Chapter 15

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Chapter 15
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  1. 1. The proprietary view of a firm stresses the importance of owners' equity and differentiates between capital provided by owners and creditors. (T/F)
    TRUE
  2. 2. Dividends paid by a corporation are reported as an expense in the income statement and represent a distribution of earnings to stockholders. (T/F)
    FALSE
  3. 3. The par value of common stock is set by the state government. (T/F)
    FALSE
  4. 4. A stock's par value does not necessarily have any relationship with a stock's market value. (T/F)
    TRUE
  5. 5. Treasury stock is considered to be a deduction from stockholders' equity. (T/F)
    TRUE
  6. 6. An $3,000 increase in total owners' equity occurs if treasury stock costing $11,500 is sold for $14,500. (T/F)
    FALSE
  7. 7. A $1,500 loss will be reported in the income statement when a company sells treasury stock for $8,500 if the treasury stock was initially purchased for $10,000. (T/F)
    FALSE
  8. 8. If a company purchases treasury stock its earnings per share will increase. (T/F)
    TRUE
  9. 9. A reason prompting a firm to purchase treasury stock is that management believes the stock is undervalued in the marketplace and therefore represents a good investment opportunity. (T/F)
    TRUE
  10. 10. 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. (T/F)
    FALSE
  11. 11. Corporations that issue preferred stock do so because preferred stock is less risky than debt. (T/F)
    TRUE
  12. 11. Corporations that issue preferred stock do so because preferred stock is less risky than debt. (T/F)
    TRUE
  13. 13. Mandatorily redeemable preferred stock is not considered to be equity by the FASB. The FASB requires that this type of stock be reported on the balance sheet on a separate line between liabilities and shareholders' equity. (T/F)
    FALSE
  14. 14. An effective way for investors to determine whether a redeemable preferred stock issue should be treated as debt or equity is by analyzing the applicable financial statement disclosures. (T/F)
    TRUE
  15. 15. Corporate distributions to shareholders are governed by state law and are consistent from state to state. (T/F)
    FALSE
  16. 16. 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. (T/F)
    TRUE
  17. 17. The 1984 Revised Model Business Corporation Act would potentially allow a corporation to have negative book value of net assets after an asset distribution occurred (T/F)
    TRUE
  18. 18. The book value of owners' equity gives an accurate picture of potentially legal asset distributions in states that have adopted the 1984 Revised Model Business Corporation Act. (T/F)
    FALSE
  19. 19. Under current GAAP a stock dividend declaration and distribution will not reduce either total assets or total owners' equity. (T/F)
    TRUE
  20. 20. When a company has no convertible securities and no stock options or warrants outstanding, the company has a simple capital structure. (T/F)
    TRUE
  21. 21. GAAP requires that both basic and fully diluted earnings per share be reported on the income statement. (T/F)
    FALSE
  22. 22. The diluted EPS figure is a conservative measure of the earnings flow to each share of stock. (T/F)
    TRUE
  23. 23. Convertible bonds that were outstanding during the entire year will not have an impact on the weighted average number of common shares outstanding used in the calculation of basic earnings per share. (T/F)
    TRUE
  24. 24. SFAS No. 128 requires that all convertible bonds be converted and included in the denominator of diluted earnings per share. (T/F)
    FALSE
  25. 25. A convertible bond's net of tax interest expense is added back to net income when determining diluted earnings per share only if the bond is known to be dilutive. (T/F)
    TRUE
  26. 26. 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. (T/F)
    FALSE
  27. 27. Diluted earnings per share will always be shown on the income statement for companies with complex capital structures. (T/F)
    FALSE
  28. 28. The ‘if-converted" method for computing earnings per share dilution understates diluted earnings per share when a company's share price is substantially below the conversion price of the debt. (T/F)
    TRUE
  29. 29. 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. (T/F)
    TRUE
  30. 30. One reason that companies issue stock options is to attempt to align employees' interests with the interests of the owners. (T/F)
    TRUE
  31. 31. Many start-up high-growth companies use stock options as a means of attracting talented employees while attempting to conserve cash. (T/F)
    TRUE
  32. 32. SFAS No. 123 required companies to use the fair value approach when determining compensation expense pertaining to stock options. (T/F)
    FALSE
  33. 33. Opposition to the FASB review of APB No. 25 on stock options arose because stock options do not involve a cash outflow, and to treat them as an expense violates materiality. (T/F)
    FALSE
  34. 34. 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 approach or expense the fair value of the options. (T/F)
    TRUE
  35. 35. SFAS No. 123 requires the disclosure of pro-forma net income and earnings per share calculated with a charge to compensation expense for options granted by those companies choosing to continue to apply APB Opinion No. 25. (T/F)
    TRUE
  36. 36. SFAS No. 123 requires companies to measure the fair value of stock options at the grant date. (T/F)
    TRUE
  37. 37. SFAS No. 123 allocates the total compensation cost to expense on a straight-line basis over the vesting period. (T/F)
    TRUE
  38. 38. According to APB No. 14, convertible bonds must be recorded at the value of debt only, with no value assigned to the conversion feature. (T/F)
    TRUE
  39. 39. By using the book value method to record the conversion of convertible bonds managers are able to protect themselves from recording conversion losses. (T/F)
    TRUE
  40. 40. An employee stock ownership plan (ESOP) is an employee benefit pension plan that invests primarily in the common stock of the employer company. (T/F)
    TRUE
  41. 41. Which of the following does not accurately describe the proprietary view of the firm?
    D. Whether creditors or shareholders provided the firm's assets is irrelevant
  42. 42. Cash dividends paid by a corporation
    C. reduces the retained earnings of the corporation that declared the dividend
  43. 43. Which of the following statements is correct if treasury stock costing $25,000 was sold for $27,500?
    B. Total owners' equity increases $27,500.
  44. 44. Treasury stock is reported within the balance sheet as
    D. an account contra to owners' equity.
  45. 48. A corporation reported the following during 2009-- Net income $175,250; a sale of 10,000 shares of $5 par value common stock for $8.75 per share; a purchase of treasury stock costing $24,750; a sale of treasury stock costing $15,500 for $14,695; a declaration and distribution of a $39,000 cash dividend; a declaration and distribution of a stock dividend of 5,000 shares of $5 par value common stock. What was the increase in owners' equity during 2009?
    A. $213,695
  46. 49. Shareholders who sell back shares of the company stock as treasury stock are
    C. taxed at capital gains rates.
  47. 50. Financial analysts should always review stock repurchase plans carefully because
    C. it is important to determine the reasons for the buyback.
  48. 51. A company's retained earnings on December 31, 2008 was $2,190,000 and its stockholders equity was $8,760,000. During 2009 the company reported the following: net income $225,000; a sale of treasury stock costing $75,000 for $79,750; a treasury stock purchase costing $125,700; a cash dividend declaration of $73,200; a 10,000 share common stock ($10 par value) dividend was declared and distributed when the market value was $12.75 per share. What is the retained earnings balance on December 31, 2009?
    • C. $2,214,300
    • $2,190,000 + $225,000 - $73,200 - $127,500 = $2,214,300
  49. 52. A company's retained earnings on December 31, 2008 was $2,190,000 and its owners' equity was $8,760,000. During 2009 the company reported the following: net income $225,000; a sale of treasury stock costing $75,000 for $79,750; a treasury stock purchase costing $125,700; a cash dividend declaration of $73,200; a 10,000 share common stock ($10 par value) dividend was declared and distributed when the market value was $12.75 per share. What is the owners' equity balance on December 31, 2009?
    C. $8,865,850
  50. 53. Which of the following is not a reason why a company would purchase its own stock?
    D. The company wants to manipulate its net income.
  51. 54. 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
    A. cumulative.
  52. 55. Companies with a history of net operating losses are prone to issue which one of the following to raise money?
    C. Preferred stock
  53. 56. Mandatorily redeemable preferred stock is not considered to be equity by the FASB. The FASB requires that this type of stock be reported on the balance sheet
    A. as a liability.
  54. 57. Which of the following statements pertaining to preferred stock is not correct?
    B. Preferred stock dividends are contractual obligations that must be paid in profitable years
  55. 58. When a publicly traded company issues both common stock and preferred stock, the SEC requires that
    B. preferred and common stock be clearly differentiated on the balance sheet.
  56. 59. The 1984 Revised Model Business Corporation Act redefined solvency as a situation where the fair value of
    B. assets exceed the fair value of liabilities after a distribution to shareholders.
  57. 60. As a result of the passage of the 1984 Revised Model Business Corporation Act, it may be fair to state that
    A. the book value of owners' equity may not give an accurate picture of potentially legal distributions.
  58. 61. A 3 for 1 stock split will reduce the per share par value and will
    B. decrease earnings per share.
  59. 62. When a company does not have any convertible securities or options or warrants outstanding, the company has
    B. a simple capital structure.
  60. 63. The denominator used in the calculation of basic earnings per share is the
    C. weighted average number of common shares outstanding during the year.
  61. 64. Which of the following is not indicative of a complex capital structure?
    C. Outstanding cumulative preferred stock.
  62. 65. Which of the following statements is correct when a company has a complex capital structure?
    C. The company might have convertible bonds outstanding
  63. 66. Earnings per share (EPS) data are prominent in corporate annual reports, but suffers as a financial performance measure because EPS ignores the amount of
    B. capital required to generate reported earnings.
  64. 67. A company that has earnings in Year 2 equal to the earnings of Year 1 can improve its Year 2 reported earnings per share by
    D. purchasing shares of treasury stock.
  65. 68. Refer to Table 15-2. The weighted average number of common shares used to compute earnings per share for 2008 is
    B. 102,500.
  66. 69. Refer to Table 15-2. The basic earnings per share for 2008 is
    C. $1.54 per share.
  67. 70. Refer to Table 15-2. If each share of preferred stock is convertible into 8 shares of common stock, the diluted earnings per share for 2008 is
    B. $1.45 per share.
  68. 71. Refer to Table 15-3. The weighted average number of common shares used to compute earnings per share for 2008 is
    B. 160,000.
  69. 72. Refer to Table 15-3. The basic earnings per share for 2008 is
    B. $3.94 per share.
  70. 73. Refer to Table 15-3. If each share of preferred stock is convertible into 2 shares of common stock, the diluted earnings per share for 2008 is
    A. $3.85 per share.
  71. 74. The following information has been obtained from the Massena Corporation--100,000 shares of common stock were outstanding on January 1, 2008. 30,000 shares of common stock were issued on March 1, 2008. A 2 for 1 stock split was declared on April 1,2008. The 2 for 1 stock split was distributed on May 1, 2008. 10,000 shares of common stock were purchased on October 1, 2008. What is the weighted average number of shares to be used in the calculation of basic earnings per share for 2008?
    A. 247,500
  72. 75. The following information has been obtained from the Brewster Corporation--250,000 shares of common stock were outstanding on January 1, 2008. 30,000 shares of preferred stock were issued on March 1, 2008. 12,000 shares of common stock were purchased on April 1,2008. 10,000 shares of common stock were issued on October 1, 2008. What is the weighted average number of shares to be used in the calculation of basic earnings per share for 2008?
    • B. 243,500
    • 250,000 - 9,000 (-12,000 x 9/12) + 2,500 (10,000 x 9/12) = 243,500
  73. 76. The following information has been obtained from the Mastic Corporation--550,000 shares of common stock were outstanding on January 1, 2008. Bonds convertible into 50,000 shares of common stock were issued on July 1, 2008; the bonds have been determined to be dilutive. 36,000 shares of common stock were issued on November 1, 2008. 24,000 shares of common stock were purchased on December 1, 2008. What is the weighted average number of shares to be used in the calculation of diluted earnings per share for 2008?
    D. 579,000
  74. 77. The following information has been obtained from the Myers Corporation--300,000 shares of common stock were outstanding on January 1, 2008. 50,000 stock options were outstanding on January 1, 2008; each option allows the holder to acquire one share of common stock for $20 per share. The average market price of the common stock during 2008 was $25 per share. 48,000 shares of common stock were issued on February 1,2008. 18,000 shares of common stock were purchased on August 1, 2008. What is the weighted average number of shares to be used in the calculation of diluted earnings per share for 2008?
    C. 346,500
  75. 78. The following information has been provided to you by the Smith Corporation for the year ending December 31, 2008--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, 2008. 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?
    B. $869,000
  76. 79. The following information has been provided to you by the Rae Corporation for the year ending December 31, 2008--Net income was $979,000. Cash dividends totaling $120,000 were paid to the common shareholders. 6% convertible bonds with a par value of $2,000,000 were issued on February 1, 2008. The corporation's marginal income tax rate is 40%. 6% convertible preferred stock with a par value of $800,000 was 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 basic earnings per share and diluted earnings per share?
    B. choice B
  77. 80. The exercise price for stock option plans on the grant date is
    D. usually equal to or higher than the market price of the underlying shares.
  78. 81. On January 1, 2008, 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, 2008. The options can be converted into common stock after July 1, 2011. The required service period is three years. How much compensation expense will be recorded for the year ending December 31, 2010 assuming that the fair value approach is used?
    • D. $25,000
    • $7.50 x 10,000 x 1/3 = $25,000
  79. 82. On January 1, 2008, 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, 2008. The options can be converted into common stock after July 1, 2011. The required service period is three years. What is the balance in paid-in capital-stock options as of December 31, 2009 assuming that the fair value approach is used?
    • C. $50,000
    • $7.50 x 10,000 x 2/3 = $50,000
  80. 83. Which of the following arguments wasn't used to support the continuation of the accounting for stock-based compensation plans as allowed under APB Opinion No. 25?
    B. The Black-Scholes method of valuing stock options has not been widely accepted and is arbitrary.
  81. 84. An argument raised by opponents to the FASB's proposal that employee stock options should be recognized as an expense was that it could
    D. jeopardize compliance with contract terms and conditions.
  82. 85. SFAS No. 123 was issued as a compromise to the FASB's original position regarding stock options as it
    C. allowed companies to choose either the APB No. 25 approach or expense the fair value of the options.
  83. 86. Stock options are granted to the employees of Young Company on March 10, 2005. The employees must wait until March 10, 2009 to exercise the options. The four-year waiting period is the
    C. vesting period.
  84. 87. According to SFAS No. 123, the date when the terms for stock options are mutually agreed-upon and the stock options are awarded to employees is the
    B. grant date.
  85. 88. SFAS No. 123 specifies that the compensation costs for stock options are measured
    A. at the grant date only.
  86. 89. Over the vesting period for employee stock options, SFAS No. 123 requires that the entire compensation expense be recognized
    C. equally in each year of the vesting period.
  87. 90. While not required to recognize compensation expense for stock options except under certain circumstances, firms must still report the information in
    B. a footnote to the financial statements.
  88. 91. Which of the following statements does not accurately reflect the financial accounting for compensatory stock option plans that are accounted for using the fair value approach?
    D. Total owners' equity is increased by the par value of the common stock issued when the options are converted.
  89. 92. A bond with a carrying value of $790,000 was converted into 100,000 shares of $5 per share par value common stock at a time when the market value per share was $9.00 per share. Which of the following statements does not accurately describe the financial accounting for the conversion?
    D. Total owners' equity increases $900,000 if the market value method of recording the conversion is used.
  90. 93. Convertible bonds are usually
    C. subordinated debentures.
  91. 94. Call provisions on convertible bonds protect the
    B. company against extreme stock price increases.
  92. 95. With the development of modern option pricing methods, the Accounting Principles Board would probably have reached the conclusion today that the conversion feature of convertible bonds
    B. has value.
  93. 96. Managers most often choose the method for recording the newly issued shares upon conversion of debt known as the
    B. book value method.
  94. 97. Financial statement users must recognize that interest expense may seriously
    B. understate the true cost of debt financing when convertible debt is used.
  95. 98. Financial analysts are able to find much information about ESOP debt
    C. on the balance sheet.
  96. 99. Which of the following is not an advantage of ESOPs to employer corporations?
    D. ESOPs debt is an off-balance sheet liability.
  97. 100. Some financial analysts argue that ESOP accounting
    D. understates the company's true cost of employee compensation.

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