Intermediate Accounting CH 16 M/C

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

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

When computing diluted earnings per share, convertible bonds are A) assumed converted only if they are dilutive. B) assumed converted whether they are dilutive or antidilutive. C) assumed converted only if they are antidilutive. D) ignored.

A) assumed converted only if they are dilutive.

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

A) book value method.

Which of the following is an advantage of a restricted-stock plan? A) It creates new job opportunities in a company. B) It never becomes completely worthless. C) It increases the market price of the stock. D) It increases the profit of a company.

B) It never becomes completely worthless.

The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the A) ending of the earliest period reported (regardless of time of issuance). B) beginning of the earliest period reported (or at time of issuance, if later). C) middle of the earliest period reported (regardless of time of issuance). D) beginning of the earliest period reported (regardless of time of issuance).

B) beginning of the earliest period reported (or at time of issuance, if later).

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) is granted the option. C) may first exercise the option. D) exercises the option.

B) is granted the option.

The major difference between convertible debt and stock warrants is that upon exercise of the warrants A) the stock involved is restricted and can only be sold by the recipient after a set period of time. B) the holder has to pay a certain amount of cash to obtain the shares. C) no paid-in capital in excess of par can be a part of the transaction. D) 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.

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

B) the warrants issued with the debt securities are nondetachable.

If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)? A) Annual preferred dividend times (one minus the income tax rate) B) Annual preferred dividend times the income tax rate C) Annual preferred dividend D) Annual preferred dividend divided by the income tax rate

C) Annual preferred dividend

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

A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably A) calculated by the excess of the proceeds over the face amount of the bonds. B) equal to the market value of the warrants. C) based on the relative market values of the two securities involved. D) zero.

C) based on the relative market values of the two securities involved.

Dilutive convertible securities must be used in the computation of A) none of these. B) basic earnings per share only. C) diluted earnings per share only. D) diluted and basic earnings per share.

C) diluted earnings per share only.

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

C) may be exchanged for equity securities.

Stock warrants outstanding should be classified as A) reductions of capital contributed in excess of par value. B) assets. C) none of these answers are correct. D) liabilities.

C) none of these answers are correct.

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) premium on bonds payable. D) a liability account.

C) 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) include stock options and warrants whose exercise price is less than the average market price of common stock. C) should be ignored in all earnings per share calculations. D) are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.

C) should be ignored in all earnings per share calculations.

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) that convertible bonds will always sell at a premium. B) the ease with which convertible debt is sold even if the company has a poor credit rating. C) that many corporations can obtain debt financing at lower rates. D) the fact that equity capital has issue costs that convertible debt does not.

C) that many corporations can obtain debt financing at lower rates.

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

D) Decrease and increase

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) 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. C) fairly present diluted earnings per share on a prospective basis. 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.

Under the intrinsic value method, compensation expense resulting from an incentive stock option is A) recognized in the period of the grant. B) recognized in the period of exercise. C) allocated to the periods benefited by the employee's required service. D) not recognized if the market price does not exceed the option price at the date of grant.

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

When computing diluted earnings per share, convertible securities are A) recognized only if they are antidilutive. B) recognized whether they are dilutive or antidilutive. C) ignored. D) recognized only if they are dilutive.

D) recognized only if they are dilutive.

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

D) sweetener.

The conversion of preferred stock into common stock 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 as an extraordinary item. B) treated as a prior period adjustment. C) reflected currently in income, but not as an extraordinary item. D) treated as a direct reduction of retained earnings.

D) treated as a direct reduction of retained earnings.