Deck 7: Financing Activities

Question 1

Which of the following is the typical tradeoff when issuing preferred stock?

A) The tradeoff between different accounting for an initial issuance of preferred stock as compared to a common stock issuance.
B) The tradeoff between maintaining corporate control and creating a class of shareholders with preference in all asset distributions.
C) The tradeoff of giving common shareholders priority over preferred shareholders in corporate liquidations.
D) The tradeoff of a convertibility feature of common shares into preferred shares.

Answer 1

B

Question 2

All of the following are primary events that typically lead to changes in book value of shareholders' equity except:

A) Investments by shareholders, usually net cash received by the company at equity issue date.
B) Profitable operating and investing activities, with net income being a large component of this increase.
C) Debtholders requiring firms to enter into debt covenants.
D) Distributions to shareholders, usually in the form of periodic cash dividend payments
To investors and sometimes in the form of share repurchases.

Answer 2

C

Question 3

Which of the following is the date on which a company determines the owners of the stock that will receive a dividend?

A) date of record
B) measurement date
C) date of declaration
D) date of payment

Answer 3

A

Question 4

Which is the date when a firm gives a stock option to employees?

A) vesting date
B) grant date
C) exercise date
D) market date

Question 5

FASB has set forth all of the following conditions for recognizing transfers of receivables as sales only if the following conditions of surrendering control of the receivables are met except:

A) The assets transferred have been isolated from the selling firm.
B) The buying firm obtains the right to pledge or exchange the transferred assets, and no condition both constrains the transferee from taking advantage of its right and provides more than a trivial benefit to the transferor.
C) The selling firm does not maintain effective control over the assets transferred through (a) an agreement that both entitles and obligates it to repurchase the assets or (b) the
Ability to unilaterally cause the transferee to return specific assets.
D) A creditor of the selling firm can access the receivables in the event of the seller's bankruptcy.

Question 6

Which kind of dividend has an interest-bearing promise to pay dividends?

A) property dividend
B) stock dividend
C) liquidating dividend
D) scrip dividend

Question 7

Which kind of dividend typically pays dividends with additional shares of the corporation's stock?

A) property dividend
B) stock dividend
C) liquidating dividend
D) scrip dividend

Question 8

Which is the date when employees elect to exchange the option and cash for shares of common stock?

A) vesting date
B) grant date
C) exercise date
D) market date

Question 9

Under IFRS,cash payments for purchase of treasury stock:

A) operating cash outflow
B) investing cash outflow
C) financing cash outflow
D) Both A and C are correct.

Question 10

Which kind of dividend typically pays dividends with investments in other corporations' stock?

A) property dividend
B) stock dividend
C) liquidating dividend
D) scrip dividend

Question 11

Regarding accounting for troubled debt,which of the following statements is true?

A) The treatment for troubled debt is the same under both U.S.GAAP and IFRS.
B) The settlement of troubled debt results in an economic loss to the debtor because the creditor accepts more than the book value of the debt to settle the debt.
C) U.S.GAAP uses a "10 percent rule" to determine whether a gain is recognized by the debtor in a troubled debt situation.
D) Because IFRS uses the present value approach to determine the magnitude of the settlement for troubled debt, the magnitude of the new book value of the restructured debt will be lower and the gain recognition will be larger under IFRS.

Question 12

In some countries the account Reserve for Contingencies may be most comparable to which of the following accounts for a company reporting under U.S.GAAP?

A) Contingency Expense
B) Retained Earnings Appropriated for Contingencies
C) Unearned Contingency Fees
D) Contingency Losses

Question 13

All of the following are benefits of leasing except:

A) They have the ability to shift the tax benefits from depreciation and other deductions from a lessee that has little or no taxable income to a lessor that has substantial taxable income.
B) They provide flexibility to change capacity as needed without having to purchase or sell assets.
C) They have the ability to reduce the risk of technological obsolescence, relative to outright ownership, by maintaining the flexibility to shift to technologically more advanced assets.
D) In an operating lease, the lessee recognizes the signing of the lease as the simultaneous acquisition of a long-term asset and the incurring of a long-term liability for lease payments.

Question 14

Financial reporting requires that firms recognize product financing arrangements as liabilities
If which of the following conditions is met?

A) The arrangement requires the sponsoring firm to purchase the inventory, substantially
Identical inventory, or processed goods of which the inventory is a component at specified prices.
B) The selling or sponsoring firm physically controls the inventory.
C) The payments made to the other entity cover all acquisition, holding, and financing
Costs.
D) Both A and C are correct.

Question 15

Which is the first date when employees can exercise their stock options?

A) vesting date
B) grant date
C) exercise date
D) liquidating date

Question 16

According to U.S.GAAP,which of the following provides the most reliable measure for fair value measurement?

A) Observable market data serving as inputs into estimates into present value-based measurements such as foreign exchange rates.
B) Quoted market prices of identical assets or liabilities in inactive markets
C) Observable quoted market prices in active markets for identical assets or liabilities
D) Unobservable inputs used by the reporting entity when modeling how the market would determine the fair value of the asset or liability in question

Question 17

Which kind of dividend is a return of the original investment by shareholders?

A) cash dividend
B) stock dividend
C) liquidating dividend
D) scrip dividend

Question 18

Under U.S.GAAP,which of the following items would require a lessee to classify a lease of equipment as a capital lease?

A) There is no transfer of ownership to the lessee at the end of the lease term.
B) The lease does not contain a bargain purchase option.
C) The lease term is 90% of the estimated economic life of the lease property.
D) The present value of the contractual minimum lease payments is 75% of the fair value of the leased property.

Question 19

Which of the following is the date on which the dividend distribution occurs?

A) date of record
B) commitment date
C) date of declaration
D) date of payment

Question 20

Which of the following is the date on which a company incurs a legal liability to distribute the dividend to owners of the stock?

A) date of record
B) commitment date
C) date of declaration
D) date of payment

Question 21

Santa Corporation
NOTE: These multiple choice questions require present value information.
Santa Corporation manufactures Christmas decorations and supplies throughout the world.The company owns property, plants, and equipment and also enters into operating leases for certain facilities.Assume that Santa's incremental borrowing rate is 8%.The company's tax rate is 40%.Listed below are selected financial data for Santa and a portion of the company's operating lease footnote.


Using the information provided by Santa Corporation,calculate the company's 2012 fixed asset ratio.

A) 3.0
B) 3.65
C) 3.23
D) 5.21

Question 22

Under current U.S.GAAP,unrealized gains and losses from four balance sheet items are reported in accumulated other comprehensive income or loss.Which of the following is not one of the balance sheet items?

A) Derivatives held as cash flow hedges
B) Deferred tax assets related to net operating loss carryforwards
C) Minimum pension obligations
D) Investment securities classified as available for sale

Question 23

Santa Corporation
NOTE: These multiple choice questions require present value information.
Santa Corporation manufactures Christmas decorations and supplies throughout the world.The company owns property, plants, and equipment and also enters into operating leases for certain facilities.Assume that Santa's incremental borrowing rate is 8%.The company's tax rate is 40%.Listed below are selected financial data for Santa and a portion of the company's operating lease footnote.


Using the information provided by Santa Corporation,calculate the present value of the operating leases.

A) $2,155,843
B) $2,024,945
C) $1,482,390
D) $2,854,452

Question 24

Derivatives are financial instruments that derive their value from changes in any of the following underlying securities except:

A) Stock prices
B) Percentage discount on accounts receivable
C) Interest rates
D) Commodity prices

Question 25

Which of the following best describes the accounting treatment for derivative instruments not held for purposes of hedging?

A) Record as an asset or liability and recognize changes in fair value in other comprehensive income.
B) Do not record as an asset or liability; record income from the transaction at maturity and recognize in earnings.
C) Record as an asset or liability; recognize changes in fair value currently in earnings.
D) Record as an asset or liability if off-balance sheet risk is material.

Question 26

On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery.The terms of the lease called for:

What accounting method should Porter use to account for the equipment lease?

A) Operating Lease method
B) Capital Lease method
C) Equipment Lease method
D) Lessee Accounting method

Question 27

Which of the following is not one of the GAAP classifications for derivatives?

A) Speculative investment
B) Fair value hedge
C) Asset-liability hedge
D) Cash flow hedge

Question 28

Which of the following does not represent an acceptable method of transferring receivables to increase cash flow?

A) With recourse
B) Without recourse
C) Factoring
D) Tax deferred Method

Question 29

Where in the financial statements are changes in the fair value of cash flow hedges reported:

A) On the Balance Sheet as part of retained earnings
B) On the Income Statement as other gains/losses
C) As other comprehensive income and accumulated in other comprehensive income on the Balance Sheet.
D) On the Statement of Stockholder's Equity

Question 30

Which of the following is not one of the three criteria for recognition of a liability?

A) The obligation involves a probable future sacrifice of resources at a specified or determinable date.
B) The firm is required to make a cash payment for the goods or services.
C) The firm has little or no discretion to avoid the transfer.
D) The transaction or event giving rise to the liability has already occurred.

Question 31

Which of the following is not true concerning the recognition of unrealized gains and losses on foreign currency translation during the consolidation process?

A) Firms do not recognize these gains/losses in current income.
B) Firms recognize these gain/losses in the statement of other comprehensive income
C) Firms increase/reduce their investment accounts by the translation gains/losses
D) Unrealized gains and losses increase/decrease other accumulated comprehensive income in shareholders' equity.

Question 32

On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery.The terms of the lease called for:

At January 1,2012,Porter should record an asset and liability with respect to the equipment lease equal to:

A) $258,726
B) $239,562
C) $275,000
D) $0

Question 33

All of the following are correct regarding operating leases except:

A) Cash outflow is in the form of rent payments
B) The rights to use the property for a specified period of time are conferred to the lessee by the lessor.
C) At the end of the lease the lessee returns the property to the lessor
D) Depreciation expense can be recorded on the books by the lessee

Question 34

Under the fair value method of accounting for stock options,firms must value stock options on the:

A) grant date
B) intrinsic date
C) measurement date
D) fair value date

Question 35

__________ means that a company will buy back those receivables that are not collected by the company they are factored to.

Question 36

Which of the following is not a distinguishing characteristic of a derivative instrument?

A) Derivative instruments have terms that require or permit net settlement.
B) Derivative instruments have a low initial net investment.
C) Derivative instruments are highly effective throughout their term.
D) Derivative instruments have one or more underlyings and notional amounts.

Question 37

On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery.The terms of the lease called for:

For the year ended December 31,2012,Porter should record depreciation expense for the leased equipment equal to:

A) $55,000
B) $39,927
C) $47,912
D) $0

Question 38

On January 1, 2012, Porter Corporation signed a five-year non-cancelable lease for certain machinery.The terms of the lease called for:

Under which of the following conditions does the equipment lease qualify for capital lease accounting?

A) The lease contains a bargain purchase option.
B) The lease term is equal to or greater than 75% of the asset's economic life.
C) A, and B are correct answers.
D) The lease transfers ownership to the lessee at the end of the lease term.

Question 39

Santa Corporation
NOTE: These multiple choice questions require present value information.
Santa Corporation manufactures Christmas decorations and supplies throughout the world.The company owns property, plants, and equipment and also enters into operating leases for certain facilities.Assume that Santa's incremental borrowing rate is 8%.The company's tax rate is 40%.Listed below are selected financial data for Santa and a portion of the company's operating lease footnote.


Using the information provided by Santa Corporation,estimate the average life of the operating leases.

A) 8.66 years
B) 13.66 years
C) 10 years
D) Not able to determine

Question 40

Assuming that Santa Corporation was required to capitalize its operating lease,how would the company's fixed asset ratio change under this assumption?

A) increase
B) decrease
C) no effect
D) unable to determine

Question 41

Under an operating lease agreement the lessee recognizes ______________________________ each period that the leased asset is used.

Question 42

The _________________________ is the date a firm gives a stock option to employees.

Question 43

Gains and losses on cash flow hedges affect earnings ____________________ than those on fair value hedges.

Question 44

Convertible preferred stock has both the attributes of _____________ and __________________________.

Question 45

Discuss the difference between transferring receivables with and without recourse.
When a company transfers receivables to the factor without recourse the factor pays the company a percentage of the total receivables and in effect it is a sale of the receivables to the factor.
The factor takes the receivables with recourse if any uncollected receivables can be returned to the company for a refund.

Question 46

The acceptable method of accounting for stock options is the _________________________ method.

Question 47

Many firms use derivative instruments to hedge exposure to changes in the fair value of an asset or liability,or to hedge exposure to variability in expected future cash flows.As an analyst examining the financial reports of a company that uses derivative instruments to hedge,what questions should you ask when thinking about derivatives and accounting quality?

Question 48

Derivative instruments acquired to hedge exposure may be classified as either a fair value hedge or a cash flow hedge.Distinguish between the two types of hedges.

Question 49

A derivative has one or more ____________________,which are a specified interest rate,commodity price,foreign exchange rate,or other variable.

Question 50

Discuss the method of accounting for employee stock options.In your answer discuss the how the accounting has changed during recent years.

Question 51

Assume that you are currently negotiating a lease transaction in the role of the lessee.Discuss whether you would rather structure the lease as an operating lease or a capital lease and why.In addition,provide the conditions that would require that the lease be accounted for as a capital lease.

Question 52

There are three dates that are important to a corporation when they issue new shares of stock.Identify the three dates and explain the significance of each?

Question 53

Derivative instruments acquired to hedge exposure to changes in the fair value of an asset or liability are ______________________________ hedges.

Question 54

The first date at which employees can exercise their stock options is termed the _________________________.

Question 55

Derivative instruments acquired to hedge exposure to variability in expected future cash are _________________________ hedges.

Question 56

One criterion that must be satisfied for a firm to recognize an obligation is that the transaction or event giving rise to the obligation has already ____________________.

Question 57

Under the fair value method of accounting for stock options,firms must value stock options on the date of ____________________.

Question 58

Why can exercising stock options create cash flow problems for managers at the exercise date? What is an alternative to this problem?

Question 59

A(n)____________________ lease arrangement is one in which the lessee enjoys the use of the property for a set period of time.

Question 60

When firms use derivatives effectively to manage risks,the net gain or loss each period should be relatively ____________________.

Question 61

Following is the shareholders' equity section of Morgan Supplies on a day its common stock is trading at $77 per share.

Required:
a.Use the financial statement template below to show the financial statement effects of
the following dividend events.(Assume that the events are independent.)
(1)Cash dividend declaration and payment of $1 per share
(2)Property dividend declaration and payment of shares representing a short-term
investment in Screen Products,Ltd.,with a fair value of $15,000
(3)10 percent stock dividend
(4)100 percent stock dividend
(5)3-for-1 stock split
(6)1-for-2 reverse stock split

Journal entry (optional):
b.Which events changed the book value of common equity?
c.Under what conditions will these events lead to future increases and decreases in ROE?

Question 62

In the chart below,assign the directional effect (I = increase,D = decrease,or NE = no effect)of each of the following six transactions on the components of the book value of common shareholders' equity.
a.Small stock dividend declared and issued.
b.2-for-1 stock split announced and issued.
c.Stock options granted.
d.Recognition of compensation expense on stock options.
e.Stock options exercised.
f.Stock options expired.

Question 63

In the chart below,assign the directional effect (I = increase,D = decrease,or NE = no effect)of each of the following six transactions on the components of the book value of common shareholders' equity.
a.Issuance of $1 par value common stock at par value.
b.Stock repurchased and placed in the treasury
c.Cash dividend declared.
d.Shareholders identified for dividend distribution on the date of record
e.Property dividend declared and paid.
f.Large stock dividend declared and issued.

Question 64

In the chart below,assign the directional effect (I = increase,D = decrease,or NE = no effect)of each of the following four transactions on the components of the book value of common shareholders' equity.
a.Recognition of compensation expense related to restricted stock.
b.Granting of stock appreciation rights to be settled with cash.
c.Recognition of compensation expense on stock appreciation rights.
d.Reacquisition and retirement of common stock at an amount greater than original issue price.

Question 65

Assume that a start-up manufacturing company raises capital through a series of equity issues.
Required:
a.Using the financial statement template below,summarize the financial statement effects of the following transactions.
(1)Issues 85,000 shares of $1 par value common stock for $15.00 per share.
(2)Receives land in exchange for 8,500 shares of $1 par common stock when the common stock is trading in the market at $25 per share.The land has no readily determinable market value.
(3)(a)Receives subscriptions for the issue of 28,000 shares of $1 par value common.The share issue price is $15 of which 30 percent is received as a down payment.
(3)(b)Subsequently,the remaining 70 percent is received from the transaction in 3(a).

Journal entry (optional):
b.In each case,how does the company measure the transaction? What measurement
attribute is used?

Question 66

In the chart below,assign the directional effect (I = increase,D = decrease,or NE = no effect)of each of the following four transactions on the components of the book value of common shareholders' equity.
a.Treasury stock acquired (company uses the cost method).
b.Treasury stock in transaction a.reissued at an amount greater than original acquisition
price.
c.Treasury stock in transaction a.reissued at an amount less than the original acquisition
price.
d.Restricted stock issued (grant date).

Question 67

NOTE: This problem requires present value information.
Charter Corp.manufactures office equipment and supplies throughout the U.S.The company owns property,plant,and equipment and also enters into operating leases for certain facilities.The company's tax rate is 35%.Listed below is selected financial data for Charter and the company's operating lease disclosure.


As an analyst you wish to restate Charter's operating leases into capital leases.
Required:
a.Using the information in the operating lease disclosure,and assuming that Charter has an incremental borrowing rate for secured debt of 8%,restate the operating leases into capital leases.
b.Estimate the average life of the operating leases.
c.Calculate Charter's fixed asset turnover ratio as reported.
d.Would Charter's fixed asset turnover ratio increase or decrease,assuming that the operating leases were capitalized?

Question 68

NOTE: The following problem requires present value information.
On January 1,2012,Porter Corporation signed a five-year non-cancelable lease for certain machinery.The terms of the lease called for:

A)Porter to make annual payments of $60,000 at the end of each year (starting on Dec.31,2012)for five years.Porter must return the equipment to the lessor end of this period.
B)The machinery has an estimated useful life of 6 years and no expected salvage value.
C)Porter uses the straight-line method of depreciation for all of its fixed assets.
D)Porter's incremental borrowing rate is 8%.
E)The fair value of the asset at January 1,2012 is $275,000.
Required:
1.Discuss whether Porter should account for the lease as an operating or capital lease and why.
2.Using the above information determine how the lease would affect Porter's financial statements in 2013.Use the balance sheet equation below to show the effects.

Question 69

Summarize how the following information about Crank Corp.'s restructuring would affect the balance sheet and income statement summary chart below.Crank Corp.'s restructuring will take approximately 18 months and was announced on March 15,2010: