Question 1

Which of the following statements does not accurately reflect the financial accounting for compensatory stock option plans?

Accepted Answer

A) Compensation expensed is allocated equally over the service (vesting)period. 
B) The compensation expense is not adjusted for changes in the market value of the stock options during the service (vesting)period. 
C) The paid-in capital stock options account is credited when compensation expense is recorded each year. 
D) Total owners' equity is increased by the par value of the common stock issued when the options are converteD.

Question 2

Shareholders who sell back shares of the company stock as treasury stock are

Accepted Answer

A) not taxed. 
B) taxed at ordinary rates. 
C) taxed at capital gains rates. 
D) subject to tax penalties.

Question 3

SFAS No.123 was issued as a compromise to the FASB's original position regarding stock options as it allowed companies to choose either the APB No.25 intrinsic value method or to expense the fair value of the options.

Accepted Answer

A) True 
 B)False

Question 4

The 1984 Revised Model Business Corporation Act redefined solvency as a situation where the fair value of assets exceed the fair value of liabilities after a distribution to shareholders.

Accepted Answer

A) True 
 B)False

Question 5

The following information has been provided to you by the Smith Corporation for the year ending December 31,2015:
• The numerator used in the calculation of basic earnings per share was $797,000.
• Cash dividends were paid to the common shareholders.
• 8% convertible bonds with a par value of $1,000,000 were issued on July 1,2015.
• The corporation's marginal income tax rate is 40%.
• 6% convertible preferred stock with a par value of $800,000 were outstanding during the entire year.
Assuming that both the bonds and preferred stock are dilutive,what is the numerator that should be used in the calculation of diluted earnings per share?

Accepted Answer

A) $893,000 
B) $869,000 
C) $773,000 
D) $821,000

Question 6

According to current GAAP,convertible bonds must be recorded at the value of debt only,with no value assigned to the conversion feature.

Accepted Answer

A) True 
 B)False

Question 7

According to current GAAP,the date when the terms for stock options are mutually agreed-upon and the stock options are awarded to employees is the

Accepted Answer

A) vesting date. 
B) grant date. 
C) exercise date. 
D) payment date.

Question 8

Mandatorily redeemable preferred stock dividends are reported as interest expense on the income statement.

Accepted Answer

A) True 
 B)False

Question 9

By using the book value method to record the conversion of convertible bonds,managers are able to protect themselves from recording conversion losses.

Accepted Answer

A) True 
 B)False

Question 10

The comparability of earnings per share across firms is influenced by the relative amount of capital raised by the various firms and by the ability of the firms to manage their reported earnings per share.

Accepted Answer

A) True 
 B)False

Question 11

One reason that companies issue stock options is to attempt to align employees' interests with the interests of the owners.

Accepted Answer

A) True 
 B)False

Question 12

On January 1, 2015, Waddle Company adopted a compensatory stock option plan and granted its managers 10,000 options to buy shares of common stock; each option can be used to acquire a share of common stock at a price of $25 a share. The fair value of each option was $7.50 on January 1, 2015. The options can be converted into common stock after July 1, 2015. The required service period is three years.
-How much compensation expense will be recorded for the year ending December 31,2017 using the fair value approach?

Accepted Answer

A) $75,000 
B) $175,000 
C) $50,000 
D) $25,000

Question 13

Corporate distributions to shareholders are governed by state law and are consistent from state to state.

Accepted Answer

A) True 
 B)False

Question 14

When a dividend is not declared on preferred stock,and the common share­holders cannot receive a dividend until all past and current dividends are paid to the preferred shareholders,the preferred stock is

Accepted Answer

A) cumulative. 
B) noncumulative. 
C) participating. 
D) nonparticipating.

Question 15

Analysts should expect to see stock option information in

Accepted Answer

A) the auditor's report. 
B) a note to the financial statements. 
C) a separate report to the SEC. 
D) a separate report to shareholders.

Question 16

Which of the following arguments was not used to support the continuation of the accounting for stock-based compensation plans as allowed under APB Opinion No.25?

Accepted Answer

A) Stock options do not involve a cash flow,therefore the recording of an expense would violate appropriate income measurement. 
B) The Black-Scholes method of valuing stock options has not been widely accepted and is arbitrary. 
C) The fair value approach could jeopardize compliance with contract terms and conditions. 
D) The fair value approach would increase expenses and lower net income which would result in lower stock prices.

Question 17

Financial analysts should always review stock repurchase plans carefully because

Accepted Answer

A) the plans always produce above-market returns. 
B) the plans usually produce above-market returns. 
C) it is important to determine the reasons for the buyback. 
D) the plans are always beneficial to the shareholders.

Exam 15: Financial Reporting for Owners Equity

Which of the following statements does not accurately reflect the financial accounting for compensatory stock option plans?

Shareholders who sell back shares of the company stock as treasury stock are

SFAS No.123 was issued as a compromise to the FASB's original position regarding stock options as it allowed companies to choose either the APB No.25 intrinsic value method or to expense the fair value of the options.

The 1984 Revised Model Business Corporation Act redefined solvency as a situation where the fair value of assets exceed the fair value of liabilities after a distribution to shareholders.

According to current GAAP,convertible bonds must be recorded at the value of debt only,with no value assigned to the conversion feature.

According to current GAAP,the date when the terms for stock options are mutually agreed-upon and the stock options are awarded to employees is the

Mandatorily redeemable preferred stock dividends are reported as interest expense on the income statement.

By using the book value method to record the conversion of convertible bonds,managers are able to protect themselves from recording conversion losses.

The comparability of earnings per share across firms is influenced by the relative amount of capital raised by the various firms and by the ability of the firms to manage their reported earnings per share.

One reason that companies issue stock options is to attempt to align employees' interests with the interests of the owners.

Corporate distributions to shareholders are governed by state law and are consistent from state to state.

When a dividend is not declared on preferred stock,and the common shareholders cannot receive a dividend until all past and current dividends are paid to the preferred shareholders,the preferred stock is

Analysts should expect to see stock option information in

Which of the following arguments was not used to support the continuation of the accounting for stock-based compensation plans as allowed under APB Opinion No.25?

Financial analysts should always review stock repurchase plans carefully because

Exam 15: Financial Reporting for Owners Equity

Which of the following statements does not accurately reflect the financial accounting for compensatory stock option plans?

Shareholders who sell back shares of the company stock as treasury stock are

SFAS No.123 was issued as a compromise to the FASB's original position regarding stock options as it allowed companies to choose either the APB No.25 intrinsic value method or to expense the fair value of the options.

The 1984 Revised Model Business Corporation Act redefined solvency as a situation where the fair value of assets exceed the fair value of liabilities after a distribution to shareholders.

According to current GAAP,convertible bonds must be recorded at the value of debt only,with no value assigned to the conversion feature.

According to current GAAP,the date when the terms for stock options are mutually agreed-upon and the stock options are awarded to employees is the

Mandatorily redeemable preferred stock dividends are reported as interest expense on the income statement.

By using the book value method to record the conversion of convertible bonds,managers are able to protect themselves from recording conversion losses.

The comparability of earnings per share across firms is influenced by the relative amount of capital raised by the various firms and by the ability of the firms to manage their reported earnings per share.

One reason that companies issue stock options is to attempt to align employees' interests with the interests of the owners.

Corporate distributions to shareholders are governed by state law and are consistent from state to state.

When a dividend is not declared on preferred stock,and the common share­holders cannot receive a dividend until all past and current dividends are paid to the preferred shareholders,the preferred stock is

Analysts should expect to see stock option information in

Which of the following arguments was not used to support the continuation of the accounting for stock-based compensation plans as allowed under APB Opinion No.25?

Financial analysts should always review stock repurchase plans carefully because

When a dividend is not declared on preferred stock,and the common shareholders cannot receive a dividend until all past and current dividends are paid to the preferred shareholders,the preferred stock is