chapter 15 exam study guide

Compensation expense resulting from a compensatory stock option plan is generally

allocated to the periods benefited by the employees required service

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

annual preferred dividend

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 be added as an adjustment to the numerator (net earnings)?

annual preferred dividend

in computing diluted earnings per share, the treasury stock method is used for options and warrants to reflect the 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 be

antidilutive

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

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

When computing diluted earnings per share, convertible bonds are

assumed converted only if they are dilutive

A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably

based on the relative market value of the two securities

The conversion of bonds is most commonly recorded by the

book value method

The conversion of preferred stock is most commonly recorded by the

book value method

In computing weighted average of shares outstanding, when a stock dividend or stock split occurs during the period, the additional shares are

considered outstanding at the beginning of the earliest year reported

The distribution of stock rights to existing common stockholders will increase paid-in capital at the

date of exercise rights and not date of issuance rights

What effect will the acquisition of treasury stock have on total stockholders equity and on earnings per share, respectively?

decrease and increase

Dilutive convertible securities must be used in the computation of

diluted earnings per share only

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

convertible bonds may be

exchanged for equity securities

antidilutive securities should be

ignored in all earnings per share calculations

The date on which to measure the compensation element in a stock option granted to a corporate employee is ordinarily the date on which the employee

is granted the option

Under the intrinsic value method, compensation expense resulting from an incentive stock option is generally

not recognized if the market price does not exceed the option price at the date of grant

Stock warrants outstanding should be classified as

paid-in capital

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

premium on bonds payable

Due to the importance of earnings per share information, it is required to be reported by all Public Companies; Nonpublic Companies

public yes nonpublic no

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

reflected currently in income

In computing earnings per share, ownership interest consisting solely of common stock indicated

simple captial sturcture

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

that many corporations can obtain a debt financing at lower rates

The major difference between convertible debt and stock warrants is that upon exercise of the warrants

the holder has to pay a certain amount of cash to obtain the shares

an advantage to restricted stock plan

the stock never becomes completely worthless

proceeds from the issuance of debt securities with stock warrants should NOT be allocated between debt and equity features when

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

treated as a direct reduction of retained earnings