Question 1

When a company repurchases its own shares,the transaction may not result in treasury stock being reported on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 2

When a company has no convertible securities and no stock options or warrants outstanding,the company has a simple capital structure.

Accepted Answer

A) True 
 B)False

Question 3

Preferred stock is viewed by many to be similar to a debt issue due to the fact that preferred stock dividends are a deductible corporate expense.

Accepted Answer

A) True 
 B)False

Question 4

The Heath Corporation reported net income for 2015 of $177,500. Heath began the year with 100,000 shares of $5 par value common shares outstanding and 2,500 shares of $100 par value 8% preferred shares outstanding. On October 1, Heath sold 10,000 shares of common stock for $6 per share. Heath paid dividends to the common shareholders in December.
-The basic earnings per share for 2015 is (rounded)

Accepted Answer

A) $3.50 per share. 
B) $3.94 per share. 
C) $4.81 per share. 
D) $6.10 per share.

Question 5

The Slazenger Company has provided the following information:
• Shareholders' equity on January 1,2015 was $2,225,900.
• Shareholders' equity on December 31,2015 was $2,379,300.
• Treasury stock costing $71,000 was sold for $62,000;the treasury stock was acquired during 2014.
• A property dividend was declared and distributed during 2015.The property's book value was $42,325 on the declaration date;the property's market value was $54,485 on the declaration date and $57,500 on the distribution date.
• 10,000 shares of $20 par value preferred stock was purchased and retired during 2015.The shares were initially issued for $25 per share and were purchased for $29 per share.
• 5,000 shares of $5 par value common stock were issued as the result of a small stock dividend.The market value per share was $9 at the declaration date and $9.50 at the distribution date.
• Cash dividends declared and paid during the year totaled $70,000.
What was Slazenger's 2015 net income assuming that the only other transactions impacting shareholders' equity are described above?

Accepted Answer

The answer of The Slazenger Company has provided the following...

Question 6

Stock options are granted to the employees of Young Company on March 10,2014.The employees must wait until March 10,2018 to exercise the options.The four-year waiting period is the

Accepted Answer

A) expected life of the options. 
B) grant period. 
C) vesting period. 
D) holding perioD.

Question 7

Current GAAP requires companies to measure the fair value of stock options at the grant date.

Accepted Answer

A) True 
 B)False

Question 8

The Dunlop Corporation reported basic EPS of $3.50 for the year ended December 31,2014;the denominator used in the basic EPS calculation was 360,000 shares.Dunlop's marginal income tax rate is 40%.Dunlap had the following convertible securities outstanding during the entire year:
• 8% convertible preferred stock with a total par value of $1,000,000;the preferred stock is convertible into 22,000 shares of common stock.
• 10% convertible bonds with a total par value of $6,000,000;the convertible bonds are convertible into 120,000 shares of common stock.
What is the diluted EPS? (Hint: First test each security separately for dilution.)

Accepted Answer

The answer of The Dunlop Corporation reported basic EPS of...

Question 9

Companies with a history of net operating losses are prone to issue which one of the following to raise money?

Accepted Answer

A) Debenture bonds 
B) Serial bonds 
C) Preferred stock 
D) Notes payable

Question 10

When a publicly traded company issues both common stock and preferred stock,the SEC requires that

Accepted Answer

A) preferred and common stock be combined in the equity section. 
B) preferred and common stock be clearly differentiated on the balance sheet. 
C) all preferred stock be shown as a liability. 
D) mandatorily redeemable preferred stock be shown as a liability.

Question 11

The diluted EPS figure is a conservative measure of the earnings flow to each share of stock.

Accepted Answer

A) True 
 B)False

Question 12

Ace Industries has the following shareholders' equity accounts at December 31, 2015:
$\begin{array}{lr}
\text { Preferred stock, S100 par value, } 10 \% \text { dividend, } 50,000 \text { shares issued and outstanding } & \$ 5,000,000 \
\text { Common stock, S6 par value, } 1 \text { million shares issued and outstanding } & 6,000,000 \
\text { Paid-in capital in excess of par } & 119,000,000 \
\text { Unrestricted retained earnings } & 7,500,000 \
\text { Retained eamings restricted for plant expansion } & 2,500,000
\end{array}$
-On December 15,2015 Ace Industries repurchased 200,000 shares of its common stock for $10 per share.Based on its shareholders' equity accounts,what can be inferred about this purchase?

Accepted Answer

A) Ace is holding $2,000,000 of treasury stock which is being disclosed in the notes to the financial statements. 
B) Ace retired the shares by reducing the common stock and paid-in capital accounts. 
C) Ace is reporting the shares as a $2,000,000 investment on the asset side of the balance sheet. 
D) Not enough information is provided to determine how Ace recorded the purchase.

Question 13

A company has stock options outstanding which allow the holders of the options to buy 12,000 shares of common stock;therefore 12,000 shares will be added to the denominator when calculating diluted earnings per share.

Accepted Answer

A) True 
 B)False

Question 14

Cheery Company follows IFRS for its financial reporting. On January 1, 2015 Cheery issued €250 million of 10-year convertible notes that pay interest at 5% annually. Investors pay €250 million for the notes even though the company's credit risk at the time implies a 10% interest rate for traditional debt of similar duration. When the cash flows associated with the debt are discounted at 10%, the resulting value is €175 million.
-On Cheery's December 31,2015 income statement how much interest expense will be recorded?

Accepted Answer

A) €25 million 
B) €12.5 million 
C) €17.5 million 
D) €8.75 million

Question 15

Which of the following statements pertaining to preferred stock is not correct?

Accepted Answer

A) Preferred stock may have an adjustable rate which pays a dividend that is adjusted,usually on a quarterly basis. 
B) Preferred stock dividends are contractual obligations that must be paid in profitable years. 
C) Most preferred stock issues are nonparticipating,meaning that the shareholders are entitled to receive only dividends based on the stated dividend rate. 
D) Preferred shareholders are given preference with respect to both dividend distributions and in liquidation of the company.

Question 16

On January 2,2015,Cannon Company issued $10,000,000 of convertible debt.The bonds are zero-coupon,and each $1,000 bond is convertible into 10 shares of Cannon Company's common stock at the bond holder's option.The bonds mature in 2019 and were issued at par.Companies with similar credit profiles were issuing non-convertible debt at an effective rate of interest of 8%.The present value factor for $1 for 5 periods at 8% is .68058.For each of the following assumptions,prepare the journal entry to record the issuance of debt and entries for 2015 and 2016 to record interest expense.No bonds were converted during 2015 or 2016.
A.  
No further entries would be required during 2015 and 2016 under U.S.GAAP.Current GAAP allows Cannon Company to avoid interest expense because the zero-coupon convertible debt and structure of the conversion feature allowed the company to sell the bond for par (face)value.Therefore,no interest expense is recorded over the life of the bond. 
A.Cannon Company uses U.S.GAAP to prepare its external financial reporting to shareholders and regulators.
B.  
  
B.Cannon Company uses IFRS to prepare its external financial reporting to shareholders and regulators.

Accepted Answer

The answer of On January 2,2015,Cannon Company issued $10,000,000 of...

Question 17

An argument raised by opponents to the FASB's proposal that employee stock options should be recognized as an expense was that it could

Accepted Answer

A) violate the historical cost principle. 
B) violate the cost-benefit rule. 
C) violate materiality concepts. 
D) jeopardize compliance with contract terms and conditions.

Question 18

The denominator used in the calculation of basic earnings per share is the

Accepted Answer

A) number of common shares outstanding at the end of the year. 
B) number of preferred shares outstanding at the end of the year. 
C) weighted average number of common shares outstanding during the year. 
D) weighted average number of common shares and preferred shares outstanding during the year.

Question 19

SFAS No.123 was issued as a compromise to the FASB's original position regarding stock options as it

Accepted Answer

A) required companies to continue following the approach used in APB No.25. 
B) required companies to measure the fair value of stock options and charge this to expense. 
C) allowed companies to choose either the APB No.25 approach or expense the fair value of the options. 
D) abandoned any reference to recognition of expense for options.

Question 20

The following information has been obtained from the Massena Corporation:
• 100,000 shares of common stock were outstanding on January 1,2015.
• 30,000 shares of common stock were issued on March 1,2015.
• A 2 for 1 stock split was declared on April 1,2015.
• The 2 for 1 stock split was distributed on May 1,2015.
• 10,000 shares of common stock were purchased on October 1,2015.
What is the weighted average number of shares to be used in the calculation of basic earnings per share for 2015?

Accepted Answer

A) 247,500 
B) 216,250 
C) 230,833 
D) 209,167

Exam 15: Financial Reporting for Owners Equity

When a company repurchases its own shares,the transaction may not result in treasury stock being reported on the balance sheet.

When a company has no convertible securities and no stock options or warrants outstanding,the company has a simple capital structure.

Preferred stock is viewed by many to be similar to a debt issue due to the fact that preferred stock dividends are a deductible corporate expense.

Stock options are granted to the employees of Young Company on March 10,2014.The employees must wait until March 10,2018 to exercise the options.The four-year waiting period is the

Current GAAP requires companies to measure the fair value of stock options at the grant date.

Companies with a history of net operating losses are prone to issue which one of the following to raise money?

When a publicly traded company issues both common stock and preferred stock,the SEC requires that

The diluted EPS figure is a conservative measure of the earnings flow to each share of stock.

A company has stock options outstanding which allow the holders of the options to buy 12,000 shares of common stock;therefore 12,000 shares will be added to the denominator when calculating diluted earnings per share.

Which of the following statements pertaining to preferred stock is not correct?

An argument raised by opponents to the FASB's proposal that employee stock options should be recognized as an expense was that it could

The denominator used in the calculation of basic earnings per share is the

SFAS No.123 was issued as a compromise to the FASB's original position regarding stock options as it