ATG 302 EXAM 2
On July 1, 2018, an interest payment date, $150000 of Sheffield Corp. bonds were converted into 3020 shares of Sheffield Corp. common stock each having a par value of $45 and a market value of $56. There is $5200 unamortized discount on the bonds. Using the book value method, Sheffield would record
$150000 - (3020 × $45) - $5200 = $8900. a $8900 increase in paid-in capital in excess of par.
Vaughn Manufacturing had 612000 shares of common stock outstanding on January 1, issued 904000 shares on July 1, and had income applicable to common stock of $2946000 for the year ending December 31, 2018. Earnings per share of common stock for 2018 would be (rounded to the nearest penny)
$2946000 Divided by 612000 + (904000 × 6/12 )= 2.77
Ivanhoe Company purchased $3100000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3222740 at an effective interest rate of 7%. Using the effective-interest method, Ivanhoe Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10820 and $11180, respectively. At April 1, 2019, Ivanhoe Company sold the Ritter bonds for $3190000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2019 was $3197440. Assuming Ivanhoe Company has a portfolio of Available-for-Sale Debt Securities, what should Ivanhoe Company report as a gain or loss on the bonds?
$3197440 - $3190000 = $-7440.
On January 1, 2018, Concord Corporation granted Sam Wine, an employee, an option to buy 1,000 shares of Concord Co. stock for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $6120. Wine exercised his option on October 1, 2018 and sold his 1,000 shares on December 1, 2018. Quoted market prices of Concord Co. stock in 2018 were: July 1 $30 per share October 1 $36 per share December 1 $40 per share The service period is for three years beginning January 1, 2018. As a result of the option granted to Wine, using the fair value method, Concord should recognize compensation expense for 2018 on its books in the amount of
$6120 ÷ 3 = $2040.
Wildhorse Company purchased bonds with a face amount of $925000 between interest payment dates. Wildhorse purchased the bonds at 103, paid brokerage costs of $14700, and paid accrued interest for three months of $24700. The amount to record as the cost of this long-term investment in bonds is
($925000 × 1.03) + $14700 = $967450.
Oriole Company had 302000 shares of common stock issued and outstanding at December 31, 2017. During 2018, no additional common stock was issued. On January 1, 2018, Oriole issued 404000 shares of nonconvertible preferred stock. During 2018, Oriole declared and paid $171000 cash dividends on the common stock and $155000 on the nonconvertible preferred stock. Net income for the year ended December 31, 2018, was $964000. What should be Oriole's 2018 earnings per common share, rounded to the nearest penny?
(964000-155000)/302000= 2.68
Which of the following is not correct in regard to trading securities?
*They are held with the intention of selling them in a short period of time, *Unrealized holding gains and losses are reported as part of net income, *Any discount or premium is amortized, *All of these choices are correct.
A requirement for a security to be classified as held-to-maturity is
-All of these are required. -The investor has the positive intent to hold to maturity. -The investor has the ability to hold the security to maturity. -The security must be a debt security.
Jordan Company purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
20 periods and 4% from the present value of 1 table.
On May 1, 2018, Waterway Industries issued $2550000 of 6% bonds at 102, which are due on April 30, 2028. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Waterway's common stock, $15 par value, were attached to each $1000 bond. The bonds without the warrants would sell at 96. On May 1, 2018, the fair value of Waterway's common stock was $35 per share and of the warrants was $2. On May 1, 2018, Waterway should credit Paid-in Capital from Stock Warrants for
250000/1000= 2500 35-15?=20 2550 × 20 × $2 = $102000 ($102000 ÷ $2550000) × $2601000 = $104040.
Waterway Industries had 802000 shares of common stock outstanding on January 1, issued 126000 shares on May 1, purchased 60000 shares of treasury stock on September 1, and issued 51000 shares on November 1. The weighted average shares outstanding for the year is
802000 + (126000 × 8/12) - (60000 × 4/12) + (51000 × 2/12) = 874500.
Q 17.10: How should the acquiring company account for an equity security if they have little or no influence over the investee company?
By using the fair value method.
On August 1, 2018, Sunland Company acquired 1140, $1000, 10% bonds at 96 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2024, with interest paid each October 31 and April 30. The bonds will be added to Sunland's available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2018 is
DEBIT: Debt Investments 1094400 Interest Revenue 28500 CREDIT: Cash 1122900 Dr. Debt Investments: 1140 × $1000 ×0.96 = $1094400 Dr. Interest Revenue: $1140000 × .10/2 × 6/12 = $28500 Cr. Cash: $1094400 + $28500 = $1122900.
The distribution of stock rights to existing common stockholders will increase paid-in capital at the
Date of issuance:no Date of Exercise: Yes
Q 17.8: Almonte Nuts purchased $50,000 in 8%, 10-year term bonds for $53,212 for an effective interest rate of 7%. How should they journalize this transaction?
Debt Investments $53,212 Cash $53,212
A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is:
Dilutive: Yes Antidilutive: NO
Which of the following debt securities are accounted for at amortized cost and not fair value? A : Never-sell debt securities B : Available-for-sale debt securities C : Held-to-maturity debt securities D : Trading debt securities C: Held-to-maturity debt securities
Held to maturity
Which of the following is an advantage of a restricted-stock plan?
It never becomes completely worthless.
Due to the importance of earnings per share information, it is required to be reported by all:
Public Companies: yes Nonpublic Companies: NO
Q 17.7: Which of the following will occur if a company uses the effective interest method in amortizing bond premiums and discounts?
The company will report a varying amount of interest income from period to period.
Q 17.13: Ahn Fences purchased 7,400 shares of Carrion Landscaping's common stock for $362,600. This was equal to 50% of Carrion's retained earnings balance. Carrion Landscaping currently has 46,000 shares of $10 par value common stock outstanding. How should Ahn Fences account for their long-term investment?
The fair value method
Q 17.14: Gorham Enterprises declared and distributed a cash dividend in 2017. How will the receipt of those dividends affect the investment account of the investor who uses the fair value method vs. the equity method?
The investment account will be decreased using the equity method but will not change using the fair value method.
Q 17.16: On March 7, 2017, Pannell Industries purchased 10,000 shares of Keeling Pumps' common stock for $189,000. Pannell decides to use the fair value option for these stocks. On December 31, 2017, the shares have a fair value of $213,000. This change in fair value would cause Pannell to journalize which of the following entries?
Unrealized Holding Gain or Loss—Equity $24,000 Equity Investments $24,000
Marigold Corp. offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $34). The price paid for 800, $1,000 bonds with the warrants attached was $825000. The market price of the Marigold bonds without the warrants was $729000, and the market price of the warrants without the bonds was $81000. What amount should be allocated to the warrants?
[$81000 ÷ ($81000 + $729000)] × $825000 = $82500.
At December 31, 2017 Bonita Industries had 210000 shares of common stock and 10500 shares of 7%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2017 or 2018. On February 10, 2019, prior to the issuance of its financial statements for the year ended December 31, 2018, Bonita declared a 100% stock dividend on its common stock. Net income for 2018 was $966000. In its 2018 financial statements, Bonita's 2018 earnings per common share should be (rounded to the nearest penny)
[$966000 - (10500 × $100 × 0.07)] ÷ (210000 × 2) = $2.13.
Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes
a debit to Debt Investments at $315,000.
Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as
a reduction of the carrying value of the investment.
Q 17.9: An investor who has purchased 20% to 50% of the investee's common stocks will likely have __________ over the investee company.
a significant level of influence
Compensation expense resulting from a compensatory stock option plan is generally
allocated to the periods benefited by the employee's required service.
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
annual preferred dividend.
Q 17.4: If a corporation accounts for a debt security by recognizing unrealized holding gains and losses as other comprehensive income and as a separate component of stockholders' equity, they are likely
available for sale
Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are
available-for-sale debt securities.
Q 17.19: Which of the following securities can be classified as either current or long-term assets on a company's balance sheet?
available-for-sale debt security
A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably
based on the relative market values of the two securities involved.
In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are
considered outstanding at the beginning of the earliest year reported.
Investments in debt securities are generally recorded at
cost including brokerage and other fees.
Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
earnings are reported by the investee in its financial statements.
Q 17.3: Which of the following debt securities have no recognized unrealized holding gains or losses in net income and are excluded from other comprehensive income? A : Trading debt securities B : Available-for-sale debt securities C : Never-sell debt securities D : Held-to-maturity debt securities
held to maturity
A correct valuation for debt securities
held-to-maturity at amortized cost.
When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be
its fair value at the date of the transfer.
When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must
make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.
Securities which could be classified as held-to-maturity are
municipal bonds.
Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are
securities where a company has holdings of less than 20%.
A reclassification adjustment is reported in the
statement of comprehensive income as other comprehensive income.
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`
that many corporations can obtain debt financing at lower rates.
Which of the following are debt securities bought and held primarily for sale in the near future?
trading debt securities
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
treated as a direct reduction of retained earnings.
