ACC-322 Chap 16 concept

11. If an employee fails to exercise a stock option before its expiration date, the company should decrease compensation expense

F

12. If an employee forfeits a stock option because of failure to satisfy a service requirement, the company should record paid-in capital from expired options

F

14. When stock dividends or stock splits occur, companies must restate the shares outstanding after the stock dividend or split, in order to compute the weighted-average number of shares

F

16. preferred dividends are subtracted from net income but not income before extraordinary items in computing earnings per share

F

18. In computing diluted EPS, stock options are considered dilutive when their option price is greater than the market price

F

2. Companies recognize the game or loss on retiring convertible debt as an extraordinary item

F

20. A company should report per share amounts for income before extraordinary items, but not for income from continuing operations

F

4. The market value method is used to account for the exercise of convertible preferred stock

F

5. Companies recognize a gain or loss when stockholders exercises convertible preferred stock

F

7. nondetachable warrants, as with detachable warrants, require an allocation of the proceeds between the bonds and the warrants

F

9. Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise

F

1. The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues

T

10. The service period is stock option plans is the time between the grant date and the vesting date

T

13. If preferred stock is cumulative and no dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share

T

15. If a stock dividend occurs after year-end, but before issuing the financial statements, a company must restate the weighted-average number of shares outstanding for the year

T

17. When a company has complex capital structure, it must report both basic and diluted earnings per share

T

19. In a contingent issue agreement, the contingent shares are considered outstanding for computing diluted EPS when the earnings or market price level is met by the end of the year

T

6. A company should allocate the proceeds from the sale of debt with detachable stock warrants between the two securities based on their market values

T

8. The intrinsic value of a stock option is the difference between the market price of the stock and the exercise price of the options at the grate date

T

The FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense

T

35. 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. is granted the option. b. has performed all conditions precedent to exercising the option. c. may first exercise the option. d. exercises the option.

a. is granted the option

37. 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. c. It increases the profit of a company.

a. it creates new job opportunities in a company

*39. Under the intrinsic value method, compensation expense resulting from an incentive stock option is a. not recognized if the market price does not exceed the option price at the date of grant b. recognized in the period of the grant. c. allocated to the periods benefited by the employee's required service. d. recognized in the period of exercise.

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

25. When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be a. reflected currently in income, but not as an extraordinary item. b. reflected currently in income as an extraordinary item. c. treated as a prior period adjustment. d. treated as an adjustment of additional paid-in capital.

a. reflected currently in income, but not as an extraordinary item

27. The conversion of preferred stock is recorded by the a. incremental method. b. book value method. c. market value method. d. par value method.

b. book value method

*41. An executive pays no taxes at the time of exercise in a(an) a. stock appreciation rights plan. b. incentive stock option plan. c. nonqualified stock option plan. d. Taxes would be paid in all of these.

b. incentive stock option plan

*42. A company estimates the fair value of SARs, using an option-pricing model, for a. share-based equity awards. b. share-based liability awards. c. both equity awards and liability awards. d. neither equity awards or liability awards.

b. share-based liability awards

23. If a company offers additional considerations to convertible bondholders in order to encourage conversion, it is called a(an): a. forced conversion. b. sweetener. c. additional conversion. d. end conversion.

b. sweetener

33. The major difference between convertible debt and stock warrants is that upon exercise of the warrants a. 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. c. the stock involved is restricted and can only be sold by the recipient after a set period of time. d. no paid-in capital in excess of par can be a part of the transaction.

b. the holder has to pay a certain amount of cash to obtain the shares

32. The distribution of stock rights to existing common stockholders will increase paid-in capital at the Date of Issuance Date of Exercise a. Yes Yes b. Yes No c. No Yes d. No No

c. No Yes

36. 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

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

c. that many corporations can obtain debt financing at lower rates

34. Which of the following is not a characteristic of a noncompensatory stock option plan? a. Substantially all full-time employees may participate on an equitable basis. b. The plan offers no substantive option feature. c. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company. d. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others.

c. unlimited time period permitted for exercise of an option as long as the holder is still employed by the company

30. Stock warrants outstanding should be classified as a. liabilities. b. reductions of capital contributed in excess of par value. c. assets. d. None of these answers are correct.

d. None of these answers are correct

38. Which of the following is not a characteristic of a noncompensatory stock purchase plan? a. It is open to almost all full-time employees. b. The discount from market price is small. c. The plan offers no substantive option feature. d. All of these are characteristics.

d. all of these are characteristics

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

d. based on the relative market values of the two securities involved

22. 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

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

d. may be exchanged for equity securities

*40. For stock appreciation rights, the measurement date for computing compensation is the date a. the rights mature. b. the stock's price reaches a predetermined amount. c. of grant. d. of exercise.

d. of exercise

28. 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. a liability account. d. premium on bonds payable.

d. premium on bonds payable

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

d. the warrants issued with the debt securities are nondetachable

26. 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, but not as an extraordinary item. b. reflected currently in income as an extraordinary item. c. treated as a prior period adjustment. d. treated as a direct reduction of retained earnings.

d. treated as a direct reduction of retained earnings