ACC 312 Midterm 1 (Ch. 14, 15, 16)
On September 1, Year 1, Cobb Co. issued a note payable to the National Bank in the amount of $900,000, bearing interest at 12%, and payable in three equal annual principal payments of $300,000.On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, Year 2.At December 31, Year 2, Cobb should record accrued interest payable of $33,000. $24,000. $36,000. $22,000.
$24,000.
Which of the following is the formula for computing EPS? (Net income - Preferred dividends) ÷ Average number of shares outstanding (Net income - Preferred dividends) ÷ Weighted average number of shares outstanding (Net income + Preferred dividends) ÷ Weighted average number of shares outstanding Net income ÷ Number of shares outstanding
(Net income - Preferred dividends) ÷ Weighted average number of shares outstanding
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. 3 1 1 or 3 2
1
Stock Dividend >20-25% Accounting based on par value Accounting based on FMV
Accounting based on par value
Which of the following are requirements of the declaration of a cash dividend? Sufficient cash. Sufficient retained earnings. Declaration by the Board. All of these answer choices are requirements of the declaration of a cash dividend.
All of these answer choices are requirements of the declaration of a cash dividend.
How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions? As ordinary earnings shown on the income statement. As an increase in the amount shown for common stock. As an other revenue and gain shown on the income statement. As paid-in capital from treasury stock transactions.
As paid-in capital from treasury stock transactions.
Which of the following represents the total number of shares that a corporation may issue under the terms of its charter? Authorized shares Unissued shares Issued shares Outstanding shares
Authorized shares
Which of the following is not an example of "off-balance-sheet financing"? Special purpose entity Capital leases Non-consolidated subsidiary Operating leases
Capital leases
Which of the following statements related to dividends is incorrect? Dividends must be declared by the Board of Directors. Before declaring a dividend, management must consider availability of funds to pay the dividend. Dividends must be paid in the period declared. Distributions to owners must be in compliance with the state laws.
Dividends must be paid in the period declared.
times interest earned ratio
EBIT/Interest
Stock issued in non-cash transactions should be recorded at the: Fair market value of the stock issued or the property received, whichever is more readily determinable. Par value of the stock issued. Fair market value of the stock issued. Fair market value of the property received.
Fair market value of the stock issued or the property received, whichever is more readily determinable.
A company with a complex capital structure calculates only basic earnings per share. True False
False
A long-term note is valued at its face value. True False
False
Companies allocate the proceeds received from a lump-sum sale of securities based on the securities' par values. True False
False
Costs of issuing stock such as underwriting costs, accounting and legal fees, and printing costs should be recorded as a deferred charge and charged to expense over a period not greater than 25 years. True False
False
Earnings per share is reported for both common and preferred stock. True False
False
GAAP requires that the issuer of convertible debt record the liability and equity components separately. True False
False
Participating preferred stock requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders. True False
False
Stock splits increase total stockholders' equity. True False
False
The effective interest method calculates bond interest expense by multiplying the carrying value of the bonds at the beginning of the period by the stated rate of interest. True False
False
The entry for bond premium amortization includes a debit to interest expense and a credit to the premium on bonds payable. True False
False
Treasury stock is classified on the balance sheet as an asset. True False
False
Treasury stock sold for less than its cost decreases net income. True False
False
When bonds are issued with detachable stock warrants, and the fair market value is known for both securities, the price is allocated between the two securities using the incremental method. True False
False
When the effective rate of a bond is lower than the stated rate, the bond sells at a discount. True False
False
How would the amortization of discount on bonds payable affect each of the following? Carrying value of bond / Net income Increase / Decrease Increase / Increase Decrease / Decrease Decrease / Increase
Increase / Decrease
Which of the following best describes a possible result of treasury stock transactions by a corporation? May increase net income if the cost method is used. May decrease but not increase net income. May increase but not decrease retained earnings. May decrease but not increase retained earnings.
May decrease but not increase retained earnings.
Which of the following is true regarding treasury stock transactions by a corporation? May decrease but not increase retained earnings. May increase net income if the cost method is used. May decrease but not increase net income. May increase but not decrease retained earnings.
May decrease but not increase retained earnings.
Treasury stock was acquired for cash at more than its par value, and then subsequently sold for cash at more than its acquisition price. Assuming that the cost method of accounting for treasury stock transactions is used, what is the effect on additional paid-in capital from treasury stock transactions? Purchase of treasury stock / Sale of treasury stock No effect / No effect No effect / Increase Decrease / Increase Decrease / No effect
No effect / Increase
How would a stock split affect each of the following?nt is increased when the treasury shares are reissued above cost. Remember: "capital in excess of par value" includes APIC from all sources. Assets / Total stockholders' equity / Additional paid in capital Increase / Increase / No effect No effect / No effect / No effect No effect / No effect / Increase Decrease / Decrease / Decrease
No effect / No effect / No effect
Under the cost method, when treasury stock is sold for more than its cost, the excess is credited to: Gain on Sale of Treasury Stock. Paid-in Capital in Excess of Par. Paid-in Capital from Treasury Stock. Retained Earnings.
Paid-in Capital from Treasury Stock.
Jackson Corporation issued a 100% stock dividend of its common stock, which had a par value of $.01, and a market value of $123 before the dividend and $62 after the dividend. At what amount should retained earnings be capitalized for the additional shares issued? Market value on the payment date. Par value. There should be no capitalization of retained earnings. Market value on the declaration date.
Par value.
When a bond is purchased, the present value of the bond's expected net future cash inflows discounted at the market rate of interest provides what information about the bond? Par. Yield. Interest. Price.
Price.
Which of the following features of preferred stock makes the security more like debt than an equity instrument? Participating Voting Noncumulative Redeemable
Redeemable
Which of the following dividends does not reduce total stockholders' equity? Stock dividends. Liquidating dividends. Cash dividends. All of these answer choices reduce total stockholders' equity.
Stock dividends.
Which of the following increases the number of shares outstanding and decreases the par value per share? Small stock dividend. Large stock dividend. Treasury stock. Stock split.
Stock split.
Which of the following is issued to shareholders by a corporation as evidence of the ownership of rights to acquire its unissued or treasury stock? Stock options. Stock dividends. Stock warrants. Stock subscriptions.
Stock warrants.
Which one of the following is not a right of common stockholders? To share proportionately in all management decisions. To share proportionately in corporate assets upon liquidation. To share proportionately in profits and losses. To share proportionately in any new issues of stock of the same class.
To share proportionately in all management decisions.
Straight line amortization
Total Interest Amount / Periods
Companies should record stock issued for services or noncash property at either the fair value of the stock issued or the fair value of the consideration received, whichever is more clearly determinable. True False
True
Gains and losses on early extinguishment of debt are reported as other gains and losses on the income statement. True False
True
In accounting for the exercise of convertible preferred stock for common stock, if the par value of the common stock issued exceeds the book value of the preferred stock, Retained Earnings is debited for the difference. True False
True
Nondetachable warrants do not require an allocation of the proceeds between the bonds and the warrants. True False
True
Preferred stock has no voting rights. True False
True
The debt to assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet. True False
True
The declaration of a property dividend will likely generate a gain or loss on the income statement. True False
True
The effective interest method is preferred when amortizing bond premiums and discounts. True False
True
True no-par stock should be carried in the accounts at issue price without any additional paid-in capital reported. True False
True
Which of the following is not a typically classified as a long-term liability? Lease Liability Bonds Payable Mortgage Payable Unearned Revenue
Unearned Revenue
On January 1, Gasperson Inc. issued $100,000,000, 7% bonds at 102. The journal entry to record the issuance of the bonds will include a credit to Premium on Bonds Payable for $2,000,000. a credit to Bonds Payable for $102,000,000. a credit to Interest Expense for $2,000,000. a debit to Cash for $100,000,000.
a credit to Premium on Bonds Payable for $2,000,000.
At the date of declaration of a large common stock dividend, the entry should include a debit to Retained Earnings. a credit to Paid-in Capital in Excess of Par. a credit to Common Stock Dividend Payable. a credit to Cash.
a debit to Retained Earnings.
The generally accepted method of accounting for gains or losses from the early extinguishment of debt is to compute them as an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption. an adjustment to the cost basis of the asset obtained by the debt issue. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.
a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.
Cumulative preferred dividends in arrears should be shown in a corporation's financial statements as a footnote. an increase in stockholders' equity. an increase in current liabilities for the current portion and long-term liabilities for the long-term portion. an increase in current liabilities.
a footnote.
The proceeds from the sale of debt with detachable stock warrants should be allocated between the two securities based on the: fair market value of the bonds. aggregate fair market value of the bonds and the warrants. face value of the bonds and market value of the warrants. face value of the bonds.
aggregate fair market value of the bonds and the warrants.
Bond issuance costs are: amortized into expense over the life time of the bond. recorded as an asset. recorded as an interest expense. added to the issue amount of the bond payable.
amortized into expense over the life time of the bond.
Common stock dividends distributable is reported on the balance sheet as: a reduction of total stockholders' equity. an addition to additional paid-in capital. an addition to common stock. a current liability.
an addition to common stock.
Premium on bonds payable is a contra account. reported as a reduction of the bond liability. debited to a deferred charge account and amortized over the life of the bonds. an adjunct account.
an adjunct account.
Before declaring a cash dividend, management must consider the legal capital of the stock. availability of funds. current market price of the stock. effect on paid-in capital.
availability of funds.
The printing costs and legal fees associated with the issuance of bonds should be expensed when incurred. be reported as a reduction to the issue amount of the bond payable and then amortized to expense over the life of the bond. not be reported as an expense until the period the bonds mature or are retired. be accumulated in a deferred charge account and amortized over the life of the bonds.
be reported as a reduction to the issue amount of the bond payable and then amortized to expense over the life of the bond.
The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the registered bond. bond coupon. bond debenture. bond indenture.
bond indenture.
All of the following statements related to bonds are correct regarding bonds except: bonds typically have a $1,000 face value. bonds arise from a contract known as a bond indenture. bonds usually pay interest annually. bonds represent a promise to pay a sum of money plus periodic interest.
bonds usually pay interest annually.
The conversion of preferred stock may be recorded by the market value method. book value method. incremental method. par value method.
book value method.
A primary source of stockholders' equity is income retained by the corporation. appropriated retained earnings. contributions by stockholders. both income retained by the corporation and contributions by stockholders.
both income retained by the corporation and contributions by stockholders.
A bond for which the issuer has the right to call and retire the bonds prior to maturity is a callable bond. retirable bond. convertible bond. debenture bond.
callable bond.
The book value per share is based on common shares outstanding. common shares issued. both common shares and preferred shares outstanding. both common shares and preferred shares issued.
common shares outstanding.
Convertible bonds are usually converted into: preferred stock. stock warrants. common stock. other bonds at a lower interest rate.
common stock.
In every corporation the one class of stock that represents the basic ownership interest is called common stock. cumulative stock. owners' stock. preferred stock.
common stock.
The residual interest in a corporation belongs to the management. common stockholders. creditors. preferred stockholders.
common stockholders.
The interest rate written in the terms of the bond indenture is known as the yield rate. coupon rate, nominal rate, or stated rate. market rate. effective rate.
coupon rate, nominal rate, or stated rate.
The type of preferred stock that would generate a dividend in arrears is: participating preferred stock. convertible preferred stock. cumulative preferred stock. callable preferred stock.
cumulative preferred stock.
In January 2020, Waterway Industries, a newly formed company, issued 10700 shares of its $8 par common stock for $13 per share. On July 1, 2020, Waterway Industries reacquired 1070 shares of its outstanding stock for $10 per share. The acquisition of these treasury shares did not change total stockholders' equity. increased total stockholders' equity. decreased the number of issued shares. decreased total stockholders' equity.
decreased total stockholders' equity.
The interest rate actually earned by bondholders is called the coupon rate. stated rate. effective yield. nominal rate.
effective yield.
When convertible debt is retired: only gains on retirement are recognized. either a gain or a loss on retirement is recognized. neither gains nor losses are recognized. only losses on retirement are recognized.
either a gain or a loss on retirement is recognized.
The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the pro forma method. the proportional method. the incremental method. either the proportional method or the incremental method.
either the proportional method or the incremental method.
When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, the sweetener is accounted for as a(n) extraordinary item. expense. loss. none of these answer choices is correct.
expense.
A ten-year bond was issued in 2019 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2021, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2021 should have equaled the call price. call price less unamortized discount. face amount plus unamortized discount. face amount less unamortized discount.
face amount less unamortized discount.
When a property dividend is declared, Retained Earnings is reduced by the: cost of the property. book value of the property. carrying value of the property. fair value of the property.
fair value of the property.
If a bond sold at 97, the market rate was: equal to the stated rate. greater than the stated rate. equal to the coupon rate. less than the stated rate.
greater than the stated rate.
Bonds which do not pay interest unless the issuing company is profitable are called secured bonds. term bonds. income bonds. debenture bonds.
income bonds.
Under the effective interest method, interest expense: is the same total amount as straight-line interest expense over the term of the bonds. always increases each period the bonds are outstanding. always decreases each period the bonds are outstanding. is the same annual amount as straight-line interest expense in the earlier years.
is the same total amount as straight-line interest expense over the term of the bonds.
When a bond sells at a premium, interest expense will be: less than the bond interest payment. equal to the bond interest payment. none of these answer choices are correct. greater than the bond interest payment.
less than the bond interest payment.
The selling price of a bond is the sum of the present values of the principal and the periodic interest payments. The present values are determined by discounting using the nominal rate. coupon rate. market rate. stated rate.
market rate.
Note disclosures for long-term debt generally include all of the following except assets pledged as security. restrictions imposed by the creditor. names of specific creditors. call provisions and conversion privileges.
names of specific creditors.
The numerator in the times interest earned ratio is: net income plus interest expense. net income plus interest expense and income tax expense. net income. net income plus income tax expense.
net income plus interest expense and income tax expense.
Additional paid-in capital is not affected by the issuance of: preferred stock. no par with a stated value stock. no-par stock. par value stock.
no-par stock.
Cash dividends are paid on the basis of the number of shares issued. outstanding. outstanding less the number of treasury shares. authorized.
outstanding.
Detachable stock warrants outstanding should be classified as paid-in capital. reductions of capital contributed in excess of par value. contingent liabilities. prepaid expenses.
paid-in capital.
A long-term note is valued at its maturity value. market value. present value. face value.
present value.
A bond issued in the name of the owner is a: registered bond. bearer bond. income bond. convertible bond.
registered bond.
Stockholders' equity is generally classified into two major categories: appropriated capital and retained earnings. retained earnings and contributed capital. contributed capital and appropriated capital. retained earnings and unappropriated capital.
retained earnings and contributed capital.
On March 1, 2020, Sealy Company sold its 5-year, $1,000 face value, 9% bonds dated March 1, 2020, at an effective annual interest rate (yield) of 11%. Interest is payable semiannually, and the first interest payment date is September 1, 2020. Sealy uses the effective-interest method of amortization. The bonds can be called by Sealy at 101 at any time on or after March 1, 2021.(c) Would the amount of bond discount amortization using the effective-interest method of amortization be lower in the second or third year of the life of the bond issue? The amount of bond discount amortization would be lower in the second third year of the life of the bond issue. second third
second
When bonds sell between interest payment dates, the purchaser will pay the seller: the price of the bonds only. the price of the bonds less the accrued interest. the price of the bonds plus the accrued interest. None of these answers are correct.
the price of the bonds plus the accrued interest.
Stonehenge, Inc. issued bonds with a maturity amount of $5,000,000 and a maturity eight years from date of issue. If the bonds were issued at a premium, this indicates that the market and stated rates coincided. no necessary relationship exists between the two rates. the market rate of interest exceeded the stated rate. the stated rate of interest exceeded the market rate.
the stated rate of interest exceeded the market rate.
Characteristics of the corporate form of organization include all of the following except: variety of ownership interests. facility for attracting and accumulating large amounts of capital. capital stock or share system. unlimited liability of stockholders.
unlimited liability of stockholders.
A debenture bond is a (an): unsecured bond. term bond. secured bond. callable bond.
unsecured bond.
Both discount on bonds payable and premium on bonds payable are: adjunct accounts. valuation accounts. nominal accounts. contra accounts.
valuation accounts.
All of the following are features of preferred stock except: preference as to dividends. convertible into common stock. voting rights. callable at the corporation's option.
voting rights.
