Chapter 16 EOC Multiple choice
In 2016, Newton Inc. issued for $105 per share, 100,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Newton's $30 par value common stock at the option of the preferred stockholder. In August 2017, 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 total amount should be credited to additional paid-in capital, common stock as a result of the conversion of the preferred stock into common stock? $375,000. $780,000. $1,250,000. $1,500,000.
1,500,000 The preferred stock and additional paid in capital has a total value of ($105 X 100,000 shares) $10,500,000. The common stock has a par value of ($30 X 300,000 shares) $9,000,000. The difference, $1,500,000, ($10,500,000 - $9,000,000), represents additional paid-in capital, common stock.
In 2016, Chartres Inc., issued for $105 per share, 60,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Chartre's $25 par value common stock at the option of the preferred stockholder. In April 2017, 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 total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock? $1,800,000. $60,000. $900,000. $2,300,000.
1,800,000 The preferred stock's par value and any additional paid-in capital, $6,300,000 ($105 x 60,000 Preferred Stock shares) is transferred to Common Stock and Additional Paid-in Capital when preferred stock is converted as follows: $6,300,000 - $4,500,000 par value assigned to Commons Stock (60,000 Preferred Stock shares × 3 common stock conversion factor × $25 par value per share) = $1,800,000, Additional Paid-In Capital from Common Stock.
Lake Norman Corporation 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 $32). The price paid for 2,000, $1,000 bonds with the warrants attached was $205,000. The market price of the Lake Norman bonds without the warrants was $180,000, and the market price of the warrants without the bonds was $20,000. What amount should be allocated to the warrants? $25,000 $24,000 $20,500 $20,000
20,500
The proceeds from the sale of debt with detachable stock warrants should be allocated between the two securities based on the: aggregate fair market value of the bonds and the warrants. face value of the bonds. fair market value of the bonds. face value of the bonds and market value of the warrants.
Aggregate fair market value of the bonds and the warrants
Disclosure for compensation plans should include all of the following except the: cash flow effects resulting from share-based payment arrangements. nature and terms of such arrangements that existed during the period. effect on the income statement of compensations cost arising from share-based payment arrangements. all of these answer choices are required disclosures.
All of the answer choices are required disclosures
Which earnings per share amounts are reported in a complex capital structure? Basic and diluted EPS. Basic and simple EPS. Basic EPS only. Diluted EPS only.
Basic and diluted EPS
Kelley Co. has $2,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2017, the holders of $500,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $112,500. Kelley should record, as a result of this conversion, a: credit of $78,125 to Paid-in Capital in Excess of Par. credit of $28,125 to Premium on Bonds Payable. credit of $421,875 to Paid-in Capital in Excess of Par. loss of $540,000.
Credit of $78,125 to Paid-in Capital in Excess of Par. The book value of convertible bonds is transferred to common stock and additional paid-in capital when they are converted. The unamortized premium attributed to the $500,000 of bonds converted is $500,000/$2,000,000 total convertible bonds = 25% x $112,500 total unamortized premium = $28,125. The book value of the bonds at conversion is: $500,000 face value of bonds + $28,125 unamortized premium attributed to the bonds converted = $528,125. The entry to record this conversion would result in a debit to Bonds Payable for $500,000; a debit to Premium on Bonds Payable for $28,125; a credit to Common Stock computed as follows: $500,000/$1,000 = 500 Bonds x 30 conversion factor x $30 par value per common stock share = $450,000; and a credit to Paid-In Capital in Excess of Par, $528,125 - $450,000 = $78,125.
What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? Decrease and no effect Increase and decrease Decrease and increase Increase and no effect
Decrease and increase
True or False: The measurement date for stock appreciation rights is the date of grant. True False
False; date of exercise
True or False: Earnings per share is reported for both common and preferred stock. True False
False; only common stock
True or false: GAAP requires that the issuer of convertible debt record the liability and equity components separately.
False; the issuer of convertible debt records the only a liability.
True or False: If there are multiple potentially dilutive securities, the one that should be used first to recalculate earnings per share is the one that is least dilutive. True False
False; use most dilutive
Of what will the numerator of the diluted EPS calculation consist when convertible preferred stock is being included? Net income - Preferred dividends. Net income + Preferred dividends. Net income. Net income + Preferred dividends (Net of tax effect).
Net Income
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 preferred dividends in arrears. preferred dividends in arrears times (one minus the income tax rate). annual preferred dividend times (one minus the income tax rate). none of these answer choices is correct.
None of these answer choices are correct; In a simple capital structure an amount equal to the dividend that should have been declared for the current year only is subtracted from net income.
True or False: Companies remeasure the fair value of the compensation each period for liability-based stock-appreciation rights. True False
True
True or False: In a complex capital structure, diluted earnings per share is not reported when the securities included in the capital structure are antidilutive. True False
True
True or False: Nondetachable warrants do not require an allocation of the proceeds between the bonds and the warrants.
True
True or False: When a company has cumulative preferred stock outstanding, the preferred dividend is subtracted from net income in the earnings per share calculation whether the dividend has been declared or not. True False
True
True or false: The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues.
True
Under the fair-value method of recording stock options, companies will report a lower compensation cost relative to the intrinsic- value method. a higher compensation cost relative to the intrinsic-value method. the same compensation expense relative to the intrinsic-value method. no increase in compensation expense.
a higher compensation cost relative to the intrinsic-value method
Compensation expense resulting from a compensatory stock option plan is generally allocated to the periods benefited by the employee's required service. recognized in the period of exercise. allocated over the periods of the employee's service life to retirement. recognized in the period of the grant.
allocated to the periods benefited by the employee's required service
The diluted EPS computation considers all of the following except the impact of: stock options. stock warrants. antidilutive securities. convertible securities.
antidilutive securities
In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would: be antidilutive. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis. reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share. fairly present diluted earnings per share on a prospective basis.
be antidilutive
The conversion of preferred stock may be recorded by the: Book method Incremental method par value method market value method
book method
Convertible bonds are usually converted into: Other bonds at lower interest Common stock Preferred stock stock warrants
common stock
Dilutive convertible securities must be used in the computation of basic earnings per share only. diluted earnings per share only. diluted and basic earnings per share. none of these answer choices is correct.
diluted earnings per share only
When convertible debt is retired: only gains on retirement are recognized. either a gain or a loss on retirement is recognized. only losses on retirement are recognized. neither gains nor losses are recognized.
either a gain or a loss in retirement is recognized
When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, the sweetener is accounted for as a(n): Expense Extraordinary item Loss None of the above
expense
The issuance of warrants arises under all of the following situations except to: make different types of securities more attractive to new investors. give existing stockholders a preemptive right to purchase stock. provide compensation to executives. give bondholders the preemptive right to purchase additional stock.
give bondholders. the preemptive right to purchase additional stock
If preferred stock is cumulative, and dividends have not been declared in the past two years or in the current year, what amount should be deducted from net income in the EPS calculation? Only the dividends in arrears. Only the current year's dividend. Both the current year's dividend and the dividends in arrears. Nothing should be deducted because no dividends were declared.
only the current year's dividend
Detachable stock warrants outstanding should be classified as: contingent liabilities. prepaid expenses. reductions of capital contributed in excess of par value. paid-in capital.
paid-in capital
Which of the following is not one of the commonly used stock compensation plans? Stock conversion plans. Employee Stock-Purchase plans. Restricted-stock plans. Stock option plans.
stock conversion plans
The treasury stock method of computing incremental shares applies to: stock options and warrants. all convertible securities. convertible preferred stock only. convertible bonds only.
stock options and warrants
Complex capital structures require all of the following disclosures except: a reconciliation of the numerators and denominators of the basic and diluted per share computations. a description of pertinent rights of the various securities outstanding. the effect of conversions before year-end. the effect given preferred dividends in determining income available to common stockholders.
the effect of conversions before year end
Accounting for stock option plans must be based on: the intrinsic value method. the fair value method. either the fair value method or the intrinsic value method. the option-pricing method.
the fair value method
The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be: reflected currently in income, but not as an extraordinary item. reflected currently in income as an extraordinary item. treated as a prior period adjustment. treated as a direct reduction of retained earnings.
treated as a direct reduction of retained earnings
On June 30, 2017, an interest payment date, $1,000,000 of Greenville Co. bonds were converted into 25,000 shares of Greenville Co. common stock each having a par value of $5 and a market value of $54. There is $350,000 unamortized discount on the bonds. Using the book value method, Greenville would record: a $350,000 increase in paid-in capital in excess of par. no change in paid-in capital in excess of par. a $135,000 increase in paid-in capital in excess of par. a $525,000 increase in paid-in capital in excess of par.
$525,000 inc. to PIC The increase to paid-in capital in excess of par is computed as follows: Book Value of Bonds = Face Value of Bonds, $1,000,000 - Unamortized Discount, $350,000 = $650,000; Book Value of Bonds, $650,000 - Value Assigned to Common Stock, $125,000 (25,000 Common Stock Shares in Conversion x $5 par value per share) = $525,000 increase to Paid-In Capital in Excess of Par.
