½% Stock, $100 par 1,700,000 Paid-in Capital in Excess of Par — Preferred Stock 500,000 Retained Earnings 950,000 Treasury Common Stock (at cost) 250,000 The total stockholders' equity of Kaenzig Corporation is (LO 4) (a)$2,300,000. (b)$5,300,000. (c)$7,400,000. (d)$7,900,000.

(c)$7,400,000. Total stockholders' equity is ($2,100,000 + $550,000 + $1,700,000 + $950,000 + $2,350,000 − $250,000) = $7,400,000.

On January 1, 2017, Vancleave Corporation had 110,000 shares of its $0.001 par value common stock outstanding. On November 27, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 28, 2017. What was the impact of the 10% stock dividend on the balance of the retained earnings account? (LO 3) (a)$11,000 decrease (b)$77,000 decrease (c)$88,000 decrease (d)No effect

(c)$88,000 decrease The amount transferred from retained earnings in a small stock dividend is based on the fair value of the stock: (110,000 × 0.10) = 11,000 shares × $8 = $88,000.

17. What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? (LO 4) (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.

Which of the following best describes a possible result of treasury stock transactions by a corporation? (LO 2) (a)May increase but not decrease retained earnings. (b)May increase net income if the cost method is used. (c)May decrease but not increase retained earnings. (d)May decrease but not increase net income.

(c)May decrease but not increase retained earnings. Treasury stock transactions by a corporation may decrease but not increase retained earnings.

Which of the following features of preferred stock makes the security more like debt than an equity instrument? (LO 1) (a)Participating (b)Voting (c)Redeemable (d)Noncumulative

(c)Redeemable Redeemable preferred stock is more like debt than the other choices.

Under IFRS, the amount of capital received in excess of par value would be credited to: (a)Retained Earnings. (b)Contributed Capital. (c)Share Premium. (d)Par value is not used under IFRS.

(c)Share Premium.

Which of the following dividends do not reduce total stockholders' equity? (LO 3) (a)Liquidating dividends. (b)Cash dividends. (c)Stock dividends. (d)All of these answer choices reduce total stockholders' equity.

(c)Stock dividends. All of these answer choices reduce total stockholders' equity except stock dividends.

At the date of declaration of a large common stock dividend, the entry should include (LO 3) (a)a credit to Common Stock Dividend Payable. (b)a credit to Paid-in Capital in Excess of Par. (c)a debit to Retained Earnings. (d)a credit to Cash.

(c)a debit to Retained Earnings. At the date of declaration of a large common stock dividend, the entry should include a debit to Retained Earnings.

11. The proceeds from the sale of debt with detachable stock warrants should be allocated between the two securities based on the: (LO 2) (a)face value of the bonds. (b)fair market value 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.

9. Compensation expense resulting from a compensatory stock option plan is generally (LO 3) (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.

5. Under IFRS, a company: (a)should evaluate only equity investments for impairment. (b)accounts for an impairment as an unrealized loss, and includes it as a part of other comprehensive income and as a component of other accumulated comprehensive income until realized. (c)calculates the impairment loss on debt investments as the difference between the carrying amount plus accrued interest and the expected future cash flows discounted at the investment's historical effective-interest rate. (d)All of the above.

(c)calculates the impairment loss on debt investments as the difference between the carrying amount plus accrued interest and the expected future cash flows discounted at the investment's historical effective-interest rate.

12. An ownership interest of 30% of the common stock of another corporation should be accounted for using the: (LO 3) (a)consolidated method. (b)cost method. (c)equity method. (d)fair value method.

(c)equity method. The equity method is used for all holdings between 20% and 50%.

20. Recovery of impairment (LO 9) (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. Recovery of impairment is permitted by IFRS for held-for-collection securities but prohibited by US GAAP for held-to-maturity securities.

Cash dividends are paid on the basis of the number of shares (LO 3) (a)authorized. (b)issued. (c)outstanding. (d)outstanding less the number of treasury shares.

(c)outstanding. Dividends are paid on issued shares less treasury shares (or outstanding shares).

13. Under the equity method, if an investee company generates net income, the investor company: (LO 3) (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. Under the equity method, the investor's investment account is increased for its proportionate share of the investee company's net income.

All of the following are key similarities between GAAP and IFRS with respect to accounting for dilutive securities and EPS except: (a)the model for recognizing stock-based compensation. (b)the calculation of basic and diluted EPS. (c)the accounting for convertible debt. (d)the accounting for modifications of share options, when the value increases.

(c)the accounting for convertible debt.

2. Unrealized holding gains or losses which are recognized in income are from securities classified as (LO 1) (a)held-to-maturity. (b)available-for-sale. (c)trading. (d)none of these answer choices are correct.

(c)trading. Unrealized holding gains or losses which are recognized in income are from securities classified as trading.

5. 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 2017, 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? (LO 1) (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 × 100,000 shares) $10,500,000. The common stock has a par value of ($30 × 300,000 shares) $9,000,000. The difference, $1,500,000, represents additional paid-in capital, common stock.

16. Savannah Corporation purchased 35,000 shares of common stock of the Boulet Corporation for $50 per share on January 2, 2017. During 2017, 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 2017 in the amount of (LO 3) (a)$0. (b)$30,000. (c)$50,000. (d)$80,000.

(d)$80,000. Under the equity method, the investor's share of the investee's income is reported as revenue: 25% × $320,000 = $80,000.

Gulfport Corporation was organized in January 2017 with authorized capital of $0.0001 par value common stock. On February 1, 2015, shares were issued at par for cash. On March 1, 2017, the corporation's attorney accepted 5,000 shares of common stock in settlement for legal services with a fair value of $25,250. Additional paid-in capital would increase on: (LO1) 2/1/2017 3/1/2017 _________________________________________________________ 1) Yes | No ________________________________________________________ 2) Yes | Yes ________________________________________________________ 3) No | No ________________________________________________________ 4) No | Yes ________________________________________________________ (a)1 (b)2 (c)3 (d)4

(d)4 The first issuance of stock is sold at par so no additional paid-in capital is recorded. The attorney accepted the stock at ($25,250 / 5,000 shares) = $5.05, a value greater than par so additional paid-in capital is recorded.

Under IFRS, a purchase by a company of its own shares results in: (a)an increase in treasury shares. (b)a decrease in assets. (c)a decrease in equity. (d)All of the above.

(d)All of the above.

5. A requirement for a security to be classified as held-to-maturity is (LO 1) (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. Requirements for a security to be classified as held-to-maturity include the ability to hold the security to maturity, positive intent, and that the security be a debt security.

2. Which of the following statements is correct? (a)IFRS permits the fair value option for the equity method of accounting. (b)GAAP permits recovery of impairment losses. (c)Under IFRS, non-trading equity investments are accounted for at amortized cost. (d)IFRS and GAAP both have a trading investment classification.

(d)IFRS and GAAP both have a trading investment classification.

13. Which of the following is not one of the commonly used stock compensation plans? (LO3) (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.

19. 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? (LO 4) (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 The type of transfer being described is a transfer from available-for-sale to held-to-maturity.

Which of the following is false? (a)Under GAAP, companies cannot record gains on transactions involving their own shares. (b)Under IFRS, companies cannot record gains on transactions involving their own shares. (c)Under IFRS, the statement of stockholders' equity is a required statement. (d)Under IFRS, a company records a revaluation surplus when it experiences an increase in the price of its common stock.

(d)Under IFRS, a company records a revaluation surplus when it experiences an increase in the price of its common stock.

8. On its December 31, 2017, balance sheet, Estes Co. reported its investment in trading debt securities, which had cost $500,000, at fair value of $475,000. At December 31, 2018, the fair value of the securities was $492,500. What should Estes report on its 2018 income statement as a result of the increase in fair value of the investments in 2018? (LO 1) (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. To adjust the Securities Fair Value Adjustment account from a $25,000 credit balance to a $7,500 credit balance, the company would debit the account and credit an unrealized gain for the difference, $17,500.

12. Under the fair-value method of recording stock options, companies will report (LO 3) (a)a lower compensation cost relative to the intrinsic-value method. (b)the same compensation cost 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

20. The diluted EPS computation considers all of the following except the impact of: (LO 5) (a)convertible securities. (b)stock options. (c)stock warrants. (d)antidilutive securities.

(d)antidilutive securities. Antidilutive securities are never considered in any EPS computation.

19. 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 (LO 5) (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.

5. Anazazi Co. offers all its 10,000 employees the opportunity to participate in an employee share-purchase plan. Under the terms of the plan, the employees are entitled to purchase 100 ordinary shares (par value $1 per share) at a 20% discount. The purchase price must be paid immediately upon acceptance of the offer. In total, 8,500 employees accept the offer, and each employee purchases on average 80 shares at $22 per share (market price $27.50). Under IFRS, Anazazi Co. will record: (a)no compensation since the plan is used to raise capital, not compensate employees. (b)compensation expense of $5,500,000. (c)compensation expense of $18,700,000. (d)compensation expense of $3,740,000.

(d)compensation expense of $3,740,000.

On October 31, 2017, Lexington Corp. declared and issued a 12% common stock dividend. Prior to this dividend, Lexington had 302,000 shares of $0.001 par value common stock issued and outstanding. The fair value of Lexington's common stock was $16.75 per share on October 31, 2017. As a result of this stock dividend, the company's total stockholders' equity (LO 3) (a)increased by $302,000. (b)decreased by $5,058,198. (c)decreased by $5,058,500. (d)did not change.

(d)did not change. As a result of this stock dividend, Lexington's total stockholders' equity did not change

11. If the parent company owns 40% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the (LO 3) (a)cost method. (b)fair value method. (c)divesture method. (d)equity method.

(d)equity method. Holdings of more than 50% are accounted for under the equity method.

14. An ownership interest of 15% in another company's voting stock should be accounted for using the: (LO 3) (a)consolidation method. (b)equity method. (c)cost method. (d)fair value method.

(d)fair value method. A holding of 15% in another company's voting stock would allow the investor company little or no influence over the investee company and would be accounted for using the fair value method.

3. Debt securities that are bought and held primarily for sale in the near term are reported at: (LO 1) (a)cost. (b)amortized cost. (c)net realizable value. (d)fair value.

(d)fair value. These are classified as trading securities and are reported at fair value.

6. The issuance of warrants arises under all of the following situations except to: (LO 2) (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

16. 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 (LO 4) (a)preferred dividends in arrears. (b)preferred dividends in arrears times (one 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.

6. An unrealized holding gain on a company's available-for-sale debt securities should be reflected in the current financial statements as (LO 1) (a)an item shown as a direct increase to retained earnings. (b)a current gain in the income statement 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. An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as other comprehensive income and included in the equity section of the balance sheet.

4. Mae Jong Corp. issues $1,000,000 of 10% bonds payable which may be converted into 10,000 shares of $2 par value ordinary shares. The market rate of interest on similar bonds is 12%. Interest is payable annually on December 31, and the bonds were issued for total proceeds of $1,000,000. In accounting for these bonds, Mae Jong Corp. will: (a)first assign a value to the equity component, then determine the liability component. (b)assign no value to the equity component since the conversion privilege is not separable from the bond. (c)first assign a value to the liability component based on the face amount of the bond. (d)use the "with-and-without" method to value the compound instrument.

(d)use the "with-and-without" method to value the compound instrument.

Additional paid-in capital is not affected by the issuance of: (LO 1) (a)stated value stock. (b)par value stock. (c)no-par stock. (d)preferred stock.

...(c)no-par stock. The issuance of no-par stock has no effect on additional paid-in capital.