Intermediate Accounting Chapter 16

Created by lildewey02 

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Convertible BondsConvertible bonds
a. have priority over other indebtedness.
b. are usually secured by a first or second mortgage.
c. pay interest only in the event earnings are sufficient to cover the interest.
d. may be exchanged for equity securities.

D. May be exchanged for equity securities

The conversion of bonds is most commonly recorded by the
a. incremental method.
b. proportional method.
c. market value method.
d. book value method.

D. Book Value method

When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, the sweetener is accounted for as a(n)
a. extraordinary item.
b. expense.
c. loss.
d. none of these.

B. Expense

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
a. the ease with which convertible debt is sold even if the company has a poor credit rating.
b. the fact that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain financing at lower rates.
d. that convertible bonds will always sell at a premium.

C. That many corporations can obtain financing at lower rates.

When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as an adjustment of additional paid-in capital.

A. Reflected currently in income but not as an extraordinary item

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
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.

D. Treated as a direct reduction of retained earnings

The conversion of preferred stock may be recorded by the
a. incremental method.
b. book value method.
c. market value method.
d. par value method.

B. Book value method

When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to
a. additional paid-in capital from stock warrants.
b. retained earnings.
c. a liability account.
d. premium on bonds payable.

D. Premium on bonds payable

Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when
a. the market value of the warrants is not readily available.
b. exercise of the warrants within the next few fiscal periods seems remote.
c. the allocation would result in a discount on the debt security.
d. the warrants issued with the debt securities are nondetachable.

D. The warrants issued with the debt securities are nondetachable

Stock warrants outstanding should be classified as
a. liabilities.
b. reductions of capital contributed in excess of par value.
c. assets.
d. none of these.

D. None of these

A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably
a. zero.
b. calculated by the excess of the proceeds over the face amount of the bonds.
c. equal to the market value of the warrants.
d. based on the relative market values of the two securities involved.

D. Based on the relative market values of the two securities involved.

The distribution of stock rights to existing common stockholders will increase paid-in capital at the
Date of Issuance Date of Exercise
of the Rights of the Rights
a. Yes Yes
b. Yes No
c. No Yes
d. No No

C. No, Yes

The major difference between convertible debt and stock warrants is that upon exercise of the warrants
a. the stock is held by the company for a defined period of time before they are issued to the warrant holder.
b. the holder has to pay a certain amount of cash to obtain the shares.
c. the stock involved is restricted and can only be sold by the recipient after a set period of time.
d. no paid-in capital in excess of par can be a part of the transaction.

B. The holder has to pay a certain amount of cash to obtain the shares

Which of the following is not a characteristic of a noncompensatory stock option plan?
a. Substantially all full-time employees may participate on an equitable basis.
b. The plan offers no substantive option feature.
c. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company.
d. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others.

C. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company.

The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee
a. is granted the option.
b. has performed all conditions precedent to exercising the option.
c. may first exercise the option.
d. exercises the option.

A. is granted the option

Compensation expense resulting from a compensatory stock option plan is generally
a. recognized in the period of exercise.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. allocated over the periods of the employee's service life to retirement.

C. Allocated to the periods benefited by the employee's required service.

The date on which total compensation expense is computed in a stock option plan is the date
a. of grant.
b. of exercise.
c. that the market price coincides with the option price.
c. that the market price exceeds the option price.

A. of grant

Which of the following is not a characteristic of a noncompensatory stock purchase plan?
a. It is open to almost all full-time employees.
b. The discount from market price is small.
c. The plan offers no substantive option feature.
d. All of these are characteristics.

D. All of these are characteristics

Under the intrinsic value method, compensation expense resulting from an incentive stock option is generally
a. not recognized because no excess of market price over the option price exists at the date of grant.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. recognized in the period of exercise.

C. Allocated to the periods benefited by the employee's required service

For stock appreciation rights, the measurement date for computing compensation is the date
a. the rights mature.
b. the stock's price reaches a predetermined amount.
c. of grant.
d. of exercise.

D. of exercise

An executive pays no taxes at time of exercise in a(an)
a. stock appreciation rights plan.
b. incentive stock option plan.
c. nonqualified stock option plan.
d. Taxes would be paid in all of these.

B. incentive stock option plan

A company estimates the fair value of SARs, using an option-pricing model, for
a. share-based equity awards.
b. share-based liability awards.
c. both equity awards and liability awards.
d. neither equity awards or liability awards.

B. Share-based liability awards

Fogel Co. has $2,500,000 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, 2010, the holders of $800,000 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 $175,000. Fogel should record, as a result of this conversion, a
a. credit of $136,000 to Paid-in Capital in Excess of Par.
b. credit of $120,000 to Paid-in Capital in Excess of Par.
c. credit of $56,000 to Premium on Bonds Payable.
d. loss of $8,000.

A. credit of $136,000 to Paid-in Capital in Excess of Par.

On July 1, 2010, an interest payment date, $60,000 of Parks Co. bonds were converted into 1,200 shares of Parks Co. common stock each having a par value of $45 and a market value of $54. There is $2,400 unamortized discount on the bonds. Using the book value method, Parks would record
a. no change in paid-in capital in excess of par.
b. a $3,600 increase in paid-in capital in excess of par.
c. a $7,200 increase in paid-in capital in excess of par.
d. a $4,800 increase in paid-in capital in excess of par.

B. a $3,600 increase in paid-in capital in excess of par.

$800,000 + ($175,000 × .32) - (800 × 30 × $30) = $136,000.

Morgan Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $16,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2010, the holders of $2,400,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $1,000,000. In applying the book value method, what amount should Morgan credit to the account "paid-in capital in excess of par," as a result of this conversion?
a. $330,000.
b. $160,000.
c. $1,440,000.
d. $720,000.

A. $330,000


($2,400,000 ÷ $1,000) × 40 × $20 = $1,920,000 (common stock)
($2,400,000 ÷ $16,000,000) × $1,000,000 = $150,000 (unamortized discount)
$2,400,000 - $1,920,000 - $150,000 = $330,000.

Chang Corporation issued $3,000,000 of 9%, ten-year convertible bonds on July 1, 2010 at 96.1 plus accrued interest. The bonds were dated April 1, 2010 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2011, $600,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

If "interest payable" were credited when the bonds were issued, what should be the amount of the debit to "interest expense" on October 1, 2010?


a. $64,500.
b. $67,500.
c. $70,500.
d. $135,000.

C: 70,500


($3,000,000 - $2,883,000) ÷ 117 = $1,000/month
($3,000,000 × .09 × 3/12) + ($1,000 × 3) = $70,500.

April 1, 2010 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2011, $600,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.


What should be the amount of the unamortized bond discount on April 1, 2011 relating to the bonds converted?
a. $23,400.
b. $21,600.
c. $11,700.
d. $22,200.

B. 21,600


$117,000 ÷ 117 = $1,000/month
$600,000
$117,000 - [($1,000 × 3) + ($1,000 × 6] × ————— = $21,600
$3,000,000

Chang Corporation issued $3,000,000 of 9%, ten-year convertible bonds on July 1, 2010 at 96.1 plus accrued interest. The bonds were dated April 1, 2010 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2011, $600,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.


What was the effective interest rate on the bonds when they were issued?
a. 9%
b. Above 9%
c. Below 9%
d. Cannot determine from the information given.

B. Above 9%

Bonds issued at a discount, market rate > coupon rate.

Litke Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into 2,000 shares of common stock (par value $40). At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, and the stock is quoted on the market at $60 per share. If the bonds are converted into common, what is the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds?
a. $25,000
b. $22,000
c. $32,000
d. $40,000

B. 22,000

$100,000 + $2,000 - (2,000 × $40) = $22,000.

In 2010, Eklund, Inc., issued for $103 per share, 60,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Eklund's $25 par value common stock at the option of the preferred stockholder. In August 2011, 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?
a. $1,020,000.
b. $780,000.
c. $1,500,000.
d. $1,680,000.

D. 1,680,000

$6,180,000 - (60,000 × 3 × $25) = $1,680,000.

On December 1, 2010, Lester Company issued at 103, two hundred of its 9%, $1,000 bonds. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Lester's common stock. On December 1, 2010, the market value of the bonds, without the stock warrants, was 95, and the market value of each stock purchase warrant was $50. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be
a. $193,640.
b. $195,700.
c. $200,000.
d. $206,000.

B. 195,700


($200,000 × .95) + (200 × $50) = $200,000; $200,000 × 1.03 = $206,000

$190,000
———— × $206,000 = $195,700.
$200,000

On March 1, 2010, Ruiz Corporation issued $800,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2030. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2010, the fair market value of Ruiz's common stock was $40 per share and the fair market value of the warrants was $2.00. What amount should Ruiz record on March 1, 2010 as paid-in capital from stock warrants?
a. $28,800
b. $33,600
c. $41,600
d. $40,000

C. 41,600


($800,000 × .95) + (800 × 25 × $2) = $800,000; $800,000 × 1.04 = $832,000

$40,000
———— × $832,000 = $41,600.
$800,000

During 2010, Gordon Company issued at 104 three hundred, $1,000 bonds due in ten years. One detachable stock warrant entitling the holder to purchase 15 shares of Gordon's common stock was attached to each bond. At the date of issuance, the market value of the bonds, without the stock warrants, was quoted at 96. The market value of each detachable warrant was quoted at $40. What amount, if any, of the proceeds from the issuance should be accounted for as part of Gordon's stockholders' equity?
a. $0
b. $12,000
c. $12,480
d. $11,856

C. 12,480


($300,000 × .96) + (300 × $40) = $300,000; $300,000 × 1.04 = $312,000

$12,000
———— × $312,000 = $12,480.
$300,000

On April 7, 2010, Kegin Corporation sold a $2,000,000, twenty-year, 8 percent bond issue for $2,120,000. Each $1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation's common stock for $30. The stock has a par value of $25 per share. Immediately after the sale of the bonds, the corporation's securities had the following market values:
8% bond without warrants $1,008
Warrants 21
Common stock 28
What accounts should Kegin credit to record the sale of the bonds?
a. Bonds Payable $2,000,000
Premium on Bonds Payable 77,600
Paid-in Capital—Stock Warrants 42,400
b. Bonds Payable $2,000,000
Premium on Bonds Payable 16,000
Paid-in Capital—Stock Warrants 84,000
c. Bonds Payable $2,000,000
Premium on Bonds Payable 35,200
Paid-in Capital—Stock Warrants 84,800
d. Bonds Payable $2,000,000
Premiums on Bonds Payable 120,000

C. Bonds Payable $2,000,000
Premium on Bonds Payable 35,200
Paid-in Capital—Stock Warrants 84,800


(2,000 × $1,008) + (4,000 × $21) = $2,100,000

$2,016,000
————— × $2,120,000 = $2,035,200, bonds: $2,000,000
$2,100,000

$84,000
Premium: $35,200; ————— × $2,120,000 = $84,800.
$2,100,000

n May 1, 2010, Payne Co. issued $300,000 of 7% bonds at 103, which are due on April 30, 2020. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2010, the fair value of Payne's common stock was $35 per share and of the warrants was $2.


On May 1, 2010, Payne should credit Paid-in Capital from Stock Warrants for
a. $11,520.
b. $12,000.
c. $12,360.
d. $21,000.

C. 12,360


($300,000 × .96) + (6,000 × $2) = $300,000;
$300,000 × 1.03 = $309,000

$12,000
———— × $309,000 = $12,360.
$300,000

n May 1, 2010, Payne Co. issued $300,000 of 7% bonds at 103, which are due on April 30, 2020. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2010, the fair value of Payne's common stock was $35 per share and of the warrants was $2.


On May 1, 2010, Payne should record the bonds with a
a. discount of $12,000.
b. discount of $3,360.
c. discount of $3,000.
d. premium of $9,000

B. discount of 3,360

$300,000 - (288,000/300,000)*309,000= $3,360.

On July 4, 2010, Chen Company issued for $4,200,000 a total of 40,000 shares of $100 par value, 7% noncumulative preferred stock along with one detachable warrant for each share issued. Each warrant contains a right to purchase one share of Chen $10 par value common stock for $15 per share. The stock without the warrants would normally sell for $4,100,000. The market price of the rights on July 1, 2010, was $2.50 per right. On October 31, 2010, when the market price of the common stock was $19 per share and the market value of the rights was $3.00 per right, 16,000 rights were exercised. As a result of the exercise of the 16,000 rights and the issuance of the related common stock, what journal entry would Chen make?
a. Cash 240,000
Common Stock 160,000
Paid-in Capital in Excess of Par 80,000
b. Cash 240,000
Paid-in Capital—Stock Warrants 40,000
Common Stock 160,000
Paid-in Capital in Excess of Par 120,000
c. Cash 240,000
Paid-in Capital—Stock Warrants 100,000
Common Stock 160,000
Paid-in Capital in Excess of Par 180,000
d. Cash 240,000
Paid-in Capital—Stock Warrants 60,000
Common Stock 160,000
Paid-in Capital in Excess of Par 140,000

B. Cash 240,000
Paid-in Capital—Stock Warrants 40,000
Common Stock 160,000
Paid-in Capital in Excess of Par 120,000


Dr. Cash: 16,000 × $15 = $240,000
Dr. Paid-in Capital—Stock Warrants: $100,000 × 16/40 = $40,000
Cr. Common Stock: 16,000 × $10 = $160,000
Cr. Paid-in Capital in Excess of Par: ($5 + $2.50) × 16,000 = $120,000.

Vernon 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 Vernon 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?
a. $20,000
b. $20,500
c. $24,000
d. $25,000

B. 20,500

[$20,000 ÷ ($20,000 + $180,000)] × $205,000 = $20,500.

On May 1, 2010, Marly Co. issued $500,000 of 7% bonds at 103, which are due on April 30, 2020. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Marly's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2010, the fair value of Marly's common stock was $35 per share and of the warrants was $2.


On May 1, 2010, Marly should record the bonds with a
a. discount of $20,000.
b. discount of $5,000.
c. discount of $5,600.
d. premium of $15,000.

C. discount of $5,600.


($500,000 × .96) + (500 × 20 × $2) = $500,000
($480,000 ÷ $500,000) × ($500,000 × 1.03) = $494,400
$500,000 - $494,400 = $5,600.

On May 1, 2010, Marly Co. issued $500,000 of 7% bonds at 103, which are due on April 30, 2020. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Marly's common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2010, the fair value of Marly's common stock was $35 per share and of the warrants was $2.


On May 1, 2010, Marly should credit Paid-in Capital from Stock Warrants for
a. $35,000
b. $20,600
c. $20,000
d. $19,200

B. 20,600


500 × 20 × $2 = $20,000
($20,000 ÷ $500,000) × $515,000 = $20,600.

On July 1, 2010, Ellison Company granted Sam Wine, an employee, an option to buy 400 shares of Ellison 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 $1,800. Wine exercised his option on October 1, 2010 and sold his 400 shares on December 1, 2010. Quoted market prices of Ellison Co. stock in 2010 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, 2010. As a result of the option granted to Wine, using the fair value method, Ellison should recognize compensation expense on its books in the amount of
a. $1,800.
b. $600.
c. $450.
d. $0.

B. 600

$1,800 ÷ 3 = $600.

On January 1, 2010, Trent Company granted Dick Williams, an employee, an option to buy 100 shares of Trent 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 $900. Williams exercised his option on September 1, 2010, and sold his 100 shares on December 1, 2010. Quoted market prices of Trent Co. stock during 2010 were:
January 1 $30 per share
September 1 $36 per share
December 1 $40 per share
The service period is for two years beginning January 1,2010. As a result of the option granted to Williams, using the fair value method, Trent should recognize compensation expense for 2010 on its books in the amount of
a. $1,000.
b. $900.
c. $450.
d. $0.

C. 450

$900 ÷ 2 = $450.

On December 31, 2010, Gonzalez Company granted some of its executives options to purchase 100,000 shares of the company's $10 par common stock at an option price of $50 per share. The Black-Scholes option pricing model determines total compensation expense to be $750,000. The options become exercisable on January 1, 2011, and represent compensation for executives' services over a three-year period beginning January 1, 2011. At December 31, 2011 none of the executives had exercised their options. What is the impact on Gonzalez's net income for the year ended December 31, 2011 as a result of this transaction under the fair value method?
a. $250,000 increase.
b. $750,000 decrease.
c. $250,000 decrease.
d. $0.

C. 250,000 decrease

$750,000 ÷ 3 = $250,000 decrease.

On January 1, 2011 Reese Company granted Jack Buchanan, an employee, an option to buy 100 shares of Reese Co. stock for $40 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 $1,200. Buchanan exercised his option on September 1, 2011, and sold his 100 shares on December 1, 2011. Quoted market prices of Reese Co. stock during 2011 were:
January 1 $40 per share
September 1 $48 per share
December 1 $54 per share
The service period is for two years beginning January 1, 2011. As a result of the option granted to Buchanan, using the fair value method, Reese should recognize compensation expense for 2011 on its books in the amount of
a. $0.
b. $600.
c. $1,200
d. $1,400

B. 600

$1,200 ÷ 2 = $600.

On June 30, 2010, Yang Corporation granted compensatory stock options for 20,000 shares of its $24 par value common stock to certain of its key employees. The market price of the common stock on that date was $31 per share and the option price was $28. Using a fair value option pricing model, total compensation expense is determined to be $64,000. The options are exercisable beginning January 1, 2012, providing those key employees are still in the employ of the company at the time the options are exercised. The options expire on June 30, 2013.
On January 4, 2012, when the market price of the stock was $36 per share, all options for the 20,000 shares were exercised. The service period is for two years beginning January 1, 2010. Using the fair value method, what should be the amount of compensation expense recorded by Yang Corporation for these options on December 31, 2010?
a. $64,000
b. $32,000
c. $15,000
d. $0

B. 32,000

$64,000 ÷ 2 = $32,000.

In order to retain certain key executives, Smiley Corporation granted them incentive stock options on December 31, 2009. 80,000 options were granted at an option price of $35
per share. Market prices of the stock were as follows:
December 31, 2010 $46 per share
December 31, 2011 51 per share
The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2010. The Black-Scholes option pricing model determines total compensation expense to be $800,000. What amount of compensation expense should Smiley recognize as a result of this plan for the year ended December 31, 2010 under the fair value method?
a. $1,400,000.
b. $880,000.
c. $800,000.
d. $400,000.

D. 400,00

$800,000 ÷ 2 = $400,000.

On January 1, 2011, Ritter Company granted stock options to officers and key employees for the purchase of 10,000 shares of the company's $1 par common stock at $20 per share as additional compensation for services to be rendered over the next three years. The options are exercisable during a five-year period beginning January 1, 2014 by grantees still employed by Ritter. The Black-Scholes option pricing model determines total compensation expense to be $90,000. The market price of common stock was $26 per share at the date of grant. The journal entry to record the compensation expense related to these options for 2011 would include a credit to the Paid-in Capital—Stock Options account for
a. $0.
b. $18,000.
c. $20,000.
d. $30,000.

D. 30,000

$90,000 ÷ 3 = $30,000.

On January 1, 2011, Evans Company granted Tim Telfer, an employee, an option to buy 1,000 shares of Evans Co. stock for $25 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 $7,500. Telfer exercised his option on September 1, 2011, and sold his 1,000 shares on December 1, 2011. Quoted market prices of Evans Co. stock during 2011 were
January 1 $25 per share
September 1 $30 per share
December 1 $34 per share
The service period is for three years beginning January 1, 2011. As a result of the option granted to Telfer, using the fair value method, Evans should recognize compensation expense for 2011 on its books in the amount of
a. $9,000.
b. $7,500.
c. $2,500.
d. $1,500.

C. 2,500

$7,500 ÷ 3 = $2,500.

On December 31, 2010, Kessler Company granted some of its executives options to purchase 50,000 shares of the company's $10 par common stock at an option price of $50 per share. The options become exercisable on January 1, 2011, and represent compensation for executives' services over a three-year period beginning January 1, 2011. The Black-Scholes option pricing model determines total compensation expense to be $300,000. At December 31, 2011, none of the executives had exercised their options. What is the impact on Kessler's net income for the year ended December 31, 2011 as a result of this transaction under the fair value method?
a. $100,000 increase
b. $0
c. $100,000 decrease
d. $300,000 decrease

C. 100,000 decrease

$300,000 ÷ 3 = $100,000.

Weiser Corp. on January 1, 2007, granted stock options for 40,000 shares of its $10 par value common stock to its key employees. The market price of the common stock on that date was $23 per share and the option price was $20. The Black-Scholes option pricing model determines total compensation expense to be $240,000. The options are exercisable beginning January 1, 2010, provided those key employees are still in Weiser's employ at the time the options are exercised. The options expire on January 1, 2011.
On January 1, 2010, when the market price of the stock was $29 per share, all 40,000 options were exercised. The amount of compensation expense Weiser should record for 2009 under the fair value method is
a. $0.
b. $40,000.
c. $80,000.
d. $120,000.

C. 80,000

$240,000 ÷ 3 = $80,000/year.

On December 31, 2010, Houser Company granted some of its executives options to purchase 45,000 shares of the company's $50 par common stock at an option price of $60 per share. The Black-Scholes option pricing model determines total compensation expense to be $900,000. The options become exercisable on January 1, 2011, and represent compensation for executives' past and future services over a three-year period beginning January 1, 2011. What is the impact on Houser's total stockholders' equity for the year ended December 31, 2010, as a result of this transaction under the fair value method?
a. $900,000 decrease
b. $300,000 decrease
c. $0
d. $300,000 increase

C. 0


$900,000 - (900,000 * 2/3) = $300,000 increase (from the credit to Paid-in
Capital—Stock Options). Offset by $300,000 decrease (from the debit to
Compensation Expense).

On June 30, 2008, Norman Corporation granted compensatory stock options for 30,000 shares of its $20 par value common stock to certain of its key employees. The market price of the common stock on that date was $36 per share and the option price was $30. The Black-Scholes option pricing model determines total compensation expense to be $360,000. The options are exercisable beginning January 1, 2011, provided those key employees are still in Norman's employ at the time the options are exercised. The options expire on June 30, 2012.
On January 4, 2011, when the market price of the stock was $42 per share, all 30,000 options were exercised. What should be the amount of compensation expense recorded by Norman Corporation for the calendar year 2010 using the fair value method?
a. $0.
b. $144,000.
c. $180,000.
d. $360,000.

B. 144,000

(360,000 * 12/30) = $144,000.

In order to retain certain key executives, Jensen Corporation granted them incentive stock options on December 31, 2009. 50,000 options were granted at an option price of $35 per share. Market prices of the stock were as follows:
December 31, 2010 $46 per share
December 31, 2011 51 per share
The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2010. The Black-Scholes option pricing model determines total compensation expense to be $500,000. What amount of compensation expense should Jensen recognize as a result of this plan for the year ended
December 31, 2010 under the fair value method?
a. $250,000.
b. $500,000.
c. $550,000.
d. $1,750,000.

A. 250,000

$500,000 ÷ 2 = $250,000.

Grant, Inc. had 40,000 shares of treasury stock ($10 par value) at December 31, 2010, which it acquired at $11 per share. On June 4, 2011, Grant issued 20,000 treasury shares to employees who exercised options under Grant's employee stock option plan. The market value per share was $13 at December 31, 2010, $15 at June 4, 2011, and $18 at December 31, 2011. The stock options had been granted for $12 per share. The cost method is used. What is the balance of the treasury stock on Grant's balance sheet at December 31, 2011?
a. $140,000.
b. $180,000.
c. $220,000.
d. $240,000.

C. 220,000

20,000 × $11 = $220,000

On January 1, 2010, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 60,000 SARs. Current market prices of the stock are as follows:
January 1, 2010 $35 per share
December 31, 2010 38 per share
December 31, 2011 30 per share
December 31, 2012 33 per share

Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2010.


What amount of compensation expense should Korsak recognize for the year ended December 31, 2010?
a. $180,000
b. $270,000
c. $225,000
d. $1,080,000

B. 270,000

($38 - $20) × 60,000 × .25 = $270,000.

On January 1, 2010, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 60,000 SARs. Current market prices of the stock are as follows:
January 1, 2010 $35 per share
December 31, 2010 38 per share
December 31, 2011 30 per share
December 31, 2012 33 per share

Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2010.


What amount of compensation expense should Korsak recognize for the year ended December 31, 2011?
a. $0
b. $30,000
c. $300,000
d. $150,000

B. 30,000


($30 - $20) × 60,000 × .5 = $300,000
$300,000 - $270,000 = $30,000.

On January 1, 2010, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 60,000 SARs. Current market prices of the stock are as follows:
January 1, 2010 $35 per share
December 31, 2010 38 per share
December 31, 2011 30 per share
December 31, 2012 33 per share

Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2010.


On December 31, 2012, 16,000 SARs are exercised by executives. What amount of compensation expense should Korsak recognize for the year ended December 31, 2012?
a. $285,000
b. $195,000
c. $585,000
d. $78,000

A: 285,000


($33 - $20) × 60,000 × .75 = $585,000
$585,000 - $300,000 = $285,000.

On January 2, 2010, Farr Co. issued 10-year convertible bonds at 105. During 2012, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Farr's common stock was 50 percent above its par value. On January 2, 2010, cash proceeds from the issuance of the convertible bonds should be reported as
a. paid-in capital for the entire proceeds.
b. paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.
c. a liability for the face amount of the bonds and paid-in capital for the premium over the face amount.
d. a liability for the entire proceeds.

D. a liability for the entire proceeds

Lang Co. issued bonds with detachable common stock warrants. Only the warrants had a known market value. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported as
a. Discount on Bonds Payable.
b. Premium on Bonds Payable.
c. Common Stock Subscribed.
d. Paid-in Capital in Excess of Par—Stock Warrants.

A. discount on bonds payable

On January 1, 2010, Sharp Corp. granted an employee an option to purchase 6,000 shares of Sharp's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $140,000. The option became exercisable on December 31, 2011, after the employee completed two years of service. The market prices of Sharp's stock were as follows:
January 1, 2010 $30
December 31, 2011 50
For 2011, should recognize compensation expense under the fair value method of
a. $90,000.
b. $30,000.
c. $70,000.
d. $0.

C. 70,000

$140,000 ÷ 2 = $70,000.

On January 2, 2010, for past services, Rosen Corp. granted Nenn Pine, its president, 16,000 stock appreciation rights that are exercisable immediately and expire on
January 2, 2011. On exercise, Nenn is entitled to receive cash for the excess of the market price of the stock on the exercise date over the market price on the grant date. Nenn did not exercise any of the rights during 2010. The market price of Rosen's stock was $30 on January 2, 2010, and $45 on December 31, 2010. As a result of the stock appreciation rights, Rosen should recognize compensation expense for 2010 of
a. $0.
b. $80,000.
c. $240,000.
d. $480,000.

C. 240,000

($45 - $30) × 16,000 = $240,000.

With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure?
a. Common stock, preferred stock, and convertible securities outstanding in lots of even thousands
b. Earnings derived from one primary line of business
c. Ownership interest consisting solely of common stock
d. None of these

C. ownership interest consisting solely of common stock

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
a. preferred dividends in arrears.
b. preferred dividends in arrears times (one minus the income tax rate).
c. annual preferred dividend times (one minus the income tax rate).
d. none of these.

D. none of these

In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are
a. weighted by the number of days outstanding.
b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year reported.

D. considered outstanding at the beginning of the earliest year reported.

What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively?
a. Decrease and no effect
b. Increase and no effect
c. Decrease and increase
d. Increase and decrease

C. decrease and increase

Due to the importance of earnings per share information, it is required to be reported by all
Public Companies Nonpublic Companies
a. Yes Yes
b. Yes No
c. No No
d. No Yes

B. Yes, No

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 Antidilutive
a. Yes Yes
b. Yes No
c. No Yes
d. No No

B. Yes, No

When computing diluted earnings per share, convertible bonds are
a. ignored.
b. assumed converted whether they are dilutive or antidilutive.
c. assumed converted only if they are antidilutive.
d. assumed converted only if they are dilutive.

D. assumed converted only if they are dilutive

Dilutive convertible securities must be used in the computation of
a. basic earnings per share only.
b. diluted earnings per share only.
c. diluted and basic earnings per share.
d. none of these.

B. diluted earnings per share only

In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
a. Annual preferred dividend
b. Annual preferred dividend times (one minus the income tax rate)
c. Annual preferred dividend times the income tax rate
d. Annual preferred dividend divided by the income tax rate

A. annual preferred dividend

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
a. fairly present diluted earnings per share on a prospective basis.
b. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
c. 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.
d. be antidilutive.

D. be antidilutive.

In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants
a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.
b. are added, net of tax, to the numerator of the calculation for diluted earnings per share.
c. are disregarded in the computation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common stock.
d. none of these.

A. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.

When applying the treasury stock method for diluted earnings per share, the market price of the common stock used for the repurchase is the
a. price at the end of the year.
b. average market price.
c. price at the beginning of the year.
d. none of these.

B. average market price

Antidilutive securities
a. should be included in the computation of diluted earnings per share but not basic earnings per share.
b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.
c. include stock options and warrants whose exercise price is less than the average market price of common stock.
d. should be ignored in all earnings per share calculations.

D. should be ignored in all earnings per share calculations

Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings per share is the security with the
a. greater earnings adjustment.
b. greater earnings per share adjustment.
c. smaller earnings adjustment.
d. smaller earnings per share adjustment.

D. smaller earnings per share adjustment

Hill Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $1,050,000 for the year ending December 31, 2010. Earnings per share of common stock for 2010 would be
a. $1.75.
b. $.83.
c. $1.00.
d. $1.17.

C. 1.00

At December 31, 2010, Hancock Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2010. Net income for the year ended December 31, 2010, was $1,020,000. What should be Hancock's 2010 earnings per common share, rounded to the nearest penny?
a. $2.02
b. $2.55
c. $2.40
d. $2.27

C 2.40

Milo Co. had 600,000 shares of common stock outstanding on January 1, issued 126,000 shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued 54,000 shares on November 1. The weighted average shares outstanding for the year is
a. 651,000.
b. 672,000.
c. 693,000.
d. 714,000.

B. 672,000

On January 1, 2011, Gridley Corporation had 125,000 shares of its $2 par value common stock outstanding. On March 1, Gridley sold an additional 250,000 shares on the open market at $20 per share. Gridley issued a 20% stock dividend on May 1. On August 1, Gridley purchased 140,000 shares and immediately retired the stock. On November 1, 200,000 shares were sold for $25 per share. What is the weighted-average number of shares outstanding for 2011?
a. 510,000
b. 375,000
c. 358,333
d. 258,333

B. 375,000

The following information is available for Barone Corporation:
January 1, 2011 Shares outstanding 1,250,000
April 1, 2011 Shares issued 200,000
July 1, 2011 Treasury shares purchased 75,000
October 1, 2011 Shares issued in a 100% stock dividend 1,375,000
The number of shares to be used in computing earnings per common share for 2011 is
a. 2,825,500.
b. 2,737,500.
c. 2,725,000.
d. 1,706,250.

C. 2,725,000

At December 31, 2010 Rice Company had 300,000 shares of common stock and 10,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2010 or 2011. On January 30, 2012, prior to the issuance of its financial statements for the year ended December 31, 2011, Rice declared a 100% stock dividend on its common stock. Net income for 2011 was $950,000. In its 2011 financial statements, Rice's 2011 earnings per common share should be
a. $1.50.
b. $1.58.
c. $3.00.
d. $3.17.

A. 1.50

Fultz Company had 300,000 shares of common stock issued and outstanding at December 31, 2010. During 2011, no additional common stock was issued. On January 1, 2011, Fultz issued 400,000 shares of nonconvertible preferred stock. During 2011, Fultz declared and paid $180,000 cash dividends on the common stock and $150,000 on the nonconvertible preferred stock. Net income for the year ended December 31, 2011, was $960,000. What should be Fultz's 2011 earnings per common share, rounded to the nearest penny?
a. $1.16
b. $2.10
c. $2.70
d. $3.20

C. 2.70

At December 31, 2010 Pine Company had 200,000 shares of common stock and 10,000 shares of 4%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2010 or 2011. On February 10, 2012, prior to the issuance of its financial statements for the year ended December 31, 2011, Pine declared a 100% stock split on its common stock. Net income for 2011 was $720,000. In its 2011 financial statements, Pine's 2011 earnings per common share should be
a. $3.40.
b. $3.20.
c. $1.70.
d. $1.00.

C. 1.70

Stine Inc. had 300,000 shares of common stock issued and outstanding at December 31, 2010. On July 1, 2011 an additional 300,000 shares were issued for cash. Stine also had stock options outstanding at the beginning and end of 2011 which allow the holders to purchase 90,000 shares of common stock at $28 per share. The average market price of Stine's common stock was $35 during 2011. The number of shares to be used in computing diluted earnings per share for 2011 is
a. 672,000
b. 618,000
c. 522,000
d. 468,000

D. 468,000

Kasravi Co. had net income for 2011 of $300,000. The average number of shares outstanding for the period was 200,000 shares. The average number of shares under outstanding options, at an option price of $30 per share is 12,000 shares. The average market price of the common stock during the year was $36. What should Kasravi Co. report for diluted earnings per share for the year ended 2011?
a. $1.50
b. $1.49
c. $1.43
d. $1.42

B. 1.49

On January 2, 2011, Worth Co. issued at par $2,000,000 of 7% convertible bonds. Each $1,000 bond is convertible into 10 shares of common stock. No bonds were converted during 2011. Worth had 200,000 shares of common stock outstanding during 2011. Worth's 2011 net income was $600,000 and the income tax rate was 30%. Worth's diluted earnings per share for 2011 would be (rounded to the nearest penny):
a. $3.49.
b. $3.17.
c. $3.00.
d. $3.36.

B. 3.17

Beaty Inc. purchased Dunbar Co. and agreed to give stockholders of Dunbar Co. 10,000 additional shares in 2012 if Dunbar Co.'s net income in 2011 is $500,000; in 2010 Dunbar Co.'s net income is $520,000. Beaty Inc. has net income for 2010 of $200,000 and has an average number of common shares outstanding for 2010 of 100,000 shares. What should Beaty report as diluted earnings per share for 2010?
a. $2.22
b. $2.00
c. $1.82
d. $1.67

C. 1.82

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 10% convertible bonds outstanding during 2011. The preferred stock is convertible into 40,000 shares of common stock. During 2011, Hanson paid dividends of $1.20 per share on the common stock and $4 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2011 was $800,000 and the income tax rate was 30%.


Basic earnings per share for 2011 is (rounded to the nearest penny)
a. $2.94.
b. $3.22.
c. $3.35.
d. $3.60.

D. 3.60

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 10% convertible bonds outstanding during 2011. The preferred stock is convertible into 40,000 shares of common stock. During 2011, Hanson paid dividends of $1.20 per share on the common stock and $4 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2011 was $800,000 and the income tax rate was 30%.


Diluted earnings per share for 2011 is (rounded to the nearest penny)
a. $2.77.
b. $2.81.
c. $3.05.
d. $3.33.

C. 3.05

Fugate Company had 500,000 shares of common stock issued and outstanding at December 31, 2010. On July 1, 2011 an additional 500,000 shares were issued for cash. Fugate also had stock options outstanding at the beginning and end of 2011 which allow the holders to purchase 150,000 shares of common stock at $20 per share. The average market price of Fugate's common stock was $25 during 2011. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2011?
a. 1,030,000
b. 870,000
c. 787,500
d. 780,000

D. 780,000

Shipley Corporation had net income for the year of $480,000 and a weighted average number of common shares outstanding during the period of 200,000 shares. The company has a convertible bond issue outstanding. The bonds were issued four years ago at par ($2,000,000), carry a 7% interest rate, and are convertible into 40,000 shares of common stock. The company has a 40% tax rate. Diluted earnings per share are
a. $1.65
b. $2.23.
c. $2.35.
d. $2.58.

C. 2.35

Colt Corporation purchased Massey Inc. and agreed to give stockholders of Massey Inc. 50,000 additional shares in 2012 if Massey Inc.'s net income in 2011 is $400,000 or more; in 2010 Massey Inc.'s net income is $410,000. Colt has net income for 2010 of $800,000 and has an average number of common shares outstanding for 2010 of 500,000 shares. What should Colt report as earnings per share for 2010?
Basic Earnings Diluted Earnings
Per Share Per Share
a. $1.60 $1.60
b. $1.45 $1.60
c. $1.60 $1.45
d. $1.45 $1.45

C. 1.60, 1.45

On January 2, 2010, Perez Co. issued at par $10,000 of 6% bonds convertible in total into 1,000 shares of Perez's common stock. No bonds were converted during 2010. Throughout 2010, Perez had 1,000 shares of common stock outstanding. Perez's 2010 net income was $3,000, and its income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2010. Perez's diluted earnings per share for 2010 would be (rounded to the nearest penny)
a. $1.50.
b. $1.71.
c. $1.80.
d. $3.42.

B. 1.71

At December 31, 2010, Kifer Company had 500,000 shares of common stock outstanding. On October 1, 2011, an additional 100,000 shares of common stock were issued. In addition, Kifer had $10,000,000 of 6% convertible bonds outstanding at December 31, 2010, which are convertible into 225,000 shares of common stock. No bonds were converted into common stock in 2011. The net income for the year ended December 31, 2011, was $3,000,000. Assuming the income tax rate was 30%, the diluted earnings per share for the year ended December 31, 2011, should be (rounded to the nearest penny)
a. $6.52.
b. $4.80.
c. $4.56.
d. $4.00.

C. 4.56

On January 2, 2011, Mize Co. issued at par $300,000 of 9% convertible bonds. Each $1,000 bond is convertible into 30 shares. No bonds were converted during 2007. Mize had 50,000 shares of common stock outstanding during 2011. Mize 's 2011 net income was $160,000 and the income tax rate was 30%. Mize's diluted earnings per share for 2011 would be (rounded to the nearest penny)
a. $2.71.
b. $3.03.
c. $3.20.
d. $3.58.

B. 3.03

At December 31, 2010, Sager Co. had 1,200,000 shares of common stock outstanding. In addition, Sager had 450,000 shares of preferred stock which were convertible into 750,000 shares of common stock. During 2011, Sager paid $600,000 cash dividends on the common stock and $400,000 cash dividends on the preferred stock. Net income for 2011 was $3,400,000 and the income tax rate was 40%. The diluted earnings per share for 2011 is (rounded to the nearest penny)
a. $1.24.
b. $1.74.
c. $2.51.
d. $2.84.

B. 1.74

Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 10% convertible bonds outstanding during 2011. The preferred stock is convertible into 40,000 shares of common stock. During 2011, Lerner paid dividends of $.90 per share on the common stock and $3.00 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2011 was $600,000 and the income tax rate was 30%.


Basic earnings per share for 2011 is (rounded to the nearest penny)
a. $2.21.
b. $2.42.
c. $2.51.
d. $2.70.

D. 2.70

Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 10% convertible bonds outstanding during 2011. The preferred stock is convertible into 40,000 shares of common stock. During 2011, Lerner paid dividends of $.90 per share on the common stock and $3.00 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2011 was $600,000 and the income tax rate was 30%.


Diluted earnings per share for 2011 is (rounded to the nearest penny)
a. $2.14.
b. $2.25.
c. $2.35.
d. $2.46.

C. 2.35

Yoder, Incorporated, has 3,200,000 shares of common stock outstanding on
December 31, 2010. An additional 800,000 shares of common stock were issued on
April 1, 2011, and 400,000 more on July 1, 2011. On October 1, 2011, Yoder issued 20,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in 2011. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively?
a. 4,000,000 and 4,000,000
b. 4,000,000 and 4,100,000
c. 4,000,000 and 4,400,000
d. 4,400,000 and 5,200,000

B. 4,000,000 and 4,100,000

Nolte Co. has 4,000,000 shares of common stock outstanding on December 31, 2010. An additional 200,000 shares are issued on April 1, 2011, and 480,000 more on September 1. On October 1, Nolte issued $6,000,000 of 9% convertible bonds. Each $1,000 bond is convertible into 40 shares of common stock. No bonds have been converted. The number of shares to be used in computing basic earnings per share and diluted earnings per share on December 31, 2011 is
a. 4,310,000 and 4,310,000.
b. 4,310,000 and 4,370,000.
c. 4,310,000 and 4,550,000.
d. 5,080,000 and 5,320,000.

b. 4,310,000 and 4,370,000.

At December 31, 2010, Tatum Company had 2,000,000 shares of common stock outstanding. On January 1, 2011, Tatum issued 500,000 shares of preferred stock which were convertible into 1,000,000 shares of common stock. During 2011, Tatum declared and paid $1,500,000 cash dividends on the common stock and $500,000 cash dividends on the preferred stock. Net income for the year ended December 31, 2011, was $5,000,000. Assuming an income tax rate of 30%, what should be diluted earnings per share for the year ended December 31, 2011? (Round to the nearest penny.)
a. $1.50
b. $1.67
c. $2.50
d. $2.08

B. 1.67

At December 31, 2010, Emley Company had 1,200,000 shares of common stock outstanding. On September 1, 2011, an additional 400,000 shares of common stock were issued. In addition, Emley had $12,000,000 of 6% convertible bonds outstanding at December 31, 2010, which are convertible into 800,000 shares of common stock. No bonds were converted into common stock in 2011. The net income for the year ended December 31, 2011, was $4,500,000. Assuming the income tax rate was 30%, what should be the diluted earnings per share for the year ended December 31, 2011, rounded to the nearest penny?
a. $2.11
b. $3.38
c. $2.35
d. $2.45

C. 2.35

Grimm Company has 1,800,000 shares of common stock outstanding on December 31, 2010. An additional 150,000 shares of common stock were issued on July 1, 2011, and 300,000 more on October 1, 2011. On April 1, 2011, Grimm issued 6,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 40 shares of common stock. No bonds were converted into common stock in 2011. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively, for the year ended December 31, 2011?
a. 1,950,000 and 2,130,000
b. 1,950,000 and 1,950,000
c. 1,950,000 and 2,190,000
d. 2,250,000 and 2,430,000

A. 1,950,000 and 2,130,000

Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2011 2010
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
9% convertible bonds $2,400,000 $2,400,000
During 2011, Piper paid dividends of $1.20 per share on its common stock and $3.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 9% convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2011, was $600,000. Assume that the income tax rate was 30%.



What should be the basic earnings per share for the year ended December 31, 2011, rounded to the nearest penny?
a. $2.66
b. $2.92
c. $3.70
d. $4.00

C. 3.70

Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2011 2010
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
9% convertible bonds $2,400,000 $2,400,000
During 2011, Piper paid dividends of $1.20 per share on its common stock and $3.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 9% convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2011, was $600,000. Assume that the income tax rate was 30%.



What should be the diluted earnings per share for the year ended December 31, 2011, rounded to the nearest penny?
a. $3.20
b. $2.95
c. $2.83
d. $2.35

B. 2.95

Warrants exercisable at $20 each to obtain 30,000 shares of common stock were outstanding during a period when the average market price of the common stock was $25. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding shares by
a. 30,000.
b. 24,000.
c. 6,000.
d. 7,500.

C. 6,000

Terry Corporation had 300,000 shares of common stock outstanding at December 31, 2010. In addition, it had 90,000 stock options outstanding, which had been granted to certain executives, and which gave them the right to purchase shares of Terry's stock at an option price of $37 per share. The average market price of Terry's common stock for 2010 was $50. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2010?
a. 300,000
b. 331,622
c. 366,600
d. 323,400

D 323,400

Didde Co. had 300,000 shares of common stock issued and outstanding at December 31, 2010. No common stock was issued during 2011. On January 1, 2011, Didde issued 200,000 shares of nonconvertible preferred stock. During 2011, Didde declared and paid $100,000 cash dividends on the common stock and $80,000 on the preferred stock. Net income for the year ended December 31, 2011 was $620,000. What should be Didde's 2011 earnings per common share?
a. $2.07
b. $1.80
c. $1.73
d. $1.47

B. 1.80

At December 31, 2011 and 2010, Miley Corp. had 180,000 shares of common stock and 10,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2011 or 2010. Net income for 2011 was $400,000. For 2011, earnings per common share amounted to
a. $2.22.
b. $1.94.
c. $1.67.
d. $1.11.

B. 1.94

Marsh Co. had 2,400,000 shares of common stock outstanding on January 1 and December 31, 2011. In connection with the acquisition of a subsidiary company in June 2010, Marsh is required to issue 100,000 additional shares of its common stock on July 1, 2012, to the former owners of the subsidiary. Marsh paid $200,000 in preferred stock dividends in 2011, and reported net income of $3,400,000 for the year. Marsh's diluted earnings per share for 2011 should be
a. $1.42.
b. $1.36.
c. $1.33.
d. $1.28.

D. 1.28

Foyle, Inc., had 560,000 shares of common stock issued and outstanding at December 31, 2010. On July 1, 2011, an additional 40,000 shares of common stock were issued for cash. Foyle also had unexercised stock options to purchase 32,000 shares of common stock at $15 per share outstanding at the beginning and end of 2011. The average market price of Foyle's common stock was $20 during 2011. What is the number of shares that should be used in computing diluted earnings per share for the year ended
December 31, 2011?
a. 580,000
b. 588,000
c. 608,000
d. 612,000

B. 588,000

When computing diluted earnings per share, convertible securities are
a. ignored.
b. recognized only if they are dilutive.
c. recognized only if they are antidilutive.
d. recognized whether they are dilutive or antidilutive.

B. Recognized only if they are dilutive

In determining diluted earnings per share, dividends on nonconvertible cumulative preferred stock should be
a. disregarded.
b. added back to net income whether declared or not.
c. deducted from net income only if declared.
d. deducted from net income whether declared or not.

D. deducted from net income whether declared or not

The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the
a. beginning of the earliest period reported (or at time of issuance, if later).
b. beginning of the earliest period reported (regardless of time of issuance).
c. middle of the earliest period reported (regardless of time of issuance).
d. ending of the earliest period reported (regardless of time of issuance).

A. beginning of the earliest period reported (or at time of issuance, if later).

With regard to recognizing stock-based compensation
a. iGAAP and U.S. GAAP follow the same model.
b. iGAAP and U.S. GAAP standards are undergoing major reform on valuation issues.
c. it has been agreed that these standards will not be merged due to the differences in currencies.
d. the reform of U.S. GAAP standards will not be addressed until iGAAP standards have been finalized.

A. iGAAP and U.S. GAAP follow the same model

The primary iGAAP reporting standards related to financial instruments, including dilutive securities, is
a. IAS 33.
b. IAS 39.
c. IFRS 2.
d. IAS 2.

B. IAS 39

When $5,000,000 in convertible bonds are issued at par with $800,000 in value of the equity option embedded in the bond, the iGAAP journal entry will include a debit of
a. $800,000 to Paid-in Capital — Convertible Bonds and a credit to Premium on Bonds Payable.
b. $800,000 to Premium on Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.
c. $800,000 to Discount on Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.
d. $4,200,000 to Cash along with a debit of $800,000 to Discount on Bonds Payable and a credit to Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.

C. $800,000 to Discount on Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.

With regard to contracts that can be settled in either cash or shares
a. iGAAP requires that share settlement must be used.
b. iGAAP gives companies a choice of either cash or shares.
c. U.S. GAAP requires that share settlement must be used.
d. the FASB project proposes that the IASB adopt the U.S. GAAP approach, requiring that share settlement must be used

A. iGAAP requires that share settlement must be used

With regard to recognizing stock-based compensation under iGAAP the fair value of shares and options awarded to employees is recognized
a. in the first fiscal period of the employees' service.
b. over the fiscal periods to which the employees' services relate.
c. in the last fiscal period of the employees' service when the total value can be calculated.
d. after last fiscal period of the employees' service when the total value can be calculated.

b. over the fiscal periods to which the employees' services relate

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