Prof. Mark A.

Breckwoldt, CPA IM Acc II Quiz 2

Name: __________________________________________

March 13, 2013

1. The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues. A) True B) False 2. The FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense. A) True B) False 3. Companies recognize a gain or loss when stockholders exercise convertible preferred stock. A) True B) False 4. Nondetachable warrants, as with detachable warrants, require an allocation of the proceeds between the bonds and the warrants. A) True B) False 5. Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise. A) True B) False 6. If an employee fails to exercise a stock option before its expiration date, the company should decrease compensation expense. A) True B) False 7. If preferred stock is cumulative and no dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share. A) True B) False 8. If a stock dividend occurs after year-end, but before issuing the financial statements, a company must restate the weighted-average number of shares outstanding for the year. A) True
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B)

False

9. When a company has a complex capital structure, it must report both basic and diluted earnings per share. A) True B) False 10. In a contingent issue agreement, the contingent shares are considered outstanding for computing diluted EPS when the earnings or market price level is met by the end of the year. A) True B) False 11. 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. 12. On January 2, 2012, 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, 2012, 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. 13. 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

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14. 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. 15. At December 31, 2012, 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, 2012. Net income for the year ended December 31, 2012, was $1,530,000. What should be Hancock's 2012 earnings per common share, rounded to the nearest penny? A) $3.03 B) $3.82 C) $3.60 D) $3.40 16. The following information is available for Barone Corporation: January 1, 2013 Shares outstanding April 1, 2013 Shares issued July 1, 2013 Treasury shares purchased October 1, 2013 Shares issued in a 100% stock dividend The number of shares to be used in computing earnings per common share for 2013 is A) B) C) D) 3,304,500. 3,622,500. 3,599,250. 3,141,750.

17. Kasravi Co. had net income for 2013 of $400,000. 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 2013? A) $2.00 B) $1.98 C) $1.90 D) $1.89 18. Fugate Company had 750,000 shares of common stock issued and outstanding at December 31, 2012. On July 1, 2013 an additional 750,000 shares were issued for cash. Fugate also had stock options outstanding at the beginning and end of 2013 which

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A) B) C) D)

allow the holders to purchase 225,000 shares of common stock at $20 per share. The average market price of Fugate's common stock was $25 during 2013. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2013? 1,545,000 1,305,000 1,181,250 1,170,000

19. 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. 20. Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences. A) True B) False 21. A company can classify a debt security as held-to-maturity if it has the positive intent to hold the securities to maturity. A) True B) False 22. Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the investee. A) True B) False 23. The accounting profession has concluded that an investment of more than 50 percent of the voting stock of an investee should lead to a presumption of significant influence over an investee. A) True B) False 24. A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation. A) True B) False

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25. If a decline in a security's value is judged to be temporary, a company needs to write down the cost basis of the individual security to a new cost basis. A) True B) False 26. The transfer of securities from trading to available-for-sale and from available-for-sale to trading has the same impact on stockholders' equity and net income. A) True B) False 27. Which of the following is not a debt security? A) Convertible bonds B) Commercial paper C) Loans receivable D) All of these are debt securities. 28. A correct valuation is A) available-for-sale at amortized cost. B) held-to-maturity at amortized cost. C) held-to-maturity at fair value. D) none of these. 29. Watt Co. purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes A) a debit to Held-to-Maturity Securities at $300,000. B) a credit to Premium on Investments of $15,000. C) a debit to Held-to-Maturity Securities at $315,000. D) none of these. 30. Investments in debt securities should be recorded on the date of acquisition at A) lower of cost or market. B) market value. C) market value plus brokerage fees and other costs incident to the purchase. D) face value plus brokerage fees and other costs incident to the purchase. 31. When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? A) The investor should always use the equity method to account for its investment.

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B) C) D)

The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. The investor should always use the fair value method to account for its investment.

32. On August 1, 2012, Fowler Company acquired $900,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2012, and mature on April 30, 2017, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2012? A) Debt 936,000 Investments Interest Revenue 22,500 Cash B) Debt Investments Cash Debt Investments Interest Revenue Cash Debt Investments Premium on Bonds Cash

C)

D)

58,500

33. On November 1, 2012, Horton Co. purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $500,000, for $450,000. An additional $15,000 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2019. Horton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Horton's 2012 income statement as a result of Horton's available-for-sale investment in Lopez was A) $8,750. B) $8,333. C) $7,500. D) $6,666.

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Use the following to answer question 34: Richman Co. purchased $600,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2012, with interest payable on July 1 and January 1. The bonds sold for $624,948 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the Availablefor-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2012 and December 31, 2012 by the amortized premiums of $2,124 and $2,196, respectively. 34. At February 1, 2013, Richman Co. sold the Carlin bonds for $618,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2013 was $620,250. Assuming Richman Co. has a portfolio of available-for-sale debt investments, what should Richman Co. report as a gain (or loss) on the bonds? A) $0. B) ($2,250). C) ($13,122). D) ($17,622). 35. Kramer Company's trading securities portfolio which is appropriately included in current assets is as follows: December 31, 2012 Fair Cost Value Catlett Corp. $250,000 $205,000 Lyman, Inc. 245,000 265,000 $495,000 $470,000 Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2012 income statement if 2012 is Kramer's first year of operation? A) B) C) D) $0. $20,000. $25,000. $45,000.

36. On January 2, 2013 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequently used the equity method to account for the investment. During 2013 Jobs, Inc. reported net income of $640,000 and distributed dividends of $270,000. The ending balance in the Investment in Pod Company account at December 31, 2013 was $450,000 after applying the equity method during 2013. What was the purchase price Pod Company paid for its investment in Jobs, Inc? A) $315,000

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B) C) D)

$357,500 $595,000 $732,500

Use the following to answer questions 37-38: Brown Corporation earns $600,000 and pays cash dividends of $200,000 during 2012. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown. 37. What amount should Dexter show in the investment account at December 31, 2012 if the beginning of the year balance in the account was $800,000? A) $980,000. B) $800,000. C) $920,000. D) $1,200,000. 38. How much investment income should Dexter report in 2012? A) $200,000. B) $180,000. C) $120,000. D) $600,000. 39. Valet Corp. began operations in 2013. An analysis of Valet's equity securities portfolio acquired in 2013 shows the following totals at December 31, 2013 for trading and availablefor-sale securities: Trading Available-for-Sale Securities Aggregate cost $90,000 Aggregate fair value 70,000 What amount should Valet report in its 2013 income statement for unrealized holding loss? A) B) C) D) $35,000. $5,000. $15,000. $20,000. 40. At December 31, 2013, Jeter Corp. had the following equity securities that were purchased during 2013, its first year of

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operation: Fair Cost Trading Securities: Securit A y B Totals $ 95,000 15,000 $110,000

Available-for-Sale Securities: Securit Y $ 70,000 y Z 85,000 Totals $155,000 All market declines are considered temporary. Fair value adjustments at December 31, 2013 should be established with a corresponding charge against Income A) B) C) D) $50,000 $35,000 $30,000 $30,000 Stockholders' Equity 0

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Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. A A B B B B A A A A B D C D C C B D B A B B B A B A C B C C B A A B C B C B D C

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