IA. Topic 9

A company should report per share amounts for income before extraordinary items, but not for income from continuing operations.

FALSE

Companies recognize a gain or loss when stockholders exercise convertible preferred stock.

FALSE

Companies recognize the gain or loss on retiring convertible debt as an extraordinary item

FALSE

If an employee fails to exercise a stock option before its expiration date, the company should decrease compensation expense.

FALSE

If an employee forfeits a stock option because of failure to satisfy a service requirement, the company should record paid-in capital from expired options.

FALSE

In computing diluted earnings per share, stock options are considered dilutive when their option price is greater than the market price.

FALSE

Nondetachable warrants, as with detachable warrants, require an allocation of the proceeds between the bonds and the warrants.

FALSE

Preferred dividends are subtracted from net income but not income before extraordinary items in computing earnings per share.

FALSE

The market value method is used to account for the exercise of convertible preferred stock.

FALSE

Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise.

FALSE

When stock dividends or stock splits occur, companies must restate the shares outstanding after the stock dividend or split, in order to compute the weighted-average number of shares.

FALSE

A company should allocate the proceeds from the sale of debt with detachable stock warrants between the two securities based on their market values.

TRUE

If a stock dividend occurs after year-end, but before issuing the financial statements, a company must restate the weighted-average number of shares outstanding for the year.

TRUE

If preferred stock is cumulative and no dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share.

TRUE

In a contingent issue agreement, the contingent shares are considered outstanding for computing diluted EPS when the earnings or market price level is met by the end of the year.

TRUE

The FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense.

TRUE

The intrinsic value of a stock option is the difference between the market price of the stock and the exercise price of the options at the grant date.

TRUE

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

TRUE

The service period in stock option plans is the time between the grant date and the vesting date.

TRUE

When a company has a complex capital structure, it must report both basic and diluted earnings per share.

TRUE

In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)? a. Annual preferred dividend b. Annual preferred dividend times (one minus the income tax rate) c. Annual preferred dividend times the income tax rate d. Annual preferred dividend divided by the income tax rate

a. Annual preferred dividend

In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share. b. are added, net of tax, to the numerator of the calculation for diluted earnings per share. c. are disregarded in the computation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common stock. d. none of these.

a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.

The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee a. is granted the option. b. has performed all conditions precedent to exercising the option. c. may first exercise the option. d. exercises the option.

a. is granted the option.

The date on which total compensation expense is computed in a stock option plan is the date a. of grant. b. of exercise. c. that the market price coincides with the option price. d. that the market price exceeds the option price.

a. of grant.

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 an extraordinary item. b. reflected currently in income as an extraordinary item. c. treated as a prior period adjustment. d. treated as an adjustment of additional paid-in capital.

a. reflected currently in income, but not as an extraordinary item.

A corporation should record no compensation expense for which of the following types of executive compensation plans? a. Stock appreciation rights b. Nonqualified stock option plans c. Incentive stock option plans d. Compensation expense should be recorded for all of these.

b. Nonqualified stock option plans

A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is Dilutive Antidilutive a. Yes Yes b. Yes No c. No Yes d. No No

b. Yes No

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. Yes No

An executive compensation plan in which the executive may receive compensation in cash, shares of stock, or a combination of both, is known as ______________ plan. a. a nonqualified stock option b. a performance-type c. a stock appreciation rights d. both a performance-type and a stock appreciation rights

b. a performance-type

When applying the treasury stock method for diluted earnings per share, the market price of the common stock used for the repurchase is the a. price at the end of the year b. average market price. c. price at the beginning of the year. d. none of these.

b. average market price.

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.

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. none of these.

b. 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.

b. expense.

The payment to executives from a performance-type plan is never based on the a. market price of the common stock. b. return on assets (investment). c. return on common stockholders' equity. d. sales.

b. return on assets (investment).

The major difference between convertible debt and 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. the holder has to pay a certain amount of cash to obtain the shares.

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 distribution of stock rights to existing common stockholders will increase paid-in capital at the Date of Issuance Date of Exercise of the Rights of the Rights a. Yes Yes b. Yes No c. No Yes d. No No

c. No Yes

With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure? a. Common stock, preferred stock, and convertible securities outstanding in lots of even thousands b. Earnings derived from one primary line of business c. Ownership interest consisting solely of common stock d. None of these

c. Ownership interest consisting solely of common stock

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. Unlimited time period permitted for exercise of an option as long as the holder is still

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.

Under the intrinsic value method, compensation expense resulting from an incentive stock option is generally a. not recognized because no excess of market price over the option price exists at the date of grant. b. recognized in the period of the grant. c. allocated to the periods benefited by the employee's required service. d. recognized in the period of exercise.

c. allocated to the periods benefited by the employee's required service.

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. that many corporations can obtain financing at lower rates.

Which of the following is not a characteristic of a noncompensatory stock purchase plan? a. It is open to almost all full-time employees. b. The discount from market price is small. c. The plan offers no substantive option feature. d. All of these are characteristics.

d. All of these are characteristics.

When computing diluted earnings per share, convertible bonds are a. ignored. b. assumed converted whether they are dilutive or antidilutive. c. assumed converted only if they are antidilutive. d. assumed converted only if they are dilutive.

d. assumed converted only if they are dilutive.

A corporation issues bonds with detachable warrants. The amount to be recorded as paidin capital is preferably a. zero. b. calculated by the excess of the proceeds over the face amount of the bonds. c. equal to the market value of the warrants. d. based on the relative market values of the two securities involved.

d. based on the relative market values of the two securities involved.

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.

The conversion of bonds is most commonly recorded by the a. incremental method. b. proportional method. c. market value method. d. book value method.

d. book value method.

In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are a. weighted by the number of days outstanding. b. weighted by the number of months outstanding. c. considered outstanding at the beginning of the year. d. considered outstanding at the beginning of the earliest year reported.

d. considered outstanding at the beginning of the earliest year reported.

Convertible bonds a. have priority over other indebtedness. b. are usually secured by a first or second mortgage. c. pay interest only in the event earnings are sufficient to cover the interest. d. may be exchanged for equity securities.

d. may be exchanged for equity securities.

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 (one minus the income tax rate). c. annual preferred dividend times (one minus the income tax rate). d. none of these

d. none of these.

Stock warrants outstanding should be classified as a. liabilities. b. reductions of capital contributed in excess of par value. c. assets. d. none of these.

d. none of these.

When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to a. additional paid-in capital from stock warrants. b. retained earnings. c. a liability account. d. premium on bonds payable.

d. premium on bonds payable.

Antidilutive securities a. should be included in the computation of diluted earnings per share but not basic earnings per share. b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share. c. include stock options and warrants whose exercise price is less than the average market price of common stock. d. should be ignored in all earnings per share calculations.

d. should be ignored in all earnings per share calculations.

Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings per share is the security with the a. greater earnings adjustment. b. greater earnings per share adjustment. c. smaller earnings adjustment. d. smaller earnings per share adjustment.

d. smaller earnings per share adjustment.

Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when a. the market value of the warrants is not readily available. b. exercise of the warrants within the next few fiscal periods seems remote. c. the allocation would result in a discount on the debt security. d. the warrants issued with the debt securities are nondetachable.

d. the warrants issued with the debt securities are nondetachable.

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.