5. On April 1, year 1, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
-Common stock, no par, $1 stated value, 20,000 shares originally issued for $30 per share
-Preferred stock, $10 par value, 6,000 shares originally i
Correct Answer: A) I. $20,000 ; II. $60,000 ; III. $820,000
Notes
(a) When the common stock was issued, it was recorded at stated value with the excess recorded as additional paid-in capital.
The preferred stock was recorded at par value with the excess c
11. On December 1, year 1, shares of authorized common stock were issued on a subscription basis at a price in excess of par value. A total of 20% of the subscription price of each share was collected as a down payment on December 1, year 1, with the rema
Correct Answer: D) Common stock subscribed for the par value of the shares of common stock subscribed.
Notes
(d) When stock is sold on a subscription basis, the full price of the stock is not received initially, and the stock is not issued until the full
12. In year 1, Seda Corp. acquired 6,000 shares of its $1 par value common stock at $36 per share. During year 2, Seda issued 3,000 of these shares at $50 per share. Seda uses the cost method to account for its treasury stock transactions. What accounts a
Correct Answer: C)
Notes
(c) Under the cost method, the treasury stock account is debited for the cost of the shares acquired. If the treasury shares are reissued at a price in excess of the acquisition cost, the excess is credited to an account titled Pa
16. Victor Corporation was organized on January 2, year 1, with 100,000 authorized shares of $10 par value common stock. During year 1 Victor had the following capital transactions:
January 5: Issued 75,000 shares at $14 per share
December 27: Purchased 5
Notes
(c) The requirement is to determine the balance in the paid-in capital from treasury stock account at 12/31/Y1. Using the par value method, treasury stock is debited for par value (5,000 � $10, or $50,000) when purchased. Any excess over par from th
19. In year 1, Rona Corp. issued 5,000 shares of $10 par value common stock for $100 per share. In year 3, Rona reacquired 2,000 of its shares at $150 per share from the estate of one of its deceased officers and immediately canceled these 2,000 shares. R
Correct Answer: C) I. $180,000 ; II. $100,000
Notes
(c) When accounting for the retirement of stock, common stock and additional paid-in capital are removed from the books based on the original issuance of the stock. Cash is credited for the cost of the s
24. Arp Corp.'s outstanding capital stock at December 15, year 1, consisted of the following:
-30,000 shares of 5% cumulative preferred stock, par value $10 per share, fully participating as to dividends. No dividends were in arrears.
-200,000 shares of c
Correct Answer: C) $40,000
Notes
(c) When preferred stock is participating, there may be different agreements as to how the participation feature is to be executed. However, in the absence of any specific agreement, the following procedure should be used:
26. East Corp., a calendar-year company, had sufficient retained earnings in year 1 as a basis for dividends, but was temporarily short of cash. East declared a dividend of $100,000 on April 1, year 1, and issued promissory notes to its stockholders in li
Correct Answer: D) Debit retained earnings for $100,000 on April 1, year 1, and debit interest expense for $7,500 on December 31, year 1.
Notes
(d) The interest is not an expense or liability until incurred, thus, none of it is recorded on April 1.
April
29. On December 1, year 1, Nilo Corp. declared a property dividend of marketable securities to be distributed on December 31, year 1, to stockholders of record on December 15, year 1. On December 1, year 1, the trading securities had a carrying amount of
Correct Answer: C) $60,000 decrease.
Notes
(c) A transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair market value of the asset transferred, and a gain or loss should be recognize
55. At December 31, year 2 and year 1, Gow Corp. had 100,000 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 year 2 or year 1. Net
Correct Answer: B) $9.50
Notes
In calculating the numerator, the claims of preferred shareholders against year 2 earnings should be deducted to arrive at the year 2 earnings attributable to common shareholders. This amount is 50,000 (5% � $100 � 10,000 sh
56. Ute Co. had the following capital structure during year 1 and year 2:
-Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding: $250,000
-Common stock, $5 par, 200,000 shares issued and outstanding: $1,000,000
Ute reported net in
Correct Answer: B) $2.45
Notes
(b) The formula for basic earnings per share (BEPS) is
(NI: $500,000 -Preferred Dividends: $10,000) / 200,000 CS outstanding = $2.45
In calculating the numerator, the claims of preferred shareholders against year 2 earnings
57. The following information pertains to Jet Corp.'s outstanding stock for year 1:
Common Stock, $5 par value:
Shares outstanding, 1/1/Y1: 20,000
2-for-1 stock split, 4/1/Y1: 20,000
Shares issued, 7/1/Y1: 10,000
Preferred stock, $10 par value, 5% cumulat
Correct Answer: B) 45,000
Notes
(b) For EPS purposes, shares of stock issued as a result of stock dividends or splits should be considered outstanding for the entire period in which they were issued. Therefore, both the original 20,000 shares and the addi
58. Timp, Inc. had the following common stock balances and transactions during year 1:
1/1/Y1 - Common Stock Outstanding: 30,000
2/1/Y1 - Issued 10% common stock dividend: 3,000
7/1/Y1 - Issued common stock for cash: 8,000
12/31/Y1 - Common Stock Outstand
Correct Answer: D) 37,000
(Image)
The 3,000 shares issued as a result of a stock dividend are weighted at 12/12 instead of 11/12 because for EPS purposes stock dividends are treated as if they occurred at the beginning of the year.
59. Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During year 1, 100,000 shares of common stock were outstanding. In year 2, two distributions of additional common shares
Correct Answer: B) I. $1.78 ; II. $1.75
(Image)
Must retroactively restate year 1 weighted-average to reflect stock split on COMPARATIVE (key word) financial statements.
60. Earnings per share data must be reported on the income statement for:
I. Cumulative effect of a change in accounting principle
II. Extraordinary Items
a. I only
b. II only
c. Both I and II
d. Neither I nor II
Correct Answer: D)
Notes
EPS must be shown on the face of the income statement for income from continuing operations & net income. EPS from discontinued operations and extraordinary items may be shown on the income statement or in the notes.
62. Mann, Inc. had 300,000 shares of common stock issued and outstanding at December 31, year 1. On July 1, year 2, an additional 50,000 shares of common stock were issued for cash. Mann also had unexercised stock options to purchase 40,000 shares of comm
Correct Answer: B) 335,000
Notes
(b) The requirement is to determine the number of shares that should be used in computing year 2 diluted earnings per share. The first step is to compute the weighted-average number of common shares outstanding. 300,000 sh
63. Peters Corp.'s capital structure was as follows:
12/31/Y1 Outstanding Shares of stock:
Common: 110,000
Convertible preferred: 10,000
12/31/Y2 Outstanding Shares of stock:
Common: 110,000
Convertible preferred: 10,000
During year 2, Peters paid dividen
Correct Answer: B) $6.54
Notes
(b) Diluted earnings per share is based on common stock and all dilutive potential common shares. To determine if a security is dilutive, EPS, including the effect of the dilutive security, must be compared to the basic EPS.
65. On June 30, year 1, Lomond, Inc. issued twenty $10,000, 7% bonds at par. Each bond was convertible into 200 shares of common stock. On January 1, year 2, 10,000 shares of common stock were outstanding. The bondholders converted all the bonds on July 1
Correct Answer: B) $2.85
Notes
(b) The effect of convertible bonds is included in diluted EPS under the if converted method, if they are dilutive. The bonds are dilutive as shown below.
(Image)
NI: $35,000
Bond Interest Expense: $4,900
WACSOS: 12,000
Comm
67. 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
Correct Answer: D) Deducted from net income whether declared or not.
Notes
(d) The requirement is to determine the treatment of nonconvertible cumulative preferred dividends in determining diluted EPS. Dividends on nonconvertible cumulative preferred shar
69. In determining earnings per share, interest expense, net of applicable income taxes, on convertible debt that is dilutive should be
a. Added back to weighted-average common shares outstanding for diluted earnings per share.
b. Added back to net income
Correct Answer: B) Added back to net income for diluted earnings per share.
Notes
(b) If convertible securities are deemed to be dilutive, then interest expense should be added back to net income when computing diluted earnings per share.
70. For contingent issue agreements requiring passage of time or earnings threshold that is met, before issuing stock, these should be I. Included in basic earnings per share II. Included in computing diluted earnings per share
a. Neither I nor II
b. II o
Correct Answer: B) II only
Notes
(b) The effect of contingent issue agreements are not included in basic earnings per share. They are included in diluted earnings per share if the contingency is met.
71. Kent Co. filed a voluntary bankruptcy petition on August 15, year 1, and the statement of affairs reflects the following amounts:
Assets:
Pledged with fully secure creditors: $300,000 Book Value; $370,000 Estimated Current Value
Pledged with partially
Correct Answer: D) $360,000
Notes
(d) The total cash available to pay all unsecured claims, including priority claims, is the cash obtained from free assets ($320,000) and any excess cash available from assets pledged with fully secured creditors after th
75. The primary purpose of a quasi reorganization is to give a corporation the opportunity to
a. Obtain relief from its creditors.
b. Revalue understated assets to their fair values.
c. Eliminate a deficit in retained earnings.
d. Distribute the stock of
Correct Answer: C) Eliminate a deficit in retained earnings.
Notes
(c) Although assets are often revalued to fair value during a quasi reorganization, the primary purpose of a quasi reorganization is to eliminate a deficit in retained earnings so that div
76. When a company goes through a quasi reorganization, its balance sheet carrying amounts are stated at
a. Original cost.
b. Original book value.
c. Replacement value.
d. Fair value.
Correct Answer: D) Fair value.
Notes
(d) In certain instances an entity may elect to restate its assets, capital stock, and surplus through a readjustment (or "quasi reorganization") and thus avail itself of permission to relieve its future income account
77. The stockholders' equity section of Brown Co.'s December 31, year 1 balance sheet consisted of the following:
Common stock, $30 par, 10,000 shares authorized & outstanding: $300,000
APIC: $150,000
Retained Earnings (deficit): ($210,000)
On January 2,
Correct Answer: C) $190,000
Notes
(c) A quasi reorganization generally involves (1) revaluing assets, (2) reducing par, and (3) writing the deficit off against additional paid-in capital. In this case, no mention is made of the first step, revaluing asset
89. Hoyt Corp.'s current balance sheet reports the following stockholders' equity:
5% cumulative preferred stock, par value $100 per share; 2,500 shares issued and outstanding: $250,000
Common stock, par value $3.50 per share; 100,000 shares issued and ou
Correct Answer: D) $7.00
Notes
(d) The requirement is to determine the book value per common share. The book value per common share is the amount each share would receive if the company were liquidated.
Total Equity = $1,025,000
Preferred Shareholders Rec
92. Logan Corporation issues convertible bonds for $500,000. At the date of issuance, it is determined that the fair value of the bonds is $480,000. Logan prepares its financial statements in accordance with IFRS. How should the issuance of the bonds be r
Correct Answer: C) As a bond liability for $480,000 and an equity component of $20,000.
Notes
(c) The requirement is to identify how Logan should recognize the issuance of the bonds. Answer (c) is correct because IFRS provides that financial instruments w
93. Vestre Corporation prepares its financial statements under IFRS. Recently the company issued convertible debt. How should the company record this debt?
a. The instrument should be presented solely as debt.
b. The instrument should be presented between
Correct Answer: D) The instrument should be presented as part debt & part equity.
78. On July 1, year 1, Vail Corp. issued rights to stockholders to subscribe to additional shares of its common stock. One right was issued for each share owned. A stockholder could purchase one additional share for 10 rights plus $15 cash. The rights exp
Correct Answer: A) $0
Notes
(a) When a corporation issues rights to its stockholders, it only makes a memorandum entry. If rights are later exercised, the corporation would make the following entry:
DR Cash
CR Common Stock
CR APIC
94. Under IFRS, which of the following is not a method that may be used to account for treasury stock?
a. Cost method.
b. Par value method.
c. Retained earnings method.
d. Constructive retirement method.
Correct Answer: C) Retained earnings method.
Notes
(c) The requirement is to identify the item that does not describe a method that may be used to account for treasury stock under IFRS. Answer (c) is correct because the retained earnings method is not a m