Chapter 16 Accounting

At December 31, 2017 Sunland Company had 297000 shares of common stock and 10100 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2017 or 2018. On January 30, 2019, prior to the issuance of its financial statements for the year ended December 31, 2018, Sunland declared a 100% stock dividend on its common stock. Net income for 2018 was $1148000. In its 2018 financial statements, Sunland's 2018 earnings per common share should be (rounded to the nearest penny) A. $3.66. B. $3.86. C. $1.92. D. $1.85

$1.85 [$1148000 - (10100 × $100 × 0.05)] ÷ (297000 × 2) = $1.85

Crane Company had 291000 shares of common stock issued and outstanding at December 31, 2017. No common stock was issued during 2018. On January 1, 2018, Crane issued 206000 shares of nonconvertible preferred stock. During 2018, Crane declared and paid $98000 cash dividends on the common stock and $85000 on the preferred stock. Net income for the year ended December 31, 2018 was $625000. What should be Crane's 2018 earnings per common share? (rounded to the nearest penny) A. $1.81 B. $1.52 C. $2.15 D. $1.86

$1.86 $625000 - $85000 --------------------- = $1.86 291000

Sunland Company had net income for the year of $710000 and a weighted average number of common shares outstanding during the period of 247000 shares. The company has a convertible bond issue outstanding. The bonds were issued four years ago at par ($3080000), carry a 7% interest rate, and are convertible into 50800 shares of common stock. The company has a 45% tax rate. Diluted earnings per share are (rounded to the nearest penny) A. $3.11. B. $2.64. C. $1.99. D. $2.78.

$2.78 [$710000 + ($3080000 × 0.07 × 0.55)] ÷ (247000 + 50800) = $2.78

Concord Corporation had net income for 2018 of $607000. The average number of shares outstanding for the period was 210000 shares. The average number of shares under outstanding options, at an option price of $31 per share is 12600 shares. The average market price of the common stock during the year was $36. What should Concord Corporation report for diluted earnings per share for the year ended 2018? (rounded to the nearest penny) A. $2.87 B. $2.75 C. $2.73 D. $2.89

$2.87 [($36 - $31) ÷ $36] × 12600 = 1750 $607000 ÷ (210000 + 1750) = $2.87

On January 2, 2018, Oriole Company issued at par $1950000 of 5% convertible bonds. Each $1000 bond is convertible into 10 shares of common stock. No bonds were converted during 2018. Oriole had 190000 shares of common stock outstanding during 2018. Oriole's 2018 net income was $904000 and the income tax rate was 35%. Oriole's diluted earnings per share for 2018 would be (rounded to the nearest penny): A. $5.14. B. $4.86. C. $4.76. D. $4.62.

$4.62 ($1950000 ÷ $1000) × 10 = 19500 $1950000 × 0.05 × (1 - 0.35) = $63375 ($904000 + $63375) ÷ (190000 + 19500) = $4.62

Which of the following is the formula for computing EPS? A. (Net income - Preferred dividends) ÷ Average number of shares outstanding B. (Net income - Preferred dividends) ÷ Weighted average number of shares outstanding C. (Net income + Preferred dividends) ÷ Weighted average number of shares outstanding D. Net income ÷ Number of shares outstanding

(Net income - Preferred dividends) ÷ Weighted average number of shares outstanding

On January 1, 2018, Swifty Corporation had 371000 shares of its $2 par value common stock outstanding. On March 1, Swifty sold an additional 750000 shares on the open market at $20 per share. Swifty issued a 20% stock dividend on May 1. On August 1, Swifty purchased 422000 shares and immediately retired the stock. On November 1, 610000 shares were sold for $25 per share. What is the weighted-average number of shares outstanding for 2018? (Rounded to the nearest dollar.) A. 514137 B. 714137 C. 1121033 D. 1533200

1121033 [(371000 × 2 × 1.20) + (1121000 × 2 × 1.20) + (1345200 × 3) + (923200 × 3) + (1533200 × 2)] ÷ 12 = 1121033

Crane Company had 1,000,000 shares of common stock issued and outstanding at December 31, 2017. On July 1, 2018 an additional 1,000,000 shares were issued for cash. Crane also had stock options outstanding at the beginning and end of 2018 which allow the holders to purchase 290000 shares of common stock at $21 per share. The average market price of Crane's common stock was $28 during 2018. The number of shares to be used in computing diluted earnings per share for 2018 is: A. 1752500 B. 1572500 C. 2072500 D. 2252500

1572500 (1,000,000 × 6/12) + (2,000,000 × 6/12) + [((28 - 21) ÷ 28) × 290000] = 1572500

Marigold Corp., has 4100000 shares of common stock outstanding on December 31, 2017. An additional 790000 shares of common stock were issued on April 1, 2018, and 400000 more on July 1, 2018. On October 1, 2018, Marigold issued 20700, $1,000 face value, 8% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in 2018. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively? A. 5296000 and 6096000 B. 4892500 and 5296000 C. 4892500 and 4892500 D. 4892500 and 4996000

4892500 and 4996000 4100000 + (790000 × 9/12) + (400000 × 6/12) = 4892500 (BEPS) 4892500 + (20700 × 20 × 3/12) = 4996000 (DEPS)

Marigold Corp. has 4850000 shares of common stock outstanding on December 31, 2017. An additional 205000 shares are issued on April 1, 2018, and 486000 more on September 1. On October 1, Marigold issued $5920000 of 10% convertible bonds. Each $1,000 bond is convertible into 40 shares of common stock. No bonds have been converted. The number of shares to be used in computing basic earnings per share and diluted earnings per share on December 31, 2018 is A. 5165750 and 5224950. B. 5165750 and 3104950. C. 5165750 and 5165750. D. 5934950 and 5374950

5165750 and 5224950 4850000 + (205000 × 9/12) + (486000 × 4/12) = 5165750. 5165750 + [($5920000 ÷ $1,000) × 40 × 3/12] = 5224950

The following information is available for Sunland Company: January 1, 2018 Shares outstanding 3990000 April 1, 2018 Shares issued 643000 July 1, 2018 Treasury shares purchased 236000 October 1, 2018 Shares issued in a 100% stock dividend 4397000 The number of shares to be used in computing earnings per common share for 2018 is A. 5448500. B. 8708500. C. 8748500. D. 9030100.

8708500 [(3990000 × 3 × 2) + (4633000 × 3 × 2) + (4397000 × 3 × 2) + (8794000 × 3)] ÷ 12 = 8708500.

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 divided by the income tax rate. B. Annual preferred dividend. C. Annual preferred dividend times (one minus the income tax rate). D. Annual preferred dividend times the income tax rate.

Annual Preferred Dividend

Which earnings per share amounts are reported in a complex capital structure? A. Basic and simple EPS. B. Basic and diluted EPS. C. Basic EPS only. D. Diluted EPS only.

Basic and diluted EPS

For which of the following securities is an allocation of the sales proceeds necessary? A. Bonds issued with either detachable or nondetachable warrants. B. Convertible bonds. C. Bonds issued with nondetachable warrants. D. Bonds issued with detachable warrants.

Bonds issued with detachable warrants

The conversion of bonds is most commonly recorded by the A. market value method. B. book value method. C. incremental method. D. proportional method.

Book Value Method

The conversion of preferred stock is recorded by the A. par value method. B. market value method. C. incremental method. D. book value method.

Book value method

On July 1, 2018, Sunland Company issued for $9450000 a total of 90000 shares of $100 par value, 8% noncumulative preferred stock along with one detachable warrant for each share issued. Each warrant contains a right to purchase one share of Sunland $10 par value common stock for $15 per share. The stock without the warrants would normally sell for $9216000. The market price of the rights on July 1, 2018, was $2.40 per right. On October 31, 2018, when the market price of the common stock was $20 per share and the market value of the rights was $3.10 per right, 36000 rights were exercised. As a result of the exercise of the 36000 rights and the issuance of the related common stock, what journal entry would Sunland make? A. Cash 540000 Paid-in Capital—Stock Warrants 216000 Common Stock 360000 Paid-in Capital in Excess of Par 396000 B. Cash 540000 Paid-in Capital—Stock Warrants 86400 Common Stock 360000 Paid-in Capital in Excess of Par 266400 C. Cash 540000 Common Stock 360000 Paid-in Capital in Excess of Par 180000 D. Cash 540000 Paid-in Capital—Stock Warrants 133200 Common Stock 360000 Paid-in Capital in Excess of Par 313200

Cash 540000 Paid-in Capital—Stock Warrants 86400 Common Stock 360000 Paid-in Capital in Excess of Par 266400

What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? A. Decrease and increase B. Decrease and no effect C. Increase and decrease D. Increase and no effect

Decrease and increase

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. Ownership interest consisting solely of common stock. C. Ownership interest not consisting solely of common stock. D. Earnings derived from one primary line of business.

Ownership interest consisting solely of common stock

If a company offers additional considerations to convertible bondholders in order to encourage conversion, it is called a(an): A. sweetener. B. forced conversion. C. additional conversion. D. end conversion.

Sweetener

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

Yes No

Compensation expense resulting from a compensatory stock option plan is generally A. allocated to the periods benefited by the employee's required service. B. recognized in the period of exercise. C. recognized in the period of the grant. D. allocated over the periods of the employee's service life to retirement.

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

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 not used to calculate the number of common shared repurchased at the average market price, when computing diluted earnings per share D. 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.

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: A. assumed converted only if they are antidilutive. B. assumed converted only if they are dilutive. C. ignored. D. assumed converted whether they are dilutive or antidilutive.

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 A. equal to the market value of the warrants. B. zero. C. calculated by the excess of the proceeds over the face amount of the bonds. D. based on the relative market values of the two securities involved.

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 the maximum potential dilution of diluted earnings per share on a prospective basis. B. be antidilutive. C. fairly present diluted earnings per share on a prospective basis. D. 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

be antidilutive

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 months outstanding. B. considered outstanding at the beginning of the earliest year reported. C. considered outstanding at the beginning of the year. D. weighted by the number of days outstanding

considered outstanding at the beginning of the earliest year reported.

In determining diluted earnings per share, dividends on nonconvertible cumulative preferred stock should be A. deducted from net income only if declared. B. disregarded. C. added back to net income whether declared or not. D. deducted from net income whether declared or not.

deducted from net income whether declared or not

Dilutive convertible securities must be used in the computation of: A. basic earnings per share only. B. diluted nor basic earnings per share. C. diluted earnings per share only. D. diluted and basic earnings per share.

diluted earnings per share only

When convertible debt is retired: A. only losses on retirement are recognized. B. neither gains nor losses are recognized. C. only gains on retirement are recognized. D. either a gain or a loss on retirement is recognized.

either a gain or a loss on retirement is recognized

An executive pays no taxes at the time of exercise in a(an) A. incentive stock option plan. B. stock appreciation rights plan. C. nonqualified stock option plan. D. taxes would be paid in all of these.

incentive stock option plan

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. has performed all conditions precedent to exercising the option. B. exercises the option. C. may first exercise the option. D. is granted the option.

is granted the option

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

may be exchanged for equity securities

Detachable stock warrants outstanding should be classified as A. prepaid expenses. B. paid-in capital. C. reductions of capital contributed in excess of par value. D. contingent liabilities.

paid-in capital

Stock warrants outstanding should be classified as A. liabilities. B. assets. C. paid-in capital-stock warrants. D. reductions of capital contributed in excess of par value.

paid-in capital-stock warrants

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. smaller earnings per share adjustment. B. greater earnings per share adjustment. C. greater earnings adjustment. D. smaller earnings adjustment.

smaller earnings per share adjustment