Acct Theory - SU 3 & 14
Deck Co. had 120,000 shares of common stock outstanding at January 1. On July 1, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to calculate basic earnings per share? A) 160,000 B) 140,000 C) 170,000 D) 150,000
B Basic earnings per share (BEPS) is used to measure earnings performance based on common stock outstanding during the period. BEPS equals income available to common shareholders divided by the weighted-average number of common shares outstanding. The weighted-average number of common shares outstanding relates the portion of the period that the shares were outstanding to the total time in the period. Consequently, the number of shares used to calculate BEPS is 140,000 {120,000 shares outstanding throughout the period + [40,000 shares × (6 months ÷ 12 months)]}. Why Incorrect: A) The figure of 160,000 includes the unweighted number of additional shares. C) The figure of 170,000 includes the preferred shares and does not weight the additional common shares. D) The figure of 150,000 includes the preferred shares.
Earnings per share disclosures are required for A) Entities with complex capital structures only. B) Public entities only. C) Entities that change their capital structures during the reporting period. D) Public and private entities.
B Guidance for presentation of earnings per share applies to entities with publicly traded common stock or potential common stock. It also applies to those that have filed or are in the process of filing with a regulatory body in preparation for issuing such securities. Furthermore, if EPS data are presented by nonpublic entities, they must comply with such guidance. EPS disclosures are therefore required only for public companies. Why Incorrect: A) Public entities with either complex or simple capital structures must disclose EPS. C) Whether entities change their capital structure during the reporting period is irrelevant to whether they must make EPS disclosures. D) Private entities need not present EPS data.
Band Co. uses the equity method to account for its investment in Guard, Inc., common stock. How should Band record a 2% stock dividend received from Guard? A) As dividend revenue at the market value of the stock. B) As a memorandum entry reducing the unit cost of all Guard stock owned. C) As a reduction in the total cost of Guard stock owned. D) As dividend revenue at Guard's carrying amount of the stock.
B No entries are made to record the receipt of stock dividends. However, a memorandum entry should be made in the investment account to record additional shares owned. This treatment applies whether the investment is accounted for by the fair-value method or the equity method. Why Incorrect: A) The stock dividend does not result in revenue. C) The cost per share, not the total cost, is reduced. D) The receipt of a stock dividend is not a revenue. The shareholder has the same proportionate interest in the investee.
Poe Co. had 300,000 shares of common stock issued and outstanding at December 31, Year 1. No common stock was issued during Year 2. On January 1, Year 2, Poe issued 200,000 shares of nonconvertible preferred stock. During Year 2, Poe declared and paid $75,000 of cash dividends on the common stock and $60,000 on the preferred stock. Net income for the year ended December 31, Year 2, was $330,000. What should be Poe's Year 2 basic earnings per common share? A) $0.90 B) $1.10 C) $0.85 D) $0.65
A Basic earnings per common share are equal to the amount of earnings available to the common shareholders divided by the weighted-average number of shares of common stock outstanding during the year. To calculate earnings available to holders of common stock, dividends on cumulative preferred stock must be subtracted from net income whether or not the dividends were declared. Earnings per common share for Year 2 thus amounted to $0.90. ($330,000 - $60,000)/ (300,000 shares) =$0.90 Why Incorrect: B) The amount of $1.10 assumes no preferred dividends were declared. C) The amount of $0.85 assumes the common but not the preferred dividends are subtracted from the numerator. D) The amount of $0.65 assumes all dividends are subtracted from the numerator.
For the last 10 years, Woody Co. has owned cumulative preferred stock issued by Hadley, Inc. During Year 2, Hadley declared and paid both the Year 2 dividend and the Year 1 dividend in arrears. How should Woody report the Year 1 dividend in arrears that was received in Year 2? A) Include in Year 2 income from continuing operations. B) As a reduction in cumulative preferred dividends receivable. C) Include, net of income taxes, after Year 2 income from continuing operations. D) As a retroactive change of the prior-period financial statements.
A Dividends, including those in arrears on preferred stock, are not liabilities of the investee or assets of the investor until the date of declaration. Thus, Woody should not recognize income from the dividends in arrears until Year 2. The amount received should be included under the income from continuing operations caption because dividends received are an operating item. Why Incorrect: B) A dividend receivable should not be recognized until the declaration date. C) The amount received should be included under the income from continuing operations caption. D) The dividend in arrears is included in the determination of income of the period in which it is declared and received.
The per-share amount must be reported on the face of a public company's income statement for which of the following items? A) Income from continuing operations. B) Preferred stock dividend. C) U.S. Treasury stock. D) Compensation effect of fair value on stock options.
A Earnings per share (EPS) is the amount of current-period earnings that can be associated with a single share of a corporation's common stock. All corporations must report per-share amounts for income from continuing operations and net income on the face of the income statement. If an entity has no discontinued operations, income from continuing operations equals net income. Thus, one or two amounts of EPS (basic EPS) for net income available to common shareholders must be presented on the face of the income statement if the entity has only common stock outstanding. All other entities must present basic EPS and dilutive EPS for income from continuing operations and net income. The entity also must report a per-share amount or amounts for a discontinued operation on the face of the income statement or in the notes. Why Incorrect: B) The preferred stock dividend per share is not required to be reported. C) No per-share amount for U.S. Treasury Stock is reported in the financial statements. D) The compensation effect of fair value on stock options is not a required amount on the income statement.
When computing diluted earnings per share (DEPS), convertible securities that are potential common stock are A) Recognized only if they are dilutive. B) Recognized only if they are antidilutive. C) Recognized whether they are dilutive or antidilutive. D) Ignored.
A The objective of DEPS is to measure the performance of an entity during an accounting period while giving effect to all dilutive potential common shares that were outstanding during the period. Convertible securities are potential common stock. Why Incorrect: B) Convertible securities are included in the computation of diluted earnings per share only when they are dilutive. C) Convertible securities are included in the computation of diluted earnings per share only when they are dilutive. D) Convertible securities are included in the computation of diluted earnings per share if they are dilutive.
Treasury stock was acquired for cash at a price in excess of its original issue price. The treasury stock was subsequently reissued for cash at a price in excess of its acquisition price. Assuming that the par value method of accounting for treasury stock transactions is used, what is the effect on total equity of each of the following events? Acquisition of Treasury Stock Reissuance of Treasury Stock A) Decrease Increase B) No effect No effect C) Increase Decrease D) Decrease No effect
A The par value method treats the acquisition of treasury stock as a constructive retirement and its resale as a new issuance of stock. Thus, the acquisition of treasury stock will be reflected as a decrease in total equity. The reissuance will be accounted for as an increase in total equity. Why Incorrect: B) The acquisition of treasury stock decreases and the reissuance of treasury stock increases total equity. C) The acquisition of treasury stock decreases and the reissuance of treasury stock increases total equity. D) The acquisition of treasury stock decreases and the reissuance of treasury stock increases total equity.
The par-value method of accounting for treasury stock differs from the cost method because A) It reverses the original entry to issue the common stock, with any difference between carrying amount and purchase price adjusted through paid-in capital or retained earnings. It treats a subsequent reissuance as a new issuance of common stock. B) It reverses the original entry to issue the common stock, with any difference between carrying amount and purchase price being shown as a gain or loss. It does not recognize any gain or loss on a subsequent resale of the stock. C) No gains or losses are recognized on the issuance of treasury stock using the par-value method. D) Any gain is recognized upon repurchase of stock, but a loss is treated as an adjustment to retained earnings.
A The par-value method treats the acquisition of treasury stock as a constructive retirement and the resale as a new issuance. Upon acquisition, the entry originally made to issue stock is reversed by offsetting the common stock account with treasury stock at par value and removing the paid-in capital recorded when the stock was originally issued. Any difference between the original issuance price and the reacquisition price is ordinarily adjusted through paid-in capital accounts and retained earnings. The subsequent reissuance removes the treasury stock at par value and reestablishes paid-in capital in excess of par for any excess of par value over the reissuance price. By contrast, the cost method does not treat the acquisition and reissuance of treasury stock as a constructive retirement and new issuance. Why Incorrect: B) Neither gains nor losses on treasury stock are recognized in income under either accounting method. C) Neither gains nor losses on treasury stock are recognized in income under either accounting method. D) Neither gains nor losses on treasury stock are recognized in income under either accounting method.
Pubco is a public company that uses a calendar year and has a complex capital structure. Pubco reported in the first quarter income from continuing operations (net of tax) of $1 million and a loss on discontinued operations (net of tax) of $1.2 million. The average market price of Pubco's common stock for the first quarter was $25, the shares outstanding at the beginning of the period equaled 300,000, and 12,000 shares were issued on March 1. At the beginning of the quarter, Pubco also had outstanding 120,000 shares of preferred stock paying a dividend of $.10 per share at the end of each quarter and convertible to common stock on a one-to-one basis. Holders of 60,000 shares of preferred stock exercised their conversion privilege on February 1. The BEPS amount for Pubco's net income or loss available to common shareholders for the first quarter is A) $(0.58) B) $(0.60) C) $(3.49) D) $2.89
B The weighted-average number of shares used in the BEPS denominator is 344,000 {300,000 + [12,000 × (1 ÷ 3)] + [60,000 × (2 ÷ 3)]}. The numerator equals net income or loss minus preferred dividends. Thus, it equals $(206,000) [$1,000,000 income from continuing operations - $1,200,000 loss on discontinued operations - (60,000 × $0.1) preferred dividends]. The BEPS amount for the net income or loss available to common shareholders is $(0.60) [$(206,000) ÷ 344,000 shares]. Why Incorrect: A) The amount of $(0.58) uses the net loss for the period instead of net income or loss available to common shareholders. C) The amount of $(3.49) is the BEPS amount for loss on discontinued operations. D) The amount of $2.89 is the BEPS amount for income from continuing operations available to common shareholders.
The if-converted method of computing diluted earnings per share (DEPS) amounts assumes conversion of convertible securities at the A) Beginning of the earliest period reported (regardless of time of issuance). B) Middle of the earliest period reported (regardless of time of issuance). C) Beginning of the earliest period reported (or at time of issuance, if later). D) End of the earliest period reported (regardless of time of issuance).
C The if-converted method of computing DEPS assumes that convertible securities are included in the determination of DEPS if dilutive. Conversion is assumed to have occurred at the beginning of the earliest period reported or, if the security was issued at a later time, at the date of issuance. Why Incorrect: A) Conversion is assumed at the beginning of the earliest period reported but not regardless of time of issuance. B) Conversion is assumed at the beginning of the earliest period reported (or at the time of issuance, if later). D) Conversion is assumed at the beginning of the earliest period reported (or at the time of issuance, if later).
Pubco is a public company that uses a calendar year and has a complex capital structure. The average market price of Pubco's common stock for the first quarter was $25, the shares outstanding at the beginning of the period equaled 300,000, and 12,000 shares were issued on March 1. At the beginning of the quarter, Pubco had outstanding $2 million of 5% convertible bonds, with each $1,000 bond convertible into 10 shares of common stock. No bonds were converted. At the beginning of the quarter, Pubco also had outstanding 120,000 shares of preferred stock paying a quarterly dividend of $.10 per share and convertible to common stock on a one-to-one basis. Holders of 60,000 shares of preferred stock exercised their conversion privilege on February 1. Throughout the first quarter, warrants to buy 50,000 shares of Pubco's common stock for $28 per share were outstanding but unexercised. The weighted-average number of shares outstanding used to calculate Pubco's basic earnings per share (BEPS) amounts for the first quarter is A) 444,000 B) 372,000 C) 344,000 D) 300,000
C The number of shares outstanding at January 1 was 300,000, 12,000 shares were issued on March 1, and 60,000 shares of preferred stock were converted to 60,000 shares of common stock on February 1. Thus, the weighted-average number of shares used to calculate BEPS amounts for the first quarter is 344,000 {300,000 + [12,000 × (1 ÷ 3)] + [60,000 × (2 ÷ 3)]}. Why Incorrect: A) The quantity of 444,000 is the adjusted weighted-average number of shares used in the diluted EPS calculation. B) The quantity of 372,000 is the total outstanding at March 31. D) The quantity of 300,000 equals the shares outstanding at January 1.
Ten thousand shares of $10 par value common stock were issued initially at $15 per share. Subsequently, 1,000 of these shares were purchased as treasury stock at $13 per share. The cost method of accounting for treasury stock is used. What is the effect of the purchase of the treasury stock on the amount reported in the balance sheet on each of the following? Additional Paid-in Capital Total Equity A) No effect No effect B) Decrease No effect C) No effect Decrease D) Decrease Decrease
C Under the cost method, the acquisition of treasury stock is recorded as a debit to treasury stock and a credit to cash equal to the amount of the purchase price. This transaction results in a decrease in both total assets and total equity. Additional paid-in capital is unaffected by the treasury stock purchase. Why Incorrect: A) Additional paid-in capital is unaffected by the treasury stock purchase, but total equity is decreased. B) Additional paid-in capital is unaffected by the treasury stock purchase, but total equity is decreased. D) Additional paid-in capital is unaffected by the treasury stock purchase, but total equity is decreased.
East Corp., a company with a fiscal year-end on October 31, had sufficient retained earnings as a basis for dividends but was temporarily short of cash. East declared a dividend of $100,000 on February 1, Year 3, and issued promissory notes to its shareholders in lieu of cash. The notes, which were dated February 1, Year 3, had a maturity date of January 31, Year 4, and a 10% interest rate. How should East account for the scrip dividend and related interest? A) Debit retained earnings for $100,000 on February 1, Year 3, and debit interest expense for $10,000 on January 31, Year 4. B) Debit retained earnings for $110,000 on February 1, Year 3. C) Debit retained earnings for $100,000 on February 1, Year 3, and debit interest expense for $7,500 on October 31, Year 3. D) Debit retained earnings for $110,000 on January 31, Year 4.
C When a scrip dividend is declared, retained earnings should be debited and scrip dividends (or notes) payable should be credited for the amount of the dividend ($100,000) excluding interest. Interest accrued on the scrip dividend is recorded as a debit to interest expense up to the balance sheet date with a corresponding credit for interest payable. Thus, interest expense will be debited and interest payable credited for $7,500 [$100,000 × 10% × (9 months ÷ 12 months)] on 10/31/Year 3. Why Incorrect: A) At year-end, $7,500 of the $10,000 interest expense should be recognized. B) Interest expense is recognized on the balance sheet date and on the date of payment, not on the date of declaration. D) At year-end, $7,500 of the $10,000 interest expense should be recognized, and retained earnings should be debited on the date of declaration.
Treasury stock was acquired for cash at a price in excess of its par value. The treasury stock was subsequently reissued for cash at a price in excess of its acquisition price. Assuming that the cost method of accounting for treasury stock transactions is used, what is the effect on retained earnings? Acquisition of Treasury Stock Reissuance of Treasury Stock A) Increase Decrease B) Decrease Increase C) No effect No effect D) No effect Increase
C When the cost method of accounting for treasury stock transactions is used, the acquisition of treasury stock is recorded as a debit to a treasury stock account and a credit to cash. The amount of retained earnings is unaffected. When the treasury stock is subsequently reissued for cash at a price in excess of its acquisition cost, the difference between the cash received and the carrying amount (acquisition cost) of the treasury stock is credited to additional paid-in capital. Again, the amount of retained earnings is unaffected. Why Incorrect: A) The purchase and reissuance of treasury stock will have no effect on retained earnings. B) The purchase and reissuance of treasury stock will have no effect on retained earnings. D) The purchase and reissuance of treasury stock will have no effect on retained earnings.
On January 2, Year 5, Lake Mining Co.'s board of directors declared a cash dividend of $400,000 to shareholders of record on January 18, Year 5, payable on February 10, Year 5. The dividend is permissible under law in Lake's state of incorporation. Selected data from Lake's December 31, Year 4, balance sheet are as follows: Accumulated depletion $100,000 Capital stock 500,000 Additional paid-in capital 150,000 Retained earnings 300,000 The $400,000 dividend includes a liquidating dividend of A) $0 B) $150,000 C) $300,000 D) $100,000
D A common practice of companies whose major activity is the exploitation of depletable resources is to pay dividends in amounts up to the sum of retained earnings and accumulated depletion. However, any distribution by a corporation to its shareholders in excess of the dollar balance in the retained earnings account is considered a liquidating dividend and return of capital to the shareholders. Consequently, the liquidating dividend equals $100,000 ($400,000 dividend - $300,000 retained earnings). Why Incorrect: A) The company paid a liquidating dividend. B) The amount of $150,000 is the additional paid-in capital. C) The amount of $300,000 equals retained earnings.
Weaver Company had 100,000 shares of common stock issued and outstanding at January 1. On July 1, Weaver issued a 10% stock dividend. Unexercised call options to purchase 20,000 shares of Weaver's common stock (adjusted for the stock dividend) at $20 per share were outstanding at the beginning and end of the year. The average market price of Weaver's common stock (which was not affected by the stock dividend) was $25 per share during the year. Net income for the year ended December 31 was $550,000. What should be Weaver's diluted earnings per share (DEPS) for the year? A) $5.05 B) $5.24 C) $5.00 D) $4.82
D A stock dividend occurring at any time before issuance of the financial statements must be reflected as a retroactive adjustment of the capital structure at the beginning of the first period presented. Hence, the 110,000 shares outstanding after the stock dividend are deemed to have been outstanding during the entire year. The options are not antidilutive because the exercise price was less than the average market price. Accordingly, exercise of the options is assumed to have occurred at the beginning of the year at the exercise price of $20. Under the treasury stock method, the assumed proceeds of $400,000 (20,000 shares × $20) are used to repurchase 16,000 shares ($400,000 ÷ $25) at the average market price during the period. The difference between the 20,000 shares assumed to be issued and the 16,000 shares assumed to be repurchased increases the DEPS denominator from 110,000 shares to 114,000 shares. Thus, DEPS equals $4.82 ($550,000 income ÷ 114,000 shares). Why Incorrect: A) The amount of $5.05 assumes the shares issued as a stock dividend were outstanding for 6 months. B) The amount of $5.24 assumes the shares issued as a stock dividend were outstanding for 6 months. This amount also excludes the stock options. C) Five dollars does not include the stock options in the calculation of shares outstanding for the year.
Grand Corporation has 10,000,000 shares of $10 par-value stock authorized, of which 2,000,000 shares are issued and outstanding. The Board of Directors of Grand declared a 2-for-1 stock split on November 30 to be issued on December 30. The stock was selling for $30 per share on the date of declaration. In addition, the Board has amended the articles of incorporation to allow for a proportional increase in the number of authorized shares. The par-value information appearing in the shareholder's equity section of Grand's statement of financial position at December 31 will be A) $10 B) $15 C) $30 D) $5
D As a result of the 2-for-1 stock split, the par value of Grand's shares is halved to $5. Why Incorrect: A) The amount of $10 is the par value before the split. B) The amount of $15 results from improperly applying the effect of the split to the market price of the stock. C) The amount of $30 is the market price of the stock.
A company had the following outstanding shares as of January 1, Year 2: Preferred stock, $60 par, 4%, cumulative 10,000 shares Common stock, $3 par 50,000 shares On April 1, Year 2, the company sold 8,000 shares of previously unissued common stock. No dividends were in arrears on January 1, Year 2, and no dividends were declared or paid during Year 2. Net income for Year 2 totaled $236,000. What amount is basic earnings per share (BEPS) for the year ended December 31, Year 2? A) $3.66 B) $4.07 C) $4.21 D) $3.79
D BEPS is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Income in the BEPS numerator is reduced by preferred dividends declared in the current period and accumulated for the current period on cumulative preferred stock. Preferred dividends accumulated in Year 2 are $24,000 (10,000 shares × $60 par × 4%). Income available to common shareholders is $212,000 ($236,000 - $24,000). The weighted-average number of common shares outstanding for the year is 56,000 {50,000 outstanding at beginning of year + [8,000 from April 1 issue × (9 months ÷ 12 months)]}. Therefore, BEPS is $3.79 ($212,000 ÷ 56,000). Why Incorrect: A) The denominator of BEPS is the weighted-average number of common shares outstanding during the period, i.e., the number of shares must be weighted by the portion of the period that the shares were outstanding. B) The numerator for BEPS is income available to common shareholders. To find income available to common shareholders, net income must be reduced by preferred dividends declared or accumulated during the current period. Furthermore, the denominator of BEPS is weighted average number of shares outstanding. The number of shares outstanding must be weighted by the portion of the period that the shares were outstanding. C) The numerator for BEPS is income available to common shareholders. To find income available to common shareholders, net income must be reduced by preferred dividends declared or accumulated during the current period.
At December 31, Year 1, Lex, Inc., had 600,000 shares of common stock outstanding. On April 1, Year 2, an additional 180,000 shares of common stock were issued for cash. Lex also had $5 million of 8% convertible bonds outstanding at December 31, Year 2, which are convertible into 150,000 shares of common stock. The bonds were dilutive in the Year 2 DEPS computation. No bonds were issued or converted into common stock during Year 2. What is the number of shares that should be used in computing DEPS for Year 2? A) 780,000 B) 930,000 C) 735,000 D) 885,000
D DEPS should be based on the weighted-average number of (1) shares of common stock outstanding and (2) the shares of common stock assumed to have been issued to reflect the conversion of the bonds. The weighted-average number of shares for Year 2 should therefore be 885,000, based on 750,000 shares outstanding for the entire year (600,000 beginning balance + 150,000 from the hypothetical conversion of bonds) and 180,000 additional shares issued on April 1.750,000 × (3 ÷ 12)=187,500 930,000 × (9 ÷ 12)=697,500 Grand Total= 885,000 Why Incorrect: A) This figure results from not assuming conversion of the convertible bonds as of the beginning of the year and treating the additional issue of stock as occurring at the beginning of the year. B) This figure results from treating the additional issue of stock as occurring at the beginning of the year. C) This figure results from not assuming conversion of the convertible bonds as of the beginning of the year.
A company's convertible debt securities are both a potential common stock and dilutive in determining earnings per share. What would be the effect of these securities on the calculation of basic earnings per share (BEPS) and dilutive earnings per share (DEPS)? BEPS DEPS A) Increase No effect B) Decrease Increase C) Decrease Decrease D) No effect Decrease
D Securities classified as potential common stock should be included in the computation of the number of common shares outstanding for DEPS if the effect of the inclusion is dilutive. Dilutive potential common stock decreases DEPS. BEPS is not affected by potential common stock. Why Incorrect: A) Dilutive potential common stock decreases DEPS and has no effect on BEPS. B) Dilutive potential common stock decreases DEPS and has no effect on BEPS. C) Dilutive potential common stock has no effect on BEPS.
Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy reacquired 30,000 of those shares at a cost of $15 per share and recorded the transaction using the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share and recognized a $50,000 gain on its income statement on May 20. Which of the following statements is correct? A) Murphy should have recognized a $50,000 loss on its income statement for the current year. B) Murphy's net income for the current year is understated. C) Murphy's comprehensive income for the current year is correctly stated. D) Murphy's net income for the current year is overstated.
D The cost method debits cash and credits treasury stock and paid-in capital from treasury stock transactions when a reissuance of shares is made for an amount in excess of cost. The credit to treasury stock is $450,000 (30,000 shares × $15), and the credit to paid-in capital from treasury stock transactions is $150,000 [$600,000 cash (debit) - $450,000 treasury stock (credit)]. The reason for the latter credit (an equity account) instead of a gain is that the effects of transactions in the entity's own stock are always excluded from net income or the results of operations. Thus, recognizing a gain on the reissuance of treasury stock overstates current net income. Why Incorrect: A) No revenue, expense, gain, or loss is recognized on transactions in the entity's own stock. B) Net income is overstated. C) Comprehensive income for the current year includes net income and items of other comprehensive income. Comprehensive income is therefore overstated if a gain is recognized in net income.
Which one of the following would most likely cause basic earnings per share to increase? A) Issuing stock options when the option price is greater than the market price. B) Selling shares of stock at a price greater than the par value. C) Postponing the declaration of dividends. D) Purchasing treasury stock.
D The denominator of the earnings per share calculation is based only on outstanding shares. The purchase of treasury stock reduces the number of outstanding shares, increasing the earnings per share ratio. Why Incorrect: A) Stock options increase the likelihood of potentially dilutive common stock being issued. B) Basic earnings per share is affected by the number of outstanding shares. Issuing stock options may decrease diluted earnings per share. C) The declaration of dividends has no effect on basic earnings per share.
A corporation declared a dividend, a portion of which was liquidating. How does this declaration affect each of the following? Additional Paid-in Capital Retained Earnings A) No effect Decrease B) No effect No effect C) Decrease No effect D) Decrease Decrease
D The portion of a dividend that is liquidating results in a distribution in excess of the corporation's retained earnings. The effect of a liquidating dividend is to decrease contributed capital. Additional paid-in capital is debited first to the extent available before other contributed capital accounts are charged. Thus, declaration of a cash dividend, a portion of which is liquidating, decreases both additional paid-in capital and retained earnings. Why Incorrect: A) Additional paid-in capital is also decreased. B) Both additional paid-in capital and retained earnings are decreased. C) Retained earnings is also decreased.
Day Corp. holds 10,000 shares of its $10 par value common stock as treasury stock reacquired in Year 2 for $120,000. On December 12, Year 4, Day reissued all 10,000 shares for $190,000. Under the cost method of accounting for treasury stock, the reissuance resulted in a credit to A) Retained earnings of $70,000. B) Capital stock of $100,000. C) Gain on sale of investments of $70,000. D) Additional paid-in capital of $70,000.
D When treasury stock accounted for under the cost method is acquired, the treasury stock account is debited for the amount of the purchase price. If it is subsequently reissued for a price greater than its carrying amount, the excess is credited to additional paid-in capital. For this transaction, the excess is $70,000 ($190,000 - $120,000). Why Incorrect: A) Gains on treasury stock transactions may not be credited to retained earnings. B) The capital stock account is unaffected by purchases and subsequent resales of treasury stock accounted for by the cost method. C) Gains on treasury stock transactions may not be credited to income.
Based on the stock transactions below, what is the weighted average number of shares outstanding as of December 31, Year 1, that should be used in the calculation of basic earnings per share in financial statements issued on March 1, Year 2? Date Transactions January 1, Year 1 Beginning balance 100,000 April 1, Year 1 Issued 30,000 shares for cash June 1, Year 1 50% stock dividend February 15, Year 2 2 for 1 stock split March 15, Year 2 Issued 40,000 shares for cash A) 295,000 B) 367,500 C) 183,750 D) 147,500
This answer is correct.The weighted-average number of common shares outstanding is determined by relating the portion of the period that the shares were outstanding to the total time in the period. Weighting is necessary because some shares may have been issued or reacquired during the period. Stock dividends and stock splits require an adjustment to the weighted-average of common shares outstanding. EPS amounts for all periods presented are adjusted retroactively to reflect the change in capital structure as if it had occurred at the beginning of the first period presented. The following is the calculation: Date/Transaction/Common Shares Outstanding/Resate for Stock Dividend/Restate for Stock Split/Portion of Year/Equals: Weighted Average January 1 Beginning balance 100,000 1.5 2 3/12 75,000 April 1 Issue 30,000 shares 130,000 1.5 2 9/12 292,500 Total: 367,500 Why Incorrect: A) The amount of 295,000 results from adding 100,000 shares outstanding, 130,000 shares outstanding, and the stock dividend of 65,000 shares. C) The amount of 183,750 fails to account for the stock split that occurs before the issue date. D) The amount of 147,500 results from adding 100,000 shares outstanding, 130,000 shares outstanding, and the 65,000 share stock dividend and then assuming a reverse stock split.
