Intermediate Accounting II- CH 19 & 21
Ahnberg Corporation had 800,000 shares of common stock issued and outstanding at January 1. No common shares were issued during the year, but on January 1, Ahnberg issued 100,000 shares of convertible preferred stock. The preferred shares are convertible into 200,000 shares of common stock. During the year Ahnberg paid $60,000 cash dividends on the preferred stock. Net income was $1,500,000. What were Ahnberg's basic and diluted earnings per share for the year?
$1,500 N.I./$60 P/S =$1,440/800 shares at Jan. 1 =$1.80 BASIC EPS $1,500 N.I./800+200 =$1,500/1,000 shares =$1.50 Dilutive EPS The preferred shares are considered converted when calculating diluted EPS. If converted, there would be no preferred dividends.
McDonnell-Myer Corporation reported net income of $741 million. The company had 544 million common shares outstanding at January 1 and sold 36 million shares on February 28. As part of an annual share repurchase plan, 6 million shares were retired on April 30 for $47 per share. Calculate McDonnell-Myer's earnings per share for the year.
$1.30 EPS Net Income $741 million/ 544 shares + 36(10/12)- 6(8/12)= 741/570= $1.30
At December 31, 2020 and 2021, Funk & Noble Corporation had outstanding 820 million shares of common stock and 2 million shares of 8%, $100 par value cumulative preferred stock. No dividends were declared on either the preferred or common stock in 2020 or 2021. Net income for 2021 was $426 million. The income tax rate is 25%. Calculate earnings per share for the year ended December 31, 2021
.50 EPS (410/820) Since the preferred stock is cumulative, the dividends (8% × $200 million = $16 million) are deducted even though no dividends were declared. There are no potential common shares, so a single calculation of EPS is appropriate.
First Link Services granted 8 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $6 per share on the grant date of the restricted stock award. 1. Ignoring taxes, what is the total compensation cost pertaining to the restricted shares? 2. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives? 1. Total compensation cost [blank] million 2. Effect on earnings [blank] by [blank] million
1.Total compensation cost [$48] million 2.Effect on earnings [decreased] by [$16] million $6 fair value per share × 8 million shares granted =$48 million total compensation The $48 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $16 million each year.
Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2021, that permit executives to purchase 12 million of the company's $1 par common shares within the next six years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $17 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. No forfeitures are anticipated. 1. Ignoring taxes, what is the total compensation cost pertaining to the stock options? 2. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives? 1. Total compensation cost [blank] million 2. Effect on earnings [blank] by [blank] million
1.Total compensation cost [$60] million 2.Effect on earnings [decreased] by [$20] million $5 fair value per option × 12 million options granted =$60 million total compensation The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million each year.
Fully vested incentive stock options exercisable at $50 per share to obtain 24,000 shares of common stock were outstanding during a period when the average market price of the common stock was $60 and the ending market price was $60. What will be the net increase in the weighted-average number of shares outstanding due to the assumed exercise of these options when calculating diluted earnings per share?
24,000 shares − 20,000 shares* = 4,000 shares *Purchase of treasury shares 24,000 shares ×$50 (exercise price) =$1,200,000 ÷$60 (average market price) =20,000 shares
Investment revenue is reported in connection with a statement of cash flows as: A. An operating activity. B. An investing activity. C. A noncash activity. D. A financing activity.
A. An operating activity (Since interest revenue is reported in the income statement under GAAP, it is reported in the operating activities section of the statement of cash flows.)
A company can report interest payments and interest received as operating cash flows using A. Either U.S. GAAP and IFRS. B. IFRS. C. US GAAP. D. Neither U.S. GAAP and IFRS.
A. Either U.S. GAAP and IFRS. (GAAP requires interest payments and interest received to be reported as an operating activity. IFRS allows interest payments to be reported as either an operating activity or financing activity and interest received as either an operating activity or investing activity.)
When calculating basic earnings per share, net income is reduced by dividends on nonconvertible cumulative preferred stock: A. Whether declared or not. B. Only if declared. C. Whether dilutive or not. D. Under no circumstances.
A. Whether declared or not. (Since cumulative preferred dividends carry over as dividends in arrears and will eventually be paid, the current year's dividends, whether paid or not, are deducted from the current year's net income when calculating basic EPS.)
Agee Technology, Inc., issued 9% bonds, dated January 1, with a face amount of $400 million on July 1, 2021, at a price of $380 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semi-annually on June 30 and December 31. Required: What would be the amount(s) related to the bonds that Agee would report in its statement of cash flows for the year ended December 31, 2021, if it uses the indirect method?
Agee would report the cash inflow of $380 million from the sale of the bonds as a cash inflow from financing activities in its statement of cash flows.The $1 million amortization of the discount would be added back to net income as a noncash adjustment because the interest expense ($19 million) was subtracted in calculating net income and yet the cash interest paid was only $18 million.
Selected information from Jacklyn Hyde Corporation's accounting records and financial statements for 2021 is as follows ($ in millions): Cash paid to retire bonds$30 Treasury stock purchased for cash 50 Proceeds from issuance of common stock 70 Proceeds from issuance of mortgage bonds 90 Cash dividends paid on common stock 25 Cash interest paid to bondholders 35 On its statement of cash flows, Jacklyn Hyde should report net cash inflows from financing activities of: A. $20 million. B. $55 million. C. $70 million. D. $105 million.
B. $55 million. ($70 (proceeds from issuance of common stock) + $90 (proceeds from issuance of mortgage bonds) − $30 (cash paid to retire bonds) − $50 (treasury stock purchased for cash) − $25 (cash dividends paid on common stock).)
Executive stock options are outstanding all year that permit executives to buy 12 million common shares at $50. The average market price of the common stock was $60. When calculating diluted earnings per share, the assumed exercise of these options will increase the weighted average number of shares outstanding by: A. zero shares. B. 2 million shares. C. 8 million shares. D. 10 million shares.
B. 2 million shares. 12 − [(12 × $50) / $60].
Sean-McDonald Company sold a printer with a cost of $34,000 and accumulated depreciation of $21,000 for $10,000 cash. This transaction would be reported as: A. An operating activity. B. An investing activity. C. A financing activity. D. None of the choices are correct.
B. An investing activity. (Selling (as well as buying) fixed assets are considered investing activities.)
A business is deemed to have a complex capital structure when it has outstanding: A. Three types of securities or more besides common stock. B. Executive stock options. C. Bonds payable. D. Cumulative preferred stock.
B. Executive stock options. (Stock options have the potential to increase the number of shares outstanding and therefore create a complex capital structure.)
Restricted stock units (RSUs): A. are reported as a liability if payable in shares rather than cash. B. are reported as part of shareholders' equity if payable in shares rather than cash. C. are reported as part of shareholders' equity if payable in cash rather than shares. D. are reported as part of shareholders' equity if the recipient will receive cash or can elect to receive cash.
B. are reported as part of shareholders' equity if payable in shares rather than cash. (Restricted stock units (RSUs) are reported as part of shareholders' equity if payable in shares rather than cash and are reported as part of liabilities if the recipient will receive cash or can elect to receive cash.)
At December 31, 2021, the balance sheet of Goode Corporation included 80 million common shares. On October 1, 2022, Goode retired 4 million shares as part of a share repurchase program. Net income for the year ended December 31, 2022, was $400 million. Goode's 2022 EPS should be: A. $4.94. B. $5.00. C. $5.06. D. $5.26.
C. $5.06 ($400 / [80 − (4 × 3/12)])
Property dividends are reported in connection with a statement of cash flows as: A. A financing activity. B. An investing activity. C. A noncash activity. D. Not reported on the statement of cash flows.
C. A noncash activity. (A property dividend does not involve a cash outflow and therefore is reported as a noncash activity.)
In determining cash flows from operating activities (indirect method), adjustments to net income should not include: A. An addition for depreciation expense. B. A deduction for bond premium amortization. C. An addition for a gain on sale of equipment. D. An addition for patent amortization.
C. An addition for a gain on sale of equipment. (The gain would be deducted from net income.)
In a statement of cash flows (indirect method), an increase in available-for-sale securities should be reported as: A. A deduction from net income in determining cash flows from operating activities. B. An addition to net income in determining cash flows from operating activities. C. An investing activity. D. Not reported.
C. An investing activity (An increase in available-for-sale securities due to the purchasing of additional shares is reported as an investing activity in the statement of cash flows.)
Carter Containers sold marketable equity securities, land, and common stock for $30 million, $15 million, and $40 million, respectively. Carter also purchased treasury stock, equipment, and a patent for $21 million, $25 million, and $12 million, respectively. Required: What amount should Carter report as net cash from financing activities?
Cash Flows from Financing Activities: Proceeds from sale of common stock $40 Purchase of treasury stock (21) Net cash inflows (outflows) from financing activities $19
Carter Containers sold marketable equity securities, land, and common stock for $30 million, $15 million, and $40 million, respectively. Carter also purchased treasury stock, equipment, and a patent for $21 million, $25 million, and $12 million, respectively. Required: What amount should Carter report as net cash from investing activities?
Cash Flows from Investing Activities: Proceeds from sale of marketable securities $30 Proceeds from sale of land 15 Purchase of equipment for cash (25) Purchase of patent for cash (12) Net cash inflows (outflows) from investing activities $8
Sanders Awnings reported net income of $90 million. Included in that number were depreciation expense of $3 million and a loss on the sale of equipment of $2 million. Records reveal increases in accounts receivable, accounts payable, and inventory of $1 million, $4 million, and $3 million, respectively. Required: What were Sanders' cash flows from operating activities?
Cash flows from operating activities: Net income $90 Adjustments for noncash effects: Depreciation expense 3 Loss on sale of equipment 2 Changes in operating assets and liabilities: Increase in accounts receivable (1) Increase in accounts payable 4 Increase in inventory (3) Net cash flows from operating activities $95
Sunset Acres reported net income of $60 million. Included in that number were trademark amortization expense of $2 million and a gain on the sale of land of $1 million. Records reveal decreases in accounts receivable, accounts payable, and inventory of $2 million, $5 million, and $4 million, respectively. Required: What were Sunset's cash flows from operating activities?
Cash flows from operating activities: Net income $60 Adjustments for noncash effects: Amortization expense 2 Gain on sale of land (1) Changes in operating assets and liabilities: Decrease in accounts receivable 2 Decrease in accounts payable (5) Decrease in inventory 4 Net cash flows from operating activities $62
Sales revenue for Marshall Matches was $240,000. The following data are from the accounting records of Marshall: Accounts receivable, January 1$52,000 Accounts receivable, December 31 47,000 The cash received from customers was: A. $235,000. B. $244,000. C. $240,000. D. $245,000.
D. $245,000 (Cash received from customers = $240,000 (sales revenue) + $5,000 (accounts receivable decrease).)
The compensation associated with restricted stock units (RSUs) under a stock award plan is: A. The book value of an unrestricted share of the same stock times the number of shares represented by the RSUs. B. The book value of a share of similar stock times the number of shares represented by the RSUs. C. The estimated fair value of a share of similar stock times the number of shares represented by the RSUs. D. Allocated to expenses over the service period which usually is the vesting period.
D. Allocated to expense over the service period which usually is the vesting period. (We allocate the compensation associated with restricted stock units (RSUs) under a stock award plan to expense over the service period which usually is the vesting period.)
Which of the following statements is untrue regarding earnings per share? A. A company has a simple capital structure if it has no outstanding securities that could potentially dilute earnings per share. B. When shares are retired, they are time-weighted for the fraction of the period they were not outstanding, prior to being subtracted from the number of shares outstanding during the reporting period. C. Dividends paid on nonconvertible preferred stock outstanding should be subtracted from reported net income. D. Any new shares issued during the period in a stock dividend or stock split are time-weighted by the fraction of the period they were outstanding and then added to the number of shares outstanding for the period.
D. Any new shares issued during the period in a stock dividend or stock split are time-weighted by the fraction of the period they were outstanding and then added to the number of shares outstanding for the period. (Any new shares issued during the period in a stock dividend or stock split are time-weighted by the fraction of the period they were outstanding and then added to the number of shares outstanding for the period. The new shares are time-weighted, but not immediately added to the number of shares outstanding for the period. The pre-dividend/split shares have to be adjusted for the effects of the stock dividend or stock split before adding the effect of the new shares.)
Which of the following statements is true regarding diluted earnings per share? A. It is assumed that stock options are exercised at the beginning of the period (or at the time the options are issued, if later) and the cash proceeds received are used to buy back (as treasury stock) as many of those shares as can be acquired at the closing market price for the period. B. To incorporate convertible bonds into the calculation, the denominator of the EPS fraction is decreased by the additional common shares assumed. C. To incorporate convertible securities into the calculation, the numerator is decreased by the interest (after-tax) that would have been avoided in the event of conversion. D. Contingently issuable shares are considered outstanding in the computation of diluted EPS when any conditions for issuance are currently being met.
D. Contingently issuable shares are considered outstanding in the computation of diluted EPS when any conditions for issuance are currently being met. (Contingently issuable shares are considered to be outstanding in the computation of diluted EPS if the target performance level already is being met.)
Sun Company owns 14.5 million shares of stock of Center Company classified as available for sale. During 2021, the fair value of those shares increased by $19 million. What effect did this increase have on Sun's 2021 statement of cash flows? A. Cash from operating activities increased. B. Cash from investing activities increased. C. Cash from financing activities increased. D. No effect.
D. No effect. (There was no flow of cash)
Which of the following statements is UNTRUE regarding the statement of cash flows? A. The statement of cash flows presents information about cash flows that the other statements either (a) do not provide or (b) provide only indirectly. B. Noncash transactions sometimes are reported also. C. Either the direct or the indirect method can be used to calculate and present the net cash increase or decrease from operating activities. D. The indirect method derives cash flows indirectly by starting with sales revenue and "working backwards" to convert that amount to a cash basis.
D. The indirect method derives cash flows indirectly by starting with sales revenue and "working backwards" to convert that amount to a cash basis. (The indirect method starts with net income, not sales revenue.)
On July 15, 2021, M.W. Morgan Distribution sold land for $35 million that it had purchased in 2016 for $22 million. Required: Direct Method: What would be the amount(s) related to the sale that Morgan would report in its statement of cash flows for the year ended December 31, 2021, using the direct method? Indirect: The indirect method?
Direct Method: Cash Inflow from investing activities $35 million (Morgan would report the cash inflow of $35 million from the sale as a cash inflow from investing activities in its statement of cash flows. The $13 million gain is not a cash flow and would not be reported when using the direct method. For that reason, when using the indirect method, the gain would be subtracted from net income (which includes the gain) to avoid double-counting it.) Indirect Method: Cash inflow from investing activities $35 million Operating Activities: Negative adjustment to net income $(13) million
When calculating diluted EPS, which of the following, if dilutive, would cause the weighted average number of shares to increase?
Dividends on P/S- No Stock Options- Yes (Any dividend adjustment (due to convertible preferred stock) would be added to the numerator of the EPS fraction.)
Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2021, that permit executives to purchase 12 million of the company's $1 par common shares within the next six years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $17 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. Suppose that the options are exercised on April 3, 2024, when the market price is $19 per share. Ignoring taxes, what journal entry will National record?
Dr. Cash $204 Dr. Paid in capital- stock options $60 Cr. Common Stock $12 Cr. Paid in capital- excess of par $252 Cash ($17 exercise price × 12 million shares) = $204 millionPaid-in capital—stock options (account balance) $5 fair value per option × 12 million options granted =$60 million total compensation The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million each year. Common stock (12 million shares at $1 par per share) = $12 million Note: The market price at exercise is irrelevant.
On January 1, 2021, the Merit Group issued to its bank a $41 million, five-year installment note to be paid in five equal payments at the end of each year. Installment payments of $10 million annually include interest at the rate of 7%. Required: What would be the amount(s) related to the note that Merit would report in its statement of cash flows for the year ended December 31, 2021?
Merit would report the cash inflow of $41 million from the borrowing as a cash inflow from financing activities in its statement of cash flows. Each installment payment includes both an amount that represents interest and an amount that represents a reduction of principal. In its statement of cash flows, then, Merit reports the interest portion ($2,870,000*) as a cash outflow from operating activities and the principal portion ($7,130,000*) as a cash outflow from financing activities. Entry: Dr. Interest Expense (7% x Outstanding bal.) $2,870,000 Dr. Notes Payable (Difference) $7,130,000 Cr. Cash (Given) $10,000,000
Common stock options that are antidilutive generally affect the calculation of:
Neither Basic EPS or Dilutive EPS (Common stock options are not considered in basic EPS but are added to the number of shares if they are dilutive. Antidilutive stock options are ignored.)
Niles Company granted 9 million of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $5 per share on January 1, 2020, the grant date of the restricted stock award. When calculating diluted EPS at December 31, 2021, what will be the net increase in the weighted-average number of shares outstanding if the market price of the common shares averaged $5 per share during 2021? Net increase in weighted-average number of shares outstanding [blank] million shares
Net increase in weighted-average number of shares outstanding [$6] million shares The total compensation for the award is $45 million ($5 market price per share × 9 million shares). Because the stock award vests over three years, it is expensed as $15 million each year for three years. At the end of 2021, the second year, $30 million has been expensed and $15 million remains unexpensed, so $15 million would be the assumed proceeds in an EPS calculation. If the market price averages $5, the $15 million will buy back 3 million shares and we would add to the denominator of diluted EPS 6 million common shares: No adjustment to the numerator __________________________________________________ 9 million − 3* million = 6 million *Assumed purchase of treasury shares $15million÷$5 (average market price) 3 million shares
Agee Technology, Inc., issued 9% bonds, dated January 1, with a face amount of $400 million on July 1, 2021, at a price of $380 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semi-annually on June 30 and December 31. Required: Part 1: Prepare the journal entry to record interest at the effective interest rate at December 31. Part 2: What would be the amount(s) related to the bonds that Agee would report in its statement of cash flows for the year ended December 31, 2021, if it uses the direct method?
Part 1: Dr. Interest Expense $19 Million Cr. Discount on B/P $1 Million Cr. Cash $18 Million (Interest expense (10% × ½ × $380) = $19Cash (paid to bondholders) (9% × ½ × $400) = $18) Part 2: Agee would report the cash inflow of $380 million from the sale of the bonds as a cash inflow from financing activities in its statement of cash flows. The $18 million cash interest paid is a cash outflow from operating activities because interest is an income statement (operating) item.
Sherriane Baby Products' salaries expense was $17 million. Required: Part 1: What is the amount of cash Sherriane paid to employees during the reporting period if its salaries payable increased by $3 million? Part 2: Prepare a summary entry that represents the net effect of salaries expense incurred and paid during the reporting period.
Part 1: $14 Million Part 2: Dr. Salaries Expense $17 Million Cr. Cash $14 Million Cr. Salaries Payable $3 Million
LaRoe Lawns' inventory increased during the year by $6 million. Its accounts payable increased by $5 million during the same period. Required: Part 1: What is the amount of cash LaRoe paid to suppliers of merchandise during the reporting period if its cost of goods sold was $25 million? Part 2: Prepare a summary entry that represents the net effect of merchandise purchases during the reporting period.
Part 1: $26 Million Part 2: Dr. COGS $25 Million Dr. Inventory $6 Million Cr. Cash $26 Million Cr. A/P $5 Million
April Wood Products' accounts receivable increased during the year by $4 million. Required: Part 1: What is the amount of cash April Wood Products received from customers during the reporting period if its sales were $44 million? Part 2: Prepare a summary entry that represents the net effect of the selling and collection activities during the reporting period.
Part 1: $40 Million Part 2: Dr. Cash $40 Million Dr. A/R $4 Million Cr. Sales Revenue $44 Million
