ACC 304 Week 11 Final Exam – Strayer University NEW

ACC/304 Week 11 Final Exam – Strayer NEW

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Week 11 Final Exam: Chapter 12 Through 16

INTANGIBLE ASSETS

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. Intangible assets derive their value from the right (claim) to receive cash in the future.

2. Internally created intangibles are recorded at cost.

3. Internally generated intangible assets are initially recorded at fair value.

4. Amortization of limited-life intangible assets should not be impacted by expected residual values.

5. Some intangible assets are not required to be amortized every year.

6. Limited-life intangibles are amortized by systematic charges to expense over their useful life.

7. The cost of acquiring a customer list from another company is recorded as an intangible asset.

8. The cost of purchased patents should be amortized over the remaining legal life of the patent.

9. If a new patent is acquired through modification of an existing patent, the remaining book value of the original patent may be amortized over the life of the new patent.

10. In a business combination, a company assigns the cost, where possible, to the identifiable tangible and intangible assets, with the remainder recorded as goodwill.

11. Internally generated goodwill should not be capitalized in the accounts.

12. Internally generated goodwill associated with a business may be recorded as an asset when a firm offer to purchase that business unit has been received.

13. All intangibles are subject to periodic consideration of impairment with corresponding potential write-downs.

14. If the fair value of an unlimited life intangible other than goodwill is less than its book value, an impairment loss must be recognized.

15. If market value of an impaired asset recovers after an impairment has been recognized, the impairment may be reversed in a subsequent period.

16. The same recoverability test that is used for impairments of property, plant, and equipment is used for impairments of indefinite-life intangibles.

17. Periodic alterations to existing products are an example of research and development costs.

18. Research and development costs that result in patents may be capitalized to the extent of the fair value of the patent.

19. Research and development costs are recorded as an intangible asset if it is felt they will provide economic benefits in future years.

20. Contra accounts must be reported for intangible assets in a manner similar to accumu-lated depreciation and property, plant, and equipment.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

21. Which of the following does not describe intangible assets?
a. They lack physical existence.
b. They are financial instruments.
c. They provide long-term benefits.
d. They are classified as long-term assets.

22. Which of the following characteristics do intangible assets possess?
a. Physical existence.
b. Claim to a specific amount of cash in the future.
c. Long-lived.
d. Held for resale.

23. Which characteristic is not possessed by intangible assets?
a. Physical existence.
b. Short-lived.
c. Result in future benefits.
d. Expensed over current and/or future years.

24. Costs incurred internally to create intangibles are
a. capitalized.
b. capitalized if they have an indefinite life.
c. expensed as incurred.
d. expensed only if they have a limited life.

25. Which of the following costs incurred internally to create an intangible asset is generally expensed?
a. Research and development costs.
b. Filing costs.
c. Legal costs.
d. All of the above.

26. Which of the following methods of amortization is normally used for intangible assets?
a. Sum-of-the-years’-digits
b. Straight-line
c. Units of production
d. Double-declining-balance

27. The cost of an intangible asset includes all of the following except
a. purchase price.
b. legal fees.
c. other incidental expenses.
d. all of these are included.

28. Factors considered in determining an intangible asset’s useful life include all of the following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life.
d. the amortization method used.

29. Under current accounting practice, intangible assets are classified as
a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
d. legally restricted or goodwill-type.

30. Companies should test indefinite life intangible assets at least annually for:
a. recoverability.
b. amortization.
c. impairment.
d. estimated useful life.

S31. One factor that is not considered in determining the useful life of an intangible asset is
a. salvage value.
b. provisions for renewal or extension.
c. legal life.
d. expected actions of competitors.

32. Which intangible assets are amortized?
Limited-Life Indefinite-Life
a. Yes Yes
b. Yes No
c. No Yes
d. No No

33. The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser’s patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser’s product.
d. amortized over the remaining estimated life of the original patent covering the product whose market would have been impaired by competition from the newly patented product.

34. Broadway Corporation was granted a patent on a product on January 1, 2001. To protect its patent, the corporation purchased on January 1, 2012 a patent on a competing product which was originally issued on January 10, 2008. Because of its unique plant, Broadway Corporation does not feel the competing patent can be used in producing a product. The cost of the competing patent should be
a. amortized over a maximum period of 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 9 years.
d. expensed in 2012.

35. Wriglee, Inc. went to court this year and successfully defended its patent from infringe-ment by a competitor. The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.

36. Which of the following is not an intangible asset?
a. Trade name
b. Research and development costs
c. Franchise
d. Copyrights

37. Which of the following intangible assets should not be amortized?
a. Copyrights
b. Customer lists
c. Perpetual franchises
d. All of these intangible assets should be amortized.

38. When a patent is amortized, the credit is usually made to
a. the Patent account.
b. an Accumulated Amortization account.
c. a Deferred Credit account.
d. an expense account.

39. When a company develops a trademark the costs directly related to securing it should generally be capitalized. Which of the following costs associated with a trademark would not be allowed to be capitalized?
a. Attorney fees.
b. Consulting fees.
c. Research and development fees.
d. Design costs.

40. In a business combination, companies record identifiable intangible assets that they can reliably measure. All other intangible assets, too difficult to identify or measure, are recorded as:
a. other assets.
b. indirect costs.
c. goodwill.
d. direct costs.

41. Goodwill may be recorded when:
a. it is identified within a company.
b. one company acquires another in a business combination.
c. the fair value of a company’s assets exceeds their cost.
d. a company has exceptional customer relations.

42. When a new company is acquired, which of these intangible assets, unrecorded on the acquired company’s books, might be recorded in addition to goodwill?
a. A brand name.
b. A patent.
c. A customer list.
d. All of the above.

43. Which of the following intangible assets could not be sold by a business to raise needed cash for a capital project?
a. Patent.
b. Copyright.
c. Goodwill.
d. Brand Name.

44. The reason goodwill is sometimes referred to as a master valuation account is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair value of the net tangible and identifiable intangible assets as compared with the purchase price of the acquired business.
c. the value of a business is computed without consideration of goodwill and then goodwill is added to arrive at a master valuation.
d. it is the only account in the financial statements that is based on value, all other accounts are recorded at an amount other than their value.

45. Easton Company and Lofton Company were combined in a purchase transaction. Easton was able to acquire Lofton at a bargain price. The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Easton. Proper accounting treatment by Easton is to report the excess amount as
a. a gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.

46. Purchased goodwill should
a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense over the period benefited.
d. not be amortized.

47. The intangible asset goodwill may be
a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.

48. A loss on impairment of an intangible asset is the difference between the asset’s
a. carrying amount and the expected future net cash flows.
b. carrying amount and its fair value.
c. fair value and the expected future net cash flows.
d. book value and its fair value.

49. The recoverability test is used to determine any impairment loss on which of the following types of intangible assets?
a. Indefinite life intangibles other than goodwill.
b. Indefinite life intangibles.
c. Goodwill.
d. Limited life intangibles.

50. Buerhle Company needs to determine if its indefinite-life intangibles other than goodwill have been impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be used is (are)
Recoverability Test Fair Value Test
a. Yes Yes
b. Yes No
c No Yes
d. No No

51. The carrying amount of an intangible is
a. the fair value of the asset at a balance sheet date.
b. the asset’s acquisition cost less the total related amortization recorded to date.
c. equal to the balance of the related accumulated amortization account.
d. the assessed value of the asset for intangible tax purposes.

52. Which of the following research and development related costs should be capitalized and depreciated over current and future periods?
a. Research and development general laboratory building which can be put to alternative uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project currently in process

53. Which of the following principles best describes the current method of accounting for research and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense

54. How should research and development costs be accounted for, according to a Financial Accounting Standards Board Statement?
a. Must be capitalized when incurred and then amortized over their estimated useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the materiality of the amounts involved.
d. Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will have alternative future uses or unless contractually reimbursable.

55. Which of the following would be considered research and development?
a. Routine efforts to refine an existing product.
b. Periodic alterations to existing production lines.
c. Marketing research to promote a new product.
d. Construction of prototypes.

56. Which of the following costs should be capitalized in the year incurred?
a. Research and development costs.
b. Costs to internally generate goodwill.
c. Organizational costs.
d. Costs to successfully defend a patent.

57. Research and development costs
a. are intangible assets.
b. may result in the development of a patent.
c. are easily identified with specific projects.
d. all of the above.

58. Which of the following is considered research and development costs?
a. Planned search or critical investigation aimed at discovery of new knowledge.
b. Translation of research findings or other knowledge into a plan or design for a new product or process.
c. Translation of research findings or other knowledge into a significant improvement of an existing product.
d. all of the above.

59. Which of the following is considered research and development costs?
a. Planned search or critical investigation aimed at discovery of new knowledge.
b. Translation of research findings or other knowledge into a plan or design for a new product or process.
c. Neither a nor b.
d. Both a and b.

60. Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the manufacturing stage

61. If a company constructs a laboratory building to be used as a research and development facility, the cost of the laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been obtained from the facility.

62. Operating losses incurred during the start-up years of a new business should be
a. accounted for and reported like the operating losses of any other business.
b. written off directly against retained earnings.
c. capitalized as a deferred charge and amortized over five years.
d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.

63. The costs of organizing a corporation include legal fees, fees paid to the state of incorporation, fees paid to promoters, and the costs of meetings for organizing the promoters. These costs are said to benefit the corporation for the entity’s entire life. These costs should be
a. capitalized and never amortized.
b. capitalized and amortized over 40 years.
c. capitalized and amortized over 5 years.
d. expensed as incurred.

64. Which of the following would not be considered an R & D activity?
a. Adaptation of an existing capability to a particular requirement or customer’s need.
b. Searching for applications of new research findings.
c. Laboratory research aimed at discovery of new knowledge.
d. Conceptual formulation and design of possible product or process alternatives.

65. Which of the following intangible assets should be shown as a separate item on the balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark

66. The notes to the financial statements should include information about acquired intangible assets, and aggregate amortization expense for how many succeeding years?
a. 6
b. 5
c. 4
d. 3

67. Which of the following should be reported under the “Other Expenses and Losses” section of the income statement?
a. Goodwill impairment losses.
b. Trade name amortization expense.
c. Patent impairment losses
d. None of the above.

68. The total amount of patent cost amortized to date is usually
a. shown in a separate Accumulated Patent Amortization account which is shown contra to the Patents account.
b. shown in the current income statement.
c. reflected as credits in the Patents account.
d. reflected as a contra property, plant and equipment item.

69. Intangible assets are reported on the balance sheet
a. with an accumulated depreciation account.
b. in the property, plant, and equipment section.
c. separately from other assets.
d. none of the above.

70. Which of the following is often reported as an extraordinary item?
a. Amortization expense.
b. Impairment losses for intangible assets other than goodwill.
c. Impairment losses on goodwill.
d. None of the above.

71. Which of the following is often reported as an extraordinary item?
a. Amortization expense.
b. Impairment losses for intangible assets.
c. Research and development costs.
d. None of the above.

*72. Which of the following costs incurred with developing computer software for internal use should be capitalized?
a. Evaluation of alternatives.
b. Coding.
c. Training.
d. Maintenance.

*73. When developing computer software to be sold, which of the following costs should be capitalized?
a. Designing.
b. Coding.
c. Testing.
d. None of the above.

*74. Capitalized costs incurred to develop internal use computer software should be amortized using the:
a. percent-of-revenue approach.
b. percent-of-completion approach.
c. straight-line approach.
d. accelerated amortization approach.

*75. Capitalized costs incurred while developing computer software to be sold should be amortized using the:
a. lower of the straight-line method or the percent-of-revenue method.
b. higher of the percent-of-revenue method or the percent-of-completion method.
c. lower of the percent-of-revenue method or the percent-of-completion method.
d. higher of the straight-line method or the percent-of-revenue method.

Multiple Choice Answers—Conceptual

MULTIPLE CHOICE—Computational

76. Lynne Corporation acquired a patent on May 1, 2012. Lynne paid cash of $40,000 to the seller. Legal fees of $1,000 were paid related to the acquisition. What amount should be debited to the patent account?
a. $1,000
b. $39,000
c. $40,000
d. $41,000

77. Contreras Corporation acquired a patent on May 1, 2012. Contreras paid cash of $35,000 to the seller. Legal fees of $900 were paid related to the acquisition. What amount should be debited to the patent account?
a. $900
b. $34,100
c. $35,000
d. $35,900

78. Mini Corp. acquires a patent from Maxi Co. in exchange for 2,500 shares of Mini Corp.’s $5 par value common stock and $90,000 cash. When the patent was initially issued to Maxi Co., Mini Corp.’s stock was selling at $7.50 per share. When Mini Corp. acquired the patent, its stock was selling for $9 a share. Mini Corp. should record the patent at what amount?
a. $102,500
b. $108,750
c. $112,500
d. $90,000

79. Alonzo Co. acquires 3 patents from Shaq Corp. for a total of $300,000. The patents were carried on Shaq’s books as follows: Patent AA: $5,000; Patent BB: $2,000; and Patent CC: $3,000. When Alonzo acquired the patents their fair values were: Patent AA: $20,000; Patent BB: $240,000; and Patent CC: $60,000. At what amount should Alonzo record Patent BB?
a. $100,000
b. $200,000
c. $2,000
d. $225,000

80. Jeff Corporation purchased a limited-life intangible asset for $150,000 on May 1, 2010. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2012?
a. $ -0-
b. $30,000
c. $40,000
d. $45,000

81. Rich Corporation purchased a limited-life intangible asset for $270,000 on May 1, 2010. It has a useful life of 10 years. What total amount of amortization expense should have been recorded on the intangible asset by December 31, 2012?
a. $ -0-.
b. $54,000
c. $72,000
d. $81,000

82. Thompson Company incurred research and development costs of $100,000 and legal fees of $20,000 to acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years. What amount should Thompson record as Patent Amortization Expense in the first year?
a. $ -0-.
b. $ 2,000.
c. $ 6,000.
d. $12,000.

83. ELO Corporation purchased a patent for $180,000 on September 1, 2010. It had a useful life of 10 years. On January 1, 2012, ELO spent $44,000 to successfully defend the patent in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2012?
a. $41,200.
b. $40,000.
c. $37,600.
d. $31,200.

84. Danks Corporation purchased a patent for $900,000 on September 1, 2010. It had a useful life of 10 years. On January 1, 2012, Danks spent $220,000 to successfully defend the patent in a lawsuit. Danks feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization expense for 2012?
a. $206,000.
b. $200,000.
c. $188,000.
d. $156,000.

85. The general ledger of Vance Corporation as of December 31, 2012, includes the following accounts:
Copyrights $ 30,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Discount on bonds payable 70,000
Excess of cost over fair value of identifiable net assets of
Acquired subsidiary 440,000
Trademarks 90,000
In the preparation of Vance’s balance sheet as of December 31, 2012, what should be reported as total intangible assets?
a. $530,000.
b. $557,000.
c. $560,000.
d. $587,000.

86. In January, 2008, Findley Corporation purchased a patent for a new consumer product for $960,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product, however, the patent was estimated to have a useful life of only ten years. During 2013 the product was permanently removed from the market under governmental order because of a potential health hazard present in the product. What amount should Findley charge to expense during 2013, assuming amortization is recorded at the end of each year?
a. $640,000.
b. $480,000.
c. $96,000.
d. $64,000.

87. Day Company purchased a patent on January 1, 2012 for $600,000. The patent had a remaining useful life of 10 years at that date. In January of 2013, Day successfully defends the patent at a cost of $270,000, extending the patent’s life to 12/31/24. What amount of amortization expense would Kerr record in 2013?
a. $60,000
b. $67,500
c. $72,500
d. $90,000

88. On January 2, 2012, Klein Co. bought a trademark from Royce, Inc. for $1,200,000. An independent research company estimated that the remaining useful life of the trademark was 10 years. Its unamortized cost on Royce’s books was $900,000. In Klein’s 2012 income statement, what amount should be reported as amortization expense?
a. $120,000.
b. $ 90,000.
c. $ 60,000.
d. $ 45,000.

89. A company acquires a patent for a drug with a remaining legal and useful life of six years on January 1, 2011 for $2,100,000. The company uses straight-line amortization for patents. On January 2, 2013, a new patent is received for a timed-release version of the same drug. The new patent has a legal and useful life of twenty years. The least amount of amortization that could be recorded in 2013 is
a. $350,000.
b. $ 70,000.
c. $ 95,454.
d. $ 80,500.

90. Blue Sky Company’s 12/31/12 balance sheet reports assets of $7,500,000 and liabilities of $3,000,000. All of Blue Sky’s assets’ book values approximate their fair value, except for land, which has a fair value that is $450,000 greater than its book value. On 12/31/12, Horace Wimp Corporation paid $7,650,000 to acquire Blue Sky. What amount of goodwill should Horace Wimp record as a result of this purchase?
a. $ -0-
b. $150,000
c. $2,700,000
d. $3,150,000

91. Dotel Company’s 12/31/12 balance sheet reports assets of $12,000,000 and liabilities of $5,000,000. All of Dotel’s assets’ book values approximate their fair value, except for land, which has a fair value that is $800,000 greater than its book value. On 12/31/12, Egbert Corporation paid $12,200,000 to acquire Dotel. What amount of goodwill should Egbert record as a result of this purchase?
a. $ -0-
b. $ 200,000
c. $4,400,000
d. $5,200,000

92. Floyd Company purchases Haeger Company for $3,200,000 cash on January 1, 2013. The book value of Haeger Company’s net assets, as reflected on its December 31, 2012 balance sheet is $2,480,000. An analysis by Floyd on December 31, 2012 indicates that the fair value of Haeger’s tangible assets exceeded the book value by $240,000, and the fair value of identifiable intangible assets exceeded book value by $180,000. How much goodwill should be recognized by Floyd Company when recording the purchase of Haeger Company?
a. $ -0-
b. $720,000
c. $480,000
d. $300,000

93. General Products Company bought Special Products Division in 2012 and appropriately recorded $500,000 of goodwill related to the purchase. On December 31, 2013, the fair value of Special Products Division is $4,000,000 and it is carried on General Product’s books for a total of $3,400,000, including the goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $400,000 exists on December 31, 2013. What goodwill impairment should be recognized by General Products in 2013?
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.

94. During 2012, Bond Company purchased the net assets of May Corporation for $2,000,000. On the date of the transaction, May had $600,000 of liabilities. The fair value of May’s assets when acquired were as follows:
Current assets $ 1,080,000
Noncurrent assets 2,520,000
$3,600,000
How should the $1,000,000 difference between the fair value of the net assets acquired ($3,000,000) and the cost ($2,000,000) be accounted for by Bond?
a. The $1,000,000 difference should be credited to retained earnings.
b. The $1,000,000 difference should be recognized as a gain.
c. The current assets should be recorded at $1,080,000 and the noncurrent assets should be recorded at $1,520,000.
d. A deferred credit of $1,000,000 should be set up and then amortized to income over a period not to exceed forty years.

95. The following information is available for Barkley Company’s patents:
Cost $2,580,000
Carrying amount 1,290,000
Expected future net cash flows 1,200,000
Fair value 975,000
Barkley would record a loss on impairment of
a. $ 90,000.
b. $ 315,000.
c. $1,290,000.
d. $1,380,000.

96. Harrel Company acquired a patent on an oil extraction technique on January 1, 2012 for $7,500,000. It was expected to have a 10 year life and no residual value. Harrel uses straight-line amortization for patents. On December 31, 2013, the expected future cash flows expected from the patent were expected to be $900,000 per year for the next eight years. The present value of these cash flows, discounted at Harrel’s market interest rate, is $4,200,000. At what amount should the patent be carried on the December 31, 2013 balance sheet?
a. $7,500,000
b. $7,200,000
c. $6,000,000
d. $4,200,000

97. Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2012 for $6,250,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line amortization for patents. On December 31, 2013, the expected future cash flows expected from the patent were expected to be $500,000 per year for the next eight years. The present value of these cash flows, discounted at Malrom’s market interest rate, is $3,000,000. At what amount should the patent be carried on the December 31, 2013 balance sheet?
a. $6,250,000
b. $5,000,000
c. $4,000,000
d. $3,000,000

98. Twilight Corporation acquired End-of-the-World Products on January 1, 2012 for $8,000,000, and recorded goodwill of $1,500,000 as a result of that purchase. At December 31, 2012, the End-of-the-World Products Division had a fair value of $6,800,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $5,800,000 at that time. What amount of loss on impairment of goodwill should Twilight record in 2012?
a. $ -0-
b. $500,000
c. $700,000
d. $1,200,000

99. Jenks Corporation acquired Linebrink Products on January 1, 2012 for $6,000,000, and recorded goodwill of $1,125,000 as a result of that purchase. At December 31, 2012, Linebrink Products had a fair value of $5,100,000. The net identifiable assets of the Linebrink (excluding goodwill) had a fair value of $4,350,000 at that time. What amount of loss on impairment of goodwill should Jenks record in 2012?
a. $ -0-
b. $375,000
c. $525,000
d. $900,000

100. In 2012, Edwards Corporation incurred research and development costs as follows:
Materials and equipment $ 90,000
Personnel 130,000
Indirect costs 150,000
$370,000
These costs relate to a product that will be marketed in 2011. It is estimated that these costs will be recouped by December 31, 2015. The equipment has no alternative future use. What is the amount of research and development costs that should be expensed in 2012?
a. $0.
b. $220,000.
c. $280,000.
d. $370,000.

101. Hall Co. incurred research and development costs in 2013 as follows:
Materials used in research and development projects $ 450,000
Equipment acquired that will have alternate future uses in future research
and development projects 3,000,000
Depreciation for 2013 on above equipment 500,000
Personnel costs of persons involved in research and development projects 750,000
Consulting fees paid to outsiders for research and development projects 300,000
Indirect costs reasonably allocable to research and development projects 225,000
$5,225,000
The amount of research and development costs charged to Hall’s 2013 income statement should be
a. $1,700,000.
b. $2,000,000.
c. $2,225,000.
d. $4,700,000.

102. Loazia Inc. incurred the following costs during the year ended December 31, 2013:
Laboratory research aimed at discovery of new knowledge $230,000
Costs of testing prototype and design modifications 45,000
Quality control during commercial production, including routine testing
of products 270,000
Construction of research facilities having an estimated useful life of
6 years but no alternative future use 360,000
The total amount to be classified and expensed as research and development in 2013 is
a. $605,000.
b. $905,000.
c. $635,000.
d. $335,000.

103. MaBelle Corporation incurred the following costs in 2012:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $600,000
Start-up costs incurred when opening a new plant 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 500,000
What amount should MaBelle record as research & development expense in 2012?
a. $ 650,000
b. $ 740,000
c. $1,100,000
d. $1,240,000

104. Leeper Corporation incurred the following costs in 2012:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $800,000
Cost of making minor modifications to an existing product 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 750,000
What amount should Leeper record as research & development expense in 2012?
a. $ 950,000
b. $ 940,000
c. $1,450,000
d. $1,640,000

105. Platteville Corporation has the following account balances at 12/31/12:
Amortization expense $ 30,000
Goodwill 420,000
Patent, net of $90,000 amortization 210,000
What amount should Platteville report for intangible assets on the 12/31/12 balance sheet?
a. $210,000
b. $300,000
c. $630,000
d. $660,000

*106. Shangra-La Company incurred $2,000,000 ($500,000 in 2011 and $1,500,000 in 2012) to develop a computer software product. $600,000 of this amount was expended before technological feasibility was established in early 2012. The product will earn future revenues of $4,000,000 over its 5-year life, as follows: 2012 – $1,000,000; 2013 – $1,000,000; 2014 – $800,000; 2015 – $800,000; and 2016 – $400,000. What portion of the $2,000,000 computer software costs should be expensed in 2012?
a. $350,000
b. $400,000
c. $450,000
d. $1,500,000

*107. Logan Company incurred $4,000,000 ($1,100,000 in 2011 and $2,900,000 in 2012) to develop a computer software product. $1,200,000 of this amount was expended before technological feasibility was established in early 2012. The product will earn future revenues of $8,000,000 over its 5-year life, as follows: 2012 – $2,000,000; 2013 – $2,000,000; 2014 – $1,600,000; 2015 – $1,600,000; and 2016 – $800,000. What portion of the $4,000,000 computer software costs should be expensed in 2012?
a. $700,000.
b. $750,000.
c. $800,000.
d. $2,900,000.

*108. Geller Inc. incurred $700,000 of capitalizable costs to develop computer software during 2012. The software will earn total revenues over its 4-year life as follows: 2012 – $400,000; 2013 – $500,000; 2014 – $600,000; and 2015 – $500,000. What amount of the computer software costs should be expensed in 2012?
a. $700,000
b. $140,000
c. $175,000
d. $245,000

*109. Tripiani Inc. incurred $800,000 of capitalizable costs to develop computer software during 2012. The software will earn total revenues over its 5-year life as follows: 2012 – $500,000; 2013 – $600,000; 2014 – $600,000; 2015 – $200,000; and 2016 – $100,000. What amount of the computer software costs should be expensed in 2012?
a. $200,000
b. $160,000
c. $180,000
d. $266,667

*110. Tripiani Inc. incurred $900,000 of capitalizable costs to develop computer software during 2012. The software will be used internally over its 5-year life. What amount of the computer software costs should be expensed in 2012?
a. $900,000
b. $180,000
c. $202,500
d. $300,000

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted
111. Lopez Corp. incurred $1,260,000 of research and development costs to develop a product for which a patent was granted on January 2, 2008. Legal fees and other costs associated with registration of the patent totaled $240,000. On March 31, 2013, Lopez paid $450,000 for legal fees in a successful defense of the patent. The total amount capitalized for the patent through March 31, 2013 should be
a. $690,000.
b. $1,500,000.
c. $1,710,000.
d. $1,950,000.

112. On June 30, 2013, Cey, Inc. exchanged 4,000 shares of Seely Corp. $30 par value common stock for a patent owned by Gore Co. The Seely stock was acquired in 2013 at a cost of $110,000. At the exchange date, Seely common stock had a fair value of $46 per share, and the patent had a net carrying value of $220,000 on Gore’s books. Cey should record the patent at
a. $110,000.
b. $120,000.
c. $184,000.
d. $220,000.

113. On May 5, 2013, MacDougal Corp. exchanged 6,000 shares of its $25 par value treasury common stock for a patent owned by Masset Co. The treasury shares were acquired in 2012 for $135,000. At May 5, 2013, MacDougal’s common stock was quoted at $34 per share, and the patent had a carrying value of $165,000 on Masset’s books. MacDougal should record the patent at
a. $135,000.
b. $150,000.
c. $165,000.
d. $204,000.

114. Ely Co. bought a patent from Baden Corp. on January 1, 2013, for $450,000. An independent consultant retained by Ely estimated that the remaining useful life at January 1, 2013 is 15 years. Its unamortized cost on Baden’s accounting records was $225,000; the patent had been amortized for 5 years by Baden. How much should be amortized for the year ended December 31, 2013 by Ely Co.?
a. $0.
b. $22,500.
c. $30,000.
d. $45,000.

115. January 2, 2010, Koll, Inc. purchased a patent for a new consumer product for $450,000. At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 2013, the product was permanently withdrawn from the market under governmental order because of a potential health hazard in the product. What amount should Koll charge against income during 2013, assuming amortization is recorded at the end of each year?
a. $ 45,000
b. $270,000
c. $315,000
d. $360,000

116. On January 1, 2009, Russell Company purchased a copyright for $2,000,000, having an estimated useful life of 16 years. In January 2013, Russell paid $300,000 for legal fees in a successful defense of the copyright. Copyright amortization expense for the year ended December 31, 2013, should be
a. $0.
b. $125,000.
c. $143,750.
d. $150,000.

117. Which of the following legal fees should be capitalized?
Legal fees to Legal fees to successfully
obtain a copyright defend a trademark
a. No No
b. No Yes
c. Yes Yes
d. Yes No

118. Which of the following costs of goodwill should be amortized over their estimated useful lives?
Costs of goodwill from a Costs of developing
business combination goodwill internally
a. No No
b. No Yes
c. Yes Yes
d. Yes No

119. During 2013, Leon Co. incurred the following costs:
Testing in search for process alternatives $ 350,000
Costs of marketing research for new product 250,000
Modification of the formulation of a process 560,000
Research and development services performed by Beck Corp. for Leon 425,000
In Leon’s 2013 income statement, research and development expense should be
a. $560,000.
b. $985,000.
c. $1,335,000.
d. $1,585,000.

120. Riley Co. incurred the following costs during 2013:
Significant modification to the formulation of a chemical product $160,000
Trouble-shooting in connection with breakdowns during commercial
production 150,000
Cost of exploration of new formulas 200,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 275,000
In its income statement for the year ended December 31, 2013, Riley should report research and development expense of
a. $635,000.
b. $785,000.
c. $820,000.
d. $970,000.

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True/False Questions
1. As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into two components.
2. Costs in the research phase are expensed under U.S. GAAP, but capitalized under IFRS.
3. Costs in the research phase are always expensed under both IFRS and U.S. GAAP.
4. IFRS differs from U.S. GAAP in the development phase in that costs are capitalized once technological feasibility is achieved.
5. The increased acceptance of IFRS has caused costs associated with internally generated intangible assets to be capitalized under U.S. GAAP.
6. IFRS permits some capitalization of internally generated intangible assets, if it is probable there will be a future benefit and the amount can be readily measured.
7. While IFRS requires an impairment test at each reporting date for long-lived assets, it requires no such test for intangibles once a legal or useful life has been determined.
8. IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of the asset. Under U.S GAAP, impairment losses cannot be reversed for assets to be held and used.
9. IFRS and U.S. GAAP are similar in the accounting for impairments of assets held for disposal.
10. Under U.S. GAAP, impairment loss is measured as the excess of the carrying amount over the assets discounted cash flow.

Answers to True/False:

Multiple-Choice Questions

1. As in U.S. GAAP, under IFRS the costs associated with research and development are segregated into
a. two components, the research phase and the production phase.
b. two components, the research phase and the development phase.
c. three components, the planning phase, the research phase and the production phase.
d. three components, the analysis phase, the development phase and the production phase.

2. In accounting for internally generated intangible assets, U.S. GAAP requires that
a. all costs, no matter how immaterial, be capitalized.
b. only material costs be capitalized.
c. planned costs be capitalized, while costs in excess of plan be expensed.
d. all costs be expensed.

3. The following costs are incurred during the research and development phases of a laser bone scanner

Laboratory research aimed at discovery of new knowledge $600,000
Search for application of new research findings 400,000
Salaries of research staff designing new laser bone scanner 1,200,000
Material, labor and overhead costs of prototype laser scanner 850,000
Costs of testing prototype and design modifications 450,000
Engineering costs incurred to advance the laser scanner to full production stage (technological feasibility reached) 700,000

Identify which of these are research phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP IFRS¬¬¬¬¬¬¬¬¬¬¬¬¬
a. $1,000,000 $1,000,000
b. 2,200,000 1,200,000
c. 4,200,000 4,200,000
d. 4,200,000 3,500,000

4. The following costs are incurred during the research and development phases of a laser bone scanner

Laboratory research aimed at discovery of new knowledge $600,000
Search for application of new research findings 400,000
Salaries of research staff designing new laser bone scanner 1,200,000
Material, labor and overhead costs of prototype laser scanner 850,000
Costs of testing prototype and design modifications 450,000
Engineering costs incurred to advance the laser scanner to full
production stage (technological feasibility reached) 700,000

Identify which of these are development phase items and will be immediately expensed under
U.S. GAAP and IFRS.
U.S. GAAP IFRS
a. $1,000,000 $1,000,000
b. 2,200,000 1,200,000
c. 2,200,000 3,200,000
d. 3,200,000 3,200,000

5. The primary IFRS related to intangible assets and impairments is found in
a. IAS 38 and IAS 10.
b. IAS 16 and IAS 36.
c. IAS 1 and IAS 34.
d. IAS 38 and IAS 36.

6. IFRS allows reversal of impairment losses when
a. the reversal is greater than the amount of the original impairment.
b. the reversal falls in a subsequent fiscal year of the company’s operations.
c. there has been a change in economic conditions or in the expected use of the asset.
d. reversal of impairment losses is never allowed.

7. Under U.S. GAAP, impairment losses
a. can be reversed but only if the reversal is greater than the amount of the original impairment.
b. can be reversed but only if the reversal falls in a subsequent fiscal year of the company’s operations.
c. cannot be reversed for assets to be held and used.
d. none of the above.

8. IFRS and U.S. GAAP
a. are diametrically opposed in their accounting for impairments of assets held for disposal.
b. are similar in the accounting for impairments of assets held for disposal.
c. are moving toward common ground in their accounting for impairments of assets held for disposal.
d. are moving further apart in their accounting for impairments of assets held for disposal.

9. Under IFRS, costs in the development phase are
a. never capitalized, but expensed as they are under U.S. GAAP.
b. capitalized if they exceed development phase costs incurred for previously successful ventures.
c. capitalized once technological feasibility is achieved.
d. capitalized on an interim basis, but then expensed prior to the end of the company’s fiscal year.

Answers to Multiple Choice:

Short Answer

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for intangible assets.

2. Briefly discuss the convergence efforts that are underway in the area of intangible assets.

CHAPTER 13

CURRENT LIABILITIES AND CONTINGENCIES

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

2. Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

3. Magazine subscriptions and airline ticket sales both result in unearned revenues.

4. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

5. All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

6. A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis.

7. Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

8. A company must accrue a liability for sick pay that accumulates but does not vest.

9. Companies report the amount of social security taxes withheld from employees as well as the companies’ matching portion as current liabilities until they are remitted.

10. Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment.

11. Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

12. Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is probable that a liability has been incurred.

13. A company discloses gain contingencies in the notes only when a high probability exists for realizing them.

14. The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold.

15. The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability.

16. The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

17. Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty.

18. Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.

19. Paying a current liability with cash will always reduce the current ratio.

20. Current liabilities are usually recorded and reported in financial statements at their full maturity value.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

21. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.

22. Which of the following is a current liability?
a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these

23. Which of the following is true about accounts payable?
1. Accounts payable should not be reported at their present value.
2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.
a. 1
b. 2
c. 3
d. Both 2 and 3 are true.

24. Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.

25. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.
d. All of these are true.

26. Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these

27. Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

28. Which of the following should not be included in the current liabilities section of the balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these are included

29. Which of the following is a current liability?
a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these

30. Stock dividends distributable should be classified on the
a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders’ equity.

31. Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.

32. An account which would be classified as a current liability is
a. dividends payable in the company’s stock.
b. accounts payable—debit balances.
c. losses expected to be incurred within the next twelve months in excess of the company’s insurance coverage.
d. none of these.

33. Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.

34. Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

35. Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entity’s credit quality.
b. To assist in understanding the entity’s liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.

36. What is the relationship between current liabilities and a company’s operating cycle?
a. Liquidation of current liabilities is reasonably expected within the company’s operating cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities can’t exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.

37. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.

38. What is a discount as it relates to zero-interest-bearing notes payable?
a. The discount represents the lender’s costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.

39. Where is debt callable by the creditor reported on the debtor’s financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a long-term liability.
c. Current liability if it is probable that creditor will call the debt within the year, otherwise a long-term liability.
d. Current liability.

40. Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.

41. Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt?
a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to refinance the obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance the obligation.

42. A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation?
a. Record a liability for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year’s dividends only.
d. No disclosure or recognition is required.

43. Which of the following situations may give rise to unearned revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.

44. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued.
d. None of these.
45. The ability to consummate the refinancing of a short-term obligation may be demon- strated by
a. actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued.
d. all of these.

46. Which of the following statements is false?
a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared by the board of directors.
c. Under the cash basis method, warranty costs are charged to expense as they are paid.
d. FICA taxes withheld from employees’ payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.

47. Which of the following is not a correct statement about sales taxes?
a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate.
d. All of these are true.

S48. If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.

S49. In accounting for compensated absences, the difference between vested rights and accumulated rights is
a. vested rights are normally for a longer period of employment than are accumu¬lated rights.
b. vested rights are not contingent upon an employee’s future service.
c. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

P50. An employee’s net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee’s
a. portion of FICA taxes and unemployment taxes.
b. and employer’s portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any voluntary deductions.
d. portion of FICA taxes and any voluntary deductions.
51. Which of these is not included in an employer’s payroll tax expense?
a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes

52. Which of the following is a condition for accruing a liability for the cost of compensation for future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.

53. A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should
a. be accrued during the period when the compensated time is expected to be used by employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.

54. The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the right to compensated absences.
2. the future rates of pay expected to be paid when employees use compensated time.
3. the present value of the amount expected to be paid in future periods.
a. 1.
b. 2.
c. 3.
d. Either 1 or 2 is acceptable.

55. What are compensated absences?
a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
d. Paid time off.

56. Which gives rise to the requirement to accrue a liability for the cost of compensated absences?
a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.
d. All of the above.

57. Under what conditions is an employer required to accrue a liability for sick pay?
a. Sick pay benefits can be reasonably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.

58. Which of the following taxes does not represent a common payroll deduction?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.

59. What is a contingency?
a. An existing situation where certainty exists as to a gain or loss that will be resolved when one or more future events occur or fail to occur.
b. An existing situation where uncertainty exists as to possible loss that will be resolved when one or more future events occur.
c. An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future.
d. An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.

60. When is a contingent liability recorded?
a. When the amount can be reasonably estimated.
b. When the future events are probable to occur and the amount can be reasonably estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur and the amount can be reasonably estimated.

61. Which of the following is an example of a contingent liability?
a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.

62. Which of the following terms is associated with recording a contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.

63. Which of the following is the proper way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the contingency.
d. As a disclosure only.

64. Which of the following contingencies need not be disclosed in the financial statements or the notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.

65. Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.

66. Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2012, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Beck had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Beck in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Beck appears inclined to accept the Railroad’s offer. The Railroad’s 2012 financial statements should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.

67. A contingency can be accrued when
a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.

68. A contingent liability
a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements.
d. is the result of a loss contingency.

69. To record an asset retirement obligation (ARO), the cost associated with the ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.

70. A company is legally obligated for the costs associated with the retirement of a long-lived asset
a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs the activities itself.
d. when it is probable the asset will be retired.

71. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty
a. should be reported as long-term.
b. should be reported as current.
c. should be reported as part current and part long-term.
d. need not be disclosed.

72. Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2012. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months. The management of Ortiz estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?
a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000

73. Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.

P74. Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.

S75. Dean Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and
a. the Dean Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial statements.

S76. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.
77. Which of the following best describes the accrual method of accounting for warranty costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.

78. Which of the following best describes the cash-basis method of accounting for warranty costs?
a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.

79. Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach?
a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.

80. An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium expense.
b. The difference between the cost of the video game and the cash received is recognized as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the coupon is recognized as premium expense.

81. What condition is necessary to recognize an asset retirement obligation?
a. Company has an existing legal obligation and can reasonably estimate the amount of the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.

82. Which of the following are not factors that are considered when evaluating whether or not to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.

83. How do you determine the acid-test ratio?
a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current liabilities.

84. What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The company’s liquidity.
d. The company’s profitability.

S85. Which of the following is not acceptable treatment for the presentation of current liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of working capital

P86. The ratio of current assets to current liabilities is called the
a. current ratio.
b. acid-test ratio.
c. current asset turnover ratio.
d. current liability turnover ratio.

87. Accrued liabilities are disclosed in financial statements by
a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.

88. The numerator of the acid-test ratio consists of
a. total current assets.
b. cash and marketable securities.
c. cash and net receivables.
d. cash, marketable securities, and net receivables.

89. Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.

Multiple Choice Answers—Conceptual

MULTIPLE CHOICE—Computational

90. Glaus Corp. signed a three-month, zero-interest-bearing note on November 1, 2012 for the purchase of $250,000 of inventory. The face value of the note was $253,675. Assuming Glaus used a “Discount on Note Payable” account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2012 will include a
a. debit to Discount on Note Payable for $1,225.
b. debit to Interest Expense for $2,450.
c. credit to Discount on Note Payable for $1,255.
d. credit to Interest Expense for $2,450.

91. The effective interest on a 12-month, zero-interest-bearing note payable of $300,000, discounted at the bank at 8% is
a. 8.51%.
b. 8%.
c. 11.49%.
d. 8.70%.

92. On September 1, Hydra purchased $13,300 of inventory items on credit with the terms 1/15, net 30, FOB destination. Freight charges were $280. Payment for the purchase was made on September 18. Assuming Hydra uses the perpetual inventory system and the net method of accounting for purchase discounts, what amount is recorded as inventory from this purchase?
a. $13,167.
b. $13,447.
c. $13,580.
d. $13,300.

93. Sodium Inc. borrowed $280,000 on April 1. The note requires interest at 12% and principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31?
a. $0.
b. $33,600.
c. $8,400.
d. $25,200.

94. Collier borrowed $350,000 on October 1 and is required to pay $360,000 on March 1. What amount is the note payable recorded at on October 1 and how much interest is recognized from October 1 to December 31?
a. $350,000 and $0.
b. $350,000 and $6,000.
c. $360,000 and $0.
d. $350,000 and $10,000.

95. Purest owes $2 million that is due on February 28. The company borrows $1,600,000 on February 25 (5-year note) and uses the proceeds to pay down the $2 million note and uses other cash to pay the balance. How much of the $2 million note is classified as long-term in the December 31 financial statements.
a. $2,000,000.
b. $0.
c. $1,600,000.
d. $400,000.

96. Vista newspapers sold 6,000 of annual subscriptions at $125 each on September 1. How much unearned revenue will exist as of December 31?
a. $0.
b. $500,000.
c. $250,000.
d. $750,000.

97. Purchase Retailer made cash sales during the month of October of $221,000. The sales are subject to a 6% sales tax that was also collected. Which of the following would be included in the summary journal entry to reflect the sale transactions?
a. Debit Cash for $221,000.
b. Credit Sales Taxes Payable for $12,510.
c. Credit Sales Revenue for $208,490.
d. Credit Sales Taxes Payable for $13,260.

98. On February 10, 2012, after issuance of its financial statements for 2011, House Company entered into a financing agreement with Lebo Bank, allowing House Company to borrow up to $6,000,000 at any time through 2014. Amounts borrowed under the agreement bear interest at 2% above the bank’s prime interest rate and mature two years from the date of loan. House Company presently has $2,250,000 of notes payable with First National Bank maturing March 15, 2012. The company intends to borrow $3,750,000 under the agreement with Lebo and liquidate the notes payable to First National. The agreement with Lebo also requires House to maintain a working capital level of $9,000,000 and prohibits the payment of dividends on common stock without prior approval by Lebo Bank. From the above information only, the total short-term debt of House Company as of the December 31, 2012 balance sheet date is
a. $0.
b. $2,250,000.
c. $3,000,000.
d. $6,000,000.

99. On December 31, 2012, Irey Co. has $4,000,000 of short-term notes payable due on February 14, 2013. On January 10, 2013, Irey arranged a line of credit with County Bank which allows Irey to borrow up to $3,000,000 at one percent above the prime rate for three years. On February 2, 2013, Irey borrowed $2,400,000 from County Bank and used $1,000,000 additional cash to liquidate $3,400,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2012 balance sheet which is issued on March 5, 2013 is
a. $0.
b. $600,000.
c. $1,000,000.
d. $1,600,000.

Use the following information for questions 100 and 101.
Stine Co. is a retail store operating in a state with a 6% retail sales tax. The retailer may keep 2% of the sales tax collected. Stine Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $222,600.

100. The amount of sales taxes (to the nearest dollar) for May is
a. $13,089.
b. $12,600.
c. $13,356.
d. $14,157.

101. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May is
a. $12,826.
b. $12,348.
c. $13,089.
d. $13,873.

102. Vopat, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law provides that the retail sales tax collected during the month must be remitted to the state during the following month. If the amount collected is remitted to the state on or before the twentieth of the following month, the retailer may keep 3% of the sales tax collected. On April 10, 2012, Vopat remitted $135,800 tax to the state tax division for March 2012 retail sales. What was Vopat ‘s March 2012 retail sales subject to sales tax?
a. $2,716,000.
b. $2,660,000.
c. $2,800,000.
d. $2,741,667.

103. Jenkins Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the sale of 90,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?
a. $1,800,000
b. $2,500,000
c. $700,000
d. $0

104. Ermler Corporation has $1,800,000 of short-term debt it expects to retire with proceeds from the sale of 50,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?
a. $1,000,000
b. $1,800,000
c. $800,000
d. $0

105. Preston Co., which has a taxable payroll of $700,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company’s state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Preston Co.?
a. $81,900
b. $57,400
c. $28,000
d. $19,600

106. Roark Co., which has a taxable payroll of $600,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company’s state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Roark Co.?
a. $70,200
b. $49,200
c. $24,000
d. $16,800

107. A company gives each of its 50 employees (assume they were all employed continuously through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2012, they made $21 per hour and in 2013 they made $24 per hour. During 2013, they took an average of 9 days of vacation each. The company’s policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2012 and 2013 balance sheets, respectively?
a. $100,800; $140,400
b. $115,200; $144,000
c. $100,800; $144,000
d. $115,200; $140,400

108. A company gives each of its 50 employees (assume they were all employed continuously through 2012 and 2013) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2012, they made $24.50 per hour and in 2013 they made $28 per hour. During 2013, they took an average of 9 days of vacation each. The company’s policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2012 and 2013 balance sheets, respectively?
a. $117,600; $163,800
b. $134,400; $168,000
c. $117,600; $168,000
d. $134,400; $163,800

109. The total payroll of Teeter Company for the month of October, 2012 was $600,000, of which $150,000 represented amounts paid in excess of $106,800 to certain employees. $500,000 represented amounts paid to employees in excess of the $7,000 maximum subject to unemployment taxes. $150,000 of federal income taxes and $15,000 of union dues were withheld. The state unemployment tax is 1%, the federal unemployment tax is .8%, and the current F.I.C.A. tax is 7.65% on an employee’s wages to $106,800 and 1.45% in excess of $106,800. What amount should Teeter record as payroll tax expense?
a. $197,700.
b. $188,400.
c. $38,400.
d. $47,400.

Use the following information for questions 110 and 111.
Vargas Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2011, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2011 may first be taken on January 1, 2012. Information relative to these employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2011 $21.50 10 0
2012 22.50 10 8
2013 23.75 10 10

Vargas has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned.
110. What is the amount of expense relative to compensated absences that should be reported on Vargas’s income statement for 2011?
a. $0.
b. $57,400.
c. $63,000.
d. $60,200.

111. What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2013?
a. $79,100.
b. $75,600.
c. $66,500.
d. $79,800.

112. CalCount pays a weekly payroll of $170,000 that includes federal taxes withheld of $25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the effect of assets and liabilities from this transaction?
a. Assets decrease $170,000 and liabilities do not change.
b. Assets decrease $128,820 and liabilities increase $41,180.
c. Assets decrease $128,820 and liabilities decrease $41,180.
d. Assets decrease $110,820 and liabilities increase $59,180.

113. CalCount provides its employees two weeks of paid vacation per year. As of December 31, 65 employees have earned two weeks of vacation time to be taken the following year. If the average weekly salary for these employees is $1,140, what is the required journal entry?
a. Debit Salaries and Wages Expense for $148,200 and credit Salaries and Wages Payable for $148,200.
b. No journal entry required.
c. Debit Salaries and Wages Payable for $147,600 and credit Salaries and Wages Expense for $147,600.
d. Debit Salaries and Wages Expense for $74,100 and credit Salaries and Wages Payable for $74,100.

114. Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $500,000. What is the required journal entry as a result of this litigation?
a. Debit Litigation Expense for $500,000 and credit Litigation liability for $500,000.
b. No journal entry is required.
c. Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000.
d. Debit Litigation Expense for $300,000 and credit Litigation Liability for $300,000.

115. Recycle Exploration is involved with innovative approaches to finding energy reserves. Recycle recently built a facility to extract natural gas at a cost of $15 million. However, Recycle is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $21 million (the present value of which is $8 million). What is the journal entry required to record the asset retirement obligation?
a. No journal entry required.
b. Debit Natural Gas Facility for $21,000,000 and credit Asset Retirement Obligation for $21,000,000
c. Debit Natural Gas Facility for $6,000,000 and credit Asset Retirement Obligation for $6,000,000.
d. Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for $8,000,000.
116. Warranty4U provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for three years. During the current year, Warranty4U provided 42,000 such warranty contracts at an average price of $81 each. Related to these contracts, the company spent $400,000 servicing the contracts during the current year and expects to spend $2,100,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts?
a. $902,000.
b. $3,002,000.
c. $300,667.
d. $734,000.

117. Electronics4U manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $200 per unit sold and reported a liability for estimated warranty costs $7.8 million at the beginning of this year. If during the current year, the company sold 60,000 units for a total of $243 million and paid warranty claims of $9,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year?
a. $3,000,000.
b. $4,200,000.
c. $10,800,000.
d. $12,000,000.

118. A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2012. Historically, 10% of customers mail in the rebate form. During 2012, 3,000,000 packages of light bulbs are sold, and 160,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2012 financial statements dated December 31?
a. $300,000; $300,000
b. $300,000; $140,000
c. $140,000; $140,000
d. $160,000; $140,000

119. A company buys an oil rig for $2,000,000 on January 1, 2012. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present value at 10% is $154,220). 10% is an appropriate interest rate for this company. What expense should be recorded for 2012 as a result of these events?
a. Depreciation expense of $240,000
b. Depreciation expense of $200,000 and interest expense of $15,422
c. Depreciation expense of $200,000 and interest expense of $40,000
d. Depreciation expense of $215,420 and interest expense of $15,422

120. Ziegler Company self insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1,500,000 per year. The company estimates that on average it will incur losses of $1,200,000 per year. During 2012, $525,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Ziegler Company for 2012?
a. $525,000 in losses and no insurance expense
b. $525,000 in losses and $675,000 in insurance expense
c. $0 in losses and $1,200,000 in insurance expense
d. $0 in losses and $1,500,000 in insurance expense

121. A company offers a cash rebate of $2 on each $6 package of batteries sold during 2012. Historically, 10% of customers mail in the rebate form. During 2012, 6,000,000 packages of batteries are sold, and 210,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2012 financial statements dated December 31?
a. $1,200,000; $1,200,000
b. $1,200,000; $780,000
c. $780,000; $780,000
d. $420,000; $780,000

122. A company buys an oil rig for $3,000,000 on January 1, 2012. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present value at 10% is $231,330). 10% is an appropriate interest rate for this company. What expense should be recorded for 2012 as a result of these events?
a. Depreciation expense of $360,000
b. Depreciation expense of $300,000 and interest expense of $23,133
c. Depreciation expense of $300,000 and interest expense of $60,000
d. Depreciation expense of $323,133 and interest expense of $23,133

123. During 2011, Vanpelt Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2011 $ 600,000 $ 9,000
2012 1,500,000 65,000
2013 2,100,000 135,000
$4,200,000 $209,000
What amount should Vanpelt report as a liability at December 31, 2013?
a. $0
b. $12,000
c. $54,000
d. $169,000

124. Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2012, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Palmer Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2012?
a. $270,000
b. $50,000
c. $75,000
d. $138,000

125. During 2011, Stabler Co. introduced a new line of machines that carry a three-year warranty against manufacturer’s defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows:
Sales Actual Warranty Expenditures
2011 $ 400,000 $ 6,000
2012 1,000,000 40,000
2013 1,400,000 90,000
$2,800,000 $136,000
What amount should Stabler report as a liability at December 31, 2013?
a. $0
b. $28,000
c. $36,000
d. $116,000

126. LeMay Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from LeMay Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2012, the company sold 500,000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls cost LeMay Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2012?
a. $150,000
b. $40,000
c. $60,000
d. $84,000

Use the following information for questions 127, 128, and 129.
Mott Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Mott $3 each. Mott estimates that 40 percent of the coupons will be redeemed. Data for 2012 and 2013 are as follows:
2012 2013
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

127. The premium expense for 2012 is
a. $37,500.
b. $45,000.
c. $52,500.
d. $75,000.

128. The premium liability at December 31, 2012 is
a. $11,250.
b. $15,000.
c. $26,250.
d. $30,000.

129. The premium liability at December 31, 2013 is
a. $16,875
b. $31,875.
c. $33,750.
d. $63,750.

130. Winter Co. is being sued for illness caused to local residents as a result of negligence on the company’s part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Winter’s lawyer states that it is probable that Winter will lose the suit and be found liable for a judgment costing Winter anywhere from $1,600,000 to $8,000,000. However, the lawyer states that the most probable cost is $4,800,000. As a result of the above facts, Winter should accrue
a. a loss contingency of $1,600,000 and disclose an additional contingency of up to $6,400,000.
b. a loss contingency of $4,800,000 and disclose an additional contingency of up to $3,200,000.
c. a loss contingency of $4,800,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,600,000 to $8,000,000.

131. Nance Company estimates its annual warranty expense as 2% of annual net sales. The following data relate to the calendar year 2012:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2012 $10,000 debit before adjustment
Balance, Dec. 31, 2012 50,000 credit after adjustment
Which one of the following entries was made to record the 2012 estimated warranty expense?
a. Warranty Expense 30,000
Retained Earnings (prior-period adjustment) 5,000
Warranty Liability 25,000
b. Warranty Expense 25,000
Retained Earnings (prior-period adjustment) 5,000
Warranty Liability 30,000
c. Warranty Expense 20,000
Warranty Liability 20,000
d. Warranty Expense 30,000
Warranty Liability 30,000

132. In 2012, Payton Corporation began selling a new line of products that carry a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows:
First year of warranty 2%
Second year of warranty 5%
Sales and actual warranty expenditures for 2012 and 2013 are presented below:
2012 2013
Sales $600,000 $800,000
Actual warranty expenditures 20,000 40,000

What is the estimated warranty liability at the end of 2013?
a. $38,000.
b. $58,000.
c. $98,000.
d. $16,000.

133. On January 3, 2012, Boyer Corp. owned a machine that had cost $300,000. The accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair value was $480,000. On January 4, 2012, this machine was irreparably damaged by Pine Corp. and became worthless. In October 2012, a court awarded damages of $480,000 against Pine in favor of Boyer. At December 31, 2012, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Boyer’s attorney, Pine’s appeal will be denied. At December 31, 2012, what amount should Boyer accrue for this gain contingency?
a. $480,000.
b. $390,000.
c. $300,000.
d. $0.

134. Fuller Food Company distributes to consumers coupons which may be presented (on or before a stated expiration date) to grocers for discounts on certain products of Fuller. The grocers are reimbursed when they send the coupons to Fuller. In Fuller’s experience, 50% of such coupons are redeemed, and generally one month elapses between the date a grocer receives a coupon from a consumer and the date Fuller receives it. During 2012 Fuller issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/12
1/1/12 $500,000 6/30/12 $236,000
7/1/12 720,000 12/31/12 300,000
The only journal entries to date recorded debits to coupon expense and credits to cash of $715,000. The December 31, 2012 balance sheet should include a liability for unredeemed coupons of
a. $0.
b. $60,000.
c. $124,000.
d. $360,000.

135. Presented below is information available for Morton Company.
Current Assets
Cash $ 4,000
Short-term investments 75,000
Accounts receivable 61,000
Inventory 110,000
Prepaid expenses 30,000
Total current assets $280,000
Total current liabilities are $110,000. The acid-test ratio for Morton is
a. 2.55 to 1.
b. 2.27 to 1.
c. 1.27 to 1.
d. 0.72 to 1.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

136. Which of the following is generally associated with payables classified as accounts payable?
Periodic Payment Secured
of Interest by Collateral
a. No No
b. No Yes
c. Yes No
d. Yes Yes

137. On January 1, 2012, Beyer Co. leased a building to Heins Corp. for a ten-year term at an annual rental of $140,000. At inception of the lease, Beyer received $560,000 covering the first two years’ rent of $280,000 and a security deposit of $280,000. This deposit will not be returned to Heins upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $560,000 should be shown as a current and long-term liability, respectively, in Beyer’s December 31, 2012 balance sheet?
Current Liability Long-term Liability
a. $0 $560,000
b. $140,000 $280,000
c. $280,000 $280,000
d. $280,000 $140,000

138. On September 1, 2012, Herman Co. issued a note payable to National Bank in the amount of $1,800,000, bearing interest at 12%, and payable in three equal annual principal payments of $600,000. On this date, the bank’s prime rate was 11%. The first payment for interest and principal was made on September 1, 2013. At December 31, 2013, Herman should record accrued interest payable of
a. $72,000.
b. $66,000.
c. $48,000.
d. $44,000.

139. Included in Vernon Corp.’s liability account balances at December 31, 2012, were the following:
7% note payable issued October 1, 2012, maturing September 30, 2013 $250,000
8% note payable issued April 1, 2012, payable in six equal annual
installments of $150,000 beginning April 1, 2013 600,000
Vernon’s December 31, 2012 financial statements were issued on March 31, 2013. On January 15, 2013, the entire $600,000 balance of the 8% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 2013, Vernon consummated a noncancelable agreement with the lender to refinance the 7%, $250,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. On the December 31, 2012 balance sheet, the amount of the notes payable that Vernon should classify as short-term obligations is
a. $175,000.
b. $125,000.
c. $50,000.
d. $0.

140. Edge Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2013 is as follows:
12/31/12 12/31/13
Employee advances $24,000 $ 36,000
Accrued salaries payable 130,000 ?
Salaries expense during the year 1,300,000
Salaries paid during the year (gross) 1,250,000
At December 31, 2013, what amount should Edge report for accrued salaries payable?
a. $180,000.
b. $168,000.
c. $144,000.
d. $50,000.

141. Risen Corp.’s payroll for the pay period ended October 31, 2012 is summarized as follows:
Federal Amount of Wages Subject
Department Total Income Tax to Payroll Taxes
Payroll Wages Withheld F.I.C.A. Unemployment
Factory $ 75,000 $ 9,000 $70,000 $32,000
Sales 22,000 3,000 16,000 2,000
Office 18,000 2,000 8,000 —
$115,000 $14,000 $94,000 $34,000
Assume the following payroll tax rates:
F.I.C.A. for employer and employee 7% each
Unemployment 3%
What amount should Risen accrue as its share of payroll taxes in its October 31, 2012 balance sheet?
a. $21,600.
b. $15,020.
c. $14,180.
d. $7,600.

142. Felton Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $720,000 at December 31, 2011 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $180,000 at December 31, 2011. Outstanding service contracts at December 31, 2011 expire as follows:
During 2012 During 2013 During 2014
$150,000 $240,000 $105,000
What amount should be reported as unearned service contract revenues in Felton’s December 31, 2011 balance sheet?
a. $540,000.
b. $495,000.
c. $360,000.
d. $330,000.

143. Yount Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Yount’s past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Yount’s liability for stamp redemptions was $6,000,000 at December 31, 2011. Additional information for 2012 is as follows:
Stamp service revenue from stamps sold to licensees $4,000,000
Cost of redemptions 2,720,000
If all the stamps sold in 2012 were presented for redemption in 2013, the redemption cost would be $2,000,000. What amount should Yount report as a liability for stamp redemptions at December 31, 2012?
a. $7,280,000.
b. $5,280,000.
c. $4,880,000.
d. $3,280,000.

144. Neer Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be
a. zero.
b. the maximum of the range.
c. the mean of the range.
d. the minimum of the range.

145. During 2012, Eaton Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 3% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2012 and 2013 are as follows:
Actual Warranty
Sales Expenditures
2012 $ 800,000 $12,000
2013 1,000,000 35,000
$1,800,000 $47,000
At December 31, 2013, Eaton should report an estimated warranty liability of
a. $0.
b. $15,000.
c. $35,000.
d. $43,000.

146. In March 2013, an explosion occurred at Kirk Co.’s plant, causing damage to area properties. By May 2013, no claims had yet been asserted against Kirk. However, Kirk’s management and legal counsel concluded that it was reasonably possible that Kirk would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Kirk’s $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Kirk’s December 31, 2012 financial statements, for which the auditor’s fieldwork was completed in April 2013, how should this casualty be reported?
a. As a note disclosing a possible liability of $4,000,000.
b. As an accrued liability of $400,000.
c. As a note disclosing a possible liability of $400,000.
d. No note disclosure of accrual is required for 2012 because the event occurred in 2013.

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True / False Questions
1. Short-term debt obligations are classified as current liabilities unless an agreement to refinance is completed before the financial statements are issued.
2. For purposes of recognizing a provision,”probable” is defined as more likely than not
3. A Provision differs from other liabilities in that there is greater uncertainty about the timing and amount of settlement.
4. IFRS allows for reduced disclosure of contingent liabilities if the disclosure could increase the company`s chance of losing a lawsuit.
5. Contingent liabilities are not reported in the financial statements but may be disclosed in the notes to the financial statements if the likelihood of an unfavorable outcome is possible.
6. A company can exclude a short-term obligation from current liablities if it intends to refinance the obligation and has an unconditional right to defer settlement of the obligation for at least 12 months following the due date.
7. Provisions are only recorded if it is likely that the company will have to settle an obligation at some point in the future.
8. An onerous contract is one in which the unavoidable costs of satisfying the obligations outweigh the economic benefits to be received.
9. Contingent assets are not reported in the statement of financial position.
10. IFRS uses the term “contigent” for assets and liabilities not recognized in the financial statement.

Answers to True / False:

CHAPTER 14

LONG-TERM LIABILITIES

IFRS questions are available at the end of this chapter.

TRUE FALSE—Conceptual

1. Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate.

2. A mortgage bond is referred to as a debenture bond.

3. Bond issues that mature in installments are called serial bonds.

4. If the market rate is greater than the coupon rate, bonds will be sold at a premium.

5. The interest rate written in the terms of the bond indenture is called the effective yield or market rate.

6. The stated rate is the same as the coupon rate.

7. Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.

8. A bond may only be issued on an interest payment date.

9. The cash paid for interest will always be greater than interest expense when using effective-interest amortization for a bond.

10. Bond issue costs are capitalized as a deferred charge and amortized to expense over the life of the bond issue.

11. The replacement of an existing bond issue with a new one is called refunding.

12. If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate.

13. The implicit interest rate is the rate that equates the cash received with the amounts received in the future.

14. An unrealized holding gain or loss is the net change in the fair value of the liability from one period to another, exclusive of interest expense recognized but not recorded.

15. Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the reporting of debt on the balance sheet.

16. The debt to total assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet.

17. If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as current.

18. The times interest earned ratio is computed by dividing income before interest expense by interest expense.

*19. The loss to be recognized by a creditor on an impaired loan is the difference between the investment in the loan and the expected undiscounted future cash flows from the loan.

*20. In a troubled debt restructuring, the loss recognized by the creditor will equal the gain recognized by the debtor.

True False Answers—Conceptual

MULTIPLE CHOICE—Conceptual

21. An example of an item which is not a liability is
a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.

22. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.

23. The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.

P24. Bonds for which the owners’ names are not registered with the issuing corporation are called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.

S25. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.

S26. If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.

27. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.

28. The rate of interest actually earned by bondholders is called the
a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.

Use the following information for questions 29 and 30:
Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.

29. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.

30. Another step in calculating the issue price of the bonds is to
a. multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table.
d. none of these.

31. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.

32. If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization been used.
b. be less than what it would have been had the effective-interest method of amortization been used.
c. be the same as what it would have been had the effective-interest method of amortiza-tion been used.
d. be less than the stated (nominal) rate of interest.

33. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

34. When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.

35. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.

36. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.

37. Theoretically, the costs of issuing bonds could be
a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.

38. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.

39. Treasury bonds should be shown on the balance sheet as
a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
c. a reduction of stockholders’ equity.
d. both an asset and a liability.

40. An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.

41. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

P42. “In-substance defeasance” is a term used to refer to an arrangement whereby
a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.

P43. A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year period.
c. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.

S44. A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed interest rate.
b. it should not be recorded on the books of either party until the fair value of the property becomes evident.
c. the board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be assigned to the property.
45. When a note payable is issued for property, goods, or services, the present value of the note is measured by
a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.

46. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales price for similar items or from current fair value of the note.
d. any of these.

47. If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting
a. Bonds Payable.
b. Gain on Restructuring of Debt.
c. Unrealized Holding Gain/Loss-Income.
d. None of these.

48. Which of the following is an example of “off-balance-sheet financing”?
1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.
a. 1
b. 2
c. 3
d. All of these are examples of “off-balance-sheet financing.”

S49. When a business enterprise enters into what is referred to as off-balance-sheet financing, the company
a. is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet.
b. wishes to confine all information related to the debt to the income statement and the statement of cash flow.
c. can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.
d. is in violation of generally accepted accounting principles.

S50. Long-term debt that matures within one year and is to be converted into stock should be reported
a. as a current liability.
b. in a special section between liabilities and stockholders’ equity.
c. as noncurrent.
d. as noncurrent and accompanied with a note explaining the method to be used in its liquidation.

51. Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?
a. The present value of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.
b. The present value of scheduled interest payments on long-term debt during each of the next five years.
c. The amount of scheduled interest payments on long-term debt during each of the next five years.
d. The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

52. Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.

53. The times interest earned ratio is computed by dividing
a. net income by interest expense.
b. income before taxes by interest expense.
c. income before income taxes and interest expense by interest expense.
d. net income and interest expense by interest expense.

54. The debt to total assets ratio is computed by dividing
a. current liabilities by total assets.
b. long-term liabilities by total assets.
c. total liabilities by total assets.
d. total assets by total liabilities.

*55. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective-interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.

*56. A troubled debt restructuring will generally result in a
a. loss by the debtor and a gain by the creditor.
b. loss by both the debtor and the creditor.
c. gain by both the debtor and the creditor.
d. gain by the debtor and a loss by the creditor.

*57. In a troubled debt restructuring in which the debt is restructured by a transfer of assets with a fair value less than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the restructuring.
b. a gain on the restructuring.
c. a loss on the restructuring.
d. none of these.

*58. In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the
a. carrying amount of the pre-restructure debt is less than the total future cash flows.
b. carrying amount of the pre-restructure debt is greater than the total future cash flows.
c. present value of the pre-restructure debt is less than the present value of the future cash flows.
d. present value of the pre-restructure debt is greater than the present value of the future cash flows.

*59. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.

MULTIPLE CHOICE—Computational

Use the following information for questions 60 through 62:
On January 1, 2012, Ellison Co. issued eight-year bonds with a face value of $2,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6% .627
Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 11.652

60. The present value of the principal is
a. $1,068,000.
b. $1,080,000.
c. $1,246,000.
d. $1,254,000.

61. The present value of the interest is
a. $689,640.
b. $699,120.
c. $745,200.
d. $753,660.

62. The issue price of the bonds is
a. $1,767,120.
b. $1,769,640.
c. $1,779,120.
d. $1,999,200.

63. Downing Company issues $3,000,000, 6%, 5-year bonds dated January 1, 2012 on January 1, 2012. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. $3,000,000
b. $3,129,896
c. $3,131,285
d. $3,130,385

64. Feller Company issues $10,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus accrued interest. The bonds are dated January 1, 2012, and pay interest on June 30 and December 31. What is the total cash received on the issue date?
a. $9,700,000
b. $10,225,000
c. $9,850,000
d. $9,550,000

65. Everhart Company issues $15,000,000, 6%, 5-year bonds dated January 1, 2012 on January 1, 2012. The bonds pays interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009

a. $15,000,000
b. $15,649,482
c. $15,656,427
d. $15,651,924

66. Farmer Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2012 at 97 plus accrued interest. The bonds are dated January 1, 2012, and pay interest on June 30 and December 31. What is the total cash received on the issue date?
a. $19,400,000
b. $20,450,000
c. $19,700,000
d. $19,100,000

67. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109. Using effective-interest amortization, how much interest expense will be recognized in 2012?
a. $585,000
b. $1,170,000
c. $1,176,374
d. $1,176,249

68. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2012 balance sheet?
a. $14,709,482
b. $15,000,000
c. $14,718,844
d. $14,706,232

69. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2011. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2013?
a. $14,752,673
b. $14,955,466
c. $14,725,375
d. $14,747,642

70. A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,109. What is interest expense for 2013, using straight-line amortization?
a. $1,540,207
b. $1,170,000
c. $1,176,894
d. $1,184,845

71. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, how much interest expense will be recognized in 2012?
a. $390,000
b. $780,000
c. $784,248
d. $784,166

72. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2012 balance sheet?
a. $9,806,320
b. $10,000,000
c. $9,812,562
d. $9,804,154

73. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2011. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2013?
a. $9,835,116
b. $9,970,312
c. $9,816,916
d. $9,831,762

74. A company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2012. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. What is interest expense for 2013, using straight-line amortization?
a. $770,104
b. $780,000
c. $784,596
d. $789,896

75. On January 1, 2012, Huber Co. sold 12% bonds with a face value of $800,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $861,600 to yield 10%. Using the effective-interest method of amortization, interest expense for 2012 is
a. $80,000.
b. $85,914.
c. $86,160.
d. $96,000.

76. On January 2, 2012, a calendar-year corporation sold 8% bonds with a face value of $900,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $830,400 to yield 10%. Using the effective-interest method of computing interest, how much should be charged to interest expense in 2012?
a. $72,000.
b. $83,040.
c. $83,316.
d. $90,000.
The following information applies to both questions 77 and 78.
On October 1, 2012 Macklin Corporation issued 5%, 10-year bonds with a face value of $2,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.

77. The entry to record the issuance of the bonds would include a credit of
a. $50,000 to Interest Payable.
b. $80,000 to Discount on Bonds Payable.
c. $1,920,000 to Bonds Payable.
d. $80,000 to Premium on Bonds Payable.

78. Bond interest expense reported on the December 31, 2012 income statement of Macklin Corporation would be
a. $23,000
b. $25,000
c. $27,000
d. $46,000

The following information applies to both questions 79 and 80.
On October 1, 2012 Bartley Corporation issued 5%, 10-year bonds with a face value of $3,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.

79. The entry to record the issuance of the bonds would include a
a. credit of $75,000 to Interest Payable.
b. credit of $120,000 to Premium on Bonds Payable.
c. credit of $2,880,000 to Bonds Payable.
d. debit of $120,000 to Discount on Bonds Payable.

80. Bond interest expense reported on the December 31, 2012 income statement of Bartley Corporation would be
a. $40,500
b. $69,000
c. $34,500
d. $37,500

81. At the beginning of 2012, Wallace Corporation issued 10% bonds with a face value of $1,500,000. These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,389,600 to yield 12%. Wallace uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2012? (Round your answer to the nearest dollar.)
a. $172,080
b. $167,255
c. $166,750
d. $166,250

82. On January 1, Patterson Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report unamortized bond discount of
a. $164,700.
b. $171,300.
c. $154,830.
d. $153,000.

83. On January 1, Martinez Inc. issued $4,000,000, 11% bonds for $4,260,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report unamortized bond premium of:
a. $246,840
b. $246,000
c. $231,400
d. $220,000

84. At the beginning of 2012, Winston Corporation issued 10% bonds with a face value of $1,200,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,111,680 to yield 12%. Winston uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2012? (Round your answer to the nearest dollar.)
a. $133,000
b. $133,400
c. $133,804
d. $137,664

85. Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250. The entry to record the redemption will include a
a. credit of $18,750 to Loss on Bond Redemption.
b. credit of $18,750 to Discount on Bonds Payable.
c. debit of $28,750 to Gain on Bond Redemption.
d. debit of $10,000 to Premium on Bonds Payable.

86. Carr Corporation retires its $500,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $518,725. The entry to record the redemption will include a
a. credit of $18,725 to Loss on Bond Redemption.
b. debit of $18,725 to Premium on Bonds Payable.
c. credit of $6,275 to Gain on Bond Redemption.
d. debit of $25,000 to Premium on Bonds Payable.

87. At December 31, 2012 the following balances existed on the books of Foxworth Corporation:
Bonds Payable $3,000,000
Discount on Bonds Payable 240,000
Interest Payable 75,000
Unamortized Bond Issue Costs 180,000
If the bonds are retired on January 1, 2013, at 102, what will Foxworth report as a loss on redemption?
a. $555,000
b. $480,000
c. $405,000
d. $300,000

88. At December 31, 2012 the following balances existed on the books of Rentro Corporation:
Bonds Payable $2,500,000
Discount on Bonds Payable 200,000
Interest Payable 60,000
Unamortized Bond Issue Costs 150,000

If the bonds are retired on January 1, 2013, at 102, what will Rentro report as a loss on redemption?
a. $250,000
b. $337,500
c. $400,000
d. $460,000

89. The December 31, 2012, balance sheet of Hess Corporation includes the following items:
9% bonds payable due December 31, 2021 $2,000,000
Unamortized premium on bonds payable 54,000
The bonds were issued on December 31, 2011, at 103, with interest payable on July 1 and December 31 of each year. Hess uses straight-line amortization. On March 1, 2013, Hess retired $800,000 of these bonds at 98 plus accrued interest. What should Hess record as a gain on retirement of these bonds? Ignore taxes.
a. $37,600.
b. $21,600.
c. $37,200.
d. $40,000.

90. On January 1, 2006, Hernandez Corporation issued $3,600,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Hernandez at 105. Hernandez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method).
On December 31, 2012, when the fair value of the bonds was 96, Hernandez repurchased $800,000 of the bonds in the open market at 96. Hernandez has recorded interest and amortization for 2012. Ignoring income taxes and assuming that the gain is material, Hernandez should report this reacquisition as
a. a loss of $39,200.
b. a gain of $39,200.
c. a loss of $48,800.
d. a gain of $48,800.

91. The 10% bonds payable of Nixon Company had a net carrying amount of $760,000 on December 31, 2012. The bonds, which had a face value of $800,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On
July 2, 2013, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2013 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2013? Ignore taxes.
a. $16,000.
b. $50,400.
c. $44,800.
d. $56,000.

92. A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $600,000. To extinguish this debt, the company had to pay a call premium of $200,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes?
a. Amortize $800,000 over four years.
b. Charge $800,000 to a loss in the year of extinguishment.
c. Charge $200,000 to a loss in the year of extinguishment and amortize $600,000 over four years.
d. Either amortize $800,000 over four years or charge $800,000 to a loss immediately, whichever management selects.

93. The 12% bonds payable of Nyman Co. had a carrying amount of $2,080,000 on
December 31, 2012. The bonds, which had a face value of $2,000,000, were issued at a premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2013, several years before their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is
a. $0.
b. $16,000.
c. $24,800.
d. $80,000.

94. Didde Company issues $15,000,000 face value of bonds at 96 on January 1, 2011. The bonds are dated January 1, 2011, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2014, $9,000,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2014?
a. $900,000 loss
b. $408,000 loss
c. $540,000 loss
d. $680,000 loss

95. Cortez Company issues $3,000,000 face value of bonds at 96 on January 1, 2011. The bonds are dated January 1, 2011, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2014, $1,800,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2014?
a. $180,000 loss
b. $81,600 loss
c. $108,000 loss
d. $136,000 loss

96. On January 1, 2012, Ann Price loaned $90,156 to Joe Kiger. A zero-interest-bearing note (face amount, $120,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2014. The prevailing rate of interest for a loan of this type is 10%. The present value of $120,000 at 10% for three years is $90,156. What amount of interest income should Ms. Price recognize in 2012?
a. $9,016.
b. $12,000.
c. $36,000.
d. $27,048.

97. On January 1, 2012, Jacobs Company sold property to Dains Company which originally cost Jacobs $950,000. There was no established exchange price for this property. Danis gave Jacobs a $1,500,000 zero-interest-bearing note payable in three equal annual installments of $500,000 with the first payment due December 31, 2012. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $1,500,000 note payable in three equal annual installments of $500,000 at a 10% rate of interest is $1,243,500. What is the amount of interest income that should be recognized by Jacobs in 2012, using the effective-interest method?
a. $0.
b. $50,000.
c. $124,350.
d. $150,000.

98. On January 1, 2012, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a $3,000,000 zero-interest-bearing note payable in 5 equal annual installments of $600,000, with the first payment due December 31, 2012. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $2,163,000 at January 1, 2012. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2012 after adjusting entries are made, assuming that the effective-interest method is used?
a. $0
b. $642,330
c. $669,600
d. $837,000

99. Putnam Company’s 2012 financial statements contain the following selected data:
Income taxes $40,000
Interest expense 25,000
Net income 60,000
Putnam’s times interest earned for 2012 is
a. 3.0 times
b. 3.4 times.
c. 4.0 times.
d. 5.0 times.

100. In the recent year Hill Corporation had net income of $280,000, interest expense of $60,000, and tax expense of $80,000. What was Hill Corporation’s times interest earned ratio for the year?
a. 7.0
b. 5.0
c. 4.7
d. 3.7

101. In recent year Cey Corporation had net income of $350,000, interest expense of $70,000, and a times interest earned ratio of 9. What was Cey Corporation’s income before taxes for the year?
a. $700,000
b. $630,000
c. $560,000
d. None of the above.

102. The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2012, contained the following accounts.
5-year Bonds Payable 8% $2,000,000
Interest Payable 50,000
Premium on Bonds Payable 100,000
Notes Payable (3 mo.) 40,000
Notes Payable (5 yr.) 165,000
Mortgage Payable ($15,000 due currently) 200,000
Salaries and wages Payable 18,000
Income Taxes Payable (due 3/15 of 2013) 25,000

The total long-term liabilities reported on the balance sheet are
a. $2,365,000.
b. $2,350,000.
c. $2,465,000.
d. $2,450,000.

Use the following information for questions *103 through *105:

On December 31, 2010, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $1,200,000 note with $120,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $580,000, an original cost of $960,000, and accumulated depreciation of $460,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2013, reduces the face amount of the note to $500,000, and reduces the interest rate to 6%, with interest payable at the end of each year.
*103. Nolte should recognize a gain or loss on the transfer of the equipment of
a. $0.
b. $80,000 gain.
c. $120,000 gain.
d. $380,000 loss.

*104. Nolte should recognize a gain on the partial settlement and restructure of the debt of
a. $0.
b. $30,000.
c. $110,000.
d. $150,000.

*105. Nolte should record interest expense for 2013 of
a. $0.
b. $30,000.
c. $60,000.
d. $90,000.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

106. On July 1, 2012, Spear Co. issued 3,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2012 and mature on April 1, 2022. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance?
a. $3,045,000
b. $3,000,000
c. $2,970,000
d. $2,895,000

107. On January 1, 2012, Solis Co. issued its 10% bonds in the face amount of $4,000,000, which mature on January 1, 2022. The bonds were issued for $4,540,000 to yield 8%, resulting in bond premium of $540,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2012, Solis’s adjusted unamortized bond premium should be
a. $540,000.
b. $503,200.
c. $486,000.
d. $406,000.

108. On July 1, 2011, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which mature on July 1, 2017. The bonds were issued for $9,390,000 to yield 10%, resulting in a bond discount of $610,000. Noble uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2013, Noble’s unamortized bond discount should be
a. $528,100.
b. $510,000.
c. $488,000.
d. $430,000.

109. On January 1, 2012, Huff Co. sold $3,000,000 of its 10% bonds for $2,655,888 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Huff report as interest expense for the six months ended June 30, 2012?
a. $132,798
b. $150,000
c. $159,353
d. $180,000

110. On January 1, 2013, Doty Co. redeemed its 15-year bonds of $3,500,000 par value for 102. They were originally issued on January 1, 2001 at 98 with a maturity date of
January 1, 2016. The bond issue costs relating to this transaction were $210,000. Doty amortizes discounts, premiums, and bond issue costs using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)?
a. $126,000
b. $84,000
c. $70,000
d. $0

111. On its December 31, 2012 balance sheet, Emig Corp. reported bonds payable of $9,000,000 and related unamortized bond issue costs of $480,000. The bonds had been issued at par. On January 2, 2013, Emig retired $4,500,000 of the outstanding bonds at par plus a call premium of $105,000. What amount should Emig report in its 2013 income statement as loss on extinguishment of debt (ignore taxes)?
a. $0
b. $105,000
c. $240,000
d. $345,000

112. On January 1, 2008, Goll Corp. issued 4,000 of its 10%, $1,000 bonds for $4,160,000. These bonds were to mature on January 1, 2016 but were callable at 101 any time after December 31, 2011. Interest was payable semiannually on July 1 and January 1. On
July 1, 2013, Goll called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Goll’s gain or loss in 2013 on this early extinguishment of debt was
a. $120,000 gain.
b. $48,000 gain.
c. $40,000 loss.
d. $32,000 gain.

113. On June 30, 2013, Omara Co. had outstanding 8%, $4,000,000 face amount, 15-year bonds maturing on June 30, 2023. Interest is payable on June 30 and December 31. The unamortized balances in the bond discount and deferred bond issue costs accounts on June 30, 2013 were $140,000 and $40,000, respectively. On June 30, 2013, Omara acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?
a. $3,960,000.
b. $3,860,000.
c. $3,820,000.
d. $3,760,000.

114. A ten-year bond was issued in 2011 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2013, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2013 should have equaled the
a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount.

115. Paige Co. took advantage of market conditions to refund debt. This was the fourth refunding operation carried out by Paige within the last three years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a
a. gain, net of income taxes.
b. loss, net of income taxes.
c. part of continuing operations.
d. deferred credit to be amortized over the life of the new debt.

*116. Eddy Co. is indebted to Cole under a $600,000, 12%, three-year note dated
December 31, 2011. Because of Eddy’s financial difficulties developing in 2013, Eddy owed accrued interest of $72,000 on the note at December 31, 2013. Under a troubled debt restructuring, on December 31, 2013, Cole agreed to settle the note and accrued interest for a tract of land having a fair value of $540,000. Eddy’s acquisition cost of the land is $435,000. Ignoring income taxes, on its 2013 income statement Eddy should report as a result of the troubled debt restructuring
Gain on Disposal Restructuring Gain
a. $237,000 $0
b. $165,000 $0
c. $105,000 $60,000
d. $105,000 $132,000
Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS

True/False
1. Similar to U.S. practice, IFRS requires that companies present current and noncurrent liabilities on the face of the balance sheet, with current liabilities generally presented in order of liquidity.

2. Similar to U.S. practice, IFRS requires that companies present current and noncurrent liabilities on the face of the balance sheet, with current liabilities generally presented in order of magnitude.

3. Both IFRS and U.S. GAAP prohibit the recognition of liabilities for future losses.

4. IFRS and U.S. GAAP are similar in the treatment of asset retirement obligations.

5. The recognition criteria for an asset retirement obligation (ARO) are more stringent under IFRS.

6. IFRS and U.S. GAAP are dissimilar in their treatment of contingencies.

7. The criteria for recognizing contingent assets are more stringent under U.S. GAAP.

8. Under IFRS, the measurement of a provision related to a contingency is based on an average estimate of the expenditure required to settle the obligation.

9. U.S. GAAP permits recognition of a restructuring liability, once a company has committed to a restructuring plan.

10. The recognition criteria for an ARO are more stringent under U.S. GAAP: The ARO is not recognized unless there is a present legal obligation and the fair value of the obligation can be reasonably estimated.

Answers to True/False:

Multiple Choice Questions
1. The primary IFRS related to reporting and recognition of liabilities is found in
a. IAS 10 and IAS 39.
b. IAS 17 and IAS 23.
c. IAS 1 and IAS 37.
d. IAS 27 and IAS 32.
2. Similar to U.S. practice, IFRS requires that companies present current and noncurrent liabilities on the face of the balance sheet with current liabilities
a. generally presented in order of magnitude.
b. presented in alphabetic order.
c. presented in order of liquidity.
d. presented in the order in which they were incurred.

3. Under IFRS, the measurement of a provision related to a contingency is based on
a. the best estimate of the expenditure required to settle the obligation.
b. the minimum amount from among a number of alternative estimates.
c. an average from among a number of alternative estimates.
d. whatever management feels that shareholders would be willing to accept because of the impact on current earnings.

4. Both U.S. GAAP and IFRS prohibit
a. the recognition of a restructuring liability, once a company has committed to a restructuring plan.
b. the recognition of liabilities for future losses.
c. communicating information on a restructuring plan to employees, before a liability can be established.
d. all of the above.

5. IFRS and U.S. GAAP are
a. similar in the treatment of asset retirement obligations (AROs).
b. significantly different when it comes to the treatment of asset retirement obligations (AROs).
c. continuing to evolve in the area of asset retirement obligations (AROs).
d. in conflict with respect to the accounting for and presentation of asset retirement obligations (AROs).

6. Both IFRS and U.S. GAAP permit valuation of long-term debt and other liabilities at
a. present value discounted at the firm’s cost of capital.
b. current market values of the obligations, based on changes in the discount rate with unrealized gains and losses reflected in a separate account in stockholders’ equity.
c. fair value with gains and losses on changes in fair value recorded in income in certain situations.
d. historic costs without reflecting changes in valuation as obligations will be retired at their maturity date.

7. As there is no comparable institution to the SEC in international securities markets, many international companies (those not registered with the SEC)
a. voluntarily adhere to SEC criteria in providing information related to contractual obligations.
b. are not required to provide disclosures such as those related to contractual obligations.
c. follow the requirements established for contractual obligations put forth by the IASB.
d. follow the requirements established for contractual obligations put forth by the FASB.

8. Under U.S. GAAP, contingent assets for insurance recoveries are recognized if __________; IFRS requires the recovery be “___________” before recognition of an asset is permitted.
a. probable and virtually certain
b. possible and very likely
c. possible and definite
d. certain and probable

9. IFRS rules for establishing restructuring liabilities could be used as an earnings management tool because IFRS rules are
a. more-stringent that U.S. GAAP.
b. less-stringent that U.S. GAAP.
c. virtually the same as U.S. GAAP.
d. totally different than U.S. GAAP.

10. A concern with IFRS is that its less-stringent rules for establishing restructuring liabilities could be used as
a. a more appropriate method than that employed under U.S. GAAP.
b. an appropriate method, but complex and difficult to explain to shareholders.
c. a method readily employed to make the understanding of financial information more comprehensible to shareholders.
d. an earinings management tool.

Answers to multiple choice:

IFRS Short Answer:

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for liabilities.

1. Among the similarities are: (1) IFRS requires that companies present current and non-current liabilities on the face of the balance sheet, with current liabilities generally presented in order of liquidity, (2) Both GAAPs prohibit the recognition of liabilities for future losses; (3) IFRS and U.S. GAAP are similar in the treatment of asset retirement obligations (AROs), and (4) IFRS and U.S. GAAP are similar in their treatment of contingencies.

2. Briefly discuss how accounting convergence efforts addressing liabilities is related to the IASB/FASB conceptual framework project.

CHAPTER 15

STOCKHOLDERS’ EQUITY

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. A corporation is incorporated in only one state regardless of the number of states in which it operates.

2. The preemptive right allows stockholders the right to vote for directors of the company.

3. Common stock is the residual corporate interest that bears the ultimate risks of loss.

4. Earned capital consists of additional paid-in capital and retained earnings.

5. True no-par stock should be carried in the accounts at issue price without any additional paid-in capital reported.

6. Companies allocate the proceeds received from a lump-sum sale of securities based on the securities’ par values.

7. Companies should record stock issued for services or noncash property at either the fair value of the stock issued or the fair value of the consideration received.

8. Treasury stock is a company’s own stock that has been reacquired and retired.

9. The cost method records all transactions in treasury shares at their cost and reports the treasury stock as a deduction from capital stock.

10. When a corporation sells treasury stock below its cost, it usually debits the difference between cost and selling price to Paid-in Capital from Treasury Stock.

11. Participating preferred stock requires that if a company fails to pay a dividend in any year, it must make it up in a later year before paying any common dividends.

12. Callable preferred stock permits the corporation at its option to redeem the outstanding preferred shares at stipulated prices.

13. The laws of some states require that corporations restrict their legal capital from distribution to stockholders.

14. The SEC requires companies to disclose their dividend policy in their annual report.

15. All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a corporation.

16. Dividends payable in assets of the corporation other than cash are called property dividends or dividends in kind.

17. When a stock dividend is less than 20-25 percent of the common stock outstanding, a company is required to transfer the fair value of the stock issued from retained earnings.

18. Stock splits and large stock dividends have the same effect on a company’s retained earnings and total stockholders’ equity.
19. The rate of return on common stock equity is computed by dividing net income by the average common stockholders’ equity.

20. The payout ratio is determined by dividing cash dividends paid to common stockholders by net income available to common stockholders.

True-False Answers—Conceptual

MULTIPLE CHOICE—Conceptual
21. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.

22. The pre-emptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.

23. The pre-emptive right enables a stockholder to
a. share proportionately in any new issues of stock of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive the same amount of dividends on a percentage basis as the preferred stockholders.

S24. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to generate.
d. the total capital raised by a corporation within the limits set by the Securities and Exchange Commission.

S25. Stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.
d. can negotiate individual contracts on behalf of the enterprise.

26. Total stockholders’ equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.

27. A primary source of stockholders’ equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.

28. Stockholders’ equity is generally classified into two major categories:
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.

29. The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the
a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the incremental method.

30. When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.

31. Direct costs incurred to sell stock such as underwriting costs should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a. 1
b. 2
c. 3
d. 1 or 3

32. A “secret reserve” will be created if
a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders’ equity is overstated.

P33. Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares

S34. Stock that has a fixed per-share amount printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.

S35. Which of the following is not a legal restriction related to profit distributions by a corporation?
a. The amount distributed to owners must be in compliance with the state laws governing corporations.
b. The amount distributed in any one year can never exceed the net income reported for that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to preferences and participation.

S36. In January 2012, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2012, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares
a. decreased total stockholders’ equity.
b. increased total stockholders’ equity.
c. did not change total stockholders’ equity.
d. decreased the number of issued shares.

P37. Treasury shares are
a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.

38. When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value.
39. “Gains” on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.

40. Porter Corp. purchased its own par value stock on January 1, 2012 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from
a. additional paid-in capital to the extent that previous net “gains” from sales of the same class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been previous net “gains” from sales of the same class of stock included therein.
c. retained earnings.
d. net income.

41. How should a “gain” from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.

42. Which of the following best describes a possible result of treasury stock transactions by a corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.

43. Which of the following features of preferred stock makes the security more like debt than an equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative

44. The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value of the preferred stock.
b. requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends.

P45. According to the FASB, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders’ equity heading.
d. included as a contra item in stockholders’ equity.
S46. Cumulative preferred dividends in arrears should be shown in a corporation’s balance sheet as
a. an increase in current liabilities.
b. an increase in stockholders’ equity.
c. a footnote.
d. an increase in current liabilities for the current portion and long-term liabilities for the long-term portion.

47. At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.

48. An entry is not made on the
a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.

49. Cash dividends are paid on the basis of the number of shares
a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.

50. Which of the following statements about property dividends is not true?
a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred.
d. All of these statements are true.

51. Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2012, Houser distributed these shares of stock as a dividend to its stockholders. This is an example of a
a. property dividend.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.

52. A dividend which is a return to stockholders of a portion of their original investments is a
a. liquidating dividend.
b. property dividend.
c. liability dividend.
d. participating dividend.

53. A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to
a. Retained Earnings.
b. a paid-in capital account.
c. Accumulated Depletion.
d. Accumulated Depreciation.

54. If management wishes to “capitalize” part of the earnings, it may issue a
a. cash dividend.
b. stock dividend.
c. property dividend.
d. liquidating dividend.

55. Which dividends do not reduce stockholders’ equity?
a. Cash dividends
b. Stock dividends
c. Property dividends
d. Liquidating dividends

56. The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding
a. increases common stock outstanding and increases total stockholders’ equity.
b. decreases retained earnings but does not change total stockholders’ equity.
c. may increase or decrease paid-in capital in excess of par but does not change total stockholders’ equity.
d. increases retained earnings and increases total stockholders’ equity.

57. Quirk Corporation issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued?
a. There should be no capitalization of retained earnings.
b. Par value
c. Fair value on the declaration date
d. Fair value on the payment date

58. The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the
a. fair value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.

59. At the date of declaration of a small common stock dividend, the entry should not include
a. a credit to Common Stock Dividend Payable.
b. a credit to Paid-in Capital in Excess of Par.
c. a debit to Retained Earnings.
d. All of these are acceptable.

60. The balance in Common Stock Dividend Distributable should be reported as a(n)
a. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset.

61. A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders’ equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.

62. What effect does the issuance of a 2-for-1 stock split have on each of the following?
Par Value per Share Retained Earnings
a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease

63. Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements?
a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices

64. The rate of return on common stock equity is calculated by dividing
a. net income less preferred dividends by average common stockholders’ equity.
b. net income by average common stockholders’ equity.
c. net income less preferred dividends by ending common stockholders’ equity.
d. net income by ending common stockholders’ equity.

65. The payout ratio can be calculated by dividing
a. dividends per share by earnings per share.
b. cash dividends by net income less preferred dividends.
c. cash dividends by market price per share.
d. dividends per share by earnings per share and dividing cash dividends by net income less preferred dividends.

66. Younger Company has outstanding both common stock and nonparticipating, non-cumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by
a. the declaration of a stock dividend on preferred payable in preferred stock when the market price of the preferred is equal to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when the market price of the common is equal to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2-for-1 split of the common stock.

P67. Assume common stock is the only class of stock outstanding in the Manley Corporation. Total stockholders’ equity divided by the number of common stock shares outstanding is called
a. book value per share.
b. par value per share.
c. stated value per share.
d. fair value per share.

*68. Dividends are not paid on
a. noncumulative preferred stock.
b. nonparticipating preferred stock.
c. treasury common stock.
d. Dividends are paid on all of these.

*69. Noncumulative preferred dividends in arrears
a. are not paid or disclosed.
b. must be paid before any other cash dividends can be distributed.
c. are disclosed as a liability until paid.
d. are paid to preferred stockholders if sufficient funds remain after payment of the current preferred dividend.

*70. How should cumulative preferred dividends in arrears be shown in a corporation’s statement of financial position?
a. Note disclosure
b. Increase in stockholders’ equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year or operating cycle, and increase in long-term liabilities for the balance

Multiple Choice Answers—Conceptual

MULTIPLE CHOICE—Computational

Use the following information for questions 71 and 72.
Presented below is information related to Hale Corporation:
Common Stock, $1 par $4,800,000
Paid-in Capital in Excess of Par—Common Stock 550,000
Preferred 8 1/2% Stock, $50 par 2,000,000
Paid-in Capital in Excess of Par—Preferred Stock 400,000
Retained Earnings 1,500,000
Treasury Common Stock (at cost) 150,000

71. The total stockholders’ equity of Hale Corporation is
a. $9,100,000.
b. $9,250,000.
c. $7,600,000.
d. $7,750,000.

72. The total paid-in capital (cash collected) related to the common stock is
a. $4,800,000.
b. $5,350,000.
c. $5,750,000.
d. $5,200,000.

73. Manning Company issued 10,000 shares of its $5 par value common stock having a fair value of $25 per share and 15,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $520,000. How much of the proceeds would be allocated to the common stock?
a. $54,167
b. $236,364
c. $270,833
d. $276,250

74. Norton Company issues 4,000 shares of its $5 par value common stock having a fair value of $25 per share and 6,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $204,000. What amount of the proceeds should be allocated to the preferred stock?
a. $182,750
b. $127,500
c. $111,273
d. $95,625

75. Berry Corporation has 50,000 shares of $10 par common stock authorized. The following transactions took place during 2012, the first year of the corporation’s existence:
Sold 10,000 shares of common stock for $18 per share.
Issued 10,000 shares of common stock in exchange for a patent valued at $200,000.
At the end of the Berry’s first year, total paid-in capital amounted to
a. $80,000.
b. $180,000.
c. $200,000.
d. $380,000.
76. Glavine Company issues 6,000 shares of its $5 par value common stock having a fair value of $25 per share and 9,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $312,000. The proceeds allocated to the common stock is
a. $32,500
b. $141,818
c. $162,500
d. $170,182

77. Wheeler Company issued 5,000 shares of its $5 par value common stock having a fair value of $25 per share and 7,500 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $260,000. The proceeds allocated to the preferred stock is
a. $232,917
b. $162,500
c. $141,818
d. $118,182

78. Pember Corporation started business in 2007 by issuing 200,000 shares of $20 par common stock for $36 each. In 2012, 30,000 of these shares were purchased for $52 per share by Pember Corporation and held as treasury stock. On June 15, 2013, these 30,000 shares were exchanged for a piece of property that had an assessed value of $810,000. Perber’s stock is actively traded and had a market price of $60 on June 15, 2013. The cost method is used to account for treasury stock. The amount of paid-in capital from treasury stock transactions resulting from the above events would be
a. $1,200,000.
b. $720,000.
c. $585,000.
d. $240,000.

79. On September 1, 2012, Valdez Company reacquired 16,000 shares of its $10 par value common stock for $15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit
a. Treasury Stock for $160,000.
b. Common Stock for $160,000.
c. Common Stock for $160,000 and Paid-in Capital in Excess of Par for $60,000.
d. Treasury Stock for $240,000.

80. Gannon Company acquired 8,000 shares of its own common stock at $20 per share on February 5, 2012, and sold 4,000 of these shares at $27 per share on August 9, 2013. The fair value of Gannon’s common stock was $24 per share at December 31, 2012, and $25 per share at December 31, 2013. The cost method is used to record treasury stock transactions. What account(s) should Gannon credit in 2013 to record the sale of 4,000 shares?
a. Treasury Stock for $108,000.
b. Treasury Stock for $80,000 and Paid-in Capital from Treasury Stock for $28,000.
c. Treasury Stock for $80,000 and Retained Earnings for $28,000.
d. Treasury Stock for $96,000 and Retained Earnings for $12,000.

81. Long Co. issued 100,000 shares of $10 par common stock for $1,200,000. Long acquired 10,000 shares of its own common stock at $15 per share. Three months later Long sold 5,000 of these shares at $19 per share. If the cost method is used to record treasury stock transactions, to record the sale of the 5,000 treasury shares, Long should credit
a. Treasury Stock for $95,000.
b. Treasury Stock for $50,000 and Paid-in Capital from Treasury Stock for $45,000.
c. Treasury Stock for $75,000 and Paid-in Capital from Treasury Stock for $20,000.
d. Treasury Stock for $75,000 and Paid-in Capital in Excess of Par for $20,000.

82. An analysis of stockholders’ equity of Hahn Corporation as of January 1, 2012, is as follows:
Common stock, par value $20; authorized 100,000 shares;
issued and outstanding 90,000 shares $1,800,000
Paid-in capital in excess of par 700,000
Retained earnings 760,000
Total $3,260,000
Hahn uses the cost method of accounting for treasury stock and during 2012 entered into the following transactions:
Acquired 2,500 shares of its stock for $75,000.
Sold 2,000 treasury shares at $35 per share.
Sold the remaining treasury shares at $20 per share.
Assuming no other equity transactions occurred during 2012, what should Hahn report at December 31, 2012, as total additional paid-in capital?
a. $695,000
b. $700,000
c. $705,000
d. $715,000

83. Percy Corporation was organized on January 1, 2012, with an authorization of 1,200,000 shares of common stock with a par value of $6 per share. During 2012, the corporation had the following capital transactions:
January 5 issued 900,000 shares @ $10 per share
July 28 purchased 120,000 shares @ $11 per share
December 31 sold the 120,000 shares held in treasury @ $18 per share
Percy used the cost method to record the purchase and reissuance of the treasury shares. What is the total amount of additional paid-in capital as of December 31, 2012?
a. $-0-.
b. $2,760,000.
c. $3,600,000.
d. $4,440,000.

84. Sosa Co.’s stockholders’ equity at January 1, 2012 is as follows:
Common stock, $10 par value; authorized 300,000 shares;
Outstanding 225,000 shares $2,250,000
Paid-in capital in excess of par 700,000
Retained earnings 2,190,000
Total $5,140,000
During 2012, Sosa had the following stock transactions:
Acquired 6,000 shares of its stock for $270,000.
Sold 3,600 treasury shares at $50 a share.
Sold the remaining treasury shares at $41 per share.
No other stock transactions occurred during 2012. Assuming Sosa uses the cost method to record treasury stock transactions, the total amount of all additional paid-in capital accounts at December 31, 2012 is
a. $691,600.
b. $670,000.
c. $708,400.
d. $727,600.

85. Presented below is the stockholders’ equity section of Oaks Corporation at December 31, 2012:
Common stock, par value $20; authorized 75,000 shares;
issued and outstanding 45,000 shares $ 900,000
Paid-in capital in excess of par value 250,000
Retained earnings 300,000
$1,450,000
During 2013, the following transactions occurred relating to stockholders’ equity:
3,000 shares were reacquired at $28 per share.
3,000 shares were reacquired at $35 per share.
1,800 shares of treasury stock were sold at $30 per share.
For the year ended December 31, 2013, Oaks reported net income of $450,000. Assuming Oaks accounts for treasury stock under the cost method, what should it report as total stockholders’ equity on its December 31, 2013, balance sheet?
a. $1,765,000.
b. $1,761,400.
c. $1,757,800.
d. $1,315,000.

86. On December 1, 2012, Abel Corporation exchanged 30,000 shares of its $10 par value common stock held in treasury for a used machine. The treasury shares were acquired by Abel at a cost of $40 per share, and are accounted for under the cost method. On the date of the exchange, the common stock had a fair value of $55 per share (the shares were originally issued at $30 per share). As a result of this exchange, Abel’s total stockholders’ equity will increase by
a. $300,000.
b. $1,200,000.
c. $1,650,000.
d. $1,350,000.

87. Luther Inc., has 3,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2013, and December 31, 2012. The board of directors declared and paid a $7,500 dividend in 2012. In 2013, $36,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2013?
a. $25,500
b. $18,000
c. $ 10,500
d. $ 9,000

88. Anders, Inc., has 10,000 shares of 5%, $100 par value, cumulative preferred stock and 40,000 shares of $1 par value common stock outstanding at December 31, 2013. There were no dividends declared in 2011. The board of directors declares and pays a $90,000 dividend in 2012 and in 2013. What is the amount of dividends received by the common stockholders in 2013?
a. $30,000
b. $50,000
c. $90,000
d. $0

89. Colson Inc. declared a $240,000 cash dividend. It currently has 9,000 shares of 7%, $100 par value cumulative preferred stock outstanding. It is one year in arrears on its preferred stock. How much cash will Colson distribute to the common stockholders?
a. $114,000.
b. $126,000.
c. $177,000.
d. None.

90. Pierson Corporation owned 10,000 shares of Hunter Corporation. These shares were purchased in 2009 for $90,000. On November 15, 2013, Pierson declared a property dividend of one share of Hunter for every ten shares of Pierson held by a stockholder. On that date, when the market price of Hunter was $21 per share, there were 90,000 shares of Pierson outstanding. What gain and net reduction in retained earnings would result from this property dividend?
Gain Net Reduction in
Retained Earnings
a. $0 $189,000
b. $0 $ 81,000
c. $108,000 $ 81,000
d. $108,000 $ 27,000

91. Stinson Corporation owned 30,000 shares of Matile Corporation. These shares were purchased in 2009 for $270,000. On November 15, 2013, Stinson declared a property dividend of one share of Matile for every ten shares of Stinson held by a stockholder. On that date, when the market price of Matile was $21 per share, there were 270,000 shares of Stinson outstanding. What gain and net reduction in retained earnings would result from this property dividend?
Gain Net Reduction in
Retained Earnings
a. $0 $243,000
b. $0 $567,000
c. $324,000 $81,000
d. $324,000 $243,000

92. Winger Corporation owned 300,000 shares of Fegan Corporation stock. On December 31, 2012, when Winger’s account “Equity Investment (Fegan Corporation”) had a carrying value of $5 per share, Winger distributed these shares to its stockholders as a dividend. Winger originally paid $8 for each share. Fegan has 1,000,000 shares issued and outstanding, which are traded on a national stock exchange. The quoted market price for a Fegan share was $7 on the declaration date and $9 on the distribution date.
What would be the reduction in Winger’s stockholders’ equity as a result of the above transactions?
a. $1,200,000.
b. $1,500,000.
c. $2,400,000.
d. $2,700,000.

93. Gibbs Corporation owned 20,000 shares of Oliver Corporation’s $5 par value common stock. These shares were purchased in 2009 for $180,000. On September 15, 2013, Gibbs declared a property dividend of one share of Oliver for every ten shares of Gibbs held by a stockholder. On that date, when the market price of Oliver was $21 per share, there were 180,000 shares of Gibbs outstanding. What NET reduction in retained earnings would result from this property dividend?
a. $162,000
b. $378,000
c. $108,000
d. $216,000

94. Melvern’s Corporation has an investment in 10,000 shares of Wallace Company common stock with a cost of $436,000. These shares are used in a property dividend to stockholders of Melvern’s. The property dividend is declared on May 25 and scheduled to be distributed on July 31 to stockholders of record on June 15. The fair value per share of Wallace stock is $63 on May 25, $66 on June 15, and $68 on July 31. The net effect of this property dividend on retained earnings is a reduction of
a. $680,000.
b. $660,000.
c. $630,000.
d. $436,000.

95. Hernandez Company has 490,000 shares of $10 par value common stock outstanding. During the year, Hernandez declared a 10% stock dividend when the market price of the stock was $30 per share. Four months later Hernandez declared a $.50 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by
a. $1,739,500.
b. $735,000.
c. $269,500.
d. $245,000.

96. On June 30, 2012, when Ermler Co.’s stock was selling at $65 per share, its capital accounts were as follows:
Capital stock (par value $50; 80,000 shares issued) $4,000,000
Premium on capital stock 600,000
Retained earnings 4,200,000
If a 100% stock dividend were declared and distributed, capital stock would be
a. $4,000,000.
b. $4,600,000.
c. $8,000,000.
d. $8,800,000.

97. The stockholders’ equity section of Gunkel Corporation as of December 31, 2012, was as follows:
Common stock, par value $2; authorized 20,000 shares;
issued and outstanding 10,000 shares $ 20,000
Paid-in capital in excess of par 30,000
Retained earnings 95,000
$145,000
On March 1, 2013, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. On March 1, 2011, the fair value of the stock was $6 per share. For the two months ended February 28, 2013, Gunkel sustained a net loss of $10,000.
What amount should Gunkel report as retained earnings as of March 1, 2013?
a. $76,000.
b. $82,000.
c. $86,000.
d. $92,000.

98. The stockholders’ equity of Howell Company at July 31, 2012 is presented below:
Common stock, par value $20, authorized 400,000 shares;
issued and outstanding 160,000 shares $3,200,000
Paid-in capital in excess of par 160,000
Retained earnings 650,000
$4,010,000
On August 1, 2012, the board of directors of Howell declared a 10% stock dividend on common stock, to be distributed on September 15th. The market price of Howell’s common stock was $35 on August 1, 2012, and $38 on September 15, 2012. What is the amount of the debit to retained earnings as a result of the declaration and distribution of this stock dividend?
a. $320,000.
b. $560,000.
c. $608,000.
d. $400,000.

99. On January 1, 2012, Dodd, Inc., declared a 15% stock dividend on its common stock when the fair value of the common stock was $20 per share. Stockholders’ equity before the stock dividend was declared consisted of:
Common stock, $10 par value, authorized 200,000 shares;
issued and outstanding 120,000 shares $1,200,000
Additional paid-in capital on common stock 150,000
Retained earnings 700,000
Total stockholders’ equity $2,050,000
What was the effect on Dodd’s retained earnings as a result of the above transaction?
a. $180,000 decrease
b. $360,000 decrease
c. $600,000 decrease
d. $300,000 decrease

100. On January 1, 2012, Culver Corporation had 110,000 shares of its $5 par value common stock outstanding. On June 1, the corporation acquired 10,000 shares of stock to be held in the treasury. On December 1, when the market price of the stock was $8, the corporation declared a 15% stock dividend to be issued to stockholders of record on December 16, 2012. What was the impact of the 15% stock dividend on the balance of the retained earnings account?
a. $750,000 decrease
b. $120,000 decrease
c. $132,000 decrease
d. No effect

101. At the beginning of 2013, Flaherty Company had retained earnings of $250,000. During the year Flaherty reported net income of $100,000, sold treasury stock at a “gain” of $36,000, declared a cash dividend of $60,000, and declared and issued a small stock dividend of 3,000 shares ($10 par value) when the fair value of the stock was $20 per share. The amount of retained earnings available for dividends at the end of 2013 was
a. $230,000.
b. $260,000.
c. $266,000.
d. $296,000.

102. Masterson Company has 420,000 shares of $10 par value common stock outstanding. During the year Masterson declared a 10% stock dividend when the market price of the stock was $36 per share. Three months later Masterson declared a $.60 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by
a. $1,789,200
b. $1,512,000
c. $277,200
d. $264,000

Questions 103 and 104 are based on the following information.

Layne Corporation had the following information in its financial statements for the years ended 2012 and 2013:
Cash dividends for the year 2013 $ 8,000
Net income for the year ended 2013 83,000
Market price of stock, 12/31/12 10
Market price of stock, 12/31/13 12
Common stockholders’ equity, 12/31/12 1,600,000
Common stockholders’ equity, 12/31/13 1,800,000
Outstanding shares, 12/31/13 180,000
Preferred dividends for the year ended 2013 15,000

103. What is the payout ratio for Layne Corporation for the year ended 2013?
a. 27.7%
b. 18.1%
c. 11.8%
d. 9.6%

104. What is the book value per share for Layne Corporation for the year ended 2013?
a. $10.00
b. $9.92
c. $9.44
d. $8.89

105. At the beginning of 2013, Hamilton Company had retained earnings of $180,000. During the year Hamilton reported net income of $75,000, sold treasury stock at a “gain” of $27,000, declared a cash dividend of $45,000, and declared and issued a small stock dividend of 1,500 shares ($10 par value) when the fair value of the stock was $30 per share. The amount of retained earnings available for dividends at the end of 2013 was:
a. $214,500.
b. $192,000.
c. $187,500.
d. $165,000.

106. Mingenback Company has 560,000 shares of $10 par value common stock outstanding. During the year Mingenback declared a 10% stock dividend when the market price of the stock was $48 per share. Two months later Mingenback declared a $.60 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by:
a. $352,000.
b. $369,600.
c. $2,688,000.
d. $3,057,600.

Questions 107 and 108 are based on the following information.

Sealy Corporation had the following information in its financial statements for the years ended 2012 and 2013:
Cash dividends for the year 2013 $ 5,000
Net income for the year ended 2013 78,000
Market price of stock, 12/31/12 10
Market price of stock, 12/31/13 12
Common stockholders’ equity, 12/31/12 1,000,000
Common stockholders’ equity, 12/31/13 1,200,000
Outstanding shares, 12/31/13 100,000
Preferred dividends for the year ended 2013 10,000

107. What is the rate of return on common stock equity for Sealy Corporation for the year ended 2013?
a. 7.1%
b. 6.5%
c. 6.2%
d. 5.7%

108. What is the price-earnings ratio for Sealy Corporation for the year ended 2013?
a. 14.7
b. 15.4
c. 17.6
d. 19.0

109. Mays, Inc. had net income for 2012 of $3,180,000 and earnings per share on common stock of $5. Included in the net income was $450,000 of bond interest expense related to its long-term debt. The income tax rate for 2012 was 30%. Dividends on preferred stock were $600,000. The payout ratio on common stock was 25%. What were the dividends on common stock in 2012?
a. $645,000.
b. $795,000.
c. $723,750.
d. $967,500.

110. Presented below is information related to Orender, Inc.:
December 31,
2013 2012
Common stock $ 75,000 $ 60,000
4% Preferred stock 350,000 350,000
Retained earnings (includes net income for current year) 90,000 75,000
Net income for year 40,000 32,000
What is Orender’s rate of return on common stock equity for 2013?
a. 26.7%
b. 17.3%
c. 15.8%
d. 24.2%

Use the following information for questions 111 and 112.

The following data are provided:
December 31,
2013 2012
10% Cumulative preferred stock, $50 par $100,000 $100,000
Common stock, $10 par 160,000 90,000
Additional paid-in capital 80,000 65,000
Retained earnings (includes current year net income) 240,000 215,000
Net income 70,000
Additional information:
On May 1, 2013, 7,000 shares of common stock were issued. The preferred dividends were not declared during 2013. The market price of the common stock was $50 at December 31, 2013.

111. The rate of return on common stock equity for 2013 is
a. 70 ÷ 420.
b. 70 ÷ 480.
c. 60 ÷ 420.
d. 60 ÷ 480.

112. The book value per share of common stock at 12/31/13 is
a. 470 ÷ 16.
b. 240 ÷ 16.
c. 370 ÷ 16.
d. 480 ÷ 15.

Use the following information for questions 113 and 114.

Turner Corporation had the following information in its financial statements for the year ended 2012 and 2013:
Cash dividends for the year 2013 $ 15,000
Net income for the year ended 2013 155,000
Market price of stock, 12/31/13 24
Common stockholders’ equity, 12/31/12 2,200,000
Common stockholders’ equity, 12/31/13 2,400,000
Outstanding shares, 12/31/13 160,000
Preferred dividends for the year ended 2013 30,000

113. What is the payout ratio for Turner Corporation for the year ended 2013?
a. 9.7%
b. 12.0%
c. 19.4%
d. 29.0%

114. What is the book value per share for Turner Corporation for the year ended 2013?
a. $14.81
b. $15.00
c. $13.75
d. $14.38

Use the following information for questions 115 through 117.

Written, Inc. has outstanding 500,000 shares of $2 par common stock and 100,000 shares of no-par 8% preferred stock with a stated value of $5. The preferred stock is cumulative and nonparticipating. Dividends have been paid in every year except the past two years and the current year.

*115. Assuming that $250,000 will be distributed as a dividend in the current year, how much will the common stockholders receive?
a. Zero.
b. $130,000.
c. $170,000.
d. $210,000.

*116. Assuming that $105,000 will be distributed as a dividend in the current year, how much will the preferred stockholders receive?
a. $35,000.
b. $40,000.
c. $80,000.
d. $105,000.

*117. Assuming that $305,000 will be distributed, and the preferred stock is also participating, how much will the common stockholders receive?
a. $185,000.
b. $150,000.
c. $155,000.
d. $80,000.

*118. Yoder, Inc. has 100,000 shares of $10 par value common stock and 50,000 shares of $10 par value, 6%, cumulative, participating preferred stock outstanding. Dividends on the preferred stock are one year in arrears. Assuming that Yoder wishes to distribute $270,000 as dividends, the common stockholders will receive
a. $60,000.
b. $110,000.
c. $160,000.
d. $210,000.

*119. Mann Co. has outstanding 60,000 shares of 8% preferred stock with a $10 par value and 150,000 shares of $3 par value common stock. Dividends have been paid every year except last year and the current year. If the preferred stock is cumulative and nonparticipating and $300,000 is distributed, the common stockholders will receive
a. $0.
b. $204,000.
c. $252,000.
d. $300,000.

Multiple Choice Answers—Computational

MULTIPLE CHOICE—CPA Adapted

120. A corporation was organized in January 2009 with authorized capital of $10 par value common stock. On February 1, 2012, shares were issued at par for cash. On March 1, 2012, the corporation’s attorney accepted 7,000 shares of common stock in settlement for legal services with a fair value of $90,000. Additional paid-in capital would increase on
February 1, 2012 March 1, 2012
a. Yes No
b. Yes Yes
c. No No
d. No Yes

121. On July 1, 2012, Nall Co. issued 2,500 shares of its $10 par common stock and 5,000 shares of its $10 par convertible preferred stock for a lump sum of $140,000. At this date Nall’s common stock was selling for $24 per share and the convertible preferred stock for $18 per share. The amount of the proceeds allocated to Nall’s preferred stock should be
a. $70,000.
b. $84,000.
c. $90,000.
d. $77,000.

122. Horton Co. was organized on January 2, 2012, with 500,000 authorized shares of $10 par value common stock. During 2012, Horton had the following capital transactions:
January 5—issued 375,000 shares at $14 per share.
July 27—purchased 25,000 shares at $11 per share.
November 25—sold 20,000 shares of treasury stock at $13 per share.
Horton used the cost 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, 2012?
a. $0.
b. $20,000.
c. $40,000.
d. $60,000.

123. In 2012, Hobbs Corp. acquired 9,000 shares of its own $1 par value common stock at $18 per share. In 2013, Hobbs issued 6,000 of these shares at $25 per share. Hobbs uses the cost method to account for its treasury stock transactions. What accounts and what amounts should Hobbs credit in 2013 to record the issuance of the 6,000 shares?
Treasury Additional Retained Common
Stock Paid-in Capital Earnings Stock
a. $108,000 $105,000
b. $108,000 $42,000
c. $144,000 $6,000
d. $102,000 $42,000 $6,000

124. At its date of incorporation, Sauder, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Sauder acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?
Retained Earnings Additional Paid-in Capital
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect

125. Farmer Corp. owned 20,000 shares of Eaton Corp. purchased in 2009 for $300,000. On December 15, 2012, Farmer declared a property dividend of all of its Eaton Corp. shares on the basis of one share of Eaton for every 10 shares of Farmer common stock held by its stockholders. The property dividend was distributed on January 15, 2013. On the declaration date, the aggregate market price of the Eaton shares held by Farmer was $500,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings of
a. $0.
b. $200,000.
c. $300,000.
d. $500,000.

126. A corporation declared a dividend, a portion of which was liquidating. How would this distribution affect each of the following?
Additional
Paid-in Capital Retained Earnings
a. Decrease No effect
b. Decrease Decrease
c. No effect Decrease
d. No effect No effect

127. On May 1, 2012, Ziek Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Ziek had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Ziek ‘s common stock was $20 per share on May 1, 2012. As a result of this stock dividend, Ziek’s total stockholders’ equity
a. increased by $200,000.
b. decreased by $200,000.
c. decreased by $10,000.
d. did not change.

128. How would the declaration and subsequent issuance of a 10% stock dividend by the issuer affect each of the following when the fair value of the shares exceeds the par value of the stock?
Additional
Common Stock Paid-in Capital
a. No effect No effect
b. No effect Increase
c. Increase No effect
d. Increase Increase

129. On December 31, 2012, the stockholders’ equity section of Arndt, Inc., was as follows:
Common stock, par value $10; authorized 30,000 shares;
issued and outstanding 9,000 shares $ 90,000
Additional paid-in capital 116,000
Retained earnings 154,000
Total stockholders’ equity $360,000
On March 31, 2013, Arndt declared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair value of the stock was $18 per share. For the three months ended March 31, 2013, Arndt sustained a net loss of $32,000. The balance of Arndt’s retained earnings as of March 31, 2013, should be
a. $105,800.
b. $113,000.
c. $114,800.
d. $122,000.

*130. At December 31, 2012 and 2013, Plank Corp. had outstanding 3,000 shares of $100 par value 8% cumulative preferred stock and 15,000 shares of $10 par value common stock. At December 31, 2012, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in 2013 totaled $45,000. What amounts were payable on each class of stock?
Preferred Stock Common Stock
a. $24,000 $21,000
b. $33,000 $12,000
c. $36,000 $9,000
d. $45,000 $0

Multiple Choice Answers—CPA Adapted

IFRS QUESTIONS
True/False

1. In the United States, like many other countries, banks are major creditors as well as the largest investors.

2. The IFRS statement of recognized income and expenses is identical to the U.S. GAAP statement of retained earnings – beginning balance retained earnings, plus net income, less dividends, equals ending balance retained earnings.

3. When the statement of recognized income and expenses is utilized the requirement for additional note disclosure is reduced.

4. Under IFRS compliance requirements the U.S. GAAP formatted income statement need not be replaced with the iGAAP statement of recognized income and expenses.

5. Under IFRS compliance requirements the revaluation surplus is not considered contributed capital.

Answers to True/False:

Multiple Choice

1. The accounting for treasury stock retirements under IFRS
a. is to charge the entire amount to paid-in capital.
b. may have the excess charged to paid-in capital, depending on the original transaction related to the issuance of the stock.
c. is to charge the excess of the cost of treasury stock over par value to retained earnings.
d. is to allocate the difference between paid-in capital and retained earnings.

2. The Revaluation Surplus of IFRS is
a. similar to U.S. GAAP in that it allows both increases and decreases in valuation.
b. similar to U.S. GAAP in that it only allows for the decrease in valuation.
c. similar to U.S. GAAP in that it only allows for the increase in valuation.
d. different than U.S. GAAP in that it allows the increase in valuation.

3. The IFRS statement of recognized income and expenses
a. does not recognize charges to equity such as revaluation surplus values.
b. is a required report under IFRS reporting requirements.
c. reports the items that were charged directly to equity such as revaluation surplus.
d. is similar to the U.S. GAAP income statement in that it only reports revenues and expenses of the period.

4. Under IFRS compliance requirements the Revaluation Surplus is
a. only utilized to record the changes in depreciable items – plant and equipment.
b. considered as revenue when utilizing the U.S. GAAP formatted income statement.
c. utilized to record the changes in property, plant, and equipment.
d. reported as contributed capital.

5. The current project of the IASB and the FASB related to financial statement presentation indicates
a. that the IFRS statement of recognized income and expenses will most likely be adopted by the FASB as a U.S. requirement in the near future.
b. that the IFRS statement of recognized income and expenses will probably be eliminated.
c. that the U.S. GAAP standard for reporting comprehensive income will most likely be adopted by the IASB for IFRS.
d. that hybrid financial instruments are unacceptable.

Answers to Multiple Choice:

Short Answer

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for stockholders’ equity.

2. Briefly discuss the implications of the financial statement presentation project for the reporting of stockholders’ equity.

CHAPTER 16

DILUTIVE SECURITIES AND EARNINGS PER SHARE

IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual

1. The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues.

2. Companies recognize the gain or loss on retiring convertible debt as an extraordinary item.

3. The FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense.

4. The market value method is used to account for the exercise of convertible preferred stock.

5. Companies recognize a gain or loss when stockholders exercise convertible preferred stock.

6. A company should allocate the proceeds from the sale of debt with detachable stock warrants between the two securities based on their market values.

7. Nondetachable warrants, as with detachable warrants, require an allocation of the proceeds between the bonds and the warrants.

8. The intrinsic value of a stock option is the difference between the market price of the stock and the exercise price of the options at the grant date.

9. Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise.

10. The service period in stock option plans is the time between the grant date and the vesting date.

11. If an employee fails to exercise a stock option before its expiration date, the company should decrease compensation expense.

12. If an employee forfeits a stock option because of failure to satisfy a service requirement, the company should record paid-in capital from expired options.

13. If preferred stock is cumulative and no dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share.

14. When stock dividends or stock splits occur, companies must restate the shares outstand-ing after the stock dividend or split, in order to compute the weighted-average number of shares.

15. 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.

16. Preferred dividends are subtracted from net income but not income before extraordinary items in computing earnings per share.

17. When a company has a complex capital structure, it must report both basic and diluted earnings per share.

18. In computing diluted earnings per share, stock options are considered dilutive when their option price is greater than the market price.

19. 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.

20. A company should report per share amounts for income before extraordinary items, but not for income from continuing operations.

True-False Answers—Conceptual

MULTIPLE CHOICE—Dilutive Securities, Conceptual

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

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

23. 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.

S24. Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is
a. the ease with which convertible debt is sold even if the company has a poor credit rating.
b. the fact that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain financing at lower rates.
d. that convertible bonds will always sell at a premium.
S25. When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as an adjustment of additional paid-in capital.

S26. The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.

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

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

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

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

P31. A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably
a. zero.
b. calculated by the excess of the proceeds over the face amount of the bonds.
c. equal to the market value of the warrants.
d. based on the relative market values of the two securities involved.

P32. The distribution of stock rights to existing common stockholders will increase paid-in capital at the
Date of Issuance Date of Exercise
of the Rights of the Rights
a. Yes Yes
b. Yes No
c. No Yes
d. No No

S33. The major difference between convertible debt and stock warrants is that upon exercise of the warrants
a. the stock is held by the company for a defined period of time before they are issued to the warrant holder.
b. the holder has to pay a certain amount of cash to obtain the shares.
c. the stock involved is restricted and can only be sold by the recipient after a set period of time.
d. no paid-in capital in excess of par can be a part of the transaction.

S34. Which of the following is not a characteristic of a noncompensatory stock option plan?
a. Substantially all full-time employees may participate on an equitable basis.
b. The plan offers no substantive option feature.
c. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company.
d. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others.

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

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

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

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

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

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

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

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

Multiple Choice Answers—Dilutive Securities, Conceptual
Solutions to those Multiple Choice questions for which the answer is “none of these.”
30. additions to contributed capital.

MULTIPLE CHOICE—Dilutive Securities, Computational

43. Fogel Co. has $5,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2012, the holders of $1,600,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $350,000. Fogel should record, as a result of this conversion, a
a. credit of $272,000 to Paid-in Capital in Excess of Par.
b. credit of $240,000 to Paid-in Capital in Excess of Par.
c. credit of $112,000 to Premium on Bonds Payable.
d. loss of $16,000.
44. On July 1, 2012, an interest payment date, $80,000 of Parks Co. bonds were converted into 1,600 shares of Parks Co. common stock each having a par value of $45 and a market value of $54. There is $3,200 unamortized discount on the bonds. Using the book value method, Parks would record
a. no change in paid-in capital in excess of par.
b. a $4,800 increase in paid-in capital in excess of par.
c. a $9,600 increase in paid-in capital in excess of par.
d. a $6,400 increase in paid-in capital in excess of par.

45. Morgan Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $20,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2012, the holders of $3,000,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $1,250,000. In applying the book value method, what amount should Morgan credit to the account “paid-in capital in excess of par,” as a result of this conversion?
a. $412,500.
b. $200,000.
c. $1,800,000.
d. $900,000.

Use the following information for questions 46 through 48.

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2012 at 96.1 plus accrued interest. The bonds were dated April 1, 2010 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2013, $1,200,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion.

46. If “interest payable” were credited when the bonds were issued, what should be the amount of the debit to “interest expense” on October 1, 2012?
a. $129,000.
b. $135,200.
c. $141,000.
d. $270,000.

47. What should be the amount of the unamortized bond discount on April 1, 2013 relating to the bonds converted?
a. $46,800.
b. $43,200.
c. $23,400.
d. $44,400.

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

49. Litke Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into 2,000 shares of common stock (par value $25). At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, and the stock is quoted on the market at $60 per share. If the bonds are converted into common, what is the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds?
a. $55,000
b. $52,000
c. $62,000
d. $70,000

50. In 2012, Eklund, Inc., issued for $103 per share, 80,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Eklund’s $25 par value common stock at the option of the preferred stockholder. In August 2013, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock?
a. $1,360,000.
b. $1,040,000.
c. $2,000,000.
d. $2,240,000.

51. On December 1, 2012, Lester Company issued at 103, four hundred of its 9%, $1,000 bonds. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Lester’s common stock. On December 1, 2012, the market value of the bonds, without the stock warrants, was 95, and the market value of each stock purchase warrant was $50. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be
a. $387,280.
b. $391,400.
c. $400,000.
d. $412,000.

52. On March 1, 2012, Ruiz Corporation issued $1,000,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2032. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2012, the fair value of Ruiz’s common stock was $40 per share and the fair value of the warrants was $2.00. What amount should Ruiz record on March 1, 2010 as paid-in capital from stock warrants?
a. $36,800
b. $42,600
c. $52,600
d. $50,000

53. During 2012, Gordon Company issued at 104 five hundred, $1,000 bonds due in ten years. One detachable stock warrant entitling the holder to purchase 15 shares of Gordon’s common stock was attached to each bond. At the date of issuance, the market value of the bonds, without the stock warrants, was quoted at 96. The market value of each detachable warrant was quoted at $40. What amount, if any, of the proceeds from the issuance should be accounted for as part of Gordon’s stockholders’ equity?
a. $0
b. $20,000
c. $20,800
d. $19,760

54. On April 7, 2012, Kegin Corporation sold a $3,000,000, twenty-year, 8 percent bond issue for $3,180,000. Each $1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation’s common stock for $30. The stock has a par value of $25 per share. Immediately after the sale of the bonds, the corporation’s securities had the following market values:
8% bond without warrants $1,008
Warrants 21
Common stock 28
What accounts should Kegin credit to record the sale of the bonds?
a. Bonds Payable $3,000,000
Premium on Bonds Payable 116,400
Paid-in Capital—Stock Warrants 63,600
b. Bonds Payable $3,000,000
Premium on Bonds Payable 24,000
Paid-in Capital—Stock Warrants 126,000
c. Bonds Payable $3,000,000
Premium on Bonds Payable 52,800
Paid-in Capital—Stock Warrants 127,200
d. Bonds Payable $3,000,000
Premiums on Bonds Payable 180,000

Use the following information for questions 55 and 56.

On May 1, 2012, Payne Co. issued $500,000 of 7% bonds at 103, which are due on April 30, 2022. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne’s common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2012, the fair value of Payne’s common stock was $35 per share and of the warrants was $2.

55. On May 1, 2012, Payne should credit Paid-in Capital from Stock Warrants for
a. $19,200.
b. $20,000.
c. $20,600.
d. $35,000.

56. On May 1, 2012, Payne should record the bonds with a
a. discount of $20,000.
b. discount of $5,600.
c. discount of $5,000.
d. premium of $15,000.

57. On July 4, 2012, Chen Company issued for $6,300,000 a total of 60,000 shares of $100 par value, 7% noncumulative preferred stock along with one detachable warrant for each share issued. Each warrant contains a right to purchase one share of Chen $10 par value common stock for $15 per share. The stock without the warrants would normally sell for $6,150,000. The market price of the rights on July 1, 2012, was $2.50 per right. On October 31, 2012, when the market price of the common stock was $19 per share and the market value of the rights was $3.00 per right, 24,000 rights were exercised. As a result of the exercise of the 24,000 rights and the issuance of the related common stock, what journal entry would Chen make?
a. Cash 360,000
Common Stock 240,000
Paid-in Capital in Excess of Par 120,000
b. Cash 360,000
Paid-in Capital—Stock Warrants 60,000
Common Stock 240,000
Paid-in Capital in Excess of Par 180,000
c. Cash 360,000
Paid-in Capital—Stock Warrants 150,000
Common Stock 240,000
Paid-in Capital in Excess of Par 270,000
d. Cash 360,000
Paid-in Capital—Stock Warrants 90,000
Common Stock 240,000
Paid-in Capital in Excess of Par 210,000

58. Vernon Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32). The price paid for 4,000, $1,000 bonds with the warrants attached was $410,000. The market price of the Vernon bonds without the warrants was $360,000, and the market price of the warrants without the bonds was $40,000. What amount should be allocated to the warrants?
a. $40,000
b. $41,000
c. $48,000
d. $50,000

Use the following information for questions 59 and 60.

On May 1, 2012, Marly Co. issued $1,000,000 of 7% bonds at 103, which are due on April 30, 2022. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Marly’s common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2012, the fair value of Marly’s common stock was $35 per share and of the warrants was $2.

59. On May 1, 2012, Marly should record the bonds with a
a. discount of $40,000.
b. discount of $10,000.
c. discount of $11,200.
d. premium of $30,000.

60. On May 1, 2012, Marly should credit Paid-in Capital from Stock Warrants for
a. $70,000
b. $41,200
c. $40,000
d. $38,400

61. On July 1, 2012, Ellison Company granted Sam Wine, an employee, an option to buy 600 shares of Ellison Co. stock for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $2,700. Wine exercised his option on October 1, 2012 and sold his 600 shares on December 1, 2012. Quoted market prices of Ellison Co. stock in 2012 were:
July 1 $30 per share
October 1 $36 per share
December 1 $40 per share
The service period is for three years beginning January 1, 2012. As a result of the option granted to Wine, using the fair value method, Ellison should recognize compensation expense on its books in the amount of
a. $2,700.
b. $900.
c. $675.
d. $0.

62. On January 1, 2012, Trent Company granted Dick Williams, an employee, an option to buy 300 shares of Trent Co. stock for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $2,700. Williams exercised his option on September 1, 2012, and sold his 300 shares on December 1, 2012. Quoted market prices of Trent Co. stock during 2012 were:
January 1 $30 per share
September 1 $36 per share
December 1 $40 per share
The service period is for two years beginning January 1,2012. As a result of the option granted to Williams, using the fair value method, Trent should recognize compensation expense for 2012 on its books in the amount of
a. $3,000.
b. $2,700.
c. $1,350.
d. $0.

63. On December 31, 2012, Gonzalez Company granted some of its executives options to purchase 120,000 shares of the company’s $10 par common stock at an option price of $50 per share. The Black-Scholes option pricing model determines total compensation expense to be $900,000. The options become exercisable on January 1, 2013, and represent compensation for executives’ services over a three-year period beginning January 1, 2013. At December 31, 2013 none of the executives had exercised their options. What is the impact on Gonzalez’s net income for the year ended December 31, 2013 as a result of this transaction under the fair value method?
a. $300,000 increase.
b. $900,000 decrease.
c. $300,000 decrease.
d. $0.
64. On January 1, 2013 Reese Company granted Jack Buchanan, an employee, an option to buy 200 shares of Reese Co. stock for $40 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $2,400. Buchanan exercised his option on September 1, 2013, and sold his 100 shares on December 1, 2013. Quoted market prices of Reese Co. stock during 2013 were:
January 1 $40 per share
September 1 $48 per share
December 1 $54 per share
The service period is for two years beginning January 1, 2013. As a result of the option granted to Buchanan, using the fair value method, Reese should recognize compensation expense for 2013 on its books in the amount of
a. $0.
b. $1,200.
c. $2,400
d. $2,800

65. On June 30, 2012, Yang Corporation granted compensatory stock options for 30,000 shares of its $24 par value common stock to certain of its key employees. The market price of the common stock on that date was $31 per share and the option price was $28. Using a fair value option pricing model, total compensation expense is determined to be $96,000. The options are exercisable beginning January 1, 2014, providing those key employees are still in the employ of the company at the time the options are exercised. The options expire on June 30, 2015.
On January 4, 2014, when the market price of the stock was $36 per share, all options for the 30,000 shares were exercised. The service period is for two years beginning January 1, 2012. Using the fair value method, what should be the amount of compensation expense recorded by Yang Corporation for these options on December 31, 2012?
a. $96,000
b. $48,000
c. $22,500
d. $0

66. In order to retain certain key executives, Smiley Corporation granted them incentive stock options on December 31, 2011. 100,000 options were granted at an option price of $35
per share. Market prices of the stock were as follows:
December 31, 2012 $46 per share
December 31, 2013 51 per share
The options were granted as compensation for executives’ services to be rendered over a two-year period beginning January 1, 2012. The Black-Scholes option pricing model determines total compensation expense to be $1,000,000. What amount of compensation expense should Smiley recognize as a result of this plan for the year ended December 31, 2012 under the fair value method?
a. $1,750,000.
b. $1,100,000.
c. $1,000,000.
d. $500,000.

67. On January 1, 2013, Ritter Company granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s $1 par common stock at $20 per share as additional compensation for services to be rendered over the next three years. The options are exercisable during a five-year period beginning January 1, 2016 by grantees still employed by Ritter. The Black-Scholes option pricing model determines total compensation expense to be $180,000. The market price of common stock was $26 per share at the date of grant. The journal entry to record the compensation expense related to these options for 2013 would include a credit to the Paid-in Capital—Stock Options account for
a. $0.
b. $36,000.
c. $40,000.
d. $60,000.

68. On January 1, 2013, Evans Company granted Tim Telfer, an employee, an option to buy 2,000 shares of Evans Co. stock for $25 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $15,000. Telfer exercised his option on September 1, 2013, and sold his 1,000 shares on December 1, 2013. Quoted market prices of Evans Co. stock during 2013 were
January 1 $25 per share
September 1 $30 per share
December 1 $34 per share
The service period is for three years beginning January 1, 2013. As a result of the option granted to Telfer, using the fair value method, Evans should recognize compensation expense for 2013 on its books in the amount of
a. $18,000.
b. $15,000.
c. $5,000.
d. $3,000.

69. On December 31, 2012, Kessler Company granted some of its executives options to purchase 75,000 shares of the company’s $10 par common stock at an option price of $50 per share. The options become exercisable on January 1, 2013, and represent compensation for executives’ services over a three-year period beginning January 1, 2013. The Black-Scholes option pricing model determines total compensation expense to be $450,000. At December 31, 2013, none of the executives had exercised their options. What is the impact on Kessler’s net income for the year ended December 31, 2013 as a result of this transaction under the fair value method?
a. $150,000 increase
b. $0
c. $150,000 decrease
d. $450,000 decrease

70. Weiser Corp. on January 1, 2009, granted stock options for 40,000 shares of its $10 par value common stock to its key employees. The market price of the common stock on that date was $23 per share and the option price was $20. The Black-Scholes option pricing model determines total compensation expense to be $360,000. The options are exercisable beginning January 1, 2012, provided those key employees are still in Weiser’s employ at the time the options are exercised. The options expire on January 1, 2013.
On January 1, 2012, when the market price of the stock was $29 per share, all 40,000 options were exercised. The amount of compensation expense Weiser should record for 2009 under the fair value method is
a. $0.
b. $60,000.
c. $120,000.
d. $180,000.

71. On December 31, 2012, Houser Company granted some of its executives options to purchase 75,000 shares of the company’s $50 par common stock at an option price of $60 per share. The Black-Scholes option pricing model determines total compensation expense to be $1,500,000. The options become exercisable on January 1, 2013, and represent compensation for executives’ past and future services over a three-year period beginning January 1, 2013. What is the impact on Houser’s total stockholders’ equity for the year ended December 31, 2012, as a result of this transaction under the fair value method?
a. $1,500,000 decrease
b. $500,000 decrease
c. $0
d. $500,000 increase

72. On June 30, 2012, Norman Corporation granted compensatory stock options for 40,000 shares of its $20 par value common stock to certain of its key employees. The market price of the common stock on that date was $36 per share and the option price was $30. The Black-Scholes option pricing model determines total compensation expense to be $480,000. The options are exercisable beginning January 1, 2013, provided those key employees are still in Norman’s employ at the time the options are exercised. The options expire on June 30, 2014.
On January 4, 2013, when the market price of the stock was $42 per share, all 40,000 options were exercised. What should be the amount of compensation expense recorded by Norman Corporation for the calendar year 2012 using the fair value method?
a. $0.
b. $192,000.
c. $240,000.
d. $480,000.

73. In order to retain certain key executives, Jensen Corporation granted them incentive stock options on December 31, 2011. 70,000 options were granted at an option price of $35 per share. Market prices of the stock were as follows:
December 31, 2012 $46 per share
December 31, 2013 51 per share
The options were granted as compensation for executives’ services to be rendered over a two-year period beginning January 1, 2012. The Black-Scholes option pricing model determines total compensation expense to be $700,000. What amount of compensation expense should Jensen recognize as a result of this plan for the year ended
December 31, 2012 under the fair value method?
a. $350,000.
b. $700,000.
c. $550,000.
d. $1,750,000.

74. Grant, Inc. had 50,000 shares of treasury stock ($10 par value) at December 31, 2012, which it acquired at $11 per share. On June 4, 2013, Grant issued 25,000 treasury shares to employees who exercised options under Grant’s employee stock option plan. The market value per share was $13 at December 31, 2012, $15 at June 4, 2013, and $18 at December 31, 2013. The stock options had been granted for $12 per share. The cost method is used. What is the balance of the treasury stock on Grant’s balance sheet at December 31, 2013?
a. $175,000.
b. $225,000.
c. $275,000.
d. $300,000.

Use the following information for questions 75 through 77.

On January 1, 2012, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 80,000 SARs. Current market prices of the stock are as follows:
January 1, 2012 $35 per share
December 31, 2012 38 per share
December 31, 2013 30 per share
December 31, 2014 33 per share

Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2012.

*75. What amount of compensation expense should Korsak recognize for the year ended December 31, 2012?
a. $240,000
b. $360,000
c. $300,000
d. $1,440,000

*76. What amount of compensation expense should Korsak recognize for the year ended December 31, 2013?
a. $0
b. $40,000
c. $400,000
d. $200,000

*77. On December 31, 2014, 16,000 SARs are exercised by executives. What amount of compensation expense should Korsak recognize for the year ended December 31, 2014?
a. $380,000
b. $260,000
c. $780,000
d. $104,000

Multiple Choice Answers—Dilutive Securities, Computational

MULTIPLE CHOICE—Dilutive Securities, CPA Adapted

78. 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.

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

80. On January 1, 2012, Sharp Corp. granted an employee an option to purchase 9,000 shares of Sharp’s $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $210,000. The option became exercisable on December 31, 2013, after the employee completed two years of service. The market prices of Sharp’s stock were as follows:
January 1, 2012 $30
December 31, 2013 50
For 2011, should recognize compensation expense under the fair value method of
a. $135,000.
b. $45,000.
c. $105,000.
d. $0.

*81. On January 2, 2012, for past services, Rosen Corp. granted Nenn Pine, its president, 20,000 stock appreciation rights that are exercisable immediately and expire on
January 2, 2013. On exercise, Nenn is entitled to receive cash for the excess of the market price of the stock on the exercise date over the market price on the grant date. Nenn did not exercise any of the rights during 2012. The market price of Rosen’s stock was $30 on January 2, 2012, and $45 on December 31, 2012. As a result of the stock appreciation rights, Rosen should recognize compensation expense for 2012 of
a. $0.
b. $120,000.
c. $300,000.
d. $600,000.

Multiple Choice Answers—Dilutive Securities, CPA Adapted

MULTIPLE CHOICE—Earnings Per Share—Conceptual

82. 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

83. In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the
a. preferred dividends in arrears.
b. preferred dividends in arrears times (one minus the income tax rate).
c. annual preferred dividend times (one minus the income tax rate).
d. none of these.

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

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

S86. Due to the importance of earnings per share information, it is required to be reported by all
Public Companies Nonpublic Companies
a. Yes Yes
b. Yes No
c. No No
d. No Yes

P87. A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is
Dilutive Antidilutive
a. Yes Yes
b. Yes No
c. No Yes
d. No No

88. 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.

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

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

91. In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would
a. fairly present diluted earnings per share on a prospective basis.
b. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
c. reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.
d. be antidilutive.

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

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

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

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

MULTIPLE CHOICE—Earnings Per Share—Computational

96. Hill Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $1,680,000 for the year ending December 31, 2012. Earnings per share of common stock for 2012 would be
a. $2.80.
b. $1.33.
c. $1.60.
d. $1.87.

97. 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

98. Milo Co. had 800,000 shares of common stock outstanding on January 1, issued 126,000 shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued 54,000 shares on November 1. The weighted average shares outstanding for the year is
a. 851,000.
b. 872,000.
c. 893,000.
d. 914,000.

99. On January 1, 2013, Gridley Corporation had 187,500 shares of its $2 par value common stock outstanding. On March 1, Gridley sold an additional 375,000 shares on the open market at $20 per share. Gridley issued a 20% stock dividend on May 1. On August 1, Gridley purchased 210,000 shares and immediately retired the stock. On November 1, 300,000 shares were sold for $25 per share. What is the weighted-average number of shares outstanding for 2013?
a. 765,000
b. 562,500
c. 358,333
d. 258,333

100. The following information is available for Barone Corporation:
January 1, 2013 Shares outstanding 1,500,000
April 1, 2013 Shares issued 240,000
July 1, 2013 Treasury shares purchased 90,000
October 1, 2013 Shares issued in a 100% stock dividend 1,650,000
The number of shares to be used in computing earnings per common share for 2013 is
a. 3,390,600.
b. 3,285,000.
c. 3,270,000.
d. 2,047,500.

101. At December 31, 2012 Rice Company had 300,000 shares of common stock and 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2012 or 2013. On January 30, 2014, prior to the issuance of its financial statements for the year ended December 31, 2013, Rice declared a 100% stock dividend on its common stock. Net income for 2013 was $1,140,000. In its 2013 financial statements, Rice’s 2013 earnings per common share should be
a. $1.80.
b. $1.89.
c. $3.60.
d. $3.80.

102. Fultz Company had 300,000 shares of common stock issued and outstanding at December 31, 2012. During 2013, no additional common stock was issued. On January 1, 2013, Fultz issued 400,000 shares of nonconvertible preferred stock. During 2013, Fultz declared and paid $210,000 cash dividends on the common stock and $175,000 on the nonconvertible preferred stock. Net income for the year ended December 31, 2013, was $1,120,000. What should be Fultz’s 2013 earnings per common share, rounded to the nearest penny?
a. $1.35
b. $2.45
c. $3.15
d. $3.73

103. At December 31, 2012 Pine Company had 200,000 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 2012 or 2013. On February 10, 2014, prior to the issuance of its financial statements for the year ended December 31, 2013, Pine declared a 100% stock split on its common stock. Net income for 2013 was $900,000. In its 2013 financial statements, Pine’s 2013 earnings per common share should be
a. $4.25.
b. $4.00.
c. $2.13.
d. $1.25.

104. Stine Inc. had 400,000 shares of common stock issued and outstanding at December 31, 2012. On July 1, 2013 an additional 400,000 shares were issued for cash. Stine also had stock options outstanding at the beginning and end of 2013 which allow the holders to purchase 120,000 shares of common stock at $28 per share. The average market price of Stine’s common stock was $35 during 2013. The number of shares to be used in computing diluted earnings per share for 2013 is
a. 896,000
b. 824,000
c. 696,000
d. 624,000

105. 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

106. On January 2, 2013, Worth Co. issued at par $1,000,000 of 7% convertible bonds. Each $1,000 bond is convertible into 20 shares of common stock. No bonds were converted during 2013. Worth had 200,000 shares of common stock outstanding during 2013. Worth’s 2013 net income was $300,000 and the income tax rate was 30%. Worth’s diluted earnings per share for 2013 would be (rounded to the nearest penny):
a. $1.74.
b. $1.59.
c. $1.50.
d. $1.68.

107. Beaty Inc. purchased Dunbar Co. and agreed to give stockholders of Dunbar Co. 10,000 additional shares in 2014 if Dunbar Co.’s net income in 2013 is $500,000; in 2012 Dunbar Co.’s net income is $520,000. Beaty Inc. has net income for 2012 of $300,000 and has an average number of common shares outstanding for 2012 of 100,000 shares. What should Beaty report as diluted earnings per share for 2012?
a. $3.33
b. $3.00
c. $2.73
d. $2.51

Use the following information for questions 108 and 109.

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 7.5% convertible bonds outstanding during 2013. The preferred stock is convertible into 40,000 shares of common stock. During 2013, Hanson paid dividends of $.90 per share on the common stock and $3 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2013 was $600,000 and the income tax rate was 30%.

108. Basic earnings per share for 2013 is (rounded to the nearest penny)
a. $2.20.
b. $2.42.
c. $2.51.
d. $2.70.

109. Diluted earnings per share for 2013 is (rounded to the nearest penny)
a. $2.08.
b. $2.11.
c. $2.29.
d. $2.50.

110. 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 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?
a. 1,545,000
b. 1,305,000
c. 1,181,250
d. 1,170,000

111. Shipley Corporation had net income for the year of $600,000 and a weighted average number of common shares outstanding during the period of 200,000 shares. The company has a convertible bond issue outstanding. The bonds were issued four years ago at par ($2,500,000), carry a 7% interest rate, and are convertible into 40,000 shares of common stock. The company has a 40% tax rate. Diluted earnings per share are
a. $2.06
b. $2.79.
c. $2.94.
d. $3.22.

112. Colt Corporation purchased Massey Inc. and agreed to give stockholders of Massey Inc. 50,000 additional shares in 2014 if Massey Inc.’s net income in 2013 is $600,000 or more; in 2012 Massey Inc.’s net income is $615,000. Colt has net income for 2010 of $1,200,000 and has an average number of common shares outstanding for 2012 of 500,000 shares. What should Colt report as earnings per share for 2012?
Basic Earnings Diluted Earnings
Per Share Per Share
a. $2.40 $2.40
b. $2.18 $2.40
c. $2.40 $2.18
d. $2.18 $2.18

113. On January 2, 2012, Perez Co. issued at par $10,000 of 8% bonds convertible in total into 1,000 shares of Perez’s common stock. No bonds were converted during 2012. Throughout 2012, Perez had 1,000 shares of common stock outstanding. Perez’s 2012 net income was $4,000, and its income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2012. Perez’s diluted earnings per share for 2012 would be (rounded to the nearest penny)
a. $2.00.
b. $2.28.
c. $2.40.
d. $4.56.

114. At December 31, 2012, Kifer Company had 600,000 shares of common stock outstanding. On October 1, 2013, an additional 120,000 shares of common stock were issued. In addition, Kifer had $10,000,000 of 6% convertible bonds outstanding at December 31, 2012, which are convertible into 270,000 shares of common stock. No bonds were converted into common stock in 2013. The net income for the year ended December 31, 2013, was $3,000,000. Assuming the income tax rate was 30%, the diluted earnings per share for the year ended December 31, 2013, should be (rounded to the nearest penny)
a. $5.43.
b. $4.00.
c. $3.80.
d. $3.33.

115. On January 2, 2013, Mize Co. issued at par $300,000 of 9% convertible bonds. Each $1,000 bond is convertible into 60 shares. No bonds were converted during 2013. Mize had 100,000 shares of common stock outstanding during 2013. Mize ‘s 2013 net income was $160,000 and the income tax rate was 30%. Mize’s diluted earnings per share for 2013 would be (rounded to the nearest penny)
a. $1.36.
b. $1.52.
c. $1.60.
d. $1.79.

116. At December 31, 2012, Sager Co. had 1,200,000 shares of common stock outstanding. In addition, Sager had 450,000 shares of preferred stock which were convertible into 750,000 shares of common stock. During 2013, Sager paid $750,000 cash dividends on the common stock and $500,000 cash dividends on the preferred stock. Net income for 2013 was $4,250,000 and the income tax rate was 40%. The diluted earnings per share for 2013 is (rounded to the nearest penny)
a. $1.55.
b. $2.18.
c. $3.14.
d. $3.55.

Use the following information for questions 117 and 118.
Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,500,000 of 10% convertible bonds outstanding during 2013. The preferred stock is convertible into 40,000 shares of common stock. During 2013, Lerner paid dividends of $1.35 per share on the common stock and $4.50 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2013 was $900,000 and the income tax rate was 30%.

117. Basic earnings per share for 2013 is (rounded to the nearest penny)
a. $3.32.
b. $3.63.
c. $3.76.
d. $4.05.

118. Diluted earnings per share for 2013 is (rounded to the nearest penny)
a. $3.21.
b. $3.37.
c. $3.53.
d. $3.69.
119. Yoder, Incorporated, has 4,200,000 shares of common stock outstanding on
December 31, 2012. An additional 800,000 shares of common stock were issued on
April 1, 2013, and 400,000 more on July 1, 2013. On October 1, 2013, Yoder issued 20,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in 2013. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively?
a. 5,000,000 and 5,000,000
b. 5,000,000 and 5,100,000
c. 5,000,000 and 5,400,000
d. 5,400,000 and 6,200,000

120. Nolte Co. has 4,800,000 shares of common stock outstanding on December 31, 2012. An additional 200,000 shares are issued on April 1, 2013, and 480,000 more on September 1. On October 1, Nolte issued $6,000,000 of 9% convertible bonds. Each $1,000 bond is convertible into 40 shares of common stock. No bonds have been converted. The number of shares to be used in computing basic earnings per share and diluted earnings per share on December 31, 2013 is
a. 5,110,000 and 5,110,000.
b. 5,110,000 and 5,170,000.
c. 5,110,000 and 5,350,000.
d. 5,880,000 and 5,320,000.

121. At December 31, 2012, Tatum Company had 2,000,000 shares of common stock outstanding. On January 1, 2013, Tatum issued 500,000 shares of preferred stock which were convertible into 1,000,000 shares of common stock. During 2013, Tatum declared and paid $1,800,000 cash dividends on the common stock and $600,000 cash dividends on the preferred stock. Net income for the year ended December 31, 2013, was $6,000,000. Assuming an income tax rate of 30%, what should be diluted earnings per share for the year ended December 31, 2013? (Round to the nearest penny.)
a. $1.80
b. $2.00
c. $3.00
d. $2.50

122. At December 31, 2012, Emley Company had 1,200,000 shares of common stock outstanding. On September 1, 2013, an additional 400,000 shares of common stock were issued. In addition, Emley had $8,000,000 of 6% convertible bonds outstanding at December 31, 2012, which are convertible into 800,000 shares of common stock. No bonds were converted into common stock in 2013. The net income for the year ended December 31, 2013, was $3,000,000. Assuming the income tax rate was 30%, what should be the diluted earnings per share for the year ended December 31, 2013, rounded to the nearest penny?
a. $1.41
b. $2.25
c. $1.56
d. $1.63

123. Grimm Company has 2,000,000 shares of common stock outstanding on December 31, 2012. An additional 150,000 shares of common stock were issued on July 1, 2013, and 300,000 more on October 1, 2013. On April 1, 2013, Grimm issued 6,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 40 shares of common stock. No bonds were converted into common stock in 2013. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively, for the year ended December 31, 2013?
a. 2,150,000 and 2,330,000
b. 2,150,000 and 2,150,000
c. 2,150,000 and 2,390,000
d. 2,450,000 and 2,630,000

Use the following information for questions 124 and 125.
Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2013 2012
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
6% convertible bonds $2,400,000 $2,400,000
During 2013, Piper paid dividends of $0.80 per share on its common stock and $2.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 6% convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2013, was $400,000. Assume that the income tax rate was 30%.

124. What should be the basic earnings per share for the year ended December 31, 2013, rounded to the nearest penny?
a. $1.77
b. $1.95
c. $2.47
d. $2.67

125. What should be the diluted earnings per share for the year ended December 31, 2013, rounded to the nearest penny?
a. $2.13
b. $1.96
c. $1.89
d. $1.57

126. Warrants exercisable at $20 each to obtain 50,000 shares of common stock were outstanding during a period when the average market price of the common stock was $25. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding shares by
a. 50,000.
b. 40,000.
c. 10,000.
d. 12,500.

127. Terry Corporation had 400,000 shares of common stock outstanding at December 31, 2012. In addition, it had 90,000 stock options outstanding, which had been granted to certain executives, and which gave them the right to purchase shares of Terry’s stock at an option price of $37 per share. The average market price of Terry’s common stock for 2012 was $50. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2012?
a. 400,000
b. 431,622
c. 466,600
d. 423,400

Multiple Choice Answers—Earnings Per Share—Computational

MULTIPLE CHOICE—Earnings Per Share—CPA Adapted

128. Didde Co. had 300,000 shares of common stock issued and outstanding at December 31, 2012. No common stock was issued during 2013. On January 1, 2013, Didde issued 200,000 shares of nonconvertible preferred stock. During 2013, Didde declared and paid $150,000 cash dividends on the common stock and $120,000 on the preferred stock. Net income for the year ended December 31, 2013 was $930,000. What should be Didde’s 2013 earnings per common share?
a. $3.10
b. $2.70
c. $2.60
d. $2.20

129. At December 31, 2013 and 2012, Miley Corp. had 180,000 shares of common stock and 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2013 or 2012. Net income for 2013 was $480,000. For 2013, earnings per common share amounted to
a. $2.67.
b. $2.33.
c. $2.11.
d. $2.00.

130. Marsh Co. had 2,400,000 shares of common stock outstanding on January 1 and December 31, 2013. In connection with the acquisition of a subsidiary company in June 2012, Marsh is required to issue 100,000 additional shares of its common stock on July 1, 2014, to the former owners of the subsidiary. Marsh paid $300,000 in preferred stock dividends in 2013, and reported net income of $5,100,000 for the year. Marsh’s diluted earnings per share for 2013 should be
a. $2.13.
b. $2.04.
c. $2.00.
d. $1.92.

131. Foyle, Inc., had 610,000 shares of common stock issued and outstanding at December 31, 2012. On July 1, 2013, an additional 40,000 shares of common stock were issued for cash. Foyle also had unexercised stock options to purchase 32,000 shares of common stock at $15 per share outstanding at the beginning and end of 2013. The average market price of Foyle’s common stock was $20 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?
a. 630,000
b. 638,000
c. 658,000
d. 662,000

132. 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.

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

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

IFRS QUESTIONS

True/False

1. IFRS and U.S. GAAP have significant differences in the reporting of securities with characteristics of debt and equity, such as convertible debt.

2. Under IFRS, all of the proceeds of convertible debt are recorded as long-term debt.

3. Under IFRS, convertible bonds are “bifurcated” —separated into the equity component (the value of the conversion option) of the bond issue and the debt component.

4. Under both U.S. GAAP and IFRS, the calculation of basic and diluted earnings per share is identical.

5. Under IFRS recording for the issuance of Bonds Payable, the Discount on Bonds Payable and the Paid-in Capital-Convertible Bonds could be utilized.

Answers to True/False:

Multiple Choice:

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

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

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

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

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

Answers to Multiple Choice:

Short Answer

1. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to the accounting for dilutive securities, stock-based compensation, and earnings per share.

2. Briefly discuss the convergence efforts that are under way by the IASB and FASB in the area of dilutive securities and earnings per share.