F7 - Commonly Missed

Lem Co. which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem's additional paid-in capital from common stock decrease as a result of the acquisition? A. 100 B. 400 C. 0 D. 300

A. 100 Under the par value method, when the shares are (re)acquired by Lem, the treasury stock is recorded at par value ($6/share) and additional paid-in-capital is reduced by the $100 recorded when the shares were originally issued. The difference, in this case between the $10 buy-back price and the $7 initial issuance price, or $3/share, is assigned to retained earnings as a reduction. At issuance: (Dr)Cash 700 (Cr)Common Stock 600 (Cr)Add'l Paid-In-Capital 100 At (re)acquisition:Debit (Dr)Credit (Cr) (Dr)Treasury Stock 600 (Dr)Add'l Paid-In-Capital 100 (Dr)Retained Earnings-plug 300 (Cr)Cash 1,000

A company granted its employees 100,000 stock options on January 1, Year 1. The stock options had a grant date fair value of $15 per option and a three-year vesting period. On January 1, Y2, the company estimated the fair value of the stock options to be $18 per options. Assuming that the company did not grant any additional options or modify the terms of any existing option grants during Year 2, what amount of share- based compensation expense should the company report for the year ended December 31, Year 2? A. 500,000 B. 700,000 C. 600,000 D. 800,000

ANSWER: A. 500,000 Stock options are valued at the fair value of the options issued. The value is determined based on the fair value on the grant date. This amount is recorded as compensation expense over the service period, which is the time between the grant date and the vesting date. Total compensation expense related to these options is $1,500,000 (100,000 shares × $15/share). The vesting period is three years, therefore $500,000 of expense will be recorded in fiscal Years 1, 2, and 3.

On January 1, Year 1, a company grants 5,000 non qualified stock options to an employee with a strike price of $3 per option and fair value of the $8 per option. All of the options vest at the end of five years from the grant date. At the end of Year 1, the company's stock price was $10 per share. What amount of annual stock compensation cost should the company report for Year 1? A. 8,000 B. 5,000 C. 3,000 D. 0

ANSWER: A. 8000 5,000 stock options, each with a fair value of $8, have a total fair value of $40,000. Because the options vest at the end of five years, the $40,000 is divided equally across five years, resulting in an annual stock compensation cost of $8,000 per year.

Bal Corp. declared a $25,000 cash dividend on May 8 to shareholders of record on May 23, payable on June 3. As a result of this cash dividend, working capital: A. Decreased on May 8. B. Decreased on June 3. C. Was not affected D. Decreased on May 23.

ANSWER: A. Decreased on May 8. Working capital is decreased on the declaration date, May 8, per the rule that the liability for a cash dividend is incurred and recorded on the declaration date. Rule: A liability for a cash dividend is incurred and recorded on the declaration date.

On which defined benefit pension plan financial statements would a pension plan's interest income be reported? A. Statement of Net Assets Available for Benefits B. Statement of Changes in Net Assets Available for Benefits C. Statement of Pension Plan Income D. Statement of Change in Accumulated Plan Benefits

ANSWER: B Statement of Changes in Net Assets Available for Benefits The Statement of Changes in Net Assets Available for Benefits shows the causes of the changes of a pension plan's assets, which would include the causes of increases such as investment income (including interest income), appreciation of plan assets, and employer contributions, as well as the causes of decreases such as benefits paid to beneficiaries and administrative expenses.

In the financial statements of employee benefit pension plans and trusts, the plan investments are reported at : A. NRV B. Fair Value C. Lower of historial cost or market D. Historical costs

ANSWER: B. Fair Value In the financial statements of employee benefit pension plans and trusts, the plan investments must be reported at fair value.

Which of the following would not be reported on a defined benefit pension plan's Statement of Changes in Accumulated Plan Benefits? A. The effect of changes in actuarial assumptions on the plan's actuarial PV of Plan benefits. B. The effect of plan amendments on the plan's actuarial PV of Plan benefits. C. The effect of appreciation of the plan's investments on the plans actuarial PV of plan benefits. D. The effect of benefits paid to beneficiaries on the plan's actuarial PV of plan benefits.

ANSWER: C The Statement of Changes in Accumulated Plan Benefits shows the impact of every factor that caused a change in a plan's actuarial present value of plan benefits, including changes in actuarial assumptions, the effect of plan amendments, and the amount of benefits paid to beneficiaries. However, the appreciation of a plan's assets would have no effect on the plan's actuarial present value of plan benefits and would thus not be included on the Statement of Changes in Accumulated Plan Benefits.

How should plan investments be reported in a defined benefit plan's financial statements? A. At NRV B. At actuarial PV C. At Fair value D. At cost

ANSWER: C Pension plan investment assets must be reported at fair value in a defined benefit plan's financial statements.

Which of the following would not be reported on a defined benefit pension plan's Statement of Changes in Accumulated Plan Benefits? A. The effect of plan amendments on the plan's actuarial present value of plan benefits. B. The effect of changes in actuarial assumptions on the plan's actuarial present value of plan benefits. C. The effect of appreciation of plan's investments on the plan's actuarial present value of plan benefits. D. The effect of benefits paid to beneficiaries on the plan's actuarial present value of plan benefits.

ANSWER: C. The effect of appreciation of plan's investments on the plan's actuarial present value of plan benefits. The Statement of Changes in Accumulated Plan Benefits shows the impact of every factor that caused a change in a plan's actuarial present value of plan benefits, including changes in actuarial assumptions, the effect of plan amendments, and the amount of benefits paid to beneficiaries. However, the appreciation of a plan's assets would have no effect on the plan's actuarial present value of plan benefits and would thus not be included on the Statement of Changes in Accumulated Plan Benefits.

Jones Fortune Company issued 10,000 shares of $15 par common stock on February 1 for $20 per share. The company bought back 2,000 shares when the share price fell to $16 per share on August 31 and then resold 1,000 shares when the price rebounded to $22/share on December 15. Jones accounts for its treasury stock transactions using the cost method. What amount would Jones report as Common Stock in the equity section of its December 31 balance sheet? a. 190,000 b. 135,000 c. 140,000 d. 150,000

ANSWER: D. 150,000 When the cost method is used to account for treasury stock, common stock is reported on the balance sheet as the total shares issued at par value: 10,000 shares issued x $15/share = $150,000

Old Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole's: PIC RE A. No Yes B. No No C. Yes No D. Yes Yes

Answer: C Yes - No. By definition, a liquidating dividend is one in which the company is returning a portion of capital originally contributed to the company in excess of retained earnings. A (pure) "liquidating dividend" implies there is no "retained earnings" left to decrease.

Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders' equity and the book value per common share? Total stockholders' equity Book value per share

Decrease - Increase. The acquisition of treasury stock at a price less than their book value will: Decrease stockholders' equity in total. All treasury stock transactions decrease total equity. Increase book value per share. Book value per share is based on the number of outstanding common shares, which is reduced by the acquisition of treasury stock (the denominator is reduced). The numerator (book value) is also reduced by the cost to purchase the shares, but the overall effect on the ratio is an increase in book value per share. For example, if book value were $1,000 and there were 100 common shares, the book value per common share would be $10. If 10 shares were repurchased for $8 (which is less than the original book value per share), the new book value would be $920 and the reduced number of shares would be 90, thus, resulting in a new book value per common share of $10.22, which is larger than the original $10.

Pott Co. owned shares in Rose Co. On December 1, Pott declared and distributed a property dividend of Rose shares when their fair value exceeded the carrying amount. As a consquence of the dividend declaration and distribution, the accounting effects would be : Dividend recorded at: Cost? FV? RE: Increase? Decrease?

FV Decrease Property dividends are recorded at "fair value." Retained earnings are "decreased" when property dividends are "declared." Rule: Use FMV of asset (not cost) to reduce retained earnings when property dividend is declared. The cost of asset will be adjusted to FMV (difference treated as "gain or loss on disposal of asset") when a property dividend is declared. Retained earnings is reduced for both cash and property dividends.

Assume that a company maintains a defined benefit pension plan. The company's net periodic pension cost for the year would be reported on: I. The company's income statement. II. The defined benefit pension plan's Statement of Changes in Net Assets Available for Benefits.

I only! The company reports the net periodic pension cost on its own income statement and the funded status of the plan (the plan's assets relative to the plan's obligations) on its own balance sheet. Neither the net periodic pension cost for the year nor the plan's funded status are reported on any single financial statement prepared for the plan, including the Statement of Changes in Net Assets Available for Benefits.

A corporation was organized in January, Year 1 with authorized capital of $10 par value CS. On February 1, Year 1, shares were issued at par for cash. On March 1, Year 1 the corporation's attroney accepted 5,000 shares of the common stock in settlement for legal services with a fair value of $60,000. APIC would increase on:

March 1, year 1 - YES when it is accepted

A company issued rights to its existing shareholders without consideration. The right allowed the recipients to purchase unissued CS for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased? Common Stock: ? APIC: ?

Neither common stock nor APIC are increase because no entry is made because no consideration is given. No entry is made when the rights are issued since no consideration is given. If the rights are exercised and stock is issued, then common stock and additional paid-in capital increase.

Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole's: Paid-in capital Retained earnings

Yes - No. By definition, a liquidating dividend is one in which the company is returning a portion of capital originally contributed to the company in excess of retained earnings. A (pure) "liquidating dividend" implies there is no "retained earnings" left to decrease.

A property dividend should be recorded in retained earnings at : A. Book value at date of issuance (payment) B. Market Value at date of declaration. C. Market value at date of issuance(payment> D. Book value at date of declaration.

the property's market value at date of declaration.