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T. International Financial Reporting Standards (IFRS)

T. International Financial Reporting Standards (IFRS)

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Module 15: Stockholders’ Equity

a. If the fair value of the property or services is not available, then the shares should be recorded at the fair

value of the shares.

b. However, if convertible debt is issued, the instrument is viewed as having a debt feature and an equity

feature and should be allocated accordingly.

(1) The amount allocated to liabilities is the fair value of the liability component, and the residual amount is

allocated to equity.

4. Notes to the financial statements should describe the rights, preferences, and restrictions with respect to

dividends for each class of stock, cumulative dividends in arrears, reacquired shares, and shares reserved for

future issuances under options and sales contracts.

5. Cash dividends are recorded in the same way as US GAAP. Although IFRS does not address share (stock)

dividends, guidance is based on national accounting rules.

a. If dividends have been proposed but not declared or formally approved, such dividends must be reported in

the notes to the financial statements.

b. In addition, information regarding dividends declared after the end of the period but prior to issuance of the

financial statements should be disclosed in the notes to the financial statements.

6. If ordinary and preferred shares are issued to investors as a unit (referred to as share units), the proceeds are

allocated in proportion to the relative market values of the securities issued.

a. If only one security is publicly traded, that security is valued at market value, and the residual is allocated to

the other security.

b. If the market value of neither security is known, then an appraisal value may be used.

7. For share subscriptions, the accounting relies on the laws of the particular jurisdiction. In some instances,

the subscription receivable is shown as either a current or noncurrent asset based upon the payment due date.

However, in other instances, the subscription receivable is a contra account and reduces shareholders’ equity.

8. For US GAAP, donated assets are recognized at fair value and as revenue when the contribution is received.

IFRS does not currently address donated assets.

9. Treasury shares are the entity’s shares that have been reacquired. There are three methods for accounting for

treasury shares: cost method, par value method, and constructive retirement method.

a. The cost method and par method entries are the same as US GAAP.

b. The construction retirement method is similar to the par value method except that the par value of the

reacquired shares is charged to the share account instead of the treasury stock account.

(1) The constructive retirement method is used when management does not intend to reissue the shares or

the jurisdiction of incorporation requires that reacquired shares be retired.

10. Share-Based Payments. IFRS accounting for share-based payments and US GAAP are similar due to the

convergence project. However, some vocabulary differences exist.

a. IFRS has three categories for share-based payments: equity-settled, cash-settled, or a choice to settle in

either cash or equity.

(1) Equity-settled share-based payments to nonemployees are valued at fair value of goods or services

received if it can be measured reliably. If the fair value of goods or services cannot be measured, then

the fair value of the equity instrument is used.

(2) Equity-settled payments to employees are valued at the fair value of the security. A debit is made to

either an expense or an asset, and a credit is made to equity. For cash-settled, share-based payments,

such as stock appreciation rights or options, a liability is measured at the fair value at the measurement

date. The liability is then remeasured at every reporting date, and additional income or expense is

recognized in profit or loss.



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601



NOW REVIEW MULTIPLE-CHOICE QUESTIONS 92 THROUGH 94



KEY TERMS

Basic EPS. Measures the performance of the entity over the reporting period.

Book value of common stock (at a point in time). Not a meaningful measure because assets are carried at historical

costs.

Callable. The corporation has the option to repurchase the preferred stock at a specified price.

Convertible. Preferred stockholders have an option of exchanging their stock for common stock at a specified ratio.

Cost method. Treasury stock is debited for the cost of treasury stock.

Cumulative. Dividends not paid in any year (dividends in arrears) must be made up before distributions can be made

to common stockholders.

Debt to equity. Shows creditors the corporation’s ability to sustain losses.

Diluted EPS. Measures the performance of the entity over the reporting period (same as basic EPS) while also taking

into account the effect of all dilutive potential common shares that were outstanding during the period.

Dividend payout. Measures percentage of earnings distributed as dividends.

Employee Stock Ownership Plan (ESOP). A qualified stock bonus plan designed to invest primarily in qualifying

employer securities, including stock and other marketable obligations.

Intrinsic value. The difference between the market value of the stock and the price the employee must pay.

Liquidating dividends (dividends based on other than earnings). A return of capital to stockholders.

Par value method. All capital balances associated with the treasury shares are removed upon acquisition.

Participating. Share with common stockholders in dividend distributions after both preferred and common stockholders receive a specified level of dividend payment.

Preferred stock. Stock with preferential rights.

Property dividends. Dividends payable in an asset other than cash; the entries are similar to those of cash dividend.

Quasi reorganization. Allows companies to avoid formal bankruptcy proceedings through an informal proceeding.

Rate of return on common stockholders’ equity. Measures the return earned on the stockholders’ investment in the

firm.

Scrip dividends. Issuance of promises to pay dividends in the future (may bear interest) instead of cash.

Share-based payments. Transactions wherein an entity acquires goods or services by issuing shares (stock), share

options, or other equity instruments.

Stock appreciation rights (SAR). Allows employees to receive stock or cash equal in amount to the difference

between the market value and some predetermined amount per share for a certain number of shares.

Stock splits. Change the number of shares outstanding and the par value per share.

Treasury stock. A firm’s own stock repurchased on the open market.



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602



Multiple-Choice Questions (1–94)

A.  Common Stock



• Common stock, no par, $1 stated value, 20,000 shares



1.  East Co. issued 1,000 shares of its $5 par common stock

to Howe as compensation for 1,000 hours of legal services

performed. Howe usually bills $160 per hour for legal

services. On the date of issuance, the stock was trading on a

public exchange at $140 per share. By what amount should the

additional paid-in capital account increase as a result of this

transaction?



• Preferred stock, $10 par value, 6,000 shares originally













a.$75,000

b.$65,000

c.$55,000

d.$45,000



a.400,000

b.325,000

c.300,000

d.225,000



4.  A corporation was organized in January year 1 with

authorized capital of $10 par value common stock. On

February 1, year 1, shares were issued at par for cash. On

March 1, year 1, the corporation’s attorney accepted 5,000

shares of the common stock in settlement for legal services

with a fair value of $60,000. Additional paid-in capital would

increase on

February 1, year 1

a.

b.

c.

d.



c12.indd 602



Hyde’s April 1, year 1 statement of stockholders’ equity

should report



a.

b.

c.

d.



3.  Beck Corp. issued 200,000 shares of common stock when

it began operations in year 1 and issued an additional 100,000

shares in year 2. Beck also issued preferred stock convertible

to 100,000 shares of common stock. In year 3, Beck purchased

75,000 shares of its common stock and held it in Treasury. At

December 31, year 3, how many shares of Beck’s common

stock were outstanding?











issued for $50 per share.



a.$135,000

b.$140,000

c.$155,000

d.$160,000



2.  On July 1, year 1, Cove Corp., a closely held corporation,

issued 6% bonds with a maturity value of $60,000, together

with 1,000 shares of its $5 par value common stock, for a

combined cash amount of $110,000. The market value of

Cove’s stock cannot be ascertained. If the bonds were issued

separately, they would have sold for $40,000 on an 8% yield to

maturity basis. What amount should Cove report for additional

paid-in capital on the issuance of the stock?











originally issued for $30 per share.



Yes

Yes

No

No



March 1, year 1

No

Yes

No

Yes



Common stock

$20,000

$20,000

$600,000

$600,000



Preferred

stock

$60,000

$300,000

$300,000

$60,000



Additional

paid-in capital

$820,000

$580,000

$0

$240,000



6.  On March 1, year 1, Rya Corp. issued 1,000 shares of its

$20 par value common stock and 2,000 shares of its $20 par

value convertible preferred stock for a total of $80,000. At this

date, Rya’s common stock was selling for $36 per share, and

the convertible preferred stock was selling for $27 per share.

What amount of the proceeds should be allocated to Rya’s

convertible preferred stock?











a.$60,000

b.$54,000

c.$48,000

d.$44,000



7.  During year 1, Brad Co. issued 5,000 shares of $100 par

convertible preferred stock for $110 per share. One share

of preferred stock can be converted into three shares of

Brad’s $25 par common stock at the option of the preferred

shareholder. On December 31, year 3, when the market value

of the common stock was $40 per share, all of the preferred

stock was converted. What amount should Brad credit to

Common Stock and to Additional Paid-in Capital—Common

Stock as a result of the conversion?

a.

b.

c.

d.



Common stock

$375,000

$375,000

$500,000

$600,000



Additional paid-in capital

$175,000

$225,000

$50,000

$0



8.  Quoit, Inc. issued preferred stock with detachable common

stock warrants. The issue price exceeded the sum of the

warrants’ fair value and the preferred stock’s par value. The

preferred stock’s fair value was not determinable. What

amount should be assigned to the warrants outstanding?









a. Total proceeds.

b. Excess of proceeds over the par value of the preferred

stock.

c. The proportion of the proceeds that the warrants’ fair

value bears to the preferred stock’s par value.

d. The fair value of the warrants.



B.  Preferred Stock







5.  On April 1, year 1, Hyde Corp., a newly formed company,

had the following stock issued and outstanding:



9.  Blue Co. issued preferred stock with detachable common

stock warrants at a price that exceeded both the par value

and the market value of the preferred stock. At the time the



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Module 15: Stockholders’ Equity



warrants are exercised, Blue’s total stockholders’ equity is

increased by the



a.

b.

c.

d.



Cash received upon

exercise of the warrants

Yes

Yes

No

No



Carrying amount

of warrants

No

Yes

No

Yes



C.  Stock Subscriptions

10. When collectibility is reasonably assured, the excess

of the subscription price over the stated value of the no par

common stock subscribed should be recorded as











a. No par common stock.

b. Additional paid-in capital when the subscription is

recorded.

c. Additional paid-in capital when the subscription is

collected.

d. Additional paid-in capital when the common stock is

issued.



13. At December 31, year 1, Rama Corp. had 20,000 shares

of $1 par value treasury stock that had been acquired in year 1

at $12 per share. In May year 2, Rama issued 15,000 of these

treasury shares at $10 per share. The cost method is used to

record treasury stock transactions. Rama is located in a state

where laws relating to acquisition of treasury stock restrict the

availability of retained earnings for declaration of dividends.

At December 31, year 2, what amount should Rama show

in notes to financial statements as a restriction of retained

earnings as a result of its treasury stock transactions?



















a. Common stock issued for 20% of the par value of the

shares of common stock subscribed.

b. Common stock issued for the par value of the shares

of common stock subscribed.

c. Common stock subscribed for 80% of the par value of

the shares of common stock subscribed.

d. Common stock subscribed for the par value of the

shares of common stock subscribed.



D.  Treasury Stock Transactions

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 and amounts should Seda credit in year 2 to

record the issuance of the 3,000 shares?

Treasury

Additional

stock

paid-in capital



c12.indd 603



a.



$102,000



b.



$144,000



c.



$108,000



d.



$108,000



Retained

earnings



Common

stock



$42,000



$6,000

$6,000



$ 42,000



a.$5,000

b.$10,000

c.$60,000

d.$90,000



14. United, Inc.’s unadjusted current assets section and

stockholders’ equity section of its December 31, year 1

balance sheet are as follows:

Current assets

Cash



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 remaining 80% of the subscription price of each

share due in year 2. Collectibility was reasonably assured. At

December 31, year 1, the stockholders’ equity section of the

balance sheet would report additional paid-in capital for the

excess of the subscription price over the par value of the shares

of common stock subscribed and





603



$ 60,000



Investments in trading securities

(including $300,000 of United, Inc.

common stock)



400,000



Trade accounts receivable



340,000



Inventories



148,000



Total



$ 948,000



Stockholders’ equity

Common stock

Retained earnings (deficit)

Total



$2,224,000

(224,000)

$2,000,000



The investments and inventories are reported at their costs,

which approximate market values. In its year 1 statement

of stockholders’ equity, United’s total amount of equity at

December 31, year 1, is











a.$2,224,000

b.$2,000,000

c.$1,924,000

d.$1,700,000



15. Cyan Corp. issued 20,000 shares of $5 par common

stock at $10 per share. On December 31, year 1, Cyan’s

retained earnings were $300,000. In March year 2, Cyan

reacquired 5,000 shares of its common stock at $20 per share.

In June year 2, Cyan sold 1,000 of these shares to its corporate

officers for $25 per share. Cyan uses the cost method to record

treasury stock. Net income for the year ended December 31,

year 2, was $60,000. At December 31, year 2, what amount

should Cyan report as retained earnings?











a.$360,000

b.$365,000

c.$375,000

d.$380,000



$42,000



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604



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:



20. The following accounts were among those reported on

Luna Corp.’s balance sheet at December 31, year 1:

Available-for-sale securities (market value

$140,000)

Preferred stock, $20 par value, 20,000 shares

issued and outstanding

Additional paid-in capital on preferred stock

Retained earnings



January 5—issued 75,000 shares at $14 per share.

December 27—purchased 5,000 shares at $11 per share.

Victor used the par value method to record the purchase of

the treasury shares. What would be the balance in the paid-in

capital from treasury stock account at December 31, year 1?











a.$0

b.$5,000

c.$15,000

d.$20,000



17. On incorporation, Dee Inc. issued common stock at a

price in excess of its par value. No other stock transactions

occurred except treasury stock was acquired for an amount

exceeding this issue price. If Dee uses the par value method

of accounting for treasury stock appropriate for retired stock,

what is the effect of the acquisition on the following?



a.

b.

c.

d.



Net common

stock

No effect

Decrease

Decrease

No effect



Additional paidin capital

Decrease

Decrease

No effect

Decrease



Retained

earnings

No effect

Decrease

Decrease

Decrease



18. Posy Corp. acquired treasury shares at an amount greater

than their par value, but less than their original issue price.

Compared to the cost method of accounting for treasury

stock, does the par value method report a greater amount for

additional paid-in capital and a greater amount for retained

earnings?

a.

b.

c.

d.



Additional paid-in capital

Yes

Yes

No

No



Retained earnings

Yes

No

No

Yes



E.  Retirement of Stock

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. Rona uses the cost method in accounting for its

treasury stock transactions. In connection with the retirement

of these 2,000 shares, Rona should debit



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Additional paid-in capital



Retained earnings



a.



$20,000



$280,000



b.



$100,000



$180,000



c.



$180,000



$100,000



d.



$280,000



$0



$ 80,000

400,000

30,000

900,000



On January 20, year 2, Luna exchanged all of the availablefor-sale securities for 5,000 shares of Luna’s preferred stock.

Market values at the date of the exchange were $150,000

for the available-for-sale securities and $30 per share for the

preferred stock. The 5,000 shares of preferred stock were

retired immediately after the exchange. Which of the following

journal entries should Luna record in connection with this

transaction?

a. Preferred stock

Additional paid-in capital

on preferred stock

Retained earnings

Available-for-sale securities

Gain on exchange of

securities

b. Preferred stock

Additional paid-in capital

on preferred stock

Available-for-sale securities

Additional paid-in

capital from retirement

of preferred stock

c. Preferred stock

Available-for-sale securities

Additional paid-in

capital on preferred stock

d. Preferred stock

Available-for-sale securities

Gain on exchange of

securities



Debit

100,000



Credit



7,500

42,500

80,000

70,000

100,000

30,000

80,000



50,000

150,000

80,000

70,000

150,000

80,000

70,000



21. On December 31, year 1, Pack Corp.’s board of directors

canceled 50,000 shares of $2.50 par value common stock

held in treasury at an average cost of $13 per share. Before

recording the cancellation of the treasury stock, Pack had the

following balances in its stockholders’ equity accounts:

Common stock

Additional paid-in capital

Retained earnings

Treasury stock, at cost



$540,000

750,000

900,000

650,000



In its balance sheet at December 31, year 1, Pack should report

a common stock balance of







a.$0

b.$250,000



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Module 15: Stockholders’ Equity

c.$415,000

d.$540,000



22. In year 1, Fogg, Inc. issued $10 par value common

stock for $25 per share. No other common stock transactions

occurred until March 31, year 3, when Fogg acquired some of

the issued shares for $20 per share and retired them. Which

of the following statements correctly states an effect of this

acquisition and retirement?











a.

b.

c.

d.



Year 3 net income is decreased.

Year 3 net income is increased.

Additional paid-in capital is decreased.

Retained earnings is increased.



F. Dividends

23. Plack Co. purchased 10,000 shares (2% ownership) of Ty

Corp. on February 14, year 1. Plack received a stock dividend

of 2,000 shares on April 30, year 1, when the market value

per share was $35. Ty paid a cash dividend of $2 per share

on December 15, year 1. In its year 1 income statement, what

amount should Plack report as dividend income?











a.$20,000

b.$24,000

c.$90,000

d.$94,000



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 common stock, par value $1 per share.



On December 15, year 1, Arp declared dividends of $100,000.

What was the amount of dividends payable to Arp’s common

stockholders?











a.$10,000

b.$34,000

c.$40,000

d.$47,500



25. At December 31, year 2 and year 3, Apex Co. had 3,000

shares of $100 par, 5% cumulative preferred stock outstanding.

No dividends were in arrears as of December 31, year 1.

Apex did not declare a dividend during year 2. During year 3,

Apex paid a cash dividend of $10,000 on its preferred stock.

Apex should report dividends in arrears in its year 3 financial

statements as a(n)











a.

b.

c.

d.



Accrued liability of $15,000.

Disclosure of $15,000.

Accrued liability of $20,000.

Disclosure of $20,000.



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 lieu of cash. The notes, which were dated



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605



April 1, year 1, had a maturity date of March 31, year 2, and

a 10% interest rate. How should East account for the scrip

dividend and related interest?











a. Debit retained earnings for $110,000 on April 1,

year 1.

b. Debit retained earnings for $110,000 on March 31,

year 2.

c. Debit retained earnings for $100,000 on April 1, year

1, and debit interest expense for $10,000 on March 31,

year 2.

d. Debit retained earnings for $100,000 on April 1,

year 1, and debit interest expense for $7,500 on

December 31, year 1.



27. On January 2, year 2, Lake Mining Co.’s board of

directors declared a cash dividend of $400,000 to stockholders

of record on January 18, year 2, payable on February 10, year

2. The dividend is permissible under law in Lake’s state of

incorporation. Selected data from Lake’s December 31, year 1

balance sheet are as follows:

Accumulated depletion

Capital stock

Additional paid-in capital

Retained earnings



$100,000

500,000

150,000

300,000



The $400,000 dividend includes a liquidating dividend of











a.$0

b.$100,000

c.$150,000

d.$300,000



28. On June 27, year 1, Brite Co. distributed to its common

stockholders 100,000 outstanding common shares of its

investment in Quik, Inc., an unrelated party. The carrying

amount on Brite’s books of Quik’s $1 par common stock was

$2 per share. Immediately after the distribution, the market

price of Quik’s stock was $2.50 per share. In its income

statement for the year ended June 30, year 1, what amount

should Brite report as gain before income taxes on disposal of

the stock?











a.$250,000

b.$200,000

c.$50,000

d.$0



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 $60,000 and a fair value of

$78,000. What is the effect of this property dividend on Nilo’s

year 1 retained earnings, after all nominal accounts are closed?











a.$0.

b. $18,000 increase.

c. $60,000 decrease.

d. $78,000 decrease.



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606



30. Long Co. had 100,000 shares of common stock issued and

outstanding at January 1, year 1. During year 1, Long took the

following actions:

March 15







December 15







Declared a 2-for-1 stock split,

when the fair value of the stock

was $80 per share.

Declared a $.50 per share cash

dividend.



In Long’s statement of stockholders’ equity for year 1, what

amount should Long report as dividends?











a.$50,000

b.$100,000

c.$850,000

d.$950,000



a.

b.

c.

d.



December 31,

Year 1

No effect

No effect

Decrease

No effect



January 12,

Year 2

Decrease

No effect

No effect

Decrease



32. Ole Corp. declared and paid a liquidating dividend of

$100,000. This distribution resulted in a decrease in Ole’s

Paid-in capital

a.

b.

c.

d.



Retained earnings



No

Yes

No

Yes



No

Yes

Yes

No



33. Instead of the usual cash dividend, Evie Corp. declared

and distributed a property dividend from its overstocked

merchandise. The excess of the merchandise’s carrying amount

over its market value should be











a.Ignored.

b. Reported as a separately disclosed reduction of

retained earnings.

c. Reported as an extraordinary loss, net of income taxes.

d. Reported as a reduction in income before

extraordinary items.



34. The following stock dividends were declared and

distributed by Sol Corp.:

Percentage of common share

outstanding at declaration date

10

28



Fair value

$15,000

40,000



Par value

$10,000

30,800



What aggregate amount should be debited to retained earnings

for these stock dividends?







c12.indd 606



a.$40,800

b.$45,800



c.$50,000

d.$55,000



35. Ray Corp. declared a 5% stock dividend on its 10,000

issued and outstanding shares of $2 par value common

stock, which had a fair value of $5 per share before the stock

dividend was declared. This stock dividend was distributed

sixty days after the declaration date. By what amount did

Ray’s current liabilities increase as a result of the stock

dividend declaration?











a.$0

b.$500

c.$1,000

d.$2,500



G.  Stock Splits



31. A company declared a cash dividend on its common

stock on December 15, year 1, payable on January 12, year 2.

How would this dividend affect stockholders’ equity on the

following dates?

December 15,

Year 1

Decrease

Decrease

No effect

No effect









36. How would total stockholders’ equity be affected by the

declaration of each of the following?



a.

b.

c.

d.



Stock dividend



Stock split



No effect

Decrease

Decrease

No effect



Increase

Decrease

No effect

No effect



37. On July 1, year 1, Bart Corporation has 200,000 shares

of $10 par common stock outstanding and the market price of

the stock is $12 per share. On the same date, Bart declared a

1-for-2 reverse stock split. The par of the stock was increased

from $10 to $20 and one new $20 par share was issued for

each two $10 par shares outstanding. Immediately before the

1-for-2 reverse stock split, Bart’s additional paid-in capital

was $450,000. What should be the balance in Bart’s additional

paid-in capital account immediately after the reverse stock

split is effected?











a.$0

b.$450,000

c.$650,000

d.$850,000



38. How would a stock split in which the par value per share

decreases in proportion to the number of additional shares

issued affect each of the following?



a.

b.

c.

d.



Additional paid-in capital



Retained earnings



Increase

No effect

No effect

Increase



No effect

No effect

Decrease

Decrease



H.  Appropriations of Retained Earnings

(Reserves)

39. At December 31, year 1, Eagle Corp. reported $1,750,000

of appropriated retained earnings for the construction of a

new office building, which was completed in year 2 at a total

cost of $1,500,000. In year 2, Eagle appropriated $1,200,000

of retained earnings for the construction of a new plant. Also,



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Module 15: Stockholders’ Equity



$2,000,000 of cash was restricted for the retirement of bonds

due in year 3. In its year 2 balance sheet, Eagle should report

what amount of appropriated retained earnings?











a.$1,200,000

b.$1,450,000

c.$2,950,000

d.$3,200,000



40. The following information pertains to Meg Corp.:









• Dividends on its 1,000 shares of 6%, $10 par value

cumulative preferred stock have not been declared or paid

for three years.

• Treasury stock that cost $15,000 was reissued for $8,000.



What amount of retained earnings should be appropriated as a

result of these items?











a.$0

b.$1,800

c.$7,000

d.$8,800



41. A retained earnings appropriation can be used to











a. Absorb a fire loss when a company is self-insured.

b. Provide for a contingent loss that is probable and

reasonably estimable.

c. Smooth periodic income.

d. Restrict earnings available for dividends.



I.  Share-Based Payments

42. On January 1, year 1, Doro Corp. granted an employee

an option to purchase 3,000 shares of Doro’s $5 par

value common stock at $20 per share. The option became

exercisable on December 31, year 2, after the employee

completed two years of service. The option was exercised on

January 10, year 3. The market prices of Doro’s stock and

stock options were as follows:



Date

January 1, year 1

December 31,

year 2

January 10, year 3



Market

price of

stock

$30

50

45



Market price

of similar stock

option

$8

9

11



For year 1, Doro should recognize compensation

expense of











a.$45,000

b.$30,000

c.$15,000

d.$12,000



43. In connection with a stock option plan for the benefit

of key employees, Ward Corp. intends to distribute treasury

shares when the options are exercised. These shares were

bought in year 1 at $42 per share. On January 1, year 2, Ward

granted stock options for 10,000 shares at $38 per share as

additional compensation for services to be rendered over the



c12.indd 607



607



next three years. The options are exercisable during a four-year

period beginning January 1, year 5, by grantees still employed

by Ward. Market price of Ward’s stock was $47 per share at

the grant date. The fair value of a similar stock option with

the same terms was $12 at the grant date. No stock options

were terminated during year 2. In Ward’s December 31,

year 2 income statement, what amount should be reported as

compensation expense pertaining to the options?











a.$90,000

b.$40,000

c.$30,000

d.$0



Items 44 and 45 are based on the following:

On January 2, year 1, Kine Co. granted Morgan, its president,

compensatory stock options to buy 1,000 shares of Kine’s

$10 par common stock. The options call for a price of $20 per

share and are exercisable for three years following the grant

date. Morgan exercised the options on December 31, year 1.

The market price of the stock was $50 on January 2, year 1,

and $70 on December 31, year 1. The fair value of a similar

stock option with the same terms was $28 on the grant date.

44. What is compensation expense for year 1 for the sharebased payments?











a.$9,333

b.$10,000

c.$20,000

d.$28,000



45. By what net amount should stockholders’ equity increase

as a result of the grant and exercise of the options?











a.$20,000

b.$30,000

c.$50,000

d.$70,000



46. On January 2, year 1, Morey Corp. granted Dean, its

president, 20,000 stock appreciation rights for past services.

Those rights are exercisable immediately and expire on

January 1, year 4. On exercise, Dean is entitled to receive cash

for the excess of the stock’s market price on the exercise date

over the market price on the grant date. Dean did not exercise

any of the rights during year 1. The market price of Morey’s

stock was $30 on January 2, year 1, and $45 on December 31,

year 1. As a result of the stock appreciation rights, Morey

should recognize compensation expense for year 1 of











a.$0

b.$100,000

c.$300,000

d.$600,000



47. Wall Corp.’s employee stock purchase plan specifies the

following:







• For every $1 withheld from employees’ wages for the

purchase of Wall’s common stock, Wall contributes $2.

• The stock is purchased from Wall’s treasury stock at

market price on the date of purchase.



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Module 15: Stockholders’ Equity



608



The following information pertains to the plan’s year 1

transactions:

Employee withholdings for the year

Market value of 150,000 shares issued

Carrying amount of treasury stock issued

(cost)



$ 350,000

1,050,000

900,000



Before payroll taxes, what amount should Wall recognize as

expense in year 1 for the stock purchase plan?











a.$1,050,000

b.$900,000

c.$700,000

d.$550,000



48. In accounting for stock-based compensation, what interest

rate is used to discount both the exercise price of the option

and the future dividend stream?











a. The firm’s known incremental borrowing rate.

b. The current market rate that firms in that particular

industry use to discount cash flows.

c. The risk-free interest rate.

d. Any rate that firms can justify as being reasonable.

































50. Compensation cost for a share-based payment to

employees that is classified as a liability is measured as











a. The change in fair value of the instrument for each

reporting period.

b. The total fair value at grant date.

c. The present value of cash payments due over the life

of the grant.

d. The actual cash outlay for the period.



51. What is the measurement date for a share-based payment

to employees that is classified as a liability?











a.

b.

c.

d.



As a component of other comprehensive income.

As a prior period adjustment.

As a current liability on the balance sheet.

As a cash inflow from financing activities on the

statement of cash flows.



a. Include the options in the denominator of basic and

diluted earnings per share for the entire year.

b. Include the options in the denominator of diluted

earnings per share weighted by number of months

outstanding.

c. Include the options in the denominator of diluted

earnings per share weighted by number of months

outstanding.

d. Ignore the options in the calculation of diluted

earnings per share.



K.  Basic Earnings Per Share

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 income for year 2 was

$1,000,000. For year 2, basic earnings per share amounted to











a.$10.00

b.$9.50

c.$9.00

d.$5.00



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

Common stock, $5 par, 200,000 shares

issued and outstanding



The service inception date.

The grant date.

The settlement date.

The end of the reporting period.



52. Shafer Corporation (a nonpublic company) established

an employee stock option plan on January 1, year 1. The plan

allows its employees to acquire 20,000 shares of its $5 par

value common stock at $70 per share, when the market price

is $75. The options may not be exercised until five years from

the grant date. The risk-free interest rate is 6%, and the stock

is expected to pay dividends of $3 annually. The fair value of

a similar option at the grant date is $6.40. What is the amount

of deferred compensation expense that should be recorded in

year one?



a.

b.

c.

d.



54. On July 1, year 1, Jordan Corp. granted employees sharebased payments in the form of compensatory stock options.

How should Jordan account for the outstanding options in

calculating earnings per share for year 1 if the options are not

antidilutive?







a. In all circumstances.

b. In circumstances when the options are exercisable

within two years for services rendered over the next

two years.

c. In circumstances when options are granted for prior

service, and the options are immediately exercisable.

d. In no circumstances is compensation expense

immediately recognized.



a.$20,000

b.$25,000

c.$100,000

d.$128,000



53. Galaxy has a tax benefit and cash retained of $20,000 as a

result of share-based payments to employees. How is this tax

benefit disclosed in the financial statements?



49. In what circumstances is compensation expense

immediately recognized?







c12.indd 608













$ 250,000

1,000,000



Ute reported net income of $500,000 for the year ended

December 31, year 2. Ute paid no preferred dividends during

year 1 and paid $16,000 in preferred dividends during year 2.

In its December 31, year 2 income statement, what amount

should Ute report as basic earnings per share?











a.$2.42

b.$2.45

c.$2.48

d.$2.50



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Module 15: Stockholders’ Equity



57. The following information pertains to Jet Corp.’s

outstanding stock for year 1:

Common stock, $5 par value

Shares outstanding, 1/1/Y1

2-for-1 stock split, 4/1/Y1

Shares issued, 7/1/Y1

Preferred stock, $10 par value, 5% cumulative

Shares outstanding, 1/1/Y1



20,000

20,000

10,000



61. On January 31, year 2, Pack, Inc. split its common

stock 2 for 1, and Young, Inc. issued a 5% stock dividend.

Both companies issued their December 31, year 1 financial

statements on March 1, year 2. Should Pack’s year 1, basic

earnings per share (BEPS) take into consideration the stock

split, and should Young’s year 1 BEPS take into consideration

the stock dividend?



4,000



a.40,000

b.45,000

c.50,000

d.54,000



7/1/Y1

12/31/Y1



Common stock outstanding

Issued a 10% common stock

dividend

Issued common stock for cash

Common stock outstanding



30,000

3,000

8,000

41,000



What were Timp’s year 1 weighted-average shares

outstanding?











a.30,000

b.34,000

c.36,750

d.37,000



c12.indd 609



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 common stock at $15 per share outstanding

at the beginning and end of year 2. The average market price

of Mann’s common stock was $20 during year 2. What is the

number of shares that should be used in computing diluted

earnings per share for the year ended December 31, year 2?











a.325,000

b.335,000

c.360,000

d.365,000



December 31



Year 2



Year 1



$1.78

$1.78

$2.34

$2.34



$3.50

$1.75

$1.75

$3.50



Cumulative effect of a

change in accounting

principle

Yes

No

No

Yes



Extraordinary

items

No

No

Yes

Yes



Year 1



Year 2



110,000

10,000



110,000

10,000



Outstanding shares of stock:

Common

Convertible preferred



During year 2, Peters paid dividends of $3.00 per share on

its preferred stock. The preferred shares are convertible into

20,000 shares of common stock and are considered common

stock equivalents. Net income for year 2 was $850,000.

Assume that the income tax rate is 30%. The diluted earnings

per share for year 2 is











60. Earnings per share data must be reported on the income

statement for



a.

b.

c.

d.



No

No

Yes

Yes



63. Peters Corp.’s capital structure was as follows:



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 occurred: On April 1, 20,000 shares

of treasury stock were sold, and on July 1, a 2-for-1 stock split

was issued. Net income was $410,000 in year 2 and $350,000

in year 1. What amounts should Strauch report as basic

earnings per share in its year 2 and year 1 comparative income

statements?

a.

b.

c.

d.



Young’s year 1 BEPS



Yes

No

Yes

No



L.  Diluted Earnings Per Share



58. Timp, Inc. had the following common stock balances and

transactions during year 1

1/1/Y1

2/1/Y1



Pack’s year 1 BEPS

a.

b.

c.

d.



What are the number of shares Jet should use to calculate year

1 basic earnings per share?











609



a.$6.31

b.$6.54

c.$7.08

d.$7.45



64. Cox Corporation had 1,200,000 shares of common

stock outstanding on January 1 and December 31, year 2. In

connection with the acquisition of a subsidiary company in

June year 1, Cox is required to issue 50,000 additional shares

of its common stock on July 1, year 3, to the former owners of

the subsidiary. Cox paid $200,000 in preferred stock dividends

in year 2, and reported net income of $3,400,000 for the year.

Cox’s diluted earnings per share for year 2 should be







a.$2.83

b.$2.72



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Module 15: Stockholders’ Equity



610











c.$2.67

d.$2.56



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, year 2. The following amounts were

reported in Lomond’s income statement for the year ended

December 31, year 2:

Revenues

Operating expenses

Interest on bonds

Income before income tax

Income tax at 30%

Net income



$977,000

920,000

7,000

50,000

15,000

$ 35,000











70. For contingent issue agreements requiring passage of time

or earnings threshold that is met, before issuing stock, these

should be



a.

b.

c.

d.



What is Lomond’s year 2 diluted earnings per share?











a.$2.50

b.$2.85

c.$2.92

d.$3.50



66. West Co. had earnings per share of $15.00 for year 1

before considering the effects of any convertible securities.

No conversion or exercise of convertible securities occurred

during year 1. However, possible conversion of convertible

bonds, not considered common stock equivalents, would have

reduced earnings per share by $0.75. The effect of possible

exercise of common stock options would have increased

earnings per share by $0.10. What amount should West report

as diluted earnings per share for year 1?





















69. In determining earnings per share, interest expense, net

of applicable income taxes, on convertible debt that is dilutive

should be



c12.indd 610



Book

value



Estimated

current

value



$ 300,000



$370,000



180,000

420,000



120,000

320,000



$ 900,000



$810,000



Assets

Assets pledged with fully

secured creditors

Assets pledged with partially

secured creditors

Free assets



Liabilities



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.



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).



Included in computing

diluted earnings per

share

No

Yes

No

Yes



71. Kent Co. filed a voluntary bankruptcy petition on August

15, year 1, and the statement of affairs reflects the following

amounts:



a.$14.25

b.$14.35

c.$15.00

d.$15.10



68. The if-converted method of computing earnings per share

data assumes conversion of convertible securities as of the



Included in basic

earnings per

share

No

No

Yes

Yes



M.  Corporate Bankruptcy



67. In determining diluted earnings per share, dividends on

nonconvertible cumulative preferred stock should be











a. Added back to weighted-average common shares

outstanding for diluted earnings per share.

b. Added back to net income for diluted earnings per

share.

c. Deducted from net income for diluted earnings per

share.

d. Deducted from weighted-average common shares

outstanding for diluted earnings per share.



Liabilities with priority



$ 70,000



Fully secured creditors



260,000



Partially secured creditors



200,000



Unsecured creditors



540,000

$1,070,000



Assume that the assets are converted to cash at the estimated

current values and the business is liquidated. What amount

of cash will be available to pay unsecured nonpriority

claims?











a.$240,000

b.$280,000

c.$320,000

d.$360,000



72. Seco Corp. was forced into bankruptcy and is in the

process of liquidating assets and paying claims. Unsecured

claims will be paid at the rate of 40 cents on the dollar. Hale

holds a $30,000 noninterest-bearing note receivable from Seco



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