ACC 232- Exam 1 MCQs (Chapter 14 & 15)

11. The if-converted method of computing earnings per share data assumes the conversion of convertible securities as of the a. beginning of the earliest period reported (or at the time of issuance, if later). b. beginning of the earliest period reported (regardless of the time of issuance). c. middle of the earliest period reported (regardless of the time of issuance). d. ending of the earliest period reported (regardless of the time of issuance)

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

6. On January 1, 2025, Ellison Company granted Sam Wine, an employee, an option to buy 1,000 shares of Ellison Co. stock for $30 per share, with the option exercisable for 5 years from the date of grant. Using a fair value option pricing model, total compensation expense is determined to be $6,000. Wine exercised his option on October 1, 2025 and sold his1,000 shares on December 1, 2025. Quoted market prices of Ellison Co. stock in 2025 were: July 1 $30 per share October 1 $36 per share December 1 $40 per share The service period is three years, beginning January 1, 2025. As a result of the option granted to Wine, using the fair value method, Ellison should recognize compensation expense for 2025 in the amount of a. $6,000. b. $2,000. c. $1,500. d. $0.

b. $2,000. Solution: $6,000 / 3 = $2,000

18. Kasravi Co. had net income for 2025 of $600,000. The average number of shares outstanding for the period was 200,000 shares. The average number of shares under outstanding options, at an option price of $30 per share, is 12,000. The average market price of the common stock during the year was $36. What should Kasravi report for diluted earnings per share for the year ended 2025? a. $3.00 b. $2.97 c. $2.86 d. $2.83

b. $2.97 Solution: [($36 - $30) x $36] x 12,000 = 2,000; $600,000 / (200,000 / 2,000) = $2.97

10. In which of the following transactions is retained earnings capitalized? a. cash dividend b. stock dividend c. property dividend d. liquidating dividend

b. stock dividend

14. What effect does the issuance of a 3-for-1 stock split have on each of the following? Par Value per Share Retained Earnings a. No effect No effect b. Increase No effect c. Decrease No effect d. Decrease Decrease

c. Decrease No effect

5. In 2024, Eklund, Inc. issued 90,000 shares of $100 par value convertible preferred stock for $103 per share. Each share of preferred stock can be converted into three shares of Eklund's $25 par value common stock at the option of the preferred stockholder. In August 2025, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What amount will be credited to additional paid-in capital from common stock as a result of the conversion? a. $1,530,000 b. $1,170,000 c. $2,250,000 d. $2,520,000

d. $2,520,000 Solution: $9,270,000 - (90,000 × 3 × $25) = $2,520,000.

1. 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.

15. Colson Inc. declared a $230,000 cash dividend. It currently has 12,000 shares of 5%,$100 par value cumulative preferred stock outstanding. It is one year in arrears on itspreferred stock. How much cash will Colson distribute to the common stockholders? a. $110,000 b. $120,000 c. $170,000 d. $0

a. $110,000 Solution: 12,000 x $100 x .05 = $60,000; $230,000 - ($60,000 x 2) = $110,000

16. Hernandez Company has 560,000 shares of $10 par value common stock outstanding.During the year, Hernandez declared a 15% stock dividend when the market price of thestock was $30 per share. Four months later Hernandez declared a $.50 per share cashdividend. As a result of the dividends declared during the year, retained earnings decreased by a. $2,842,000. b. $1,260,000. c. $462,000. d. $ 420,000.

a. $2,842,000. Solution: 560,000 x .15 × $30 = $2,520,000; $2,520,000 + (560,000 x 1.15 x $.50) = $2,842,000.

18. The stockholders' equity section of Gunkel Corporation as of December 31, 2025, was as follows: Common stock, par value $2; authorized 20,000 shares; issued and outstanding 10,000 shares $ 20,000 Paid-in capital in excess of par 30,000 Retained earnings 85,000 $135,000 On March 1, 2026, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. On March 1, 2026, the fair value of the stock was $6 per share. For the two months ended February 28, 2026, Gunkel sustained a net loss of $15,000. What amount should Gunkel report as retained earnings as of March 1, 2026? a. $

a. $61,000 Solution: $85,000 - $15,000 - (1,500 x $6) = $61,000.

7. Presented below is information related to Hale Corporation: Common Stock, $1 par $3,500,000Paid-in Capital in Excess of Par—Common Stock 550,000 8 1/2% preferred Stock, $50 par 2,000,000 Paid-in Capital in Excess of Par—Preferred Stock 400,000 Retained Earnings 1,500,000 Treasury Common Stock (at cost) 150,000 The total stockholders' equity of Hale Corporation is a. $7,800,000. b. $7,950,000. c. $6,300,000. d. $6,450,000.

a. $7,800,000. Solution: $3,500,000 + $400,000 + $550,000 + $2,000,000 + $1,500,000 - $150,000 = $7,800,000.

2. Direct costs incurred to sell stock such as underwriting costs should be accounted for as 1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset. a. 1 b. 2 c. 3 d. 1 or 3

a. 1

13. The journal entry at the date of declaration of a small common stock dividend does not include a. a credit to Common Stock. b. a credit to Paid-in Capital in Excess of Par. c. a debit to Retained Earnings. d. a credit to Common Stock Dividend Distributable.

a. a credit to Common Stock

10. 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)? 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

12. The issuer of a 5% common stock dividend to common stockholders should transfer from retained earnings to paid-in capital an amount equal to the a. fair value of the shares issued. b. book value of the shares issued. c. minimum legal requirements. d. par or stated value of the shares issued.

a. fair value of the shares issued.

2. 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 a. is granted the option. b. has performed all conditions precedent to exercising the option. c. can first exercise the option. d. exercises the option

a. is granted the option.

9. A dividend which is a return to stockholders of a portion of their original investments is a a. liquidating dividend. b. property dividend. c. liability dividend. d. participating dividend.

a. liquidating dividend.

16. At December 31, 2024, Tatum Company had 2,000,000 shares of common stockoutstanding. On January 1, 2025, Tatum issued 500,000 shares of preferred stock whichwere convertible into 1,000,000 shares of its common stock. In 2025, Tatum declared andpaid $1,200,000 cash dividends on the common stock and $400,000 cash dividends on the preferred stock. Net income for the year ended December 31, 2025, was $5,000,000.Assuming an income tax rate of 30%, what was diluted earnings per share for the year ended December 31, 2025? (Round to the nearest penny.) a. $1.50 b. $1.67 c. $2.50 d. $2.07

b. $1.67 Solution: $5,000,000/ ($2,000,000 + 1,000,000)= $1.67

5. Manning Company issued 10,000 shares of its $5 par value common stock having a fair value of $25 per share and 15,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $520,000. How much of the proceeds would be allocated to the common stock? a. $250,000 b. $236,364 c. $283,636 d. $276,250

b. $236,364 Solution: (10,000 x $25) + (15,000 x $20) = $550,000; ($250,000 ÷ $550,000) x $520,000 = $236,364

13. On January 1, 2025, Gridley Corporation had 375,000 shares of its $2 par value common stock outstanding. On March 1, Gridley sold an additional 750,000 shares on the open market at $20 per share. Gridley issued a 20% stock dividend on May 1. On August 1, Gridley purchased 420,000 shares and immediately retired the stock. On November 1,600,000 shares were sold for $25 per share. What is the weighted-average number of shares outstanding for 2025? a. 1,530,000 b. 1,125,000 c. 716,665 d. 516,666

b. 1,125,000 Solution: [(375,000 × 2 × 1.20) + (1,125,000 × 2 × 1.20) + (1,350,000 × 3) + (930,000 × 3) + (1,530,000 × 2)] ÷ 12 = 1,125,000.

15. Nolte Co. has 4,800,000 shares of common stock outstanding on December 31, 2024. An additional 200,000 shares are issued on April 1, 2025, and 480,000 more on September1. On October 1, Nolte issued $6,000,000 of 9% convertible bonds. Each $1,000 bond is convertible into 40 shares of its common stock. No bonds have been converted. The numbers of shares to be used in computing basic earnings per share and diluted earnings per share, respectively, on December 31, 2025 are a. 5,110,000 and 5,110,000. b. 5,110,000 and 5,170,000. c. 5,110,000 and 3,050,000. d. 5,880,000 and 5,320,000.

b. 5,110,000 and 5,170,000. Solution: 4,800,000 + (200,000 × 9/12) + (480,000 × 4/12) = 5,110,000 (BEPS); 5,110,000 + [($6,000,000 ÷ $1,000) × 40 × 3/12] = 5,170,000 (DEPS).

12. Milo Co. had 800,000 shares of common stock outstanding on January 1, issued 126,000shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued54,000 shares on November 1. The weighted average shares outstanding for the year is a. 851,000. b. 872,000. c. 893,000. d. 914,000.

b. 872,000.

6. Gannon Company acquired 20,000 shares of its common stock at $20 per share onFebruary 5, 2025, and sold 10,000 of these shares at $27 per share on August 9, 2026.The fair value of Gannon's common stock was $24 per share at December 31, 2025, and$25 per share at December 31, 2026. The cost method is used to record treasury stocktransactions. What account(s) should Gannon credit in 2026 to record the sale of 10,000shares? a. Treasury Stock for $270,000 b. Treasury Stock for $200,000 and Paid-in Capital from Treasury Stock for $70,000 c. Treasury Stock for $200,000 and Retained Earnings for $70,000 d. Treasury Stock for $240,000 and Retained Earnings for $30,000

b. Treasury Stock for $200,000 and Paid-in Capital from Treasury Stock for $70,000 Solution: 10,000 x $20 = $200,000; 10,000 x $7 = $70,000

4. On July 1, 2025, an interest payment date, $150,000 of Parks Co. bonds were converted into 3,000 shares of Parks Co. common stock, each having a par value of $45 and a market value of $54. There is $6,000 of unamortized discount on the bonds. If the book value method is used, Parks would record a. no change in paid-in capital in excess of par. b. a $9,000 increase in paid-in capital in excess of par. c. an $18,000 increase in paid-in capital in excess of par. d. a $12,000 increase in paid-in capital in excess of par.

b. a $9,000 increase in paid-in capital in excess of par. Solution: $150,000 - (3,000 × $45) - $6,000 = $9,000.

11. The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding a. increases common stock outstanding and increases total stockholders' equity. b. decreases retained earnings but does not change total stockholders' equity. c. may increase or decrease paid-in capital in excess of par but does not change total stockholders' equity. d. increases retained earnings and increases total stockholders' equity.

b. decreases retained earnings but does not change total stockholders' equity.

4. The cumulative feature of preferred stock a. limits the cumulative dividends to the par value of the preferred stock. b. requires that dividends not paid in any year must be paid in a later year before dividends are distributed to common shareholders. c. means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock. d. enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends.

b. requires that dividends not paid in any year must be paid in a later year before dividends are distributed to common shareholders

7. On December 31, 2024, Houser Company granted executives options to purchase 150,000shares of the company's $50 par common stock at an option price of $60 per share. The Black-Scholes option-pricing model determined total compensation expense to be$3,000,000. The options become exercisable on January 1, 2025 and represent compensation for executives' past and future services over a three-year period beginning January 1, 2025. What is the impact on Houser's total stockholders' equity for the year ended December 31, 2024, as a result of this transaction under the fair value method? a. $3,000,000 decrease b. $1,000,000 decrease c. $0 d. $1,000,000 increase

c. $0 Solution: $3,000,000 - ($3,000,000 x 2/3) = $1,000,000 increase (from the credit to Paid-in Capital—Stock Options); offset by $1,000,000 decrease (debit to Compensation Expense)

14. Fultz Company had 300,000 shares of common stock issued and outstanding at December 31, 2024. In 2025, no additional common stock was issued. On January 1,2025, Fultz issued 400,000 shares of nonconvertible preferred stock. During 2025, Fultz declared and paid $180,000 cash dividends on the common stock and $150,000 on the nonconvertible preferred stock. Net income for the year ended December 31, 2025, was $960,000. What is Fultz's 2025 earnings per share (rounded to the nearest cent)? a. $1.15 b. $2.10 c. $2.70 d. $3.20

c. $2.70 Solution: ($960,000-$150,000)/ 300,000= $2.70

17. At December 31, 2024, Emley Company had 1,200,000 shares of common stock outstanding. On October 1, 2025, an additional 400,000 shares of common stock were issued. In addition, Emley had $14,000,000 of 6% convertible bonds outstanding at December 31, 2024 that are convertible into 800,000 shares of common stock. No bonds were converted into common stock in 2025. The net income for the year ended December31, 2025, was $5,250,000. Assuming an income tax rate of 30%, what is diluted earnings per share for the year ended December 31, 2025, rounded to the nearest penny? a. $2.22 b. $2.89 c. $2.78 d. $4.02

c. $2.78 Solution: $5,250,000 + ($14,000,000 × .06 × .7)/ 1,200,000 + (400,000 x 3/12) + 800,000= $2.78

17. On June 30, 2026, when Ermler Co.'s stock was selling at $65 per share, its capital accounts were as follows: Capital stock (par value $50; 60,000 shares issued) $3,000,000 Premium on capital stock 600,000 Retained earnings 4,200,000 If a 100% stock dividend were declared and distributed, capital stock would be a. $3,000,000. b. $3,600,000. c. $6,000,000. d. $7,800,000.

c. $6,000,000. Solution: (60,000 x $50) + $3,000,000 = $6,000,000.

3. When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited? a. Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value. b. Paid-in capital in excess of par for the purchase price. c. Treasury stock for the purchase price. d. Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value.

c. Treasury stock for the purchase price.

3. 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.

8. Cash dividends are paid on the basis of the number of shares a. authorized. b. issued. c. outstanding. d. outstanding less the number of treasury shares.

c. outstanding

8. 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. annual preferred dividend.

d. annual preferred dividend.

9. 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.

1. Stockholders' equity is generally classified into two major categories which are a. contributed capital and appropriated capital. b. appropriated capital and retained earnings. c. retained earnings and unappropriated capital. d. earned capital and contributed capital.

d. earned capital and contributed capital.